Acquisition Finance 2024 Comparisons

The Swiss M&A market is driven mainly by strategic investors. However, investors are being challenged to find more creative ways to get deals done, particularly in terms of financing. Large transactions are facing financing difficulties due to more expensive debt, and investors have to look 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 – in particular UBS, Credit Suisse and Zürcher Kantonalbank – are usually involved as arrangers in connection with bank financings of Swiss acquisitions financed in the Swiss market. In these transactions, a small group of Swiss banks, including the Swiss cantonal banks, participate in the banking syndicate.

On 12 June 2023, the merger between the holding companies of UBS and Credit Suisse was legally completed, resulting in the creation of a new consolidated banking group. On 7 December 2023, UBS announced that the merger of the Swiss operating companies is expected to take place in 2024. UBS's stated goal is to fully integrate Credit Suisse's business, which is expected to take up to three more years. Until then, Credit Suisse will operate as a “bank within a bank”.

International banks usually take the lead in arranging large Swiss acquisitions, through the London market, which – in the recent low interest rate environment – typically consisted of only a senior term loan provided by a syndicate of international banks. However, as interest rates have risen, there has been a trend towards combined bank/bond structures, which are placed internationally with institutional high-yield investors and other international banks.

The activity of foreign debt funds has remained stable in Switzerland due to the country's mostly liberal cross-border regulatory regime. However, since the implementation of the new Swiss financial regulatory regime on 1 January 2020, debt funds are now subject to supervision and specific regulatory requirements. In particular, most fund distributors must be registered as investment advisers. However, pure cross-border lending without the physical presence of the lender in Switzerland is generally unregulated. The only exception is for so-called “lombard (margin) loans”, which qualify as financial services that are subject to the Financial Services Act.

In addition, platforms connecting institutional investors and borrowers are attempting to enter the Swiss lending market and to increase their share.

In 2023, the involvement of equity firms in transactions decreased from around a third to less than a quarter. This was due to many private equity investors focusing on optimising their existing portfolios last year, given the difficult economic environment. Regular LBOs remained the preferred strategy for the majority of transactions.

The law governing an acquisition finance transaction is determined by several factors, such as the parties involved, the transaction structure, the size of the transaction and the financing instruments used.

If a transaction is financed by a single or a small number of regional banks, the deal is typically based on a short and straightforward loan agreement governed by Swiss law, usually in the language of the borrower (German, French or Italian). The documentation for larger syndicated loans is typically in English and follows the standard documentation provided by the Loan Market Association (LMA), which is governed by Swiss law and includes certain provisions required under Swiss law.

In the case of M&A deals, the documentation is typically 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 LMA's standard documentation for the syndicated loan market is widely recognised and used in Switzerland for larger Swiss financing transactions. As a result, Swiss law loan documentation largely follows the structure of the LMA agreements, to the extent permitted under Swiss law. Occasionally, the LMA documentation receives a so-called “Swiss finish”, which differs slightly from the London market practice by compressing the scope of the LMA standard.

English is the primary language used for syndicated loans. However, in certain cases, the documentation may be drafted in German, French or Italian. This occurs when:

• a syndicate includes smaller and more regional Swiss banks; or
• there is a local borrower who is less familiar with English language documents.

In Switzerland, it is customary 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, especially when the borrowers' counsel is advising the borrower on general corporate matters.

The debt financing structure comprises a senior term loan and/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 loans;
• mezzanine loans;
• payment-in-kind (PIK) financings (where interest is capitalised and deferred until final maturity); and
• high-yield notes.

Second-lien debt is subordinate to senior debt and is secured only by second-ranking security interests over the same assets that serve as security for the senior debt.

Mezzanine debt is usually unsecured and subordinated to rank behind senior and second-lien debt. The subordination of mezzanine loans is typically established by a bilateral agreement between the mezzanine lender and the company. In this agreement, the mezzanine lender declares that its claim under the mezzanine loan will rank behind the claims of senior lenders (including second-ranking lenders) and all other non-subordinated creditors in the event of the company's bankruptcy or composition with its creditors. As this declaration is effective without the consent of senior or second-ranking lenders, it does not need to be included in an intercreditor agreement.

