The Swiss M&A market is currently mostly driven by strategic investors. However, investors are challenged to find more creative ways to get deals done, particularly in terms of financing. Large transactions face financing difficulties due to more expensive debt borrowing, and investors have to look out for sophisticated financing structures that go beyond term loans. Moreover, financial investors have recently suffered from the recession and higher prices, which have slowed their activism.
Swiss banks, particularly UBS, Credit Suisse and Zürcher Kantonalbank, are usually involved as arranger in connection with bank financings of Swiss acquisitions financed in the Swiss market. In such deals, a handful of Swiss banks participate in the banking syndicate, including the Swiss Cantonal banks. Following the intervention of the Swiss Federal Department of Finance, the Swiss National Bank and the Financial Market Supervisory Authority, it was announced on 19 March 2023 that Credit Suisse and UBS have entered into a merger agreement, with UBS being the surviving entity. Until the completion of the merger, which is subject to customary closing conditions and is expected to be consummated by the end of 2023, Credit Suisse is expected to continue to conduct its business in the usual way, in close collaboration with UBS. The extent to which Credit Suisse's business will continue to be conducted after the consummation of the merger, and in what form, is currently unclear. In any event, this merger will mark a significant shift for the Swiss banking market.
International banks usually take the lead in arranging large Swiss acquisitions, through the London market, which – during the recent low interest phase – typically consisted of only a senior term loan provided by a syndicate of international banks. Against the background of raising interests, however, there has been a trend towards combined bank/bond structures, which will be placed internationally with institutional high-yield investors and other international banks.
The activity of foreign debt funds has remained constant in Switzerland due to the mostly liberal Swiss regulatory cross-border regime. However, following the entry into force of the new Swiss financial regulatory regime on 1 January 2020, debt funds are now subject to supervision and certain regulatory requirements. In particular, most distributors of funds have to have an entry in the register of investment advisers. However, pure cross-border lending without the physical presence of the lender in Switzerland is generally unregulated (except for so-called “lombard (margin) loans”, which qualify as financial services that are subject to the Financial Services Act).
Furthermore, platforms connecting institutional investors and borrowers are still trying to invade the Swiss lending market and to increase their stake therein.
In 2022, the involvement of private equity investors was again seen in around a third of the M&A transactions in Switzerland, and regular LBOs remained the preferred strategy for the majority of transactions.
After the turmoil of the worldwide COVID-19 crisis was mostly overcome, inflation and geopolitical uncertainties took over and triggered interest rate rises and a potential recession. However, once more the Swiss M&A market proved to be steady, with market reports indicating that the number of deals hit a new record in 2022.
While the climate crisis has been pushed to the background in media coverage by the ongoing geopolitical uncertainties, one of the hottest new criteria on the M&A agenda is sustainability considerations with respect to the target, and performing ESG due diligence is expected to become increasingly important. Even though ESG due diligence reviews still pose various challenges and certain aspects are to be further defined, most investors are increasingly aware of the ESG risks and their potential financial implications.
The law governing an acquisition finance transaction depends on various factors, including:
If a transaction is financed by a single or small number of regional banks, the deal is typically based on a short and straightforward Swiss law governed loan agreement, and is usually in the relevant language of the borrower (German, French or Italian). The documentation for larger syndicated loans is typically in English and based on the standard documentation provided by the Loan Market Association (LMA), which is governed by Swiss law and further includes certain provisions necessary under Swiss law.
The documentation for M&A deals is generally governed by Swiss law if the parties are located in Switzerland and financing is arranged by Swiss banks. However, transactions that cannot be syndicated in the Swiss banking market due to their size or volume and transactions that are (additionally) financed through the issuance of high-yield notes are customarily arranged through the London market and the documentation is governed by English law.
For private M&A transactions, Swiss law does not contain any requirements for “certain funds” but it is common practice to include provisions for certain funds in larger acquisitions.
The standard documentation for the syndicated loan market provided for by the LMA is well known and generally used in Switzerland for larger Swiss financing transactions. Therefore, Swiss law loan documentation largely follows the structure of the LMA agreements in full (as far as acceptable under Swiss law). From time to time, a so-called “Swiss finish” may be applied to the standard LMA documentation which, in certain respects, differs slightly from the London market practice by compressing the scope of the LMA standard.
English is the common language for the predominant part of the syndicated loans. However, the documentation may occasionally be drafted in German, French or Italian in cases where:
In Switzerland, it is common practice for lenders' counsel to be responsible for drafting the finance documentation and for providing the validity and enforceability opinion. Lenders' counsel may also issue the capacity and due authorisation opinion but banks occasionally request borrowers' counsel to be responsible for those opinion statements, particularly in cases where the borrowers' counsel is also advising such a borrower with respect to general corporate matters.
The principal elements of the debt financing structure are a senior term loan or high-yield notes, if any, to fund the purchase price of the acquisition on the one hand and a revolving credit facility for the target's working capital financing on the other hand. The senior debt may be guaranteed and/or secured by security in the assets of the target group.
