After a strong year for M&A in Switzerland in 2017, M&A activity involving Swiss businesses in 2018 further increased in terms of number and value of deals. Not only the private M&A market (including private equity), but also the public takeover market showed growth compared to 2017.
One of the trends in 2017-18 was an increased number of large and complex carve-out/spin-off transactions. Another trend with respect to procedure is the comeback of dual-track transactions (concurrent preparation of sale and IPO).
In 2017-18, the financial sector, consumer markets, power and utilities, as well as TMT experienced significant M&A activity.
Swiss businesses may be acquired through share deals or asset deals. The latter may take the form of a transfer of individual assets and liabilities, or a bulk transfer pursuant to the Swiss Merger Act.
The most common way of acquiring a public company is a public tender offer, which may be structured as cash offers, as exchange offers (with securities as consideration), or as a combination of both (see 6.3 Consideration, below). If a public company has a controlling shareholder, control may be acquired – subject to the potential obligation to launch a mandatory offer (see 6.2 Mandatory Offer Threshold, below) – by purchasing a controlling stake.
An alternative legal technique for acquiring a public or private company is a statutory merger, either by absorption (one company is dissolved and merged into another company) or by combination (the two combining companies are dissolved and merged into a newly formed company). Statutory mergers at the level of Swiss listed companies are, however, rare. Other commonly used techniques are share-for-share transactions and the formation of a new company that acquires the assets and liabilities of two existing companies in exchange for its own shares.
The regulators for M&A activity vary depending on the type of transaction.
In a public takeover, the most important authority is the Swiss Takeover Board (TOB), an independent commission appointed by the federal government that oversees and regulates public takeovers. Notably, the offer prospectus has to be filed with the TOB ahead of a public tender offer.
The SIX Swiss Exchange Ltd (SIX), Switzerland’s main stock exchange, has self-regulatory authority over the listing and delisting of securities. For instance, if equity or debt securities are to be listed in connection with a business combination, a listing application, and in some cases a listing prospectus, must be submitted to the SIX. In addition, ad hoc disclosures and, in some cases, disclosures of shareholdings have to be filed with the SIX in the course of a public tender offer.
The Swiss Competition Commission, Switzerland’s merger control authority, has to be involved in an M&A transaction whenever the relevant turnover thresholds are met (see 2.4 Antitrust Regulations, below).
The financial industry (banks, insurance companies, securities dealers, trading venues) is regulated and overseen by the Swiss Financial Markets Supervisory Authority (FINMA), whose approval is required de facto for a change of control in a financial institution. In other industries, the purchase of a business that requires a permit or licence (eg, in the transport, telecommunications and health sectors) may be subject to governmental approval.
If a target holds real estate in Switzerland, a no-action letter from a local authority may be required with regard to the restrictions to foreign investments in residential and agricultural real estate (see 2.3 Restrictions on Foreign Investments, below).
As a general rule, foreign persons and foreign entities may purchase a Swiss company (see 2.6 National Security Review, below). However, there are restrictions – not necessarily prohibitions – with regard to the acquisition of companies by foreign persons and foreign entities in certain regulated industries (eg, financial services, radio and television, telecommunications and transportation). Certain individuals and entities may be barred from investing in Switzerland by sanctions imposed against certain countries, groups or individuals.
The acquisition by foreigners and foreign entities of residential real estate is subject to governmental approval, which is usually not granted. The same is the case with respect to the acquisition of unlisted shares in a company whose business purpose is acquiring or dealing in residential real estate, whose assets consist of more than a third of residential real estate, or that owns considerable land reserves suitable for residential buildings or industrial land reserves that will not be used within two to three years (rule of thumb). No such restriction applies to companies whose shares are traded on a stock exchange. In addition, non-farmers (whether Swiss or foreign) may not acquire agricultural properties in Switzerland.
Business concentrations (including public tender offers, statutory mergers, other change of control transactions and full-function joint ventures) are subject to the Swiss Federal Act on Cartels and Other Restraints of Competition, and its implementing ordinances. If (i) either all involved businesses have a combined turnover of at least CHF2 billion worldwide or at least CHF500 million in Switzerland and (ii) each of at least two involved businesses have an individual turnover in Switzerland of at least CHF100 million, the purchaser or – in a business combination – all involved parties have to make a merger control filing after signing and prior to closing. A filing prior to signing is usually possible based on a letter of intent signed by the parties. There are special rules with regard to financial institutions and businesses with respect to which dominant market position in Switzerland has been previously ascertained.
The substantive test used by the Swiss Competition Commission (ComCo) is whether the proposed concentration would create or strengthen a dominant market position that risks eliminating effective competition whose harmful effects are not outweighed by a strengthening of competition in another market.
In phase I, ComCo has one month to open an in-depth phase II investigation; otherwise, the concentration may be completed without reservation.
In phase II, ComCo has four additional months to decide whether to clear the concentration, to prohibit the concentration or to authorise it subject to conditions and restraints. A final decision has to be made within five months of the notification. So far, only a few concentrations have been prohibited, but several have been authorised subject to conditions and restraints.
During phase I and phase II (if any), the involved businesses must not execute the concentration without ComCo’s authorisation (prohibition of gun-jumping).
ComCo’s decisions may be challenged within 30 days at the Federal Administrative Court, whose decision may in turn be appealed before the Federal Supreme Court.