Mezzanine debt is often combined with equity kickers, although they are not common in LBO transactions. Equity kickers can be used to compensate the lenders where the leverage and risk go beyond conventional standards. Under Swiss law, equity kickers (ie, 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, equity kickers are typically 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, from 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.

Due to the typically tight timelines in acquisition financings, syndicating the bank loan prior to closing may not always be feasible. In such cases, a bridge financing with a maturity of six to 12 months may be necessary to be refinanced through the syndicated term loan or the issuance of a debt capital market instrument.

Although pure financing through capital market instruments is rare in the Swiss market, large acquisition transactions or transactions involving a major industrial buyer may include a capital market element, such as the issuance of a high-yield bond. These bonds are typically issued on the New York market. In addition, the capital market instrument may be issued in conjunction with the loan structure or may be used as a take-out instrument.

Private placements may be used in connection with capital market instruments, but they are not commonly used in the Swiss market for acquisition financing. Financing structures that use loan notes are subject to Swiss withholding tax and are therefore not typically used for acquisition financing.

If an asset-based financing is used for an acquisition, the loan would be secured by specific borrower assets, and lenders would determine the amount of money they are willing to lend based on a loan-to-value ratio. However, asset-based financings are rarely requested for acquisition financing, being more commonly used for working capital financing.

In cases where there are multi-layered debt financing instruments, such as senior loans, second-lien, mezzanine and high-yield bonds, it is typical to have an agreement among the creditors. This agreement serves the purpose of:

• determining the relative rights of the various creditor groups;
• establishing the priorities in relation to payments (waterfall) and sharing in the collateral; and
• choosing the mechanisms relating to the enforcement of the collateral.

Large acquisitions may be financed through secured loans and secured bonds. In such cases, it is common for loans and bonds to be secured on a pari passu basis. The intercreditor agreement typically follows the LMA standard.

Hedge counterparties are usually not involved in the acquisition financing of Swiss deals, and do not typically receive the benefit of the collateral securing the acquisition financing.

In relation to debt financings, the most common forms of security are as follows, depending on the kind of underlying assets available:

• a pledge;
• a security assignment (Sicherungszession); and
• a security transfer (Sicherungsübereignung).

The typical Swiss security package consists of the following (in terms of security and underlying assets):

• the pledge of shares or quotas;
• the security assignment (Sicherungszession) of intercompany loan receivables, insurance receivables and trade receivables;
• the pledge of bank accounts;
• the pledge of intellectual property rights; and
• the security transfer (Sicherungsübereignung) of mortgage certificates (Schuldbriefe).

Under Swiss law, the perfection requirements for collateral depend on the form of the security and the type of asset. Swiss law does not recognise or accept the concept of a floating charge or lien. Taking security over movable assets requires the security provider to relinquish exclusive control of the movable assets, and for the secured party to obtain physical possession of 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 or possession of those assets (those registry security interests are explained in more detail in 5.3 Registration Process).

Shares

For security purposes, shares of a corporation (Aktiengesellschaft) or quotas of a limited liability company (Gesellschaft mit beschränkter Haftung) are typically pledged instead of assigned or transferred for security purposes. This is done to prevent the security agent from 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, it is necessary for the share certificate to be delivered to the pledgee or security agent (acting on behalf of the other pledgees) (as applicable) in order to perfect the security. The share certificate must be duly endorsed in blank or assigned in blank (as applicable) by the pledgor.

Although a share certificate is not required to create a pledge of shares, it is market practice for the Swiss company to issue one in connection with financings. This is because a share certificate, endorsed in blank, facilitates a private enforcement of the share pledge. In addition, and also in view of a private enforcement, it is recommended to remove any transfer restriction on the shares from the company's articles of incorporation. Alternatively, a board resolution that approves the transfer of the pledged shares to a third-party acquirer upon enforcement of the pledge in advance could be obtained.

