M&A activity in Switzerland keeps growing. In 2018, the number of M&A deals reached almost 500, which represents a 20% increase compared to the previous year. The overall transaction volume of almost CHF140 billion also increased significantly in 2018. The total volume of Swiss investors abroad was nearly double the volume of foreign investors in Switzerland. Private transactions prevail in terms of number of deals and deal volume, with private equity accounting for around one third of the overall number of deals. All indicators show that the growth trend is continuing in 2019. Financial services, consumer markets and industry are the sectors currently showing the most M&A activity. M&A transactions are accompanied by increased activity among private equity players.
The growth is boosted by fundamental changes in the economic environment. Low interest rates allow investors to have easy access to financing, and to apply higher leverage on transactions. This trend facilitates fundraising and pressures financial investors to find attractive target companies. M&A activity is also supported by changes in the consumer landscape, as consumers are becoming more tech-affined and retailers and financial services providers are transforming their businesses to focus on the needs for online markets and mobile payment solutions, for instance. In parallel, big corporations are focusing on their core competencies, and privately owned industrial players are planning for succession.
The share of Swiss deals that involve private equity funds has risen continuously over the past few years. In 2018, private equity was involved in almost one third of all deals, and this trend seems to have continued in the first half of 2019.
With respect to the types of transaction, there has been increased divestiture activity so far, particularly in the financial sector, where financial institutions are actively cleaning up their portfolios and disposing of divisions that are not a part of their core business. Big pharma and consumer goods have also been sectors that have observed important divestitures since the beginning of the year, including the sale of Nestlé’s skin care division to the private equity group EQT for a deal value of CHF2.8 billion.
2019 has also seen increased transaction movement in the industry sector, with larger, privately owned companies being sold to private equity groups in connection with succession planning. Recent industry deals include the acquisition of Xovis, the Swiss-based technology leader for 3D sensors, and Variosystems, an electronics manufacturer, by Capvis AG, a Swiss private equity player.
Financial investors have also played an important role in optimising shareholders’ value in listed companies in recent years. One example is the active effort of the financial investors White Tale and 40 North to stop the merger of Clariant and Huntsman, and the subsequent sale of their investments to Saudi Basic Industries Corporation. Another recent example is Cevian Capital and Artisan Partners pressuring Ernst Goehner Stiftung to facilitate DSV’s public tender offer for all Panalpina shares, and, with respect to Cevian, the sale of ABB’s power grid division to Hitachi.
During the past three years, there have been no legal developments that have significantly affected the private equity industry in Switzerland. Changes in the industry have been the result of economic developments during recent years. Due to the low interest environment, the current environment is a sellers’ market, with easy access to financing and a shortage of available targets. This has led to higher valuations and higher leverage on transactions. Banking institutions are competing to finance transactions and are therefore offering favourable financing terms (“covenant-light” terms) in the finance documentation.
However, legal changes that will have an impact on private equity funds will enter into force in January 2020 or 2021: the new Swiss Federal Act on Financial Services (FinSA) will contain provisions regarding the obligation to draw-up a prospectus in a public share offering. The existing prospectus regime will be overhauled, and disclosure obligations will be significantly extended. This will affect the exit of private equity investments by way of an IPO.
The primary source of regulation applicable to private equity funds is the Swiss Federal Act on collective investment schemes (CISA) and its implementing ordinances. Private equity funds established or managed in Switzerland are subject to the CISA and require an authorisation from the Swiss Financial Market Supervisory Authority (FINMA). Given the relatively high set-up and running costs associated with such authorisation, private equity sponsors will usually invest through foreign funds in Switzerland. There are no restrictions on foreign investment (except for residential property) or resulting from the Swiss security regime that would limit the respective investment activity.
It goes without saying that Swiss antitrust regulations apply to business combinations and private equity-backed buyers. Article 9 of the Federal Act on Cartels and other Restraints of Competition (CartA) provides that planned concentrations of undertakings (ie, mergers, acquisitions or joint ventures) must be notified to the Competition Commission before their implementation if the undertakings concerned together reported a turnover of at least CHF2 billion in the financial year preceding the concentration, or a turnover in Switzerland of at least CHF500 million, and at least two of the undertakings concerned each reported a turnover in Switzerland of at least CHF100 million.
In public-to-private transactions, Swiss takeover laws need to be complied with. The relevant regulator is the Swiss Takeover Board, which will review the terms and conditions of the public offer. For more detail, see 7 Takeovers.