If an acquisition is structured as an asset deal or conducted via a statutory merger, the employee representatives (or, if there are none, the employees directly) of some or all involved entities have to be notified and, if measures are planned affecting the employees, consulted a few weeks before closing or, in the case of a statutory merger, the approval of the shareholders of the involved entities. Employees or their representatives do not have decision rights with regard to such restructurings, but they may request the commercial register to block the registration of a bulk transfer or statutory merger if they have not been properly notified or consulted.
Swiss employees may be terminated without cause but have a minimum notice period of one to three months, depending on seniority and collective (if any) and/or individual contractual arrangements. If an employer plans a mass dismissal (termination of at least 30 employees in businesses with at least 300 employees or, if the business employs fewer than 300 employees, at least 10% of all employees or, in businesses with 20 to 100 employees, at least 10 employees), the employee representatives and employees, respectively, have to be consulted and the cantonal labour office has to be notified. If the employer has at least 250 employees and intends to terminate at least 30 employees, a redundancy plan has to be negotiated with the labour union, the employee representatives or the employees, as the case may be. If the negotiations fail, a court of arbitration has to draw up a redundancy plan.
Collective employment agreements, which exist in many industries, may set out additional requirements in relation to the above.
Swiss pension plans are deemed to be defined benefit plans under International Accounting Standard 19 even if they are defined contribution plans under Swiss law. Thus, an employer’s International Financial Reporting Standards or US Generally Accepted Accounting Principles accounts may show a notional funding deficit even if the plan is overfunded according to Swiss actuarial rules. Many Swiss companies have a pension fund organised as an independent foundation, which needs to be taken into account in an M&A transaction.
The Swiss government has certain powers to safeguard national security, but it is unlikely that a business combination would be restricted for such a reason. There have recently been political initiatives to implement national security review of acquisitions by the Swiss government; however, it is currently unlikely that any legislative process in this regard is started in the near future.
Switzerland is undertaking a comprehensive corporate tax reform to abolish the cantonal tax privileges of holding, domiciliary and mixed companies, and substitute them by new competitive and internationally accepted measures such as the patent box regime. Depending on the progress of the legislative process, the revision may take effect in early 2020.
Another project in the legislative process is the revision of corporate law. In November 2016, the Swiss Federal Council published its proposal regarding a revision of Swiss corporate law. The aim of the revision is to strengthen corporate governance, to modernise the incorporation and capital structure of public and private companies in Switzerland, and to increase legal certainty. Depending on the progress of the legislative process, the corporate law revision may take effect in the early 2020s.
As of 1 January 2020, the Financial Services Act, the Financial Institutions Act (both including implementing ordinances) and the revised Swiss Federal Collective Investment Schemes Act are expected to enter into force, which will have significant implications for private equity funds.
There have not been any significant changes to takeover law since 2017, nor is the takeover legislation currently under review.
It is not customary for a bidder to build a stake in the target before it approaches the target. On the one hand, this is generally perceived as aggressive. On the other hand, regulatory requirements make it very difficult to build up a relevant stake without early disclosure (eg, cash-settled derivatives are subject to the significant shareholder disclosure rules). After an approach of the target by the bidder, a standstill agreement is often signed in which the bidder undertakes not to buy any target securities.
If a bidder is prepared to launch a hostile offer, which rarely happens, it may purchase shares or call options over the stock exchange, have bank structure options and other derivatives, or purchase existing blocks from large shareholders. The obligations to disclose significant shareholdings are designed to prevent 'sneak attacks' on a company, however: a bidder and the parties acting in concert have to disclose their aggregate purchase positions (regardless of the type of security purchased) within four trading days from reaching or crossing certain thresholds (see 4.2 Material Shareholding Disclosure Threshold, below), which leaves a bidder little time to build a meaningful stake other than through block purchases.
General Obligation to Disclose Significant Shareholdings
Whoever directly or indirectly, alone or acting in concert with other parties, acquires or sells securities in a Swiss company listed in Switzerland (or a foreign company with a primary listing in Switzerland) has to notify the Disclosure Office of the SIX within four trading days after having reached or crossed the thresholds of 3, 5, 10, 15, 20, 25, 33⅓, 50 or 66⅔% of voting rights (whether exercised or not). The disclosure obligation relates to shares and derivatives of any kind (whether cash or stock settled). The triggering event is the entering into the transaction, not the closing. The reporting must be made separately for shares, purchase positions (long call or short put positions of any sort, including financial instruments that are economically equivalent to an acquisition of shares) and sale positions (short call or long put positions of any sort). Both the intentional and negligent breach of disclosure obligations are subject to fines. FINMA may also temporarily suspend the voting rights and enjoin an investor from acquiring additional securities if it has sufficient evidence of a potential breach.
Special Disclosure Obligations During a Public Tender Offer
From the announcement of a public tender offer until the end of the acceptance period, certain disclosure requirements apply to the bidder, all other parties to the TOB proceedings and anyone else who – directly, indirectly or acting in concert with third parties – holds at least 3% of the voting rights in the target (or, as the case may be, in another company whose shares are offered in exchange for the target shares). These persons must report to the TOB and to the SIX on a daily basis every purchase or sale of equity securities in the target. The TOB publishes such transactions on its website.
Industry-specific Notification Obligations
In certain regulated industries, the acquisition of significant participations in a company – whether listed or not – has to be notified to the regulator. For instance, persons or entities who reach or cross the thresholds of 10, 20, 33 or 50% of the capital or voting rights of a bank or insurance company have to notify FINMA before completing the transaction. FINMA has the power to prohibit or impose conditions on such transactions in some cases.
Swiss companies may not introduce different rules regarding the disclosure of shareholdings.
