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Blogs - The M&A Perspective

Court Decision on Swissair Cash Pooling - A Red Flag for Past Dividends?

15.05.2014 – In a recent decision regarding auditor liability, the Zurich Commercial Court held that upstream and cross-stream loans granted by a Swiss company may under certain conditions reduce its freely disposable equity and with this its legal ability to pay out dividends. The anonymized decision purportedly concerned the auditors of Swisscargo, a former subsidiary of Swissair, which took part in the Swissair group cash pooling. Swisscargo's auditors were held liable because they confirmed the legality of a contemplated dividend without deducting from the freely disposable equity the intra-group loans that were granted by the company in the context of a group cash pooling.

The decision's consequences are unclear and discussed controversially in legal doctrine. It also remains to be seen whether the judgment will be upheld by the Swiss Federal Supreme Court. Already the Zurich Commercial Court's first decision in this matter was reversed by the higher court and sent back for reconsideration. If this decision were upheld, dividends in groups with cash pooling arrangements would need to be (re-)analyzed in detail. The question would be whether, following the court's calculation method, the company (still) had sufficient freely disposable equity to declare the relevant dividend. If the answer were no, the dividend would be null and void and would need to be repaid to the company. In the context of a sale of a Swiss company that participated in a cash pooling, sellers consequently need to assess the risk that, based on the reasoning of this court decision, the company will seek to reclaim past dividends after consummation of the transaction. Buyers need to verify whether they are covered in case the target company is obliged to repay dividends received from former subsidiaries before closing. The M&A Perspective will of course keep you posted on future related developments.