Depending on the size of the acquisition and the level of the targeted leverage, the senior debt can be supplemented by any of the following:
Second-lien debt ranks junior to senior debt and is only secured by second-ranking security interests over the same assets that serve as security for the senior debt.
Mezzanine debt is typically unsecured and subordinated in order to rank behind senior and second-lien debt. The subordination of mezzanine loans is usually established by a bilateral agreement between the mezzanine lender and the company. In such an agreement, the mezzanine lender declares that, with effect for all senior lenders (and second-ranking lenders) and in the event of the company's bankruptcy or composition with its creditors, the mezzanine lender's claim under the mezzanine loan will rank behind the senior lenders' (and second-ranking lenders') and all other non-subordinated creditors' claims. Since this declaration is effective without the senior lenders' (and second-ranking lenders') consent, it does not need to be set out in an intercreditor agreement.
The mezzanine debt is further often combined with equity kickers. Although not common in LBO transactions, equity kickers can also be used to compensate the lenders where the leverage and risk go beyond conventional standards. Under Swiss law, an equity kicker (ie, the means to participate in the upside of the target's value) can take different forms – for example, a company can make interest payments on a PIK basis, but not in cash. However, typical equity kickers are either conversion rights or option rights. In both cases, Swiss law requires the company to provide for conditional share capital in its articles of incorporation, out of which shares can be issued upon a creditor's exercise of its conversion or option right. The shareholder's right to advance the subscription of any such equity-linked debt instruments may only be waived or withdrawn for valid reasons.
Since the timelines in acquisition financings are usually fairly tight, it may not be possible to syndicate the bank loan prior to closing. In such cases, there may be a bridge financing with a maturity of six to 12 months to be refinanced through the syndicated term loan or the issuance of a debt capital market instrument.
While a pure financing through capital market instruments is rarely seen in the Swiss market, large acquisition transactions or transactions involving a big industrial buyer may provide for a capital market element, such as the issuance of a high-yield bond. Such bonds are usually issued on the London or New York market. Furthermore, the capital market instrument may be issued in addition to the loan structure or may be used as a take-out instrument.
Private placements may be made in connection with capital market instruments but are rarely seen in the Swiss market with respect to acquisition financing. Furthermore, financing structures using loan notes are subject to Swiss withholding tax, so are not usually used in connection with acquisition financings.
If an asset-based financing were used in connection with an acquisition financing, the loan would be secured by certain assets of the borrower, and a loan-to-value ratio would be used to determine the amount of money the lenders are willing to lend. However, with acquisition financings in particular, such asset-based financings are rarely requested as they are more common in connection with working capital financings.
If there are multi-layered debt financing instruments (eg, senior loans, second-lien, mezzanine and high-yield bonds), it is common to have an agreement among the creditors for the purpose of:
Large acquisitions might be financed through secured loans and secured bonds. In these cases, it is common for loans and bonds to be secured on a pari passu basis and for the intercreditor agreement to follow the LMA standard.
Hedge counterparties are usually not involved in the acquisition financing of Swiss deals and do not usually benefit from the collateral securing the acquisition financing.
In connection with debt financings, and depending on the kind of underlying assets available, the most customary forms of security are:
The typical Swiss security package consists of the following (in terms of security and underlying assets):
The perfection requirements under Swiss law depend on the form of the security and the type of asset that is subject to the collateral. Swiss law does not recognise or accept the concept of a floating charge or lien. Moreover, from a mandatory Swiss law perspective, taking security over movable assets requires the security provider to give up exclusive control of the movable assets, and for the secured party to obtain physical possession over them. However, certain movable assets (such as aircraft and ships) are subject to special laws providing for the perfection of a security in such movable assets by registration of the security interest in the relevant registry, rather than taking control/possession of those assets (those registry security interests are explained in more detail in 5.3 Registration Process).
Shares of a corporation (Aktiengesellschaft) or quotas of a limited liability company (Gesellschaft mit beschränkter Haftung) are usually pledged rather than assigned or transferred for security purposes, in order to avoid the security agent becoming the formal shareholder. The perfection of a pledge of shares of a Swiss company generally requires a written security agreement. If the company has issued physical share certificates, the perfection of the security further requires the delivery of such share certificate to the pledgee or security agent (acting on behalf of the other pledgees) (as applicable). Such a share certificate has to be duly endorsed in blank by the pledgor.
However, while the issuance of a share certificate is not required for purposes of creating the pledge, it is market practice for the Swiss company to issue a share certificate in connection with financings for the purposes of a share pledge because a share certificate, endorsed in blank, facilitates a private enforcement of the share pledge. Furthermore, and also in view of a private enforcement, if the transfer of the shares is restricted by the company's articles of incorporation, it is advisable to require the transfer restriction to be deleted from the articles of incorporation (or at least to obtain a board resolution approving the transfer of the pledged shares to a third-party acquirer upon enforcement of the pledge in advance).
