Excessive binding of shareholder tie-in agreements

Shareholder binding agreements regulate the rights and duties among the shareholders of a corporation such as voting rights agreements, participation ratios, share transfers, or dividend policies. They were often made for long durations or even without the possibility of termination in the past. However, this can represent an excessive binding in the sense of Art. 27 Para. 2 of the Swiss Civil Code (ZGB).

With a shareholder binding agreement (ABV), the shareholders of a corporation are obligated among themselves. The content is based on the needs of the shareholders, but usually includes issues such as voting rights agreements, participation ratios, transfer regulations, or the dividend policy. Particularly older ABVs are often non-cancellable and designed for an indefinite duration, which raises the question of excessive contractual commitment in the sense of Art. 27 Para. 2 ZGB.  This issue was the point of contention in a case ruled by the Federal Court on June 27, 2017. In 1985, three shareholders (A, B, and C) founded a corporation and entered into an ABV among them and the company. This included a pre-emption right among themselves, the claim of A, B, and C to a seat on the board of directors, and the distributions of the company to them, specifically the following provision: "As soon as the salary of A increases in real terms by more than CHF 10,000, or adjusted for inflation exceeds CHF 110,000 per year, the AG is to pay Mr. B 34% of the amount exceeding this limit. The payment is made annually at the end of each year." The contract was made non-cancellable for an indefinite period. For the case of violations of the contract terms, a contractual penalty in the amount of CHF 40,000 per case was agreed upon. The agreement could only be changed with the consent of all three shareholders.

In 1998, negotiations for a change in the contract were held, however, no agreement was reached. Subsequently, shareholder A terminated the ABV a year later, which B did not accept. In 2013, B filed a lawsuit against A at the district court of Appenzell Ausserrhoden demanding payment of the contractual penalties and his election to the board of directors, since he was not elected to the board as foreseen in the ABV from 1999 to 2014. The district court ruled in favor of B and obligated A to pay the penalties and to elect, or not deselect, B. This under the threat of fines or imprisonment according to Art. 292 of the Swiss Penal Code, should he not elect, or deselect B. A brought the case before the Federal Court, which partially approved the complaint. It emphasized that a violation against Art. 27 Para. 2 ZGB (excessive commitment) should generally be assumed only very cautiously. A contract is only excessively binding if it delivers the obligated to the arbitrariness of another, abolishes his economic freedom, or restricts it to an extent that the foundations of his economic existence are endangered. However, an indefinite or very long binding period is permissible if it is inseparably linked to the shareholder status and can be relinquished under not significantly difficult conditions (such as by selling the shares at a fair price).

According to the Federal Court, however, one can assume an excessive commitment particularly when it concerns the entire economic freedom of activity of a contract party in the context of a succession planning and at the same time limits the personal field of activity. In this case, this was applicable as the ABV excessively restricted shareholder A’s freedoms in succession planning a generation after contract conclusion. The sons of A working in the AG had to grant increasingly higher distributions to the non-operatively active B, which made a business takeover unattractive and thus overly complicated the succession planning. Therefore, the contract was seen as excessively binding and was nullified with immediate effect.

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