Claims for Damages of Credit Suisse Investors against the Swiss Federal Government / Swiss Authorities?
Following the collapse of Credit Suisse (“CS”), namely the merger with its rival UBS facilitated or possibly even ordered by the Swiss authorities during the weekend of 18 / 19 March 2023 (the “CS-UBS-Merger”), media are reporting about initiatives to raise claims against the Swiss authorities in this context (see, for example: https://www.20min.ch/story/laesst-sich-automatisieren-kommt-es-zur-klagewelle-der-cs-kleinanleger-483973532115; https://www.reuters.com/business/finance/possible-legal-action-by-some-credit-suisse-at1-bondholders-discussed-law-firm-2023-03-20/). What actually creates quite some upheaval, namely in international media, is the full write down of the CS Additional Tier 1 (“AT1”) capital instruments, which is treated at section B below. Prior to that, section A below addresses the issue of possible damages claims of CS shareholders. At section C below, bilateral investment treaties (“BIT”) are briefly addressed as potential bases for damages claims in the present context.
A) Credit Suisse Shareholders
As far as the situation of CS shareholders is concerned, the purpose of this paper is to share a few preliminary thoughts in this context.
As a preliminary remark, it should be noted that the following considerations relate to CS shareholders who purchased their shares before 16 March 2023, i.e., before the Swiss National Bank and the Swiss financial-markets regulator FINMA announced the following, among other things, in a media release on the evening of 15 March 2023: “Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks. If necessary, the SNB will provide CS with liquidity.” This reservation is made because it is not clear at this stage whether this media release could have been misleading in that the decision on the CS-UBS-Merger might already have been taken on 15 March 2023, i.e., before this media release was published. If this were the case, special legal consequences might arise with regard to shareholders who purchased their CS shares on 16 and/or 17 March 2023, which would have to be specifically examined.
The principal legal basis for any claims for damages against the Swiss government would appear to be Art. 3(1)(a) of the Swiss federal law on the liability of the federal government as well as its civil servants dated 14 March 1958, as amended (currently as of 1 January 2020) (hereinafter: the Swiss Federal Liability Act or, shorter, the “SFLA”), which reads, in a tentative and unofficial English translation, as follows:
“The Swiss federal government shall be liable for damage unlawfully caused to third parties by a civil servant in the performance of his or her official duties, irrespective of the fault of the civil servant.”
In the sense of preliminary first thoughts, at least two elements of Art. 3(1)(a) of the SFLA would appear to be problematic in the present context, namely the conditions that (i) the relevant government action had to be unlawful and that (ii) such action had to cause a financial damage.
(i) Unlawful ordering of the CS-UBS-Merger?
On a preliminary basis, convincing the Swiss Federal Tribunal (the “SFT”), Switzerland’s highest court, that the Swiss federal government acted unlawfully in connection with the CS-UBS-Merger would appear to be a challenge. In essence, and simplifying the complex legal issues for the purposes of this paper, in connection with the CS-UBS-Merger, the Swiss federal government used its constitutional power to issue emergency legislation in situations of distress. Such constitutional power is vested in the Swiss federal government in Art. 184(3) and Art. 185(3) of the Swiss Federal Constitution of the Swiss Confederation, dated 18 April 1999, as amended (currently as of 13 February 2022) (the “Swiss Constitution”). When reviewing and assessing the Swiss federal government’s use of its constitutional emergency legislative power, the SFT restrains itself. The SFT’s case law in relation to Art. 184(3) and Art. 185(3) of the Swiss Constitution as well as the relevant doctrinal writings of Swiss legal scholars would have to be analyzed in detail to make a more precise assessment of this critical legal issue. That said, it would at least appear to be uncertain whether the SFT would conclude that in the relevant circumstances, the Swiss federal government overstepped the boundaries of its relevant powers when initiating the CS-UBS-Merger. Therefore, in the sense of very preliminary thoughts, it would appear to be uncertain whether the element of unlawfulness is met in the present context.
(ii) Causation of financial damage?
Prima vista, one could be inclined to conclude that the CS shareholders have sustained a financial damage because of the conditions of the CS-UBS-Merger. On 17 March 2023, the closing price for one CS share was CHF 1.86, whereas the price for one such share in the CS-UBS-Merger has been fixed at CHF 0.76 (based on the 17 March 2023 closing share prices), which represents a reduction of approximately 59.14%.
However, in relation to the element of the causation of financial damage, it is crucial to understand the concept of financial damage under Swiss damages law. One of the basic principles in this regard is that at most the financial damage actually suffered is compensated. Legal concepts that grant a claim for compensation that exceeds the financial loss actually suffered, such as the French concept of a “perte de chance” or much less the concept of punitive damages under U.S. law, are unknown to Swiss damages law. According to the established case law of the SFT, the financial damage actually suffered is determined in the sense of the so-called difference theory by the arithmetic difference of two asset values, an actual asset value taking into account the damaging event on the one hand and a hypothetical asset value that would exist without the damaging event on the other hand.