Inventory can be pledged or transferred for security purposes (Sicherungsübereignung). To perfect such a security interest, the security provider must give up exclusive control and the secured party must obtain physical possession over the inventory. This strict de-possession requirement under Swiss law makes it difficult and impracticable to perfect a security interest over relevant inventory without substantially disturbing the course of business of an operational security provider. In most cases, taking possession over inventory is regarded as unduly burdensome, costly and unmanageable, so taking security over inventory is usually not feasible under Swiss law and inventory is not part of the standard Swiss security package.
Security over bank accounts is established by taking security in the receivables against the account bank, and is mostly granted in the form of a pledge, but can also be granted by security assignment (Sicherungszession). However, it is more common for bank accounts to be pledged for the following reasons:
However, account banks are occasionally not prepared to accept a pledge of bank accounts and/or threaten to close the bank accounts and terminate the respective banking relationship with the pledgor. In this context, it has become established practice of certain banks to require the pledgor and the security agent to enter into a tripartite agreement with such bank. While the entering into such a tripartite agreement is not required for the purpose of creating a pledge or security assignment over a bank account, whether the pledgor can risk its banking relationship by denying such entry should always be assessed.
Furthermore, if the assignee (such as the security agent) is the same entity as the account bank, the relevant receivables would cease to exist due to the creditor and the debtor under the bank account receivables having the same identity.
A security over receivables is normally created by way of a general assignment for security purposes (Global- und Sicherungszession). A security assignment may provide for all existing and future receivables to be subject to the security interest and, moreover, the assignee or security agent obtains full title in such receivables as a fiduciary, which is more favourable for the secured creditors in the event of the bankruptcy of the security provider. However, certain limitations will apply to secured creditors in relation to future receivables that come into existence only after the security provider is declared bankrupt. These receivables will fall into the bankruptcy estate and will not be available as collateral to the secured creditors.
The creation of a security assignment requires the assignability of the relevant receivables under the law by which they are governed (any such assignability may also be excluded by the governing agreement or applicable general terms and conditions). For perfection of the assignment, a written assignment agreement is required. With respect to operational debtors in particular, the security assignment usually remains silent (which means the third-party debtors will only be notified of the assignment in the event of default or in order to protect the secured creditors' rights in the security). However, it is customary to notify intra-group debtors and insurance companies. As long as the relevant debtor has not been notified, that debtor can still satisfy its payment obligation by discharging its debts directly to the assignor.
Intellectual Property Rights
Security is commonly granted over intellectual property rights such as patents, trade marks and designs but typically only if any such intellectual property rights exist and are material to the business of the security provider and/or the target group. It is not very common to take security over any intellectual property rights that may only be created in the future. The usual form of security over intellectual property rights is a pledge, but it is also possible to take security by way of a security transfer (Sicherungsübereignung).
The security interest over intellectual property rights is created and perfected by a written agreement. The registration of the security interest in any register is not required to perfect the security. However, registration is recommended in order for the security holder to be able to enforce its security interest against a third party who could otherwise rely, in good faith, on the information registered in the relevant public register.
Security over immovable property may be created by using either of the following.
Mortgage assignments and the establishment of mortgage certificates are created and perfected by the parties entering into an agreement regarding the creation of the security, which is made by a notarised deed and entered into the land register. The security transfer or pledge of the mortgage certificate further requires the transfer of the original mortgage certificate in paper form (Papier-Schuldbrief) (including applicable endorsements) to the transferee or security agent or, in the case of a registered mortgage certificate (Register-Schuldbrief), the entry of the transferee in the land registry.
The preferred way to create a security over Swiss real estate in connection with acquisition financings and other group financings is through an outright transfer of mortgage certificate(s), especially if those mortgage certificates have already been issued. The secured party's claims can be backed by property belonging to the borrower or a third party (third-party security).
Movable Assets (Trucks, Trains, etc)
While the security over ships and aircrafts can be created by the entry of the security interest in the respective register, the perfection of a security interest over other movable assets (machinery, trucks, trains, etc) requires the transfer of possession of such an asset to the pledgee or security agent, and is therefore not practicable for any such movable assets that serve the operational business. The rules that apply with respect to inventory (see above) are also applicable here.
The pledge of bank accounts receivables and other receivables is perfected by entering into a written security agreement; the same applies to any security assignment of the same assets. The security interest over intellectual property rights is also perfected by a written security agreement. As a matter of Swiss law, any agreement that is required by law to be made in writing needs a wet ink signature.
Furthermore, as Swiss account banks usually have a prevailing security interest in any assets of the account holder held with the respective account bank based on their general terms and conditions, perfection of the pledge (but not of a security assignment) further requires that any such account bank, as prior-ranking pledgee, is notified of the subordinated pledge. Moreover, such a notification requirement applies with respect to any debtor of receivables who holds a prior-ranking security interest in receivables that are to be pledged.
In order to perfect a security interest in inventory and movable assets, the security provider must give up exclusive control and the secured party must obtain physical possession over the inventory.
The form requirements of creating a security interest over real estate are explained in more detail in 5.1 Types of Security Commonly Used.