Likewise, given the significance of the private banking industry in Switzerland, Swiss banks and independent asset managers play an important role in the distribution of private equity funds. The distribution to qualified investors is possible without any authorisation or licence. It is currently still necessary to appoint a Swiss representative and a Swiss paying agent, but this requirement will be abolished with the entry into force of the FinSA, which is expected to occur on 1 January 2020 or 1 January 2021.
It is customary for private equity buyers to conduct a due diligence review prior to the acquisition of a target company. The scope of the legal due diligence review depends on the industry in which the target company is active. The most common areas of review are corporate matters, financing agreements, business agreements, employment, real property, intellectual property rights and litigation. In the financial industry sector, compliance and regulatory matters are also key review areas. For cost reasons, the legal due diligence review is usually subject to a certain materiality threshold (red flag review). Typically, a legal due diligence review lasts two to four weeks.
Due diligence processes are significant cost factors for private equity buyers. Therefore, vendor due diligence is sometimes conducted in auction processes, where potential private equity bidders would otherwise incur significant due diligence costs without being certain they would win the tender. In some instances, the vendor due diligence is limited to certain key areas, such as environmental questions (chemical industry) or intellectual property rights (life sciences). A reliance letter from the external advisers increases the credibility of the report. The scope and the form of the reliance language depend on the particularities of the case.
If the target company is privately held, the acquisition is usually carried out by way of a share purchase and, less commonly, by way of an asset purchase agreement. These agreements contain very similar provisions, although the object of the sale (shares versus business assets) is different. For tax reasons, share deals are much more common in Switzerland than asset deals.
Other acquisition structures available under the Swiss Merger Act, such as a statutory merger or a demerger, are rare, but are sometimes used to effect a carve-out or another restructuring prior to the completion of the acquisition. A statutory merger, a business transfer or a demerger require shareholder approval, and must be recorded in the commercial register. The parties should obtain a tax ruling before proceeding with any of these transactions.
If the target company is a listed company in Switzerland, the acquisition must be done by way of a public tender offer, in accordance with the Swiss Federal Financial Market Infrastructure Act (FMIA).
Private equity funds regularly invest in Swiss targets through a newly incorporated special-purpose vehicle (SPV), which then purchases the shares in the target company. The SPV is either a direct subsidiary of the fund or is held through a Dutch or Luxembourg subsidiary. The SPV is usually incorporated with the minimum share capital of CHF100,000 in cash. The SPV is then funded shortly before completion of the transaction.
In venture capital investments, the investment in the target company is sometimes made directly by the private equity fund by way of a share subscription in a capital increase of the target company.
The main driver for the structure is tax optimisation. The application of tax treaties for the repatriation of dividends and the exit proceeds are key points.
In Switzerland, acquisitions are financed by either equity or debt, or a combination thereof. In many cases, instruments with debt and equity components are used (mezzanine). The structuring of the debt and the equity depends primarily on the targeted leverage of the transaction. Equity commitment letters have become more common in Switzerland of late.
In highly leveraged transactions, senior debt and junior debt are used. Junior debt usually consists of mezzanine debt and less frequently of second lien loans and payment-in-kind financings. In deals with low leverage, the financing consists primarily of senior debt in the form of term loans. If working capital finance is required, a separate revolving credit facility is granted.
In larger transactions, financing is usually provided by a syndicate of foreign and domestic banks. In mid-sized deals, syndication often only involves Swiss banking institutions. Credit agreements with a volume in excess of CHF50 million are regularly based on the standard forms prepared by the Loan Market Association.
Banks providing acquisition financing customarily require a refinancing of the existing debt of the target company. Any existing security that is released as a result of the refinancing is used to secure the acquisition financing.
The possibilities of a target company providing security under a financing arrangement are restricted. Upstream or cross-stream guarantees and collaterals are only permissible if certain prerequisites are fulfilled, and must not exceed the target company’s freely distributable reserves.
Private equity consortia are seen in large deals. A recent example is the acquisition of Canopius AG by a consortium of investors led by the private equity group Centerbridge Partners for a deal value of CHF1 billion.
The structure of an acquisition does not differ materially if several investors are involved. Governance questions and the exit of the investment (drag rights, for instance) are addressed in a shareholders’ agreement.
Locked box structures and purchase price adjustment mechanisms with closing accounts are both common in Switzerland. Generally, locked box mechanisms are more favourable to the sellers since they contain a minor risk of post-closing price reductions. Due to the current market trends, in which sellers have good leverage on transactions, locked box structures are used more frequently than purchase price adjustment mechanisms. However, locked box solutions are not well suited for carve-out transactions, where they are rarely used.