Inventory

Inventory may be pledged or transferred for security purposes (Sicherungsübereignung). To perfect such a security interest, the security provider must relinquish exclusive control, and the secured party must obtain physical possession of the inventory. This strict de-possession requirement under Swiss law makes it difficult and impractical to perfect a security interest over relevant inventory without substantially disrupting the business of an operating security provider. In most cases, taking possession of inventory is considered to be unduly burdensome, costly and unmanageable and, as a result, taking security over inventory is usually not feasible under Swiss law, and inventory is not part of the standard Swiss security package.

Bank Accounts

Security over bank accounts is established by taking security in the receivables against the account bank, and is typically granted in the form of a pledge, but can also be granted by way of security assignment (Sicherungszession). However, it is more common for bank accounts to be pledged for the following reasons:

• a security assignment is technically a full legal transfer of the receivables to the assignee or security agent, while a pledge only provides for a limited right in rem; and
• account banks are concerned about know-your-customer and beneficial owner-identification issues, which are evident when the bank accounts are assigned, and the security agent obtains legal title in the respective receivables, which results in the security agent becoming the client of the account bank, at least from the perspective of the account bank.

However, some account banks may refuse to accept a pledge of bank accounts, and may even threaten to close the bank accounts and terminate the respective banking relationship with the pledgor. In this context, certain banks have established a practice of requiring the pledgor and the security agent to enter into a tripartite agreement with the account bank. Entering into such a tripartite agreement is not necessary to create a pledge or security assignment over a bank account. However, it is important to assess the risk of denying such entry and potentially damaging the banking relationship.

In addition, 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.

Receivables

A security over receivables is typically created by way of a general assignment for security purposes (Global- und Sicherungszession). The security assignment may cover all existing and future receivables, and the assignee or security agent obtains full title in such receivables as a fiduciary. This arrangement is more favourable for secured creditors in the event of the security provider's bankruptcy. However, secured creditors will face certain limitations regarding future receivables that come into existence only after the security provider is declared bankrupt. These receivables will become part of the bankruptcy estate and will not be available as collateral to the secured creditors.

To create a security assignment, it is necessary for the relevant receivables to be assignable under the governing law. However, it is important to note that the governing agreement or any applicable general terms and conditions may exclude such assignability. A written assignment agreement is required for the perfection of the assignment. Regarding operational debtors, the security assignment typically remains silent – ie, no notification will be served to the third-party debtors unless there is an event of default or in order to safeguard the rights of the secured creditors. Intra-group debtors and insurance companies are usually notified along with perfection of the security interest. As long as the relevant debtor has not been notified, that debtor can still fulfil its payment obligation by discharging its debts directly to the assignor.

Intellectual Property Rights

Security is commonly granted over existing and significant intellectual property rights, such as patents, trade marks and designs, that are material to the business of the security provider and/or the target group. Future intellectual property rights are not typically used as security. Security over intellectual property rights is usually established through a pledge, but it is also possible to take security by way of a security transfer (Sicherungsübereignung).

A written agreement is all that is required to create and perfect a security interest over intellectual property rights. Although not necessary to perfect the security interest, registering the security in a relevant public register is recommended to enable the security holder 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.

Real Property

Security over immovable property can be created by using either a mortgage assignment (Grundpfandverschreibung) or a pledge or security transfer of a mortgage certificate (Schuldbrief).

• A mortgage assignment (Grundpfandverschreibung) can be used to secure any type of debt, whether actual, future or contingent. The creditor of a claim secured by a mortgage assignment can demand an extract from the land register, but said extract only acts as evidence and does not constitute a negotiable security.
• A pledge or security transfer of a mortgage certificate (Schuldbrief) is the customary form of security with respect to mortgage certificates. An outright transfer has certain advantages in the event of the security provider's bankruptcy and in multi-party transactions. A mortgage certificate establishes a personal claim against the debtor, secured by a property lien, and constitutes a negotiable security. It can be issued in paper form (Papier-Schuldbrief) or registered form (Register-Schuldbrief).

Mortgage assignments and the creation of mortgage certificates are established through an agreement between the parties, which is formalised by a notarised deed and entered into the land register. The security transfer or pledge of the mortgage certificate is documented in a security transfer agreement and 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 most recommended method for establishing 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 such mortgage certificates have already been issued. In this way, the claims of the secured parties can be supported by property owned by the borrower or a third party (third-party security).