Under Swiss law, security interests that are perfected by registration are the exception and are only available with respect to security on ships and aircrafts, as well as mortgage certificates that have been issued in registered form (Register-Schuldbrief). The registration is procured by filing the required documentation with the relevant registry, upon which, and subject to the accuracy of the submitted documentation, the registry will undertake the registration in the relevant register. The registration perfects the security interest. Once the registration is obtained, the security provider does not have to make any periodic filings in order to maintain the registration over time.
Restrictions under Swiss corporate law apply to the granting of security by a Swiss capital company – particularly share corporations (Aktiengesellschaft) or limited liability companies (Gesellschaft mit beschränkter Haftung) – when such security is granted for the benefit of either:
The permissibility of granting such upstream or cross-stream security has to be assessed primarily based on the benefits the security provider receives for granting the security, which defines whether such financial assistance is granted on arm's length terms. However, the “arm's length terms” requirement can lead to practical difficulties, for the following reasons:
Due to these difficulties, it is advisable and standard practice to assume the granting of security is not at arm's length and, therefore, constitutes a distribution by the company to its shareholders. Consequently, the following applies:
Certain aspects of the concept of upstream and cross-stream security and other benefits remain unclear until the Swiss Federal Supreme Court has the opportunity to review and decide a specific case dealing with all of these matters. However, the Swiss Federal Supreme Court has stated certain additional requirements with respect to the determination of the amount of the freely distributable equity capital available for the use of enforcement proceeds of any upstream or cross-stream security (or the payment under any upstream or cross-stream guarantees). While those requirements do not have a direct impact on the granting of upstream or cross-stream guarantees or security, they are relevant for the determination of the amount of the freely distributable equity capital of a Swiss security provider at the time of the enforcement of such security. In particular, a Swiss security provider that has upstream or cross-stream shareholder loans outstanding that were not granted on arm's length terms is obliged to build a respective reserve, and the freely disposable equity amount will be reduced accordingly.
The granting of upstream and cross-stream security can also raise issues of directors' liability (criminal or civil). The directors of a Swiss company are subject to a general obligation to act in the interest of that company in relation to all their actions on behalf of the company, including when granting security for the benefit of third parties.
The aforementioned requirements and limitations applicable to upstream and cross-stream security also apply to upstream and cross-stream guarantees (ie, guarantees for obligations of direct or indirect shareholders of the guarantor or sister companies of the guarantor), indemnities and certain other benefits, such as the subordination of intra-group claims, and also apply to refinancings.
However, the aforementioned restrictions under corporate benefit rules do not mean that the lenders will not have access to the cash flow of the target. Debt “push-down” structures or “on-lending” structures are generally accepted in Switzerland. It is quite common for lenders to make funds available to the target and/or its subsidiaries. To allow the target to repay its debt, subsidiaries will upstream funds to the target, by way of dividends or the repayment of intra-group loans. However, this upstreaming is again subject to corporate law restrictions.
There are no particular rules concerning the prohibition of financial assistance under Swiss law. However, a company must not purchase more than 10% of its own voting shares.
Generally, as a matter of Swiss law, a Swiss company has to put its own interest ahead of that of the parent and the group. The interest of any company is set forth in its articles of incorporation and is fundamentally established in its nature to be a capital company and the seeking of profit (Gewinnstrebigkeit). Therefore, a Swiss subsidiary has to conclude any transaction for its own benefit and requires a valid business reason for any transaction contemplated, which is usually given if the transaction is conducted on arm's length terms (Drittbedingungen).
The principle outlined above also applies with regard to a Swiss company granting upstream or cross-stream security. If an upstream or cross-stream security is granted on arm's length terms, it is generally valid from a civil and corporate law perspective. However, the assessment as to whether an upstream or cross-stream security is granted on arm's length terms is subject to uncertainty, so is usually not assessed. In order to mitigate against upstream or cross-stream security not being granted on arm's length terms, additional requirements should be adhered to, which are outlined further in 5.4 Restrictions on Upstream Security.
The conditions under which a security can be enforced are determined by general principles of law and by the specific provisions of the security agreement. A secured party must have a secured claim that is due in order to be permitted to enforce the security. The relevant security agreement may set forth further conditions for the enforcement of the security.
In the case of pledged assets, there are two main forms of enforcement.
With respect to assets that have been assigned or transferred for security purposes, enforcement in a strict sense is not necessary, as the ownership in the relevant assets has already been transferred to the secured party. In an enforcement event, the obligation of the secured party to return the assets to the security provider ceases and, furthermore, the same principles with respect to private enforcement of pledged assets apply.
As a matter of Swiss law, a guarantee is a promise to the guaranteed party that a third party will provide a performance and a promise to compensate the guaranteed party for any damages caused as a result of the third party's failure to provide such a performance against the guarantee. Therefore, in the context of a financing transaction, the third party undertakes to pay the lenders a guaranteed amount if the borrower is in default under the credit agreement.
Swiss law distinguishes between two types of guarantees.
While the parties are generally free to choose the form of guarantee (subject to certain restrictions in the involvement of natural persons), sureties are rarely seen in acquisition financings. The reasons for that are mainly of an ancillary nature, as the financing banks are looking for independent and separate obligations and swift and informal execution.
