An «eternal» shareholders' agreement hindering succession planning is invalid due to excessive binding according to Federal Supreme Court ruling 4A_45/2017
The parties to shareholders' agreements are often inclined to stipulate an indefinite period of time instead of implementing any termination options. Long-term contracts, however, usually are deemed invalid because of a prohibition of excessive self-commitment under Swiss law (article 27 para. 2 CC). This applies in particular if the contract restricts not only a party's economic sphere but also its personal freedom. Therefore, parties to shareholders' agreements should always stipulate termination modalities (if necessary combined with a long minimum term), as a recent judgment of the Federal Supreme Court shows.
Underlying the Federal Supreme Court ruling 4A_45/2017 (intended for publication) was a shareholders' agreement from 1985. Therein, the parties agreed to grant each other pre-emption rights and established considerable dividend rights in favor of a non-operatively active shareholder. The contract was concluded for an indefinite period of time and did not provide a possibility for termination. Essentially, the scope and consequences of such a clause were the main subjects of controversy in front of the Federal Supreme Court.
First of all, the Court pointed out that, according to its case-law, contracts cannot validly be concluded for all eternity. If a permanent contract does not include a possibility for termination, it must be decided on a case-by case basis, at what point the contractual relationship may be terminated.
If a contract restricts (only) the freedom to engage in economic activities, a violation of art. 27 para. 2 CC may be assumed reluctantly. A contractual restriction should only be considered excessive if it exposes the obliged obligated party to the arbitrariness of another, abolishes his economic freedom altogether or restricts it to such an extent that the foundations of his economic existence were at risk. Even a (very) long-term commitment to a shareholders' agreement may be permissible, if it is inseparably linked to the shareholder status and if this status could be abandoned at conditions that are not obstructive (e. g. the possibility of selling the shares at a fair price). However, an excessive commitment would be assumed if, in context with succession planning, it affects the entire economic freedom of a contracting party and, at the same time, restricts the personal sphere of this party.
In above mentioned case, the Federal Supreme Court considered the contract to be excessively binding. The shareholders' agreement, which had been in place for more than 30 years already, unduly restricted the freedom of the defendant to plan his succession. The defendant's sons, who are also active in the firm, would have had to pay ever-increasing dividends to the non-operatively active founding shareholder. Such an obligation makes the transition of a business to a new generation unattractive and thus succession planning (too) difficult. On the basis of these circumstances, the Federal Supreme Court concluded that the shareholders' agreement had to be limited in time; i.e. in this case that the contract is terminated with immediate effect (ex nunc).
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