In addition to disclosure obligations, there are other hurdles to stakebuilding: if the bidder or any of the parties acting in concert with it possesses material non-public information on the target ('inside information'), they must not deal in, or tip another person in relation to, target securities. Further, the rules on market manipulation also apply to stakebuilding. Finally, the price paid by the bidder or any parties acting in concert for equity securities of the target within twelve months prior to the publication of the pre-announcement (or the offer prospectus if no pre-announcement is made) sets a floor on the offer price, unless the target has opted out of the mandatory offer rule (see 6.2 Mandatory Offer Threshold, below). Note that, according to the so-called best price rule, if the bidder pays a higher price than the offer price for target securities during the offer period or until six months after the end of the additional acceptance period, the bidder must offer that higher price to all shareholders.
Dealings in derivatives are allowed but are subject to the same disclosure obligations as dealings in shares (see 4.2 Material Shareholding Disclosure Threshold, above).
Derivatives are subject to the same disclosure rules as other securities. In addition, if a Swiss counterparty is involved in derivatives trading, the general regulations and reporting obligations with respect to derivatives trading in Switzerland set out by the Financial Market Infrastructure Act and implementing ordinances apply.
Before the pre-announcement of a public tender offer, shareholders do not have to make known the purpose of their acquisition of target securities or their intention regarding control of the company. Persons acquiring target securities in concert have to describe the nature of their group when they have to disclose their aggregate shareholdings. This description may, however, be rather generic.
Companies listed in Switzerland must publicly disclose any price-sensitive facts that have arisen in their sphere of activity and are not public knowledge (so-called ad hoc publicity). Any information capable of triggering significant price changes is considered price-sensitive. As a result, public M&A deals typically qualify as price-sensitive facts and would need to be announced as soon as the target gains knowledge about the main facts of the deal. However, a target may decide to postpone such disclosure to review an unsolicited offer or to explore or negotiate the terms of a recommended offer, provided that the target is able to maintain complete confidentiality of the price-sensitive facts during the time that disclosure is postponed. If details of the approach or offer, whether solicited or not, leak into the market, the target and, if the bidder is a Swiss-listed company, the bidder must make announcements to the SIX and the public without delay.
It should also be noted that a target, absent a contractual commitment to keep the approach or the negotiations in confidence, may decide to make the approach or the negotiations public at any time.
Provided that the deal has not leaked before, a friendly takeover offer is usually announced with a joint press release and in a joint press conference at the time when the bidder publishes the formal pre-announcement (or the offer prospectus if no pre-announcement is made). One of the reasons for not announcing the deal earlier is that the volume weighted average price (VWAP) of the listed shares during the 60 trading days before the pre-announcement sets a floor on the offer price (in the case of mandatory offers).
In public M&A, potential bidders often conduct a due diligence review based on public information before they approach the target, even if they plan to enter into a negotiated deal. While a bidder would usually want to perform as much due diligence as possible before announcing an offer, because opportunities to withdraw from an announced bid are limited, the target board has wide discretion when deciding on a bidder’s request to conduct due diligence. In particular, a bidder is not entitled to conduct any additional due diligence and if a target board decides that the company is not for sale, it does not have to allow due diligence to anyone. If the target board does allow due diligence to a bidder, however, it has to treat bidders who launch a competing bid equally.
A target board that allows due diligence is likely to disclose information sequentially and to restrict the scope of due diligence generally, subject to appropriate confidentiality undertakings by the bidder and its advisers. Typically, a due diligence review involves a relatively small number of senior personnel of the bidder, who focus on key aspects of the target’s business, in addition to the review performed by the bidder’s legal, financial and tax advisers.
A bidder must certify in the offer prospectus that it has received no material non-public information on the target that would be likely to have a decisive influence on the decision of the target shareholders to tender their shares. If such information is received, it must be disclosed in the offer prospectus.
Swiss target companies usually expect a bidder to enter into a standstill agreement for the period until the offer is officially launched. In contrast, a target’s ability to grant exclusivity is limited, as the target board has a fiduciary duty to examine all offers in good faith and must treat all bidders equally; eg, with respect to allowing them to conduct due diligence.
In recommended bids (other than in restructuring and going-private transactions), there is almost always a transaction agreement between the bidder and the target. In some cases, important shareholders of the target are also parties to the transaction agreement, which usually sets out the terms and conditions of the public tender offer and the target’s future management structure. The target would in turn undertake to support the bid and recommend it to its shareholders.
A public tender offer takes a minimum of four to six months from the announcement to the settlement and approximately one month longer if there is a competing offer. If the deal requires merger control clearance or regulatory approvals, it may take considerably longer. The preparatory phase in the run-up to the announcement takes one or two additional months. A back-end squeeze-out usually takes four to six months after the completion of the offer.
The timing of a private M&A transaction depends almost entirely on the parties, except where merger control clearance or regulatory approvals are needed. Depending on its type and complexity, an M&A transaction may take anything between two months (or less, in exceptional cases) and more than twelve months. In many transactions where no merger control clearance or regulatory approvals are needed, the parties choose a simultaneous signing and closing.
A bidder that directly or indirectly acquires equity securities in a Swiss company listed in Switzerland (or a foreign company with primary listing in Switzerland) and thus, alone or together with parties acting in concert, crosses the threshold of 33⅓% of the target’s voting rights (whether exercisable or not) must submit a mandatory offer for all of the target’s listed equity securities. Acting in concert with the intention to control the target also triggers the mandatory offer rule if the parties acting in concert collectively hold more than 33⅓% of the target’s voting rights.