The same principles apply to upstream and cross-stream guarantees as are set forth in relation to upstream and cross-stream security (see 5.6 Other Restrictions), including with respect to financial assistance.
While the granting of a guarantee is a service offered in the market that would only be granted against remuneration, in intra-group set-ups such a guarantee fee is usually not paid. In accordance with the principles applicable for upstream and cross-stream security (see 6.2 Restrictions), however, such a fee would limit the risk of the guarantee not being granted on arm's length terms. Consequently, if such an upstream or cross-stream guarantee is limited to the freely distributable equity capital of the guarantor, no guarantee fee is necessary.
The concept of lenders' liability is not specifically recognised in Switzerland. Therefore, the liability of lenders can only arise when lenders exercise rights and obligations under the financing agreements in violation of their terms or general rules and applicable Swiss laws. For example, lender liability issues can arise if the lender:
As a general rule, lenders must exercise their rights with due care and balance their own interests with those of their borrowers.
Swiss law does not explicitly address the concept of equitable subordination; although it has been considered and applied in court decisions, there is no established case law in relation to the concept.
Swiss legal doctrine does support equitable subordination in relation to shareholder loans in an insolvency scenario. According to this doctrine, equitable subordination will apply if a shareholder loan is granted in a situation where the borrower is already over-indebted or in financial distress or, generally, at a time and with terms that are not at arm's length (third-party test – Drittmannstest). In these circumstances, there is a risk that the shareholder loan is either deemed to be subordinated behind all creditors or recharacterised and treated as the equity of the borrower company, resulting in the lender only being entitled to repayment once all other creditors of the borrowing company are satisfied in full.
Under Swiss insolvency laws, a debt enforcement office may avoid transactions under certain conditions, such as the granting of, the payment under or the enforcement of any guarantee or security, or, if a payment under the relevant guarantee or the enforcement of a security has already been made, it may require that the recipients return the amount received to the bankrupt estate. In particular, a transaction may be avoided in the following cases if such acts result in damages to the creditors.
However, any avoidance action is dismissed if the beneficiary of the transaction can prove that it was not aware of the debtor's over-indebtedness and, being diligent, could not know that the debtor had been over-indebted at that time.
Furthermore, any acts performed by the debtor within the last five years prior to the opening of formal insolvency proceedings or the confirmation of a composition agreement with the intention to discriminate between creditors or to favour some creditors over others are voidable if any such intention was known to the debtor’s counterparty.
If loans are secured over real estate, the following fees may be payable, depending on the transaction:
The rates depend on the security’s face value and the location of the real estate.
The rates for fees vary widely from canton to canton.
The granting of upstream or cross-stream security on terms other than arm’s length may trigger a 35% dividend withholding tax, which must be deducted from the gross payment made. Dividend withholding tax is fully recoverable if the recipient is a Swiss-resident entity. Non-resident companies with a permanent establishment in Switzerland can claim a full refund if the relevant asset is attributable to the Swiss permanent establishment. Non-resident companies can claim a full or partial refund of the dividend withholding tax, based on an applicable double tax treaty between their country of residence and Switzerland. If no double tax treaty applies, the dividend withholding tax may become a final burden for the recipient (subject to any measures required in the country of residence of the recipient).
In addition, the Swiss Confederation and the cantons or communes levy an interest withholding tax on interest that is secured by a mortgage on Swiss real estate. The combined rate of the tax varies between 13% and 33%, depending on the canton in which the real estate is located. This interest withholding tax is reduced to zero under many double tax treaties, including those with the USA, the UK, Luxembourg, Germany and France.
Under Swiss tax law, the tax authorities can deny the deduction of interest on the portion of loans granted to group companies that exceed certain levels of debt. The level of acceptable debt in relation to the equity capital of a Swiss company generally depends on the market value of the company's assets (for example, for finance companies, the debt-to-equity ratio must not exceed 6:1). If the applicable threshold is exceeded, the interest payments for the portion of debt exceeding the threshold are no longer tax-deductible, and capital tax becomes due on the exceeding portion of the loan.
In addition, the interest rate on debt financings must be determined on an arm's length basis (ie, it must not exceed the maximum interest rates published by the Swiss Federal Tax Administration annually), failing which Swiss dividend withholding tax (currently levied at the rate of 35%) will be levied on the interest payments if the loan has been granted by a parent or sister company. Neither maximum debt-to-equity ratios nor maximum interest rates apply to third-party debt. Due to these limitations on investor financing, third-party acquisition financing prevails over investor financing in practice.
Under Swiss corporate law, a company whose liabilities exceed its assets must take measures to restore its balance sheet. In particular, if the claims of the company's creditors are no longer covered (based on either the company's going-concern value or the liquidation value of its assets), the company's board of directors must notify the competent bankruptcy judge, unless some of the company's creditors agree to subordinate their claims to those of the company's other creditors.
