Beware the differences of signatory power in Swiss company law

Although Chinese and Swiss company laws are similar in general outline, numerous differences exist in the details. One such divergence lies in the origin and exercise of signatory power. We have seen Chinese investors entrusting a “friend” with their entire Swiss company, extending them signatory power without knowing what that actually means until suffering great, in some cases irreparable, losses.

A valid signature

Signing a contract means acknowledging the rights and obligations written therein. As companies can only act through representatives, the signature of the representative, if valid, will constitute rights and obligations for the company, rather than for the representative as an individual.

The representative is thus in a strong position to establish contractual relationships (i.e. mutual rights and obligations) for the company. Both the company and the contracting partner have to be protected against possible abuse of the signatory power by the representative. The major risk for the company is to be bound to its detriment, and for the contractual partner that the invalidity of the representative’s signature leads to the invalidity of the contract.

Protecting mechanism

When making direct investments in Switzerland, Chinese investors usually either establish or buy into a limited liability or incorporated company. Sometimes they also establish a branch.

As shareholder of the invested company, or as companies establishing a branch, they appoint or elect the general manager(s) – in the case of a limited liability company or branch – or the board of directors in the case of an incorporated company, who have then, pursuant to the Swiss company law, a comprehensive right to represent the company (or branch), i.e. a sole signature power by law enabling them to enter into any type of transaction as far as it lies within the company’s purpose, as defined in its articles of association.

This comprehensive right to represent the company may be limited in the company’s articles of association or organisational rules in different ways, but in order to validate the limitations vis -a-vis third parties that are unaware of such limitations they must be registered in the commercial register.

Nevertheless, the only limitations that may be registered are signature powers to be exercised collectively – i.e. by several signatories together – and, in the case of a branch, signature powers that are valid for the branch only, rather than for the whole company.

Collective signature porwer

Collective signature power means that the relevant persons may not validly sign alone. Mostly, the collective signature power is joint, i.e. two individuals must collectively sign in order to validly bind the company.

The general manager(s) of a limited liability company (or branch), or the directors of an incorporated company, must be registered with the commercial register together with the information about their signature power (none, sole or collective). If other individuals are granted the right to represent the company, such right may either be granted as registered signature power or mere power of attorney (not registered in the commercial register).

For registered signature powers, a notarised sample of the signature must be lodged with the commercial register. The entries are publicly accessible online as well as offline, so that any potential business partner may consult the commercial register to see whether a signing person is authorised to bind the company and verify the signature. Nevertheless, if such third parties know that the information registered in the commercial register is outdated or incorrect, they may not rely on it.

Not registered

If a signing person is not registered, the contracting partner may either not proceed with the execution of the contract or ask the person to produce a power of attorney granted by persons with registered signature power. According to Swiss company law, any limited liability company, branch or incorporated company must be represented by at least one individual resident in Switzerland who, however, need not be a general manager or director.

In foreign-invested Swiss companies or branches owned by investors far away from their daily operations, it is even more essential to control the company’s or branch’s signature power. It makes sense to “split” the Swiss representation in two by prescribing collective signature in order to let the two signatories exercise control upon each other.

Assigning signature power

However important it is to control the signatory power, we should not lose sight of its nature or essence: the power to sign is the capacity to contract, while the inability to validly sign is equivalent to loss of legal capacity.

This can happen if signature power is only granted jointly to two individuals. What happens if in an urgent matter one of them is unable to act due to unavailability for whatever reason? To avoid such incidents and at the same time keep the advantage of collective signature, the company may grant collective signature power or a power of attorney to a further individual, for example a lawyer, who could only step in in emergency cases.

Cultural risk

Chinese businesspeople invest a lot of time and effort in building up trust before entering into business dealings with each other, however they tend to rely fully on the counterpart’s loyalty once that test is over. This culture-bound trait may lead to abuse abroad, where the rules of the game are different. It is essential for Chinese investors to be aware of this trait, its potential dangers, and to learn to protect their own interests using host country law.