Using digital shares to ensure an orderly shareholding structure
A majority of Swiss SMEs cannot fully track the ownership of their shares. This may have dire consequences – for example in the event of succession management, if the company is to be sold, or if it needs to raise capital. Digital shares provide a simple, relatively unknown solution.
A majority of Swiss joint-stock companies do not have a clear shareholding structure
Every SME needs to ask itself three questions:
- Do you know who the owners of your company are?
- Is your shareholding structure clear, and is it legally watertight?
- Would your company be structurally prepared for a transfer of ownership – for example, if the company were to be sold?
Why these questions? Reto Leisi, expert for Entrepreneurs & Executives at Credit Suisse, explains: "We're finding that approximately two thirds of all Swiss SMEs are unclear about the ownership structure of their shares." But through his day-to-day work he sees time and time again how important it is to have an orderly shareholding structure. "If you only realize halfway through the succession or sale of the company that there are deficiencies in your ownership structure, this can result in delays, impairments, or even a cancelation of the transaction."
Having a clear shareholding structure is therefore important, particularly when it comes to raising capital, mergers, company successions, and similar actions.
However, there are other good reasons for having a clear shareholding structure. For instance, inadequate tax compliance due to an unclear ownership structure can have dire consequences for shareholders and also for the company and its board of directors. In addition, decisions made by the general meeting of shareholders, as well as the election of members of the board of directors, depend on a clear shareholding structure.
Share disposals, divorce, and inheritance among the possible causes
The deficiencies in a shareholder structure can be down to numerous factors: Stocks are sold, inherited, or can change hands due to the shareholder getting divorced. "Transfers can often have legal defects. For example, ownership is transferred by what is known as a written assignment; but in many cases this part of the transaction is not properly completed, or it contains defects," says Leisi.
Digital shares offer a solution
To avoid the risk of a defective ownership structure, it is often worth reissuing the shares in book-entry form. Leisi explains: "These digital shares, as we call them, ensure full integration into the banking system – in exactly the same way as happens with listed shares. The difference is that the digital shares are not traded on an exchange."From then on, the share certificates do not leave the banking system and the shareholding structure is legally compliant at all times.
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.
What type of companies are digital shares particularly suitable for?
"I recommend digital shares both for capital-intensive start-ups as well as established SMEs that are preparing for one of the transactions mentioned," says Leisi. The motivation is the same in both cases: A transfer or broadening of the shareholder base should be preceded by a switch to digital shares, he adds.
One in five established SMEs in Switzerland currently faces a change of ownership in the next few years – and the trend is rising. This is due to the imminent retirement of many entrepreneurs from the baby boomer generation. According to Leisi: "It's best to make the switch to digital shares when things are quieter – before matters become urgent in the run-up to a succession."
For start-ups, on the other hand, there is no such thing as a quiet period. Leisi recommends that firms set to embark on multiple financing rounds should adopt a digital share register right from the start.
"Either way, for virtually every company with at least a certain size of shareholder base, digital shares offer advantages in relation to their share certificates – advantages that shouldn't be underestimated," the Credit Suisse advisor concludes.