There are no specific shareholder liability issues in relation to thin capitalisation or restrictions on debt financing under Swiss law. The obligations of a shareholder are limited to the payment of the subscription amount. There has been much debate about the potential conversion or recharacterisation of a loan granted by a parent to a subsidiary into equity in cases where a subsidiary is too thinly capitalised. However, the Swiss courts and the prevailing doctrine have so far declined to support such a conversion or recharacterisation merely because the company is thinly capitalised.
Swiss law does not generally prohibit or restrict the acquisition of a Swiss business by a foreign investor to safeguard public order or national security. However, after the Swiss parliament passed a motion to introduce certain legislation on foreign investments in Switzerland, the Swiss Federal Council initiated the consultation on its draft legislation to screen foreign direct investment in Switzerland in May 2022. While the Swiss Federal Council advises against the introduction of the draft legislation, it is currently preparing the resulting report after the consultation of the draft legislation ended in September 2022. In addition, there are specific restrictions on the acquisition of nuclear power plants and Swiss residential real estate companies. There are also restrictions for Swiss banks, securities dealers, fund management companies, asset managers, trustees and insurance companies. All of these activities are licensed and supervised by the Swiss Financial Market Authority (FINMA).
The acquisition of a Swiss bank by a financial investor presents particular challenges. A general condition is that any individual or legal entity that directly or indirectly holds at least 10% of its capital or voting rights must ensure that its influence will not have a negative impact on the prudent and reliable business activities of the bank. Meeting this condition is less of an issue if the acquirer is itself a financial organisation subject to adequate supervision.
For private equity funds, the FINMA has been reluctant to approve the acquisition of a qualified participation (ie, 10% of the capital or voting rights) in a bank. If FINMA takes the view that the conditions for the respective company's licences are no longer met due to a shareholder acquiring a qualified participation, it can require the acquirer to sell its participation. If the acquirer does not do this, the FINMA may:
A party that acquires shares, directly or indirectly, that increase its holding of the voting rights in a company listed in Switzerland to above 33.33% must make a mandatory offer for all the target's listed shares. However, in its articles of incorporation, a company may:
The mandatory offer must be made within two months of the date on which the relevant threshold is exceeded.
An acquisition of shares representing less than 33.33% of the voting rights (or 49% in the case of an opting-up) in a Swiss target does not present particular problems. However, if the ownership percentage in the voting rights held by a party crosses 3%, 5%, 10%, 15%, 20%, 25%, 33.33%, 50% or 66.66%, the acquirer must notify the relevant company and the relevant exchange within a short period of time.
Public takeovers are subject to certain funds rules, which are generally in line with international rules. Consequently, funding must be in place before the offer is announced. The offer prospectus must contain the following, inter alia:
Commitment letters from banks in support of the bid are usually sufficient for the review body to issue its funding confirmation, provided the conditions set out in the commitment letters either correspond to the conditions of the tender offer or are under the sole control of the acquirer.
Following a successful tender offer, the bidder has the following two alternatives in order to obtain 100% control in the target.
The typical security package of an acquisition loan includes taking security over the target company's shares, which is provided by a share pledge. If the target is incorporated in Switzerland, the transfer of the title in the target shares under the share purchase agreement is effected by endorsing the share certificate(s) of the target company in the name of the purchaser. In addition, in order to perfect the share pledge in registered shares, the share certificate(s) have to be duly endorsed in blank by the new shareholder and pledgor of the shares.
As the share pledge is usually a condition to funding the purchase price, the perfection of the share pledge should, in theory, take place prior to effecting the transfer of title in the target shares. However, this is not feasible from a practical perspective as the pledge may only be granted by the purchaser upon obtaining title in the shares. This “chicken and egg” problem is usually solved by preparing the necessary endorsements for the transfer of title and perfection of the pledge and disclosing the so-prepared share certificate(s) for the financing parties' review in the closing meeting. If the endorsements on the share certificate(s) are to the financing party's satisfaction, it may confirm that the conditions to funding are fulfilled at the same time as funding of the purchase price is released and the transfer of title in the target shares is effected. However, if no physical closing takes place, the perfection of the target share pledge is often made a post-closing condition.
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The market for acquisition and leveraged finance transactions in Switzerland has seen a constant growth in the past few years, supported by an increasing number of mid-size or large M&A transactions involving private equity investors mainly based in Switzerland and further European countries such as the United Kingdom, Germany and France. Small and medium-sized acquisitions of Swiss targets are financed through the Swiss market and usually involve large Swiss banks such as UBS, Credit Suisse and Zurich Cantonal Bank acting as arrangers in M&A financing transactions or club deals. Smaller Cantonal banks often also participate in a syndicate. Larger acquisitions of Swiss targets are mostly arranged through London or New York and led by international players such as Citibank, HSBC, Barclays, Deutsche Bank or BNP Paribas as lead arrangers and often also involve the issuance of bonds placed internationally with other financial institutions or high-yield investors.
After a dip in M&A activity during the outbreak and first year of the COVID-19 pandemic in 2020, the demand for acquisition financing has increased again and even surpassed the number of transactions pre COVID-19 crisis. Despite some uncertainties due to the war in Ukraine, the market outlook is generally positive.