A mandatory offer must be made not later than two months after the crossing of the 33⅓% threshold. In the case of a mandatory offer, the so-called minimum price rule applies; ie, the offer price may not be set below (i) the 60-day VWAP of the shares and (ii) the highest price paid by the bidder or the parties acting in concert with it for equity securities (including privately negotiated block trades) in the preceding twelve months. The minimum price rule restricts a bidder’s ability to pay a control premium.
Generally, the mandatory offer rule is triggered when shares are acquired; eg, a share purchase is consummated or shares are delivered after the exercise of call options. Absent particular control arrangements regarding the target, the entering into a share purchase agreement does not trigger the mandatory offer rule.
There are exemptions from the obligation to make a mandatory offer if the crossing of the 33⅓% threshold results from a gift, an inheritance, the division of an estate, a matrimonial arrangement or the enforcement of a judgment and the TOB may grant further exemptions; eg, if the crossing of the threshold results from a capital reduction, if the threshold is only temporarily exceeded, or if equity securities are acquired in connection with a reorganisation of a distressed company. In addition, the shareholders of a company may opt out of the mandatory offer rule or increase the threshold to up to 49% (so-called opting up) by amending the company’s articles of incorporation before or after an IPO. If the company is already listed, an opting out or opting up requires the approval of a majority of the minority shareholders and its consequences have to be disclosed to the shareholders in detail. The TOB reserves the right to void an opting out or opting up if it believes that it would unduly prejudice the rights of minority shareholders.
In a voluntary offer, a bidder may offer cash, listed or non-listed shares, or non-equity securities as consideration. Combined offers of cash and securities, and mix-and-match offers are also possible. In a mandatory offer only, the bidder must offer a cash alternative if it offers securities as consideration.
Historically, two thirds of all public tender offers have been cash offers, a little more than a fifth have been exchange offers and less than a tenth have been mixed offers. While the proportion of cash offers has further increased over the past years, there have been a number of high-profile exchange and mixed offers recently.
As a principle, a voluntary tender offer may be made subject to conditions, provided that the conditions are outside the bidder’s control and that it may be ascertained objectively whether a condition is satisfied.
The following offer conditions are common:
Bidders usually reserve the right to waive certain conditions. If the bidder’s co-operation is required to satisfy a condition, the bidder must take all necessary steps to ensure that the condition is satisfied. Otherwise, the condition is deemed to be satisfied.
Unlike voluntary tender offers, mandatory tender offers may only be subject to a very limited set of conditions:
Other conditions, including a MAC condition, are generally not permitted in a mandatory tender offer.
As a matter of law, a minimum acceptance condition must be low enough that it can realistically be satisfied. If a bidder holds no more than a trivial number of target shares at the launch of the bid, a common minimum acceptance condition is 66⅔%. The TOB has allowed minimum acceptance conditions of 70% or more – and up to 98% in a few special cases – where the bidder held a large number or the majority of target shares at the outset. As a rule of thumb, the higher a bidder’s stake pre-bid, the more willing the TOB will be to permit a high acceptance level.
Under Swiss law, most shareholder resolutions may be passed by a majority of votes represented at a shareholders’ meeting, but certain important resolutions – such as certain changes to the articles of association, certain types of capital increases or mergers/demergers – require a two thirds majority of votes represented (and a majority of the capital represented). With 90% of all outstanding shares, a bidder may carry out a squeeze-out merger and with 98% of all outstanding shares, a bidder may squeeze out the remaining shareholders after a public tender offer (see 6.10 Squeeze-out Mechanisms, below).
The TOB does not permit financing conditions with regard to a cash consideration. To the extent that securities are offered as consideration, an offer may be conditional upon the issuance and listing of such securities, but only if the bidder has taken all necessary steps to ensure that the condition will be satisfied.
In terms of process, the offer prospectus, which is published at the launch of the offer, must set out the details of the financing and its sources, and must contain a confirmation by the Independent Review Body that the financing is available (see 7.2 Type of Disclosure Required,below). Because of that and as a practical matter, the funding has to be in place a significant amount of time prior to the launch of an offer.
There are various means of fostering deal security in Swiss takeover law and practice.
In a friendly takeover, the target often undertakes not to solicit or recommend other offers ('no-shop clause'). While the predominant view is that no-shop clauses are generally permitted, they are subject to limitations: firstly, the target board must still be able to negotiate with unsolicited rival bidders, which is why a no-talk clause would likely be problematic; secondly, the target board must provide all bidders the same amount of information (whether solicited or unsolicited); and thirdly, the target board must be able to advise the target shareholders of the merits of a rival bid and to recommend the rival bid if it determines that this is in the interest of the company (so-called fiduciary out).
There is no need to agree on a match right, as any bidder has that right by operation of law.
Break-up fees are generally considered to be permitted to the extent that they cover the bidder’s costs and expenses. It is not court-tested whether punitive break-up fees (eg, with the aim to frustrate any competing bids) are permissible, but the TOB would likely not accept it. In transactions requiring shareholder approval (eg, a statutory merger), a break-up fee must not coerce shareholders to approve the transaction. Usually a break-up fee is payable if the offer is unsuccessful due to the target breaching any laws and regulations applying to the offer, the target’s failure to satisfy the offer conditions, or the successful completion of a competing bid. While break-up fees payable by the target are often agreed in friendly deals, reverse break-up fees payable by the bidder are relatively rare and are more often seen in private M&A transactions.
In transactions requiring shareholder approval, the target customarily agrees to solicit the necessary shareholder approvals.
