Markets
Switzerland: conditional capital and the discount test
Switzerland permits the instrument and attaches a test to it. A SIX-listed company can issue a convertible priced at each conversion, and the articles must state the basis on which the issue amount is calculated. What it cannot do freely is lift the advance subscription right: Article 653c(3) of the Code of Obligations allows that only for good cause, or on appropriate conditions.
Key takeaways
- The gate is the Vorwegzeichnungsrecht. Bonds carrying conversion rights go first to shareholders pro rata. Article 653c(3) CO lets that advance subscription right be cancelled only for good cause, or where the shares are listed and the bonds are issued on appropriate conditions.
- A formula price is written into the statute. Where the bonds are not offered to shareholders first, Article 653b(2) requires the articles to stipulate the basis on which the issue amount is to be calculated. Swiss law asks for a basis, not a figure.
- Two hard numbers in Article 653a. Conditional capital may not exceed one-half of the share capital in the commercial register, and the contribution must be at least equal to the nominal value.
- The Kapitalband is the 2023 addition. The articles may authorise the board to vary the share capital within a band for not more than five years, up to half above and half below the registered figure.
What has to change before the structure works
Switzerland imposes no pricing formula, reference period or maximum discount. It imposes a procedure, and that is where a market-referenced convertible survives or does not.
Article 653c(2) CO requires bonds carrying conversion rights issued in connection with conditional capital to be offered first to shareholders in proportion to their existing participations. Article 653c(3) allows that priority right to be cancelled in two cases only: where there is wichtiger Grund, good cause; or where the shares are listed and the bonds are issued subject to appropriate conditions. Article 653c(4) adds that no one may gain an undue advantage or suffer an undue disadvantage as a result.
For a listed issuer the second limb is the working route, and it is a standard rather than a rule. A facility priced at a deep discount has to be defended as issued on appropriate conditions, on the day, by a board judged afterwards. No published authority applying that test to a refixing conversion price could be found for this note, which is why the honest verdict here is constrained rather than permissive.
What the articles have to say about the price
On pricing mechanics Swiss law is unusually helpful. Bedingtes Kapital, conditional capital, is created by a clause in the articles, and Article 653b(1) lists what that clause must contain: the nominal value of the conditional capital, the number and type of shares, the beneficiaries of the conversion rights, any restriction of the subscription right, and the procedure for exercising the rights. Article 653b(2) adds two items where the instruments are not offered to shareholders first: the conditions on which the rights may be exercised, and the basis on which the issue amount is to be calculated.
That phrase answers the question most issuers ask. A conversion price expressed as a stated discount to an average over a defined window is a basis of calculation; it need not be a figure fixed at signing.
| Point | What the Code of Obligations requires | What the structure needs |
|---|---|---|
| Advance subscription right | Offered to shareholders pro rata unless lifted | Lifted once, in advance, covering every tranche |
| Ground for lifting it | Good cause, or listed shares plus appropriate conditions | An untested standard applied to a discount |
| Price in the articles | The basis on which the issue amount is calculated | A formula, which that wording accommodates |
| Size of the conditional capital | Not more than half the registered share capital | Headroom for the whole facility, reserved up front |
| Floor per share | Contribution at least equal to nominal value | Room under the traded price if it falls |
| Structural comparison only. Not an offer, a quote, or a rate card. | ||
The Kapitalband, and why a Swiss board should have one
The company law revision in force since 1 January 2023 added the capital band. Under Article 653s CO the articles may authorise the board to vary the share capital within a bandwidth for not more than five years, the upper limit no more than half above the registered capital and the lower limit not below half of it. Putting one in place at an annual general meeting turns a governance question into a headroom question, and it is the most useful preparatory step a Swiss board can take.
On an ordinary capital increase the older rule still applies. Article 652b(2) CO allows the general meeting to restrict or cancel the subscription right only for good cause, naming takeovers and employee share ownership as examples, and Article 652b(4) applies the no-undue-advantage test to the fixing of the issue price itself.
General information, not legal advice. How Swiss courts or SIX Exchange Regulation would apply the appropriate conditions test in Article 653c(3) to a discounted, refixing conversion price is unsettled and was not resolved for this note. Take advice from qualified Swiss counsel before terms are agreed.
Resale, disclosure and the Swiss prospectus regime
Switzerland sits outside the EU prospectus regime, so the fungible-securities exemption that shapes an issue in Germany or Austria has no application here; the Financial Services Act regime applies instead. Shares created out of conditional capital are ordinary shares once admitted to trading, with no Swiss holding period and no resale registration. The recurring obligations are ad hoc publicity at each material drawdown and shareholding notifications as the investor's stake crosses the disclosure thresholds.
Where the par floor binds harder than the procedure, the comparison worth reading is Greece, where nominal value is a hard floor and a conversion range has to be voted. On the instrument side see convertible debt financing for listed issuers and equity facilities. A Swiss issuer with US holders should also read Rule 144 and restricted securities. Send the conditional capital clause.
Primary sources
Financing a Swiss listed issuer: frequently asked questions
Can a Swiss listed company issue a convertible with a floating conversion price?
Yes in principle. Nothing in the Code of Obligations fixes the conversion price at issuance, and where the bonds are not offered to shareholders first, Article 653b requires the articles to stipulate the basis on which the issue amount is to be calculated. A formula is contemplated by the statute. The constraint is procedural: the advance subscription right has to be validly lifted.
What does appropriate conditions mean in Article 653c(3)?
The statute does not define it, and no published authority applying it to a conversion price set at a discount to a volume weighted average price was found for this note. That is the largest open question in the Swiss analysis and why this market is treated as constrained rather than permissive. The point needs Swiss counsel before terms are agreed.
How large can the conditional capital be?
Article 653a(1) provides that the nominal amount by which the share capital may be increased in this contingent manner must not exceed one-half of the share capital specified in the commercial register. Article 653a(2) adds that the capital contribution must be at least equal to the nominal value, so a low nominal value is what creates room under a falling share price.
Are shares issued on conversion freely tradable in Switzerland?
There is no Swiss holding period and no resale registration. Shares created out of conditional capital are ordinary shares once admitted to trading. What applies is disclosure: the prospectus regime under the Financial Services Act, ad hoc publicity at each material drawdown, and shareholding notifications as the investor crosses the statutory thresholds.
If this is about a live situation
Swiss law will take a basis of calculation rather than a figure, which is unusual; what it will not do freely is set aside the advance subscription right. Whether the articles already handle that decides whether there is a structure here at all, and the instrument comparison is the next page once they do.