Closing accounts with net working capital and net debt adjustments are usually preferred on buy-side but are now being used less frequently. There is often a discussion regarding whether the closing accounts, based on which adjustment to the purchase price will be made, are prepared by the seller or the buyer.
Earn-out schemes are sometimes used to bridge a valuation gap between the parties, or if the sellers remain shareholders of the target company or remain involved in the company’s management. The structure of earn-out provisions depends on the particularities of each deal. It is key that the applicable metrics are defined as precisely as possible in order to avoid post-closing manipulation by the buyer. Earn-out schemes may be problematic from a tax point of view.
Fixed purchase prices are rare, and are generally only seen in smaller transactions.
Sellers very often try to charge interest on the locked box amount. Such interest is often meant not only to compensate for the time value of the locked box amount but also as a participation of sellers in the business activities of the target company from the locked box date to the closing of the transaction. Accordingly, rather high interest rates are sometimes agreed upon in transaction agreements. On the other hand, no interest is usually charged on leakages.
Dispute resolution mechanisms for consideration provisions (earn-out, purchase price adjustment, etc) are very common in Switzerland. A special accounting firm is often engaged as appraisal expert, particularly if the parties disagree on closing accounts and purchase price adjustments. The decision of the appraisal expert is final and binding on the parties.
If the closing of a transaction is subject to regulatory approvals, the receipt of such approvals is regularly structured as a closing condition in the transaction agreement. Typical regulatory approvals include antitrust clearance and approvals from FINMA.
Apart from regulatory requirements, there are other reasons why the closing of the transaction cannot occur at the execution of the transaction agreement. Such conditions depend on the particularities of the deal and may include third-party consents, availability of financing and the completion of a pre-closing divestiture.
If the target has concluded important agreements that contain change-of-control language, the consent of the relevant third parties is regularly included as a closing condition.
The abovementioned regulatory and specific closing conditions are commonly combined with standard conditions that protect the buyer. In larger transactions, the most typical conditions are the absence of material adverse changes (MAC), that the representations and warranties are true and correct at closing (often subject to a materiality level), and that no action is pending that would prevent the closing of the transaction.
In practice, the absence of a MAC is sometimes included as a representation and warranty instead of a standalone closing condition. This structural difference does not have a major impact; however, the content of the MAC provision itself is often heavily negotiated between the parties. Typically, the seller intends to have a narrow definition, whereas the buyer seeks to include even negative trends in the industry (market MAC).
Private equity investors tend not to accept hell or high water clauses pursuant to which the private equity buyer agrees to assume all antitrust risks in a transaction. The materialisation of such risks includes the divestiture of certain operations and the legal challenge of the decisions of the antitrust authorities. This affects the timing of the closing, the valuation and the investment strategy, which are key factors for private equity investors.
In deals that do not provide for simultaneous signing and closing, break fees and/or reverse break fees are not uncommon. In the current sellers’ market, break fees are often particularly seen in transactions where exclusivity is granted to a specific buyer.
In principle, the law does not limit the amount of the break fees. However, excessive break fees may violate the duties of the board of directors of the selling or purchasing entity, and may engage the personal liability of its members.
In transactions that are subject to the approval of a general meeting of shareholders (eg, a statutory merger or demerger), break fees must not reach an amount that, as a result of its importance, obliges the shareholders to approve the transaction. An amount that corresponds to the costs and expenses incurred in connection with such transaction is generally within the admissible threshold.
Transaction agreements that are subject to closing conditions regularly contain termination rights if the closing conditions are not fulfilled within a certain period of time (long-stop date). The long-stop date is often determined in consideration of regulatory requirements, such as the time required to obtain antitrust clearance or the approval of FINMA.
Sometimes, transaction agreements also provide for automatic termination if the closing conditions are not fulfilled by the long-stop date. Such provisions are only included if a closing before the long-stop date is absolutely key for the parties.
Risk is allocated by way of representations and warranties for unknown risks (purchase warranties pursuant to art. 192 et seq. and 197 et seq. of the Swiss Code of Obligations) and indemnities (guarantees in the meaning of art. 111 of the Swiss Code of Obligations) for taxes and risks that have been identified during the due diligence review.
Usually, the liability for representations and warranties is subject to limitations. As a general rule, indemnities are not subject to any limitations, and require the seller to indemnify the buyer franc by franc. Recently, however, there have been transactions in which indemnities are subject to the same limitations as the representations and warranties. This is a typical effect of the current sellers’ market.