Movable Assets

Security over ships and aircraft can be created by entering the security interest in the respective register. However, for other movable assets, such as machinery, trucks and trains, the perfection of a security interest requires transferring possession of the asset to the pledgee or security agent. This is not practicable for assets that serve the operational business. The rules that apply to inventory (as mentioned above) also apply here.

The perfection of the pledge of bank account receivables and other receivables, as well as any security assignment of the same assets, requires a written security agreement. 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 legally required to be made in writing must be signed by the parties with a wet ink signature.

Swiss account banks usually have a prevailing security interest in any assets held by the account holder with the respective account bank, as per their general terms and conditions. Therefore, to perfect the pledge of bank accounts (but not of a security assignment), it is necessary to notify the prior-ranking pledgee, which is the account bank, of the subordinated pledge. Moreover, the obligation to notify applies to any debtor of receivables who holds a security interest in receivables that have a higher priority than those being pledged.

In order to perfect a security interest in inventory and movable assets, the security provider must relinquish exclusive control, and the secured party must obtain physical possession of 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 created with respect to ships and aircraft, as well as mortgage certificates that have been issued in registered form (Register-Schuldbrief). The registration is obtained by submitting the required documentation to the relevant registry. Upon submission, and subject to the accuracy of the submitted documentation, the registry will undertake the registration in the relevant registry. The registration perfects the security interest. Once the registration is obtained, the security provider is not required to make any periodic filings to maintain it over time.

Swiss corporate law imposes restrictions on the granting of security by Swiss capital companies, in particular share corporations (Aktiengesellschaft) or limited liability companies (Gesellschaft mit beschränkter Haftung), when such security is granted for the benefit of either:

• a direct or indirect parent company (upstream security); or
• another group company not fully owned by the party providing the security (cross-stream security).

The permissibility of granting such upstream or cross-stream security must be assessed based primarily on the benefits received by the security provider for granting the security. This determines whether such financial assistance is granted on arm's length terms. However, the requirement for “arm's length terms” can lead to practical difficulties for the following reasons:

• shareholders often do not wish to provide any consideration for the granting of the security; and
• it is difficult to determine what consideration would be adequate.

Due to these difficulties, it is standard practice to assume that 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:

• the board of directors and the shareholders must approve the granting of the security;
• any such upstream or cross-stream security must be covered by the security provider's purpose as set forth in its articles of incorporation; and
• enforcement of the security is limited to the freely distributable equity capital of the company at the time of the enforcement, the amount of which must be confirmed by the company's auditors. While this limitation applies by law, limitation terms are typically included in the finance documents to further establish this legal limitation.

Certain aspects of the concept of upstream and cross-stream security and other benefits will remain unclear until the Swiss Federal Supreme Court decides a case dealing specifically with all of these matters. However, the Swiss Federal Supreme Court has already stated certain additional requirements for determining 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 these requirements do not directly impact the granting of upstream or cross-stream guarantees or security, they are relevant for determining the amount of the freely distributable equity capital of a Swiss security provider at the time of the enforcement of such security. A Swiss security provider must build a reserve if it has upstream or cross-stream shareholder loans outstanding that were not granted on arm's length terms. This will result in a reduction of the freely disposable equity amount.

Granting upstream and cross-stream security can also raise issues of directors' liability, both criminal and civil. The directors of a Swiss company have a general obligation to act in the company's interest, including when granting security for the benefit of third parties.

The requirements and limitations that apply to upstream and cross-stream security also apply to upstream and cross-stream guarantees for obligations of direct or indirect shareholders of the guarantor or sister companies of the guarantor. This includes 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 applies to refinancings.

However, despite the restrictions imposed by corporate benefit rules, lenders may still have access to the target's cash flow through debt “push-down” or “on-lending” structures, which are generally accepted in Switzerland. It is quite common for lenders to make funds available to the target and/or its subsidiaries, which can then be used to repay debt. This is achieved through the upstreaming of funds from subsidiaries to the target, through either dividends or the repayment of intra-group loans. However, it is important to note that this upstreaming is also subject to corporate law restrictions.

