Clear ownership structure in your company with digital shares
Many corporations have the Sword of Damocles hanging over them. This is true for many SMEs in Switzerland for which the ownership structure of the company shares is unclear. Often the presumed shareholders are not in fact the legitimate owners of the company. In this interview, learn how to use digital shares to create clear relationships in the shareholding structure.
Today we are discussing the issue of clear relationships within the shareholder structure. Mr. Arni, Mr. Vischer, why is this topic of interest to companies?
Andreas Arni (AA): The Boards of Directors in many corporations are unaware of how relevant the issue of “clear relationships within the shareholder structure” is to them. In cases of company successions, we found that around two-thirds cannot say for sure who their shareholders are.
Markus Vischer (MV): I can confirm that. I often try to provoke entrepreneurs a little by asking: Are you sure you are the owner of your business? From my experience I would even say that 95% cannot say for sure who their shareholders are. This can be fatal.
What is the worst case scenario?
MV: The company becomes incapable of action. If the shareholders are not known, they cannot be invited to general meetings in a legally correct way, meaning that this meeting cannot be held. Previous general meetings may also be rendered invalid and decisions made can be reversed. A judge may call for bankrupcy proceedings.
AA: However, most companies are not aware of this. Only when a transfer of ownership (e.g. to a successor) or a sale is imminent will such things come to light. And that means a lot of work for people like Markus Vischer.
Why is it such a widespread problem that companies don’t know who their shareholders are?
AA: To answer this, we will briefly explain the different types of shares. There are, for example, registered shares, which are registered in the name of the shareholder and are entered in the share register. Bearer shares, on the other hand, make their owner a shareholder. In Switzerland there are around 50,000 companies with bearer shares, which is about a quarter. However, companies with registered shares are the most common, and they almost always have registered shares with restricted transferability.
And the problem lies with the transfer of the shares?
MV: Depending on the type of share there are different rules that must be followed. Often, the responsible parties believe that the transfer is carried out by making an entry into the share register. But, for example, in the case of securitized registered shares, an endorsement is required; this is a kind of transfer declaration for the share. Non-securitized registered shares must be transferred by assignment. A written declaration of assignment is therefore necessary. In addition to keeping a share register, since the FATF recommendations came into effect in 2015, a directory of bearer shareholders must also be kept and, where necessary, a list of beneficial owners. Basically, there are quite a lot of stumbling blocks and plenty of room for error.
We have discussed the problem in detail, now give us the solution!
MV: I recommend, for larger companies at least, to acquire so-called intermediated securities, a form of digital shares, and to consign them to the bank for handling. This prevents errors in the chain of succession, and the bank will still be there five or ten years later.
Mr. Arni, what solutions does Credit Suisse offer?
AA: For small family businesses with two or four shareholders who have experienced little change, it is not intermediated securities which are required but professional handling of the necessary paperwork. When a company deposits its stock with us, we register them with us and begin to help them. If a company has reached a certain size, let’s say a medium-sized family business, things can start to get very complex by the 3rd or 4th generation as the shares have been passed on through inheritance or divorce. This type of company can suddenly have 50 or 100 shareholders. In these cases, intermediated securities can be useful.
Are there companies that you would specifically recommend acquire digital shares?
AA: Yes, start-ups which are growing rapidly, as well as companies generally where employees participate through the buying of company shares. Employees come and go. This becomes very complex after a short while. In addition, start-ups often go through several rounds of funding. If there is no clear ownership structure, there is no money. Intermediated securities are very useful for such companies.
Intermediated securities are not free of charge and start-ups in particular are probably more likely to use their capital for something else rather than for intermediated securities …
AA: There are indeed costs involved in setting this up. The bank assumes the role of paying agent – this means that it charges fees, for example when paying dividends. But if you think about it, this investment is often worth it.
MV: We look after many corporations who have lost track of their shareholders, either during the handing-down of the business or for other reasons. Getting a specialized law firm to handle this will cost a lot more than conversion to intermediated form. When looked at this way you can see that intermediated securities make sense.
Key benefits of digital shares at a glance
- Ownership of the shares can be tracked at all times.
- Professionalization of share management enables the company and its board of directors to protect themselves against legal disputes.
- Potential investors, co-owners, lenders, and other important parties can rely on a tried-and-tested system for tracking ownership and professional management of changes in the shareholder structure.
- Established companies can successfully prepare for an upcoming transaction, such as a major loan, a new investor, the sale of the business, succession, or employee participation.
- Meanwhile, start-ups that opt for digital shares from the outset will find it easier to obtain capital.