Representations and warranties (RW) usually cover fundamental aspects, such as authority, power and ownership of shares. Other RWs depend on the type of business that is the subject of the transaction, but usually cover financials, employees, material contracts, assets (including intellectual property rights), taxes and compliance. Generally, private equity sellers do not accept a disclosure RW. RW are often qualified by knowledge of sellers and materiality, and are heavily negotiated between the parties.
Unlike indemnities for known risks, which are usually unlimited, RW are subject to the general exclusion of liability and monetary thresholds and caps. The transaction agreement usually contains detailed provisions on exclusion and limitation of liability, which replace the statutory warranty provisions under the Swiss Code of Obligations.
Most importantly, exclusions of liability include fair disclosure and time limits. Private equity buyers often insist on specific disclosure by way of a disclosure letter, and try to exclude the fair disclosure concept generally used in Swiss transactions. The applicable concept is often subject to heavy negotiations. Under the fair disclosure concept, which is more favourable to the seller than specific disclosure, the entire data room is deemed disclosed against all RW, provided that the disclosure has been “fair”. With respect to time, the typical limit is 12 to 36 months. In most cases, the parties agree on 18 months, but in many transactions, different time limits between 12 and 36 months are applied, depending on the specific RW. In monetary terms, limitations include thresholds (1% of the purchase price is a common threshold), caps (commonly between 10% and 30% of the purchase price) and de minimis (0.1% of the purchase price is common). Usually, if the threshold is reached, the seller is liable for all claims.
Private equity sellers generally attempt to limit their liability under RW and indemnifications (see 6.10 Other Protections in Acquisition Documents). Recent transactions have included cases where, except for the fundamental RW, only the selling management shareholders give RW for business-related matters.
The prevailing remedy in case of a breach of RW or indemnities is damages, irrespective of any fault of the seller. Sometimes, the seller has a right to cure the defect during a limited period of time, before the buyer has a right to claim damages. Commonly, the parties exclude the statutory right to rescind the transaction agreement.
Private equity sellers typically attempt to limit risk exposure in representations and warranties as much as possible, since they want to have a clean exit and do not want to bear the risks associated with the operations of their portfolio companies. As a result, high caps and thresholds apply, and W&I insurance has become a standard (particularly in medium-sized and larger deals).
In auction processes, it is often the seller that takes the initial steps with an insurance broker. At a later stage of the auction process, buyers are put in contact with the insurance company and take out the proposed insurance policy. Known risks, which are typically covered by indemnities in the transaction agreement, are not usually covered by insurance policies.
Buyers regularly seek protection by way of retention of a part of the purchase price, or the depositing of it in escrow. This is particularly the case if there are multiple sellers or individuals as sellers.
Over the course of the past decade, litigation in private equity transactions has become more common. By far the largest number of litigation cases is post-closing, in connection with representations and warranties, indemnities and price adjustments (including earn-outs). Closing and pre-closing disputes are less common. The rare cases of pre-signing disputes are related to exclusivity and confidentiality agreements.
Public to private transactions have become more common in Switzerland, with the Swiss stock exchanges reporting more going-private transactions in the years 2013 to 2016 than initial public offerings. Private equity players are rarely involved in public to private transactions, although there have been some prominent recent transactions involving private equity players, such as EQT’s purchase of all shares in Kuoni Travel Holding Ltd (the Swiss travel operator). Very often, public to private transactions are driven by strategic buyers.
Going-private transactions are made by way of a public takeover offer, followed by a delisting of the shares. The listing must generally be maintained for three to 12 months following the delisting announcement. The delisting is within the competency of the target’s board of directors and cannot be challenged by shareholders.
Shareholders of listed companies (including the listed company itself) are subject to disclosure obligations. Article 120 para. 1 of the FMIA requires anyone who, directly or indirectly, or acting in concert with third parties, acquires or disposes of shares or acquisition or sale rights relating to shares of a company with its registered office in Switzerland whose equity securities are listed in whole or in part in Switzerland, or of a company with its registered office abroad whose equity securities are mainly listed in whole or in part in Switzerland, and thereby reaches, falls below or exceeds the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% or 66⅔% of the voting rights, whether exercisable or not, must notify this to the company and to the stock exchanges on which the equity securities are listed.
The basis of calculation is the capital registered with the commercial register and not the aggregate number of outstanding shares. These numbers may differ if the company has issued shares out of its conditional capital that have not yet been recorded in the register of commerce. Disclosure obligations are also triggered if a threshold is passed as a result of a variation in the share capital (capital increase or decrease).