Under Swiss law, there are no specific rules regarding the prohibition of financial assistance. However, a Swiss corporation is prohibited from purchasing more than 10% of its own voting shares.

As a matter of Swiss law, a Swiss company is required to prioritise its own interests over those of the parent and the group. The company's interests are defined in its articles of incorporation and are fundamentally based on its nature as a capital company seeking profit (Gewinnstrebigkeit). Therefore, a Swiss subsidiary must conclude any transaction for its own benefit and requires a valid business reason for any transaction it conducts, which is usually given if the transaction is conducted on arm's length terms (Drittbedingungen).

The principle outlined above also applies to Swiss companies granting upstream or cross-stream security. If such security is granted on arm's length terms, it is generally valid from a civil and corporate law perspective. However, assessing whether such upstream or cross-stream security is granted on arm's length terms is subject to uncertainty and is usually not done. To ensure that upstream or cross-stream security is granted on arm's length terms, it is necessary to adhere to additional requirements, as further outlined in 5.4 Restrictions on Upstream Security.

The enforcement of a security is determined by general principles of law and by the specific provisions of the security agreement. To be permitted to enforce the security, a secured party must have a secured claim that is due. The relevant security agreement may also specify additional conditions for the enforcement of the security.

When dealing with pledged assets, there are two primary forms of enforcement.

• Private enforcement is only allowed if the parties have agreed to it in advance (except for intermediated securities). Private enforcement can take place through private sale, by public auction or, for assets with objectively determinable value, by appropriating the assets and offsetting their value against the secured obligations (Selbsteintritt). In all forms of private enforcement, the pledgee must protect the interest of the pledgor and obtain the best possible price. The enforcement must be fully documented, and any surplus remaining after the application of the proceeds to the secured obligations must be returned to the pledgor.
• Debt enforcement pursuant to the Swiss Federal Debt Enforcement and Bankruptcy Act usually takes place by the debt enforcement office selling the assets in a public auction. However, in certain cases, assets can also be sold without a public auction.

Regarding the assets assigned or transferred for security purposes, enforcement in a strict sense is not necessary, as the ownership of the relevant assets has already been transferred to the secured party. Consequently, the secured party is no longer obliged to return the assets to the security provider upon an enforcement event. The same principles for private enforcement of pledged assets apply.

As a matter of Swiss law, a guarantee is a promise made to the guaranteed party that a third party will provide a performance. It also includes 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. In the context of a financing transaction, the third party undertakes to pay the lenders a guaranteed amount if the borrower defaults under the credit agreement.

Swiss law distinguishes between two types of guarantee.

• The independent promise of guarantee is an abstract undertaking to pay a specified amount upon the request of the guaranteed party. It is independent and enforceable even if the borrower's obligations have been cancelled or are unenforceable or even null and void. There are no specific requirements as to the form of the guarantee agreement. Once validly entered into, the existence of a guarantee is, in principle, independent of the existence of the underlying obligation secured by the guarantee.
• The surety is an agreement between two parties whereby one party undertakes to perform the obligations of the borrower in the event of the borrower's default. Unlike an independent promise of guarantee, a surety is ancillary in nature – ie, it can only be called if the borrower's obligations are valid, due and enforceable. If a surety is granted by a natural person, it is subject to certain form requirements, including the need to legalise the agreement.

While the parties are generally free to choose the form of the guarantee (subject to certain restrictions where natural persons are involved), sureties are rarely used in acquisition financings. The reasons for this are mainly of an ancillary nature, as the financing banks are looking for independent and separate obligations as well as 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 in relation to financial assistance.

While the granting of a guarantee is a service that would only be provided for a fee in the market, such a guarantee fee is usually not paid in intra-group arrangements. However, in line with the principles applicable to upstream and cross-stream security (see 6.2 Restrictions), such a fee would limit the risk that the guarantee is not provided at arm's length. Consequently, if such an upstream or cross-stream guarantee is limited to the freely distributable equity of the guarantor, no guarantee fee is required.