Acquisitions financing arrangements mostly consist of a combination of equity (such as share capital, capital contributions or quasi-equity in the form of subordinated shareholder loans) and debt elements. How the debt part is structured depends mostly on the required leverage for the transaction and regularly consists of a senior debt structured as term loan facility providing the means to pay the purchase price of the targeted entity combined with a revolving credit facility to meet the target’s working capital needs. High leverage transactions are supplemented by mezzanine loans or high-yield bond instruments being part of second lien senior debt or junior debt structures.
To provide the borrowers with more flexibility regarding the size of the financing, incremental debt can be added to the debt structure, allowing the extension of the total commitments in the form of an incremental facility.
Security and Guarantees
When granting security, on the one hand the point in time is relevant: certain securities can already be provided at closing, while others are only eligible as post-closing items. On the other hand, the company granting the security plays a role: the security can be provided by the acquisition vehicle as well as by the target (and their respective group companies).
A standard security package in an acquisition financing consists of the following:
These types of security can furthermore be extended on the target level by:
Most of the above-mentioned security can already be provided pre-closing, except for a share pledge over the shares in the target company which can only be perfected after the acquisition of its shares. The same applies for guarantees of material group companies of the target group, which can only be granted upon accession. The security at target level is therefore often structured as condition subsequent.
Security over shares and quotas
Shares in stock corporations (Aktiengesellschaften) and quotas in limited liability companies (Gesellschaften mit beschränkter Haftung) are generally pledged rather than assigned to avoid the assignee (or security agent in case of syndicated financings) becoming the formal share or quotaholder with full legal title. The perfection of the pledge requires a written agreement and usually also provides for the handing over of the share or quota certificates. It is, thus, standard to issue share or quota certificates if none had been issued so far and endorse or duly assign them in blank. If share or quota certificates are issued, transfer handing over of the certificates duly endorsed or assigned in blank is required for the perfection of the security.
Should the company’s articles of association contain restrictions on the transfer of the shares or quotas, it is advisable to amend the articles in this regard and lift the transfer restrictions which will give a potential third-party acquirer more confidence than a mere board resolution approving the transfer of the pledged shares or quotas because such resolution may be changed or amended at any time. The issuance of share or quota certificates and the amendment of the articles of association can be structured as conditions subsequent.
For the same reason shares or quotas are commonly pledged instead of assigned or transferred, bank accounts, or more precisely, the claims an account holder has against a bank, are pledged rather than assigned, even though the latter would be permitted under Swiss law as well. It is a perfection requirement for the security to notify the account bank after the bank account pledge agreement has been entered into. In addition, it is common practice to request a waiver from the account bank regarding its priority claims it may have over the bank account in question according to its general terms and conditions.
Another argument against the assignment of a bank account holder claim is that account banks became more concerned about know-your-customer and beneficial owner identification matters, which are relevant in case a claim is assigned (and thus concludes a full legal transfer), whereas a pledge only provides for a limited right in rem. However, for the opposite reason, some account banks are not prepared to accept a pledge and threaten to terminate the client relationship and close the respective bank account because they cannot fully identify the ultimate beneficial owner behind a pledgee. One feasible solution to avoid the risk of termination of a client–bank relationship is to enter into a tripartite agreement between the involved bank, the pledgor and the security agent (in syndicated financings), and thus directly involve the account bank as party to the pledge agreement, instead of merely informing it about the existence of a pledge.
Claims and receivables
A common type of security is the assignment of claims, especially of the target, where they constitute a substantial part of the target’s business. Security over receivables is mostly taken by way of a general assignment and can also include future claims if they are clearly identifiable. Prior to the assignment, it is paramount to make sure that the contracts underlying the claims do not contain a clause prohibiting the assignment of the claim (pactum de non cedendo). It is even recommended to explicitly state in important finance documents (such as the share purchase agreement) that assignments of claims resulting thereof are allowed.
As with the pledging of bank account claims, it is also recommended in the case of assignments of claims and receivables to notify the debtors of the assignment of such claim or receivable, as otherwise they can still discharge their obligation in good faith via payment to the assignee.
Swiss law does not generally provide for any filing, registration or approval requirement in connection with the creation of security. An exception applies to security over real estate, which is usually created by way of taking security over mortgage certificates (Schuldbriefe), establishing a personal claim against the debtor secured by a property lien. Alternatively, a mortgage assignment (Grundpfandverschreibung) can be used to secure a debt. The advantage of the latter is that it can be used to secure any type of debt, even future or contingent debt. However, a mortgage assignment, in contrast to the pledge or transfer of a mortgage certificate, does not constitute a negotiable security, which is why mortgage securities are more common in practice.
The creation of a new mortgage certificate requires a notarised deed and an entry into the land register but such certificates are afterwards freely transferable without further notarisation or land register entry.