Unlike a mandatory offer obligation, the disclosure obligation is triggered at the time of execution of a transaction, and not upon completion of a transaction. Purchase positions (long positions in shares and options and short positions in put instruments) and sale positions (short positions in shares, long positions in put options or written call options) have to be disclosed separately.
If a disclosure obligation is triggered, the relevant party must make the notification within four trading days to the company and to the stock exchanges on which the equity securities are listed (the SIX Disclosure Office for the SIX Swiss Exchange Ltd). The disclosure notification is published on the website of the stock exchange.
Swiss disclosure law is highly complex, particularly regarding non-standard financial instruments. The disclosure obligations – which are at least in part a response to allegedly abusive practices in takeovers in the 1990s and the 2000s – shall prevent private equity investors from building up hidden stakes in a potential target company. In particular, the disclosure of purchase or sale positions requires the disclosure of all types of derivative instruments, irrespective of whether they are settled physically or in cash. There is no netting of purchase and sale positions. In this regard, if the purchase and sale positions of financial instruments vary, the parties are well advised to apply special care when making the disclosure, or to seek for a ruling prior to entering into the relevant instruments. Although the FMIA and the regulations promulgated thereunder are the legal basis for disclosure, the practice of the SIX Disclosure Office has to be regularly consulted. Unfortunately, such practice is only partially published in the yearly reports and circulars of the SIX Disclosure Office.
Non-compliance with disclosure obligations pursuant to arts. 120 et seq. FMIA constitutes a criminal act, punishable with fines of up to CHF100,000 in cases of negligence and CHF10 million in cases of intentional misconduct.
In the case of a public tender offer, additional disclosure obligations apply to the bidder, to persons acting in concert with the bidder, to the parties to proceedings of the Swiss Takeover Board and to any other party that holds (alone or in concert with other parties) 3% or more of the target’s voting rights. Any change in the sale and purchase positions of such parties must be disclosed to the Swiss Takeover Board on a daily basis. The transactions are disclosed on the website of the Swiss Takeover Board.
Finally, parties passing the thresholds of 10%, 20%, 33 ⅓% and 50% of the capital or the voting rights of a bank or insurance company must make a notification to FINMA prior to completion of the transaction.
Article 135 para. 1 FMIA requires anyone who directly, indirectly or acting in concert with third parties acquires equity securities which, added to the equity securities already owned, exceed the threshold of 33⅓% of the voting rights of a target company, whether exercisable or not, to make an offer to acquire all listed equity securities of the respective company. Corporations may raise this threshold to 49% of voting rights in their articles of incorporation. The price offered to the shareholders must be at least as high as the stock exchange price or the highest price that the offeror has paid for equity securities of the target company in the preceding 12 months, whichever is higher. There is a detailed regime governing mandatory takeover offers.
If a party acts in concert with other parties with the intention of jointly acquiring or exercising control over the target, the shareholdings of the relevant parties are aggregated for the purposes of determining whether the 33⅓% threshold has been reached. If they collectively exceed such threshold, the obligation to submit a mandatory offer is triggered. In practice, the Swiss Takeover Board interprets this rule strictly. The intention of joint control is a matter of fact and does not require a written document such as a shareholders’ agreement. Also, if two parties act in concert, their shareholdings are added up, even if no additional shares are acquired at the time they decide to act in concert.
A party is exempted from the obligation to make an offer if the articles of association of the target contain an opting-out or an opting-up provision. If there is an opting-up, the mandatory offer threshold is increased to 49%. The introduction of an opting-out or an opting-up provision and the respective amendment to the articles of associations is subject to the approval of a majority of the company’s shareholders. If the opting-out or opting-up provision is introduced after the listing of the company’s shares or its IPO, the approval of the majority of the minority shareholders is also required.
Apart from other specific exemptions to the mandatory offer obligation (for instance, if the applicable threshold is passed as the result of an inheritance), the Swiss Takeover Board may grant further exemptions. Such exemptions are granted in connection with capital increases, capital reductions or a temporary excess of the applicable thresholds, or in connection with a reorganisation.
Contrary to the disclosure obligations, where rights to acquire shares also have to be disclosed if a relevant threshold is exceeded, the mandatory offer obligation is only triggered when shares are actually acquired (closing).
The mandatory offer must be made and the relevant offer prospectus published no later than two months after the relevant threshold has been passed.
In principle, Swiss law allows for exchange and cash offers as consideration in public takeovers