Last but not least, it is common for a bidder to procure tender undertakings from large shareholders of the target (see 6.11 Irrevocable Commitments, below).
If a bidder and the parties acting in concert with it exceed the threshold of 33⅓% before or as a result of a public tender offer, they must make an offer for 100% of the target shares, unless the target company has opted out of the mandatory offer rule (see 6.2 Mandatory Offer Threshold, above). However, depending on the offer price, which is subject to different constraints depending on the offer type (see 4.3 Hurdles to Stakebuilding and 6.2 Mandatory Offer Threshold, above), the bidder may end up with considerably less than 100% of the target shares.
A bidder may obtain additional governance rights with respect to a target through a shareholders’ agreement with target shareholders that will not tender their shares to the bidder. If such arrangements are entered into before or during a public tender offer, however, the mandatory offer rule may be triggered. A shareholders’ agreement may provide for a wide range of governance arrangements.
Swiss public companies send hard copies of their voting materials (ie, the agenda, the motions and a voting card) to their shareholders and nominees. Shareholders of Swiss public companies who do not want to attend a shareholders’ meeting in person may give voting instructions to the so-called independent voting representative (ie, an independent proxy elected by the shareholders) by returning the hard-copy voting card they have received by post or, in the case of some companies, electronically. As an alternative, shareholders may appoint any other person as their proxy. The articles of incorporation of some companies require that such proxy be a shareholder of the company.
After the main offer period has lapsed, the target shareholders who have not tendered their shares receive a grace period (the so-called additional acceptance period) during which they may tender their shares. Often, a significant portion of the remaining shares are tendered during that grace period.
If the bidder holds more than 98% of the target’s voting rights following a successful tender offer, it may squeeze out the remaining shareholders. To that end, the bidder must petition the court at the seat of the target company for cancellation of the minority shares within three months of the end of the additional acceptance period. The court then orders the cancellation of the remaining shares. Thereupon, the target must reissue the shares so cancelled and allot them to the bidder against payment of the offer consideration for the benefit of the shareholders whose shares were cancelled. The court does not review the adequacy of the offer consideration.
As an alternative, the Swiss Federal Merger Act allows the owner of at least 90% of the outstanding shares to carry out a squeeze-out merger with another Swiss company. Typically, the bidder would merge the target company into a wholly-owned subsidiary of the bidder and the minority shareholders of the target would receive the same consideration as the shareholders who had tendered their shares received. The minority shareholders may challenge the merger and/or the adequacy of the consideration in court. Thus, a squeeze-out merger de facto triggers an appraisal remedy.
Potential bidders commonly seek undertakings from the target’s major shareholders to tender their shares or enter into share purchase agreements with such shareholders (which may or may not be conditional on the success of the offer) before the offer is announced. If a shareholder is actively involved in the negotiations with the target concerning a friendly bid, the discussions usually cover tender undertakings by shareholders as well. If a shareholder is not involved in the negotiations with the target, the bidder would typically seek tender undertakings after it has reached an agreement in principle with the target board.
Tender undertakings are not strictly irrevocable: a shareholder has the right to withdraw from its tender obligation if a competing offer is announced. The same is the case if a share purchase agreement with the bidder is conditional upon the success of the offer. However, if an agreement with a shareholder is not conditional upon the success of the offer, the shareholder’s obligations are enforceable even if there is a competing offer.
Undertakings to tender or to enter into a share purchase agreement have implications on the offer terms. If such undertakings have been entered into within the twelve months before the offer is announced, the agreed consideration for the shares (which may include elements other than the price, such as a consideration in kind or the option value of any price adjustment provisions) may set a floor on the offer price (see 6.2 Mandatory Offer Threshold, above) and the details of the undertakings have to be disclosed in the offer prospectus.
Furthermore, a shareholder who has undertaken to tender or sell his shares to the bidder may be deemed to be acting in concert with the bidder. As a result, any transactions by such shareholder in equity securities of the target must be disclosed and may affect the minimum offer price.
Unless there is a leak requiring the target to make an announcement at an earlier stage (see 5.1 Negotiation Phase, above), the bidder usually makes a so-called pre-announcement of a public tender offer before the offer prospectus is published, although this is not mandatory. In a negotiated transaction, the pre-announcement is usually made shortly after the signing of the transaction agreement (see 5.5 Definitive Agreements, above).
The pre-announcement (if any) must be published on the bidder’s website and sent to the major Swiss media outlets, the major financial news services and the TOB. It must identify the bidder and the target, describe the scope of the offer (ie, the shares and financial instruments that it covers), disclose the offer consideration, describe any offer conditions and set out the expected timetable for the offer.
The publication of the pre-announcement (or of the offer prospectus if no pre-announcement is made) has numerous legal consequences. For instance, the minimum price is set and the best price rule as well as many disclosure and other obligations of the bidder and/or the target are triggered. Furthermore, the bidder may change the terms of the offer only in favour of the target shareholders after the announcement.
A bidder must publish the offer prospectus within six weeks of publishing the pre-announcement. The TOB may grant extensions in certain circumstances. The offer prospectus has to be published in the same manner as a pre-announcement. The offer prospectus itself has to be made available in printed form or electronically on the bidder’s website.
The main disclosure document in a public tender offer is the offer prospectus, which is to be published by the bidder and must contain all necessary information to enable the target shareholders to decide whether to tender their shares. This includes the terms of the offer (eg, price, scope), information on the bidder (eg, address, share capital, main business activities), information on significant shareholders of the target, parties acting in concert with the bidder and their transactions in target shares, the sources of financing, information on the bidder’s intention as to the future of the target’s business, a description of the agreements between the bidder and the target, and information on the target’s corporate bodies and shareholders. In an exchange offer, the bidder has to disclose more extensive information about itself and the securities offered as consideration for the target shares.