When security is provided over real estate, tax law implications must be considered in each case. If the borrower is a Swiss entity, real estate should only be used as security for those foreign lenders situated in countries with favourable double taxation agreements with Switzerland (so-called Swiss treaty lenders), as loans secured by real estate are subject to withholding tax at source. The same issue exists for foreign borrowers but can usually settled by obtaining a respective tax ruling.
Intellectual property rights are normally only considered to serve as security if they are material to the business of the security provider or its group companies and of certain value. Intellectual property such as trade marks, patents or designs can be taken as security by way of a pledge or security transfer. A written agreement is sufficient to create the security. Nonetheless, it is highly recommended that the security be registered in the relevant public register due to its publicity function and to provide the security holder with a stronger claim in case of enforcement.
Under Swiss law, the creation of a security interest over movable assets can generally only be achieved if such assets come into the sole possession of the pledgee or the security provider gives up exclusive control over the assets, ie, can no longer access them without the assistance of the pledgee. However, since the movable assets that could be pledged are usually inventory, machines or fleets of vehicles that are indispensable for the pledgor to continue its daily business, the provision of security over movable assets is in practice most likely ruled out for practical reasons. An exception to this strict de-possession requirement applies to ships and aircraft: a lien can be established by means of an entry in a public ownership register.
There are structural solutions around this issue (like pledgeholder structures or OpCo/PropCo structures) but these solutions are rarely used in practice: on the one hand, because they only make sense if very valuable assets are involved, and, on the other hand, because there is a risk that these structures could be regarded as circumvention by a court of law and therefore not recognised in case of enforcement.
Limitations on financial assistance
Although Swiss law does not provide for any specific provisions on financial assistance, Swiss company law contains capital maintenance provisions mandatory to safeguard the nominal capital and reserves of a company. Under these provisions upstream and cross-stream security and guarantees for the benefit of a parent or sister company are only permitted if certain requirements are fulfilled, such as the following:
Furthermore, the planned transaction documents need to be validly approved by the relevant corporate bodies and must contain provisions addressing certain Swiss withholding tax law matters (“Swiss limitation language”).
In contrast, security for downstream loans is not restricted (as long as the fully owned subsidiary is not in financial distress) as in this case the target company secures its own debt.
Insolvency and Enforcement
Swiss law governed security can be enforced by way of private enforcement (Privatverwertung) or official enforcement proceedings under Swiss debt collection and bankruptcy law. A private enforcement is only permitted if the security provider has given its consent to this type of enforcement (which is standard practice in Swiss security agreements) and where the relevant asset serving as security (for example, the shares certificates in case of a share pledge agreement) has been transferred to the secured party or a security agent acting on behalf of multiple secured parties.
In case of assignment agreements where the full legal title has been transferred to the secured party, private enforcement is the only available enforcement method.
Official enforcement proceedings are often lengthy and usually require court involvement, which makes private enforcement more favourable in most cases. For certain creditors, official enforcement proceedings can be beneficial because Swiss bankruptcy law provides for a clear order of priority of claims, prioritising secured claims and claims incurred by the bankruptcy or liquidation estate above unsecured claims. Within the unsecured claims, claims of employees and pension funds rank higher than claims relating to social insurances and tax claims, followed by all other unsecured claims. Only within this last class of claims, debtors can freely agree on a ranking amongst themselves by written agreement (“intercreditor agreement”).
Governing law and jurisdiction
Small transactions financed by a single or small number of banks are mostly concluded by simple and straightforward Swiss law governed loan agreements in the respective language of the borrower and lender, whereas large (syndicated) financings are mainly based on the English Loan Market Association (LMA) standard agreements including specific Swiss law-related provisions (“Swiss finish”) and are governed by English law.
Jurisdiction clauses, such as the “courts of England and Wales, situated in London”, are generally binding on Swiss borrowers, with few exceptions provided by the Lugano Convention or the Swiss Federal Private International Law Act (as applicable) or the Swiss debt collection and bankruptcy law. Furthermore, Swiss courts might order preliminary measures even if they have no jurisdiction over the matter itself.
Foreign entities are generally not restricted in financing acquisitions in Switzerland and do not require a licence, unless they fall under the Banking Act or Financial Services Act for other reasons or transactions performed in Switzerland (such as accepting money from the public to refinance themselves).
Lending into Switzerland on a cross-border basis without the physical presence of the lender in Switzerland remains generally unregulated, apart from “Lombard (margin) loans”, which are regarded as financial services within the scope of the Financial Services Act, or consumer credits, which fall under the Consumer Credit Act.
The Swiss Federal Council resolved in 2020 to abolish Swiss withholding tax on interest payments to foreign investors with effect as of January 2023. This reform, however, was rejected in a popular referendum by the people of Switzerland last year and has thus not come to pass.
To ensure that no withholding tax applies to interest payments by a Swiss obligor to foreign investors (currently at a rate of 35%), the “Swiss non-bank rules” must therefore continue to be observed and complied with, meaning (i) the number of lenders participating in a financing and qualifying as banks must not exceed ten, and (ii) the total of number of creditors of any Swiss obligor that do not qualify as banks must not exceed twenty.
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