Conflicts of interest – best practice in Swiss boards of directors

Directors of a Swiss company must perform their duties with due care and act in the best interest of the company¹. To protect a company's interests, directors are required to organize their personal matters such that conflicts of interest² are avoided. If a conflict arises, the conflicted director and the board of directors (the Board) have certain duties: The director must inform the Board of the conflict without delay and in a complete manner. It is the Board's duty to assess whether a conflict of interest actually exists and if so, what measures need to be taken to protect the interests of the company. The measures need to be commensurate to avoid a conflict with the interests of the director. The choice of appropriate measures depends very much on the specific circumstances, including the intensity of the conflict. Possible measures in particular include the abstention from voting and/or participating in the deliberations by the conflicted director, the obtaining of an opinion by an independent third party, a decision by another corporate body (e.g. shareholder meeting) or the resignation of the conflicted director.³

Non-compliance with conflict of interest rules may lead to personal liability of the directors. In this context, it is noteworthy that the applicability of the business judgment rule that protects directors from a comprehensive review of their business decisions by the court in hindsight requires that the Board decision has been taken free of conflicts. Non-compliance may also pose a reputational risk for the affected director, the Board and the company as a whole.

Best market practice on how to handle conflicts of interest in the Board of a Swiss company includes, among other measures, the following: 

• Organizational regulations. A company's organizational regulations (or similar internal rules) should contain adequate provisions regarding conflicts of interest. While these provisions can be kept rather short, they should at least include a simple but robust set of rules on the duty of the directors and members of the management to inform the Board (typically the chairperson) of any potential conflict immediately and to fully disclose the relevant factors (who? when? how?). It is recommended to give the Board broad discretion to decide on potential measures to address conflicts. A regular review of these provisions is advisable to assess whether they are up to date and reflect current statutory requirements and best market practice. 
• Composition of the Board. While Boards should be composed of persons who bring the necessary and diverse expertise required to ensure an adequate management of the company's business, independence (including from major shareholders) of at least a part of the members is also a criterion to be taken into account. In situations where the risk of potential conflicts of interest is particularly high (e.g., joint ventures where the joint venture company interacts with its joint venture partners), one should consider having a sufficient number of independent directors so that an unbiased decision process is ensured despite conflicts. 
• Appropriate documentation. A Board's deliberations and resolutions in relation to a conflict should be appropriately documented and summarized in the Board materials, in particular the Board minutes. Typically, there are two resolutions to be taken by the Board in connection with a conflict of interest: first, the Board should determine whether a conflict actually exists and second, if there is a conflict, the Board should assess the conflict and resolve on the appropriate measures to be taken. Proper documentation and minutes are also key to have a record showing that the Board complied with its obligations in connection with a conflict, and in particular to ensure that the benefit of the business judgment rule is not jeopardized. 
• Monitoring and regular training. It is recommended that directors (and management) are regularly updated and trained on recent developments and the proper handling of conflicts of interest to raise awareness and understanding of the related duties of each director and member of the management. Further, it is key that companies implement ongoing monitoring and periodical reporting measures. 

While it is important to take adequate preventive measures ensuring a proper handling of potential conflicts, it is equally important to note that the circumstances of each situation are different and adequate measures largely depend on the specific facts and circumstances. Always of fundamental importance is every director's awareness of situations of potential conflicts of interest. 

¹ The key legal rules dealing with the duties of the board of directors of a Swiss company in connection with conflicts of interest are contained in the Swiss corporate law (in particular articles 717 and 717a of the Swiss Code of Obligations) and the Swiss Code of Best Practice for Corporate Governance.

² Swiss corporate law does not provide for a definition of what constitutes a conflict of interest. A conflict of interest arises if a director has to take a corporate decision where the company's interests are in conflict with the interests of the director, the director's family and other related persons or third parties whose interests the director has to protect such that the director's unbiased acting in the interest of the company is or appears to be endangered.

³ In a public tender offer for the shares of a listed company, specific conflicts rules apply that are set out in the Swiss takeover regulations. These rules follow Swiss corporate law and in addition cover certain aspects specifically relevant for public takeovers.

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Legal Note: The information contained in this Smart Insight newsletter is of general nature and does not constitute legal advice.