Credit Suisse and the Future of Shareholder Rights in the Banking Sector
Reflecting on the recent completion of the agreement to merge banking giants Credit Suisse and UBS, the transaction history leaves us with several concerns regarding the future of shareholder rights in the banking sector. Credit Suisse was a Swiss multinational investment bank and financial services company that offered a range of services including private banking, investment banking, and asset management. By the end of 2021, it managed CHF 1.6 trillion in assets, making it the second-largest bank in Switzerland. But by the end of 2022, this sum had decreased to CHF 1.3 trillion and the bank’s stock price had declined 90 percent.
Credit Suisse ultimately failed in March 2023 after a challenging period, marked by a spying scandal involving an outgoing executive in the wealth management division; the collapse of Archegos Capital and Greensill Capital that resulted in a $1 billion loss for Credit Suisse; and the departure of the company’s Chairman in January 2022 due to reports that he had broken Covid-19 protocols. Management changes ensued, and in July and August of 2022, rumors began to circulate that Credit Suisse was on the verge of failing. These rumors prompted clients to withdraw approximately $110 billion in funds during the final quarter of the year, further placing the bank in peril.
By the first trimester of 2023, the situation had become too dire for Credit Suisse. The company announced that it would need to borrow up to $54 billion from the Swiss National Bank. This news, coupled with the failures of two US institutions, Silicon Valley Bank and Signature Bank, sent shockwaves through the global financial system. Finally, in a rushed movement in March 2023, Switzerland's regulatory authorities allowed the takeover of Credit Suisse by rival UBS for approximately $3.3 billion, without requiring the approval of either company's shareholders.
Aside from considerations concerning the future of the financial landscape in Switzerland – a country known for its banking stability – several features of the transaction generated concerns among financial and legal experts. Firstly, Swiss authorities orchestrated the deal without Credit Suisse or UBS shareholder approval, meaning that investors had to watch the company be sold with a 60 percent discount and listen to an apologetic statement from the CEO during their annual meeting last April.
Shareholder approval of mergers is a paramount rule of corporate law providing a safeguard against management’s abuse of power. Because shareholders have a vested interest in the company and mergers can significantly impact the value of their investment, requiring their majority approval helps ensure that the decision is made in the best interest of the company and its owners. Some jurisdictions legally require shareholder approval of a merger, including Switzerland. However, for Credit Suisse, the government made the unprecedented decision to pass an emergency ordinance to bypass this step.
Shareholders still received close to $3.25 billion in UBS shares. However, in a bizarre inversion of recovery rules, Additional Tier 1 (“AT1”) bondholders were completely wiped out by the agreement. AT1s are a type of debt designed to absorb losses in the case of an institution’s failure and are typically placed above equity. The strange situation with AT1s in this deal has prompted holders of more than CHF 4.5 billion ($5 billion) of Credit Suisse bonds to initiate a lawsuit against the Swiss financial watchdog, FINMA. FINMA claims that its decision to inflict severe losses on some bondholders is legally sound because the bond prospectuses and emergency government regulations permit a total write-down in a “viability event.” Documents recently revealed that Credit Suisse had also privately disputed FINMA’s decision. The bank was already facing numerous legal difficulties prior to the announcement of the merger, having put aside $4 billion for legal expenditures since 2020, culminating in net losses in 2021 and 2022.
After so many mishaps at one of the world’s most prestigious banks, people are left wondering what happened to Credit Suisse and what this portends for the future of the banking industry. The first consideration revolves around Credit Suisse’s ability to handle its critical moments. Credit Suisse’s problem originated in its corporate governance and culture, as seen by the number of scandals, financial losses, and management turnovers the company faced prior to its collapse. One significant component of this was Credit Suisse’s continuous shift in recent years away from its core business of wealth management and into investment banking. The endeavor did not pay off and, prior to the UBS acquisition, Credit Suisse’s recovery strategy included spinning out the IB division. While it is unclear what UBS will do with the division now, its failure pre-merger highlights the kind of bad management decisions that may have contributed to Credit Suisse’s current condition.
A few conclusions might be reached for the second consideration regarding the banking industry’s prospects following the bailout. It is worth noting that the transaction will undoubtedly create a financial juggernaut with more than $5 trillion in total invested assets. Although the “too big to fail” philosophy may have saved financial institutions in the past, a shock in a bank of this size could be catastrophic for the global economy in the long term. Even the short-term consequences are unclear. Some experts view the fact that the $3.25 billion that UBS paid was only a small fraction of Credit Suisse’s book value at the time as indicative of a much larger quality problem with the assets Credit Suisse and even other banks held on their balance sheets, a problem that the markets do not appear to have taken into account in the months since the acquisition.
The saga of Credit Suisse’s downfall and subsequent takeover by UBS raises important questions about corporate governance, shareholder rights, and the future of the banking industry. The bank’s troubles were born out of poor management decisions and a cultural shift away from its core business of wealth management – broadly, the failure of what was once one of the world’s most prestigious banks highlights the risks inherent in investment banking and the importance of maintaining a focus on core competencies. The emergency takeover by UBS, orchestrated without shareholder approval, also raises concerns about the role of government intervention in the banking sector. It remains to be seen how the markets will react to the deal and whether UBS can successfully integrate Credit Suisse’s operations. The fallout from Credit Suisse’s collapse and the ensuing legal battles will likely continue to reverberate throughout the banking industry for years to come, serving as a cautionary tale for future generations of bankers, investors, lawyers and more.
Luiza Coelho da Rocha is an LL.M. candidate at NYU, where she also serves as a Graduate Editor for the NYU Journal of Law & Business and as the Brazilian Legal Society's Communications Officer. Before attending NYU, Luiza worked at a top boutique firm in Rio de Janeiro focusing on investment funds, securities law, and strategic corporate litigation. She is also a member of the Brazilian Bar Association's Capital Markets Commission.