Swiss Federal Criminal Court rules a merger by absorption does not constitute a definitive impediment to a criminal proceeding against the transferring company

On 19 August 2024, the Appeal Court of the Swiss Federal Criminal Court ruled on the question of whether, in the context of the merger by absorption between two banks, the criminal liability of the transferring company can be attributed to the acquiring company or whether the dissolution of the transferring company without liquidation constitutes a final procedural impediment.

In its ruling, the Court recalled that procedural provisions that apply to natural persons are in principle applicable to legal persons, such as the presumption of innocence. No parallel between the death of an individual and the merger by absorption of a company, however, can be established. By dispensing with a uniform solution for liquidation, dissolution and conversion, the Swiss legislator recognised the specific features inherent in the status of a legal person compared to that of a natural person and invited the courts to treat each case based on its own merits and specific circumstances.

In Swiss criminal law, criminal liability of undertakings encompasses all legal persons (except for territorial corporations), including companies and sole proprietorships. Such liability is not dependent on the existence of a legal personality since commercial activities can be conducted outside of the formal legal framework of a duly registered company. In other words, an interpretation of the criminal liability of undertakings based only on the registration with the Commercial Register does not take into account that entities without legal personality are also punishable under Swiss criminal law.

Therefore, the Court is of the view that, from a criminal and procedural law perspective, it would be inappropriate and, depending on the circumstances, excessively formalistic to consider a company as no longer existing because of its deletion from the Commercial Register. The Court concluded that, while the legal form of a company does not constitute the very essence of its existence, it must be recognised that its corporate purpose and economic activity do constitute the essence of its existence. According to the Court, the criterion of economic and functional continuity (i.e. the same or similar corporate purpose, universal transfer of activities under Swiss merger rules, including transfer of employees and premises) should be favoured when interpreting the legal provisions governing the criminal liability of undertakings. In short, to quote a frequently used maxim in regulatory matter, the Court decided to follow the "substance over form" principle.

Consequently, the court considers that, if a merger results in the continuity of the transferring company's economic and functional activity, the absorption by the acquiring company does result in the transfer by universal succession of the assets and liabilities of the transferring company to the acquiring company, including the transferring company's criminal liabilities. For the Court, this interpretation neither violates the principle of legality nor the principle of the individual nature of penalties according to which a person may not be convicted of a punishable criminal offence that it has not committed insofar as the acquiring company is not "economically" a third party in relation to the transferring company.

Outlook

This decision of the Appeal Court of the Swiss Federal Criminal Court does not appear surprising from a corporate/M&A perspective. It can be seen as an application of the principle of universal transfer of assets and liabilities in case of a merger by absorption. However, from a procedural perspective, in the context of a criminal case the decision of the Swiss Federal Criminal Court clarifies a situation that was disputed among scholars.

This ruling remains subject to appeal before the Swiss Federal Supreme Court.

For more information on Banking and Financial services regulations or Corporate/M&A matters in Switzerland, contact your CMS client partners or local CMS experts.