The concept of lender's liability is not specifically recognised in Switzerland. Therefore, lender liability can only arise where a lender exercises its rights and obligations under the financing agreements in breach of their terms or of general rules and applicable Swiss law. For example, lender liability issues may arise if the lender:

• improperly terminates a facility agreement; or
• does not act in good faith in exercising its rights under a facility agreement.

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 on the concept.

Swiss legal doctrine supports equitable subordination in relation to shareholder loans in an insolvency scenario. According to this doctrine, equitable subordination applies 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 on terms that are not at arm's length (third-party test – Drittmannstest). In these circumstances, there is a risk that the shareholder loan may either be deemed to be subordinated to all creditors or be reclassified and treated as the equity in the borrower company, with the result that the lender is not entitled to repayment until all other creditors of the borrowing company have been satisfied in full.

Under Swiss insolvency law, a debt enforcement office has the power to avoid transactions under certain conditions. These transactions include the granting of, the payment under, or the enforcement of any guarantee or security. If a payment has already been made under the relevant guarantee or the security has been enforced, the debt enforcement office may require the recipients to return the amount received to the bankrupt estate. In particular, a transaction may be avoided in the following cases if it results in damages to the creditors and has been made within the last year prior to the opening of formal insolvency proceedings or the confirmation of a composition agreement with the assignment or transfer of assets relating to the debtor.

• The debtor has made a transaction that is being considered as a gift or a disposal of assets without any consideration. Transactions in which the debtor received disproportionate consideration may also be avoided.
• The following acts are voidable, provided that the debtor was already over-indebted at that time:        
1. the granting of security for existing claims, provided that the debtor was not previously obliged to grant such security;
2. the payment of a monetary obligation in any other way than by payment in cash or other customary means of payment; and
3. the payment of a debt not yet due.

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, despite being diligent, could not have known that the debtor had been over-indebted at that time.

Moreover, any actions carried out by the debtor in the five years preceding the commencement of formal insolvency proceedings or the confirmation of a composition agreement with the aim of discriminating between creditors or favouring some creditors over others are voidable if the debtor's counterparty was aware of such intention.

If loans are secured by real estate, the following fees may be payable, depending on the transaction:

• notaries’ fees;
• registration fees for the land register; and
• cantonal and communal stamp duties.

The rates vary depending on the face value of the security 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. The 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 may be eligible for a full or partial refund of the dividend withholding tax, depending on the applicable double tax treaty between their country of residence and Switzerland. If there is no double tax treaty in force, 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 may refuse to deduct 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, when determining the interest rate on debt financings, it is important to ensure that it is on an arm's length basis. This means that it must not exceed the maximum interest rates published annually by the Swiss Federal Tax Administration. Failure to comply with this requirement will result in Swiss dividend withholding tax (currently levied at the rate of 35%) being 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. Shareholders are only obliged to pay the subscription amount. There has been considerable debate regarding the potential conversion or recharacterisation of a loan from a parent company to a subsidiary into equity, particularly when the subsidiary is undercapitalised. However, Swiss courts and prevailing doctrine have so far not supported such a conversion or recharacterisation based solely on a company's thin capitalisation.

Swiss law currently does not prohibit or restrict foreign investors from acquiring a Swiss business in order to safeguard public order or national security. However, on 15 December 2023, the Swiss government published a draft Investment Control Act, presenting a minimal solution with a significantly reduced scope of application. According to the draft, acquisitions of Swiss businesses will only be notifiable if:

• a foreign state investor acquires control;
• a (security-)critical sector is involved; and
• certain de minimis or turnover thresholds are exceeded.

The draft Investment Control Act is currently being tabled in the Swiss Parliament for deliberation, and is not expected to come into force before 2025.

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).

Acquiring a Swiss bank as a financial investor poses unique challenges. One of the general conditions is that any individual or legal entity holding (directly or indirectly) at least 10% of the bank's capital or voting rights must ensure that its influence will not negatively impact on the prudent and reliable business activities of the bank. Meeting this condition is less problematic if the acquirer is itself a financial organisation subject to adequate supervision.