In relation to the CS-UBS-Merger discussed herein, the SFT’s above-described financial damage concept leads to the comparison between, on the one hand, the actual situation a CS shareholder finds himself or herself in following such merger, with a fixed value of CHF 0.76 per CS share (based on the 17 March 2023 closing share prices), with, on the other hand, the hypothetical scenario he or she would be in had the Swiss federal government not ordered such merger.
Now, had the Swiss federal government not ordered the CS-UBS-Merger, it would appear to be probable that the CS share price would have declined even more than the CHF 0.76 per share level fixed in the CS-UBS-Merger. This would most likely have been so in the event that the Swiss government would not have taken any rescue measures at all, likely resulting in a bank run on CS and its bankruptcy, but also in the event that the Swiss authorities would have initiated a restructuring in the sense of the Swiss TBTF regulation.
In summary, based on a very preliminary analysis of the possibility for CS shareholders to raise damages claims against the Swiss authorities in connection with the CS-UBS-Merger, and subject to the preliminary remark above, it would appear that at least two elements of such claims are problematic, the element of unlawfulness as well as the element of financial damage.
B) Credit Suisse AT1 Investors
The factual and legal situation regarding the total write down of CS’s AT1 capital instruments would appear to be quite complex.
In the sense of a very preliminary assessment, it would appear that one of the critical legal issues in relation to the write down of CS’s AT1 capital instruments is the question whether the conditions of a “Write-down Event” in the form of a “Viability Event” as per “Condition” 7(a)(iii)(B) of the relevant offering memoranda were met. Based on media reports, it would appear that in this regard, the position is advanced in the current discussions that the conditions of this “Viability Event” as defined in the offering memoranda were not met, because the support provided by the Swiss government to CS would not have the effect of improving CS’s capital adequacy (see “Condition” 7(a)(iii)(B), emphasis added: „… CSG has received an irrevocable commitment of extraordinary support from the Public Sector (beyond customary transactions and arrangements in the ordinary course) that has, or imminently will have, the effect of improving CSG’s capital adequacy…“). Regarding this position, see, for instance, the interesting article of Ruedi Keller, published in the Neue Zürcher Zeitung on 25 March 2023, at page 5.
Apart from this aspect, as FINMA points out in its press release of 23 March 2023, it is to be noted in the present context that on 19 March 2023, the Swiss federal government enacted an emergency ordinance on additional liquidity assistance loans and the granting of federal default guarantees for liquidity assistance loans by the Swiss National Bank to systemically important banks (the “Emergency Ordinance”), which would authorize FINMA in its Art. 5a to order the borrower and the financial group to write down AT1 capital instruments. Consequently, it would appear that the Swiss federal government used its constitutional power to issue emergency legislation in situations of distress not only in relation to CS and UBS shareholders, depriving them of their legal right to vote on the relevant merger transaction, but also concerning the full write down of the value of the CS AT1 capital instruments. Such constitutional power is, as mentioned above, vested in the Swiss federal government on the basis of Art. 184(3) and Art. 185(3) of the Swiss Constitution. Another key legal issue in the present context is, therefore, to determine whether or not the Swiss federal government overstepped the boundaries of its relevant emergency legislative powers when enacting the above-mentioned Art. 5a of the Emergency Ordinance.
From a lawyer’s perspective, it will be very interesting to follow the developments related to the full write down of the CS AT1 capital instruments. Namely because quite a few complex legal issues are to be determined in this context, such as, for instance, the question against whom any claims for damages would have to be brought (CS as the issuer of the AT1 capital instruments? The Swiss federal government that enacted Art. 5a of the Emergency Ordinance? FINMA that ordered the write down?).
C) Bilateral Investment Treaties
For non-Swiss CS investors, a BIT might constitute an alternative or additional legal basis for bringing claims against Switzerland in connection with the CS-UBS-Merger. Such international treaties shall, in essence, protect non-Swiss investors from unfair treatment or expropriations by the host state, here Switzerland, and intricate legal issues are to be analyzed in detail whether in the present context claims for damages might be based on a particular BIT binding Switzerland.
D) Word of Caution
Given the complexity of the relevant factual and legal issues as well as the important amount of discretion at various levels to be exercised when determining such issues, i.e., at the level of the assessment of facts and evidence and at the level of the interpretation of open, not precisely defined legal terms and concepts, it is to be hoped that prior to engaging in any costly legal proceedings, potential claimants, be they CS shareholders or holders of AT1 capital instruments, analyze their legal position in detail and obtain a detailed and full explanation of the cost implications of such proceedings.
PHH, Zurich, as of 26 March 2023
This article has been written by Dr. iur. Philipp H. Haberbeck (PHH), a Swiss attorney-at-law, who is registered in the Attorneys’ Register of the Canton of Zurich, Switzerland (see, for more detailed information, www.haberbeck.ch). The law firm PHH operates in the form of an individual company (Einzelunternehmen) under Swiss law, registered in the Commercial Register of the Canton of Zurich, Switzerland, with the company identification number CHE-407.615.179. Each and any mandate is exclusively concluded in writing, based on the mutual signing of a mandate agreement. Please note that the information contained in this article is for general informational purposes only and is not intended to constitute legal advice. No actions or decisions should be taken on the basis of this article without seeking specific legal advice.