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Blogs - The M&A Perspective

Shareholder Loans and Dividends - A Possibly Fatal Financial Assistance Cocktail

29.07.2015 – Financial assistance, broadly understood as the provision of inter-company loan(s) or security to affiliate companies, has always been problematic from a Swiss corporate and tax law perspective. Various mandatory restrictions apply. To comply with the law is particularly demanding if a Swiss company participates in a group-wide cash pool system, because such an arrangement invariably leads to the granting of intra-group loans by its participants.

A recent decision by the Swiss Federal Supreme Court adds another level of complexity to this topic:

As a rule, a Swiss company may only pay dividends out of so-called "free equity". The free equity is ascertained on the basis of a balance sheet test and corresponds, in principle, to the amount by which the assets of the company exceed the total sum of the company's liabilities and its share capital (incl. reserves). According to the Federal Supreme Court's recent decision,

  • the free equity available for dividend distribution must be further reduced by the amount of any outstanding shareholder loans (including receivables from intra-group cash pools) that do not pass the arm's length test, and
  • a shareholder loan is not granted at arm's length if no security is provided and the borrower's solvency is not verified.

Legal scholars criticize the decision for various reasons and its ramifications are still unclear. Potentially, a dividend which has been paid in violation of the above rules on free equity is null and void and the target company's board is entitled and obliged to reclaim the dividend amount from the recipient. In the context of a sale of a Swiss company, this issue is not only a due diligence item for the potential buyer, but also, and foremost, for the seller. For the seller may have to safeguard in the sales contract against the risk that after closing the target company successfully reclaims a pre-closing dividend from him/her. One way to deal with this could be to provide in the share purchase agreement for an equivalent post-closing increase in purchase price in case a dividend is reclaimed.