When it comes to private equity funds, 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 demand that the acquirer sells its participation. If the acquirer fails to comply, FINMA may:

• suspend the voting rights related to that qualified participation; or
• where appropriate and only as a measure of last resort, revoke the existing licence and require the entity to liquidate.

If a party acquires shares, directly or indirectly, that increase its holding of the voting rights in a company listed in Switzerland to more than 33.33%, it must make a mandatory offer for all the target's listed shares. However, in its articles of incorporation a company may:

• increase the threshold from 33.33% to 49% (opting up); or
• subject to certain conditions, waive the application of the mandatory offer rule (opting out).

The mandatory offer must be made within two months of the date on which the relevant threshold is exceeded.

Acquiring less than 33.33% of the voting rights (or 49% in the case of an opting-up) in a Swiss target does not pose any significant issues. However, if the ownership percentage of 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 and standards. Consequently, funding must be secured before the offer is announced. The offer prospectus must contain the following, among other things:

• information on the sources of financing; and
• confirmation from the review body (a licensed security dealer or auditor approved to review security dealers) that the financing is available.

Commitment letters from banks in support of the bid are usually sufficient for the review body to issue its funding confirmation, provided the conditions in the commitment letters either correspond to the conditions of the tender offer or are under the sole control of the acquirer.

After a successful tender offer, the bidder has the following two options in order to gain 100% control of the target.

• 98% squeeze-out procedure – the bidder can request a squeeze-out of the remaining shareholders if it has obtained more than 98% of the voting rights in the target. The squeeze-out procedure must be initiated within three months from the end of the additional acceptance period by filing a squeeze-out action against the target. The consideration to be paid to the minority shareholders in the squeeze-out is the same as in the offer, and there are no appraisal rights (the court does not review the adequacy of the consideration and offer price). The 98% squeeze-out procedure is typically completed within six to eight months following the offer.
• 90% squeeze-out merger – as an alternative to a 98% squeeze-out, the Swiss Merger Act allows a bidder holding more than 90% of all of the target's voting rights to effect a squeeze-out merger between the target and a (newly incorporated) Swiss wholly owned subsidiary of the bidder. In this scenario, the minority shareholders do not receive the absorbing company's shares, but instead receive cash or any other form of consideration (such as shares in the bidder company). The compensation for squeeze-out shares must be equal to the value. Appraisal rights increase the risk of litigation and a delay to the merger if the minority shareholders block the registration of the merger in the commercial register. If the squeeze-out merger occurs six months after the end of the acceptance period, when the best-price rule no longer applies, the bidder may offer consideration exceeding the offer price to the minority shareholders. However, a squeeze-out merger can only be carried out if 90% or more of the shareholders in the target company resolve to allow this. This means, in practice, that the bidder cannot be certain of obtaining 100% of the voting rights in the target company through a tender offer.

The typical security package of an acquisition loan involves taking security over the target company's shares, which is provided by a share pledge. If the target company 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. To perfect the share pledge in registered shares, the new shareholder and pledgor of the shares has to duly endorsed in blank the share certificate(s).

As the share pledge is typically a condition for funding the purchase price, it should, in theory, be perfected before transferring title in the target shares. However, this is not practical as the purchaser can only grant the pledge after obtaining title in the shares. To solve this “chicken and egg” problem, the necessary endorsements for the transfer of title and perfection of the pledge are prepared by disclosing the so-prepared share certificate(s) for the financing parties' review during 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 completed. However, if there is no physical closing, the perfection of the target share pledge is often a post-closing condition.

Sustainability Linked Loans

One of the emerging trends in financings, although not so much in acquisition financings, is the incorporation of sustainability criteria into the credit agreements. Such sustainability linked loans typically provide for a margin adjustment based on the borrower's performance against certain environmental, social and governance (ESG) indicators. In Switzerland, however, sustainability linked loans are still relatively rare and there is no established market practice for their terms and conditions. Therefore, many Swiss law-governed credit agreements include a so-called rendezvous clause, which allows the parties to negotiate the specific features of a sustainability link during the term of the loan, subject to mutual agreement. This way, the borrower can benefit from potential savings and reputational advantages, while the lender can align its portfolio with its ESG strategy and regulatory requirements.