In addition, the report of the Independent Review Body has to be disclosed in the offer prospectus. In the preparation phase of a public tender offer, the bidder has to appoint a licensed securities dealer or a qualified accounting firm – in practice usually a large accounting firm – as the Independent Review Body, which must be independent from the bidder and the target. Its task is to review the offer prospectus for compliance with takeover regulations and, in particular, to confirm in a report that the offer prospectus is complete and correct, that the target shareholders are being treated equally and that the bidder has the necessary funds to complete the transaction.
The board of directors of the target has to publish a special report to its shareholders, which must contain all necessary information for the target shareholders to make an informed decision on the offer. The board of directors may recommend that shareholders accept or reject the offer, or it may just discuss the advantages and drawbacks of the offer without making a recommendation. The report also has to contain certain information, notably updated interim financial statements, if the cut-off date of the last published financial statements would otherwise be more than six months before the expected end date of the offer period. Additional required disclosures relate to potential conflicts of interest among the members of the board or the management of the target, among other things.
In a negotiated transaction, the target often procures a fairness opinion from an audit firm or investment bank selected by it. In limited circumstances, a fairness opinion is required by law. The fairness opinion is a detailed valuation report and must explain the basis for the fairness conclusion (eg, peer groups, valuation parameters, but not the target’s business plan). It has to be published as part of the board report.
The bidder and the target usually agree on the content of the offer prospectus and the board report (which is typically included in the offer prospectus). Before the offer is announced, the bidder and the target would file a draft offer prospectus (including the report by the Independent Review Body, the board report and the fairness opinion) with the TOB, which issues a decision as to whether the offer prospectus complies with applicable laws and regulations.
After the publication of the pre-announcement (or the offer prospectus if no pre-announcement is made), the bidder, the parties acting in concert with it (which may include the target itself) and significant shareholders of the target have special disclosure obligations with regard to their dealings in target shares (see 4.2 Material Shareholding Disclosure Threshold, above).
If the transaction results in the listing of new shares on the SIX (eg, if the bidder offers its own shares as consideration), the relevant listing requirements have to be complied with. In particular, a listing prospectus may have to be published as of the first day of trading of the new shares.
A bidder does not need to include financial statements in the offer prospectus. However, the board of directors of the target has to establish interim financial statements for its report (see 7.2 Type of Disclosure Required, above) if the cut-off date of the last published financial statements would otherwise be more than six months before the expected end date of the offer period. The interim financial statements must be in the same form as those that the target usually publishes.
Besides the offer prospectus, the report by the target board and the report by the Independent Review Body, no transaction documents have to be disclosed in full. The key terms of any agreements between the bidder and the target (but not the agreements in full) have to be disclosed in the offer prospectus.
Directors and officers of a Swiss corporation have a duty of care, a duty of loyalty, a duty to safeguard the interests of the company in good faith and a duty to treat shareholders equally in like circumstances. These duties are owed to the company, and directors and officers may take into account the position of stakeholders other than the company’s shareholders in their actions.
In a business combination, the directors and officers of the companies involved have the same fiduciary duties as they have in their daily business.
The board of the target of a public tender offer has some additional specific obligations. For instance, the target board must seriously consider an approach by a potential bidder, but in normal circumstances, it is not obliged to initiate an auction. The target board also has to treat bidders equally in some circumstances. For example, a competing bidder must be granted the same due diligence access as the target board’s preferred bidder (see 5.3 Scope of Due Diligence, above). After the public announcement of an offer, the target board must not take certain defensive measures and must report intended defensive measures to the TOB (see 9.2 Directors' Use of Defensive Measures, below).
It is possible to establish a special committee of (independent) directors to review a potential business combination, but it is not common outside conflict of interest situations. Public takeovers are usually management-driven and sometimes initiated by the chairmen of the two boards. It is typically the entire board of directors, not just a board committee, to which proposals for approval are presented.
There is limited case law concerning the fiduciary duties of the board of directors of a public corporation in a public takeover context. With respect to business decisions of non-conflicted directors and officers of private companies, the Swiss Federal Supreme Court applies a business judgement rule similar to the one in the USA.
It should also be mentioned that shareholders’ remedies are limited to damages (and restitution in the case of illicit enrichment), with injunctions against board decisions being generally unavailable. Swiss procedural law is generally less plaintiff-friendly than procedural laws in the USA.
In business combinations of a certain size, whether private or public, the companies involved are usually advised by financial advisers (typically an investment bank or a management consulting firm), legal advisers and tax advisers, and perhaps employment and pension advisers.
In most public takeovers, the financial adviser is an investment bank. The Independent Review Body selected by the target and the firm providing the fairness opinion (see 7.2 Type of Disclosure Required, above)are not advisers of the target in a strict sense but may nevertheless give the target board some comfort as to the adequacy of the consideration.
While directors and officers do owe a duty of loyalty to the company, shareholders – including controlling shareholders – do not, unless they act as shadow directors of the company. Depending on the severity of a conflict, the board and/or the conflicted director have to take different countermeasures (eg, disclosure, recusal, shareholder vote, resignation) developed by case law and the legal doctrine.
In a public takeover, the target board has to disclose potential conflicts of interest of its members or members of the management in the board report. The Independent Review Body has to be independent from the bidder and the target as a matter of law.
Hostile tender offers are permitted in Switzerland and some of the rules governing public tender offers are designed to facilitate hostile or competing bids. However, there have hardly been any hostile tender offers in the past decade.
Before a public tender offer is announced, the board of a potential target may adopt defensive measures (provided they do not breach corporate law), even if the board knows that an offer is imminent. However, the board has restricted room for manoeuvre in this respect, as many defensive measures require shareholder approval (see 9.3 Common Defensive Measures, below). In Switzerland, 'poison pills' are hardly used and would only be lawful under very limited circumstances.
Between the launch or pre-announcement of a public tender offer (whether friendly or unfriendly) and the publication of the final result, the board must not take any action to frustrate the offer unless the shareholders approve such action in a general meeting. For example, the board must not, without shareholders’ approval:
In contrast, the board may search for a white knight or make a public tender offer for the bidder’s shares ('Pac-Man' defence).
Some Swiss public companies have structural takeover defences in their articles of incorporation. For example, the articles may limit shareholders’ rights to be registered in the share register with voting rights to a certain percentage of shares (eg, 5%) and/or limit the exercise of voting rights by one shareholder (or group of shareholders) to a certain percentage. Sometimes, these restrictions may only be lifted by a supermajority of shareholders. A bidder may make its public tender offer conditional upon the removal of these restrictions by a shareholders’ meeting.
Many Swiss companies have one or several anchor shareholders who are not willing to tender their shares in an unfriendly offer. Some companies have a dual-class share structure with a controlling shareholder holding a majority of voting rights but only a minority of the capital.
Finally, there may be express or implied change of control provisions in financing arrangements that require loans or bonds to be repaid immediately if the company is subject to a hostile bid. Other material agreements may also contain change of control provisions.
When enacting defensive measures, directors are bound by their fiduciary duties and their duty to treat shareholders equally in like circumstances (see 8.1 Principal Directors' Duties, above).This prevents them, for instance, from promising gratuitous benefits to certain shareholders or third parties that become payable when an unsolicited tender offer is launched. For this reason, poison pills are permissible only under very limited circumstances. When a takeover bid has been launched or pre-announced, the board’s leeway to take potentially defensive measures is further restricted (see 9.2 Directors' Use of Defensive Measures, above) and any defensive measures have to be reported to the TOB.
Directors are not obliged to enter into discussions or negotiations with a potential bidder if they decide that this is not in the company’s best interest. However, the board’s ability to take defensive measures is limited (see 9.2 Directors' Use of Defensive Measures and 9.4 Directors' Duties, above).
Generally, litigation is the exception in connection with M&A deals in Switzerland. Most private M&A agreements contain arbitration clauses, but it is rare that proceedings are actually initiated.
In a public takeover, significant (≥3%) shareholders have a right to join proceedings after the launch of a public tender offer and sometimes use their right to achieve a higher offer price; eg, arguing that the price offered by the bidder is below the minimum price. If a bidder chooses to carry out a squeeze-out merger after the closing of a public tender offer, the minority shareholders may challenge the merger and/or the adequacy of the consideration (see 6.10 Squeeze-out Mechanisms, above).
See 10.1 for relevant information.
Historically, there has been a low level of shareholder activism in Switzerland with the exception of (sometimes very active) industrialists and financiers making demands for changes in strategy or the capital structure of a public company. Recently, there has been increased activity by foreign activists with a focus on changes to the board or management, or a restructuring of a company’s business activities.
See 11.1 Shareholder Activism, above.
In some cases, investors have successfully sought better terms for themselves in a public takeover; for instance, by joining proceedings before the TOB and litigating the case further (see 10.1 Frequency of Litigation, above). This does not prevent a bidder from completing the acquisition but may make it more expensive. There is also one recent example of an activist group successfully preventing the closing of an announced transaction involving a Swiss public company.
A Busy Year for M&A
2018 was a very strong year for M&A in Switzerland. With almost 500 transactions, whereof more than 150 involved private equity investors, the number of transactions surpassed even the record year of 2014. Overall transaction value was USD120 billion, marking a slight increase on 2017, but due to the lack of mega deals did not reach the record level of 2014. The number of outbound transactions was almost twice as high as the number of inbound transactions and in terms of transaction volume, Asia was the main source for acquisitions of Swiss companies.
Activists Playing a Key Role with Limited Instruments
Compared to 2017, shareholder activist campaigns were hardly conducted in 2018. However, shareholder activists are still a significant force in Switzerland: in some mid-sized listed companies, they requested that representatives be elected as members of the board of directors and/or that certain rules in the articles of association be amended to the effect that the exercise of shareholder rights be facilitated (such as a lower threshold for the request that an agenda item be included in the invitation).
The instruments available to shareholder activists in Switzerland are rather limited. They can request from the board of directors that some agenda items are included in the invitation to a shareholders' meeting or, if the shareholder owns a stake of at least 10%, that an extraordinary shareholders' meeting be held. These rights are, however, limited to requesting votes on issues that can be decided by the shareholders. As the powers of a shareholders' meeting are limited, in most cases requests of activists are focused on the board composition, or, as in the case of Clariant, activists simply build a large stake and try to exert pressure on the board of directors by other means. Given that such other means are limited in Switzerland, short-term-oriented activists are often seen in special situations only. Long-term-oriented activists are forced to be represented on the board of directors due to the limited legal instruments available to activists in Switzerland.
Shareholders Keen to Retain a Stake in the Future
Another trend seen lately is that existing shareholders do not want to exit in the context of a going private transaction, but rather to remain invested in some way. The takeover of the SIX-listed Actelion by the NYSE-listed Johnson & Johnson, for example, involved the creation of Idorsia, a spin-off keeping Actelion's drug discovery and early clinical pipeline that was listed on SIX in June 2017. The founder and CEO of Actelion, Jean-Paul Clozel, is the CEO of Idorsia and together with his wife holds over 25% of Idorsia. Another example where former shareholders remained invested was the public takeover of ImmoMentum, a real estate company that was listed on the BX Berne eXchange. Four shareholders, who together held 15.22% of ImmoMentum, contributed a certain number of their ImmoMentum shares to the offeror at the offer price and in turn received shares of the offeror. Finally, this trend also seems to have been established in private M&A transactions. When, in April 2017, the Kuoni Group, which since a public takeover in 2016 has been controlled by EQT, sold the B2B bed bank GTA to the Spanish Hotelbeds group, it announced that the Kuoni and Hugentobler Foundation would keep a stake in the combined Hotelbeds/GTA business.
Going private transactions in which one or several main shareholders become shareholders of the offeror – and remain invested – are quite demanding to implement because of the equal treatment obligation of the offeror and in particular the limits set by the (minimum) price rules. The overall benefits and costs associated with becoming a shareholder of the offeror based on an existing position as a shareholder of the target company must be such that the price rules and the equal treatment obligation are met. Such an assessment entails extensive valuation exercises of shareholder positions and rights governed in shareholder agreements normally performed by boutique firms focused on valuations. In theory, the equal treatment rule might even lead the respective main shareholder to receive less than tendering shareholders who exit in the course of the going private if the ancillary benefits stemming from the new shareholding in the offeror exceed the costs associated with this new position.
Anchor Shareholders Providing Stability
In 2018 another trend seemed to persist: companies evaluating ownership structures that include an anchor shareholder. Such a structure can be implemented by various means, in particular a partial public tender offer, a capital increase, a commitment to purchasing shares in an IPO, an acquisition of a business with a consideration in shares (capital increase based on a contribution in kind), or an activist selling its participation to a long-term-oriented shareholder. A company assumes that with an anchor shareholder, a strategy focused on long-term shareholder value creation can be pursued without disruption by other shareholders and/or opportunistic acting activists or competitors. At the same time, companies often aim to enter into a relationship agreement (often also labelled as a corporate governance agreement) with the anchor shareholder and attempt to channel the influence of the anchor shareholder by means of voting arrangements.
Such a relationship agreement normally governs at least the representation of the anchor shareholder on the board of directors by providing for a duty of the company to propose a number of members nominated by the anchor shareholder, but also by limiting this number. In addition, some form of a standstill is usually implemented in which the anchor shareholder agrees not to increase the participation above a certain level and/or not to launch a public tender offer unless the board is willing to recommend the offer to the shareholders.
Companies often also try to govern how the votes of the anchor shareholder are exercised. Normally, anchor shareholders only accept voting arrangements with respect to selected agenda items such as dividend payments or third-party transactions. Such voting arrangements are normally limited in time and often simply oblige the anchor shareholder to exercise the votes pursuant to the proposal of the board of directors. The extent to which such voting arrangements in a relationship agreement are legally valid under Swiss law is unclear and disputed.
A special provision for a relationship agreement was contained in the agreement between CEVA Logistics AG, which was listed on the SIX Swiss Exchange in 2018, and its anchor shareholder CMA CGM S.A. Especially when an anchor shareholder receives their stake in the context of an IPO, it can be important that a tender offer at attractive conditions can still be successful even if this stake is significant. For this reason, a special provision was included in the relationship agreement, whereby if a third party makes a public tender offer for the shares, the anchor shareholder shall have the right to submit a superior offer. If the anchor shareholder does, however, not submit a superior offer, then subject to certain exceptions it shall be obligated to tender its shares in the third party offer if such an offer is recommended by the board of the company.
Selective Opting Out Not Only in Transactions, But Also in the Context of IPOs
In 2018, two companies have been listed on the SIX Swiss Exchange with a selective opting-out provision in their articles of association. With a selective opting-out provision, certain shareholders can be excluded from the obligation to make a mandatory tender offer if they reach or exceed the threshold of 33 1/3% of the voting rights. While the introduction of a selective opting-out provision before the listing is not subject to any further conditions, the introduction after a company has been listed is only valid if the shareholders have been fully and properly informed and if the majority of the minority shareholders has voted in favour of the provision.
While selective opting-out provisions are frequently introduced in connection with transactions, it is a rather new phenomenon for them to be introduced in the context of an IPO.
Question Marks Over Enforceability
Another important, but in most respects unclear, aspect of voting arrangements is enforceability. Although it seems to be clear that a relationship agreement leads to concerted activity for the purpose of disclosure of shareholdings, it is not entirely clear under which circumstances a relationship agreement might trigger a duty to launch a mandatory offer if the shares held by the anchor shareholder together with the treasury shares of the company are above one third of all shares. If the rights and obligations under such an agreement result in concerted activity within the meaning of the mandatory offer rules and if the combined 'holding' is in excess of one third of the recorded share capital, a solution can be that some form of an opting out – a selective partial opting out is the preferred solution – is implemented in the articles of association of the company by a respective shareholder resolution.
Irrespective of all these uncertainties, it must be assumed that in 2019 even more companies are evaluating some kind of transaction that would result in an ownership structure with an anchor shareholder. Advising an anchor shareholder or the company is an interesting and challenging matter because precedents are rare and the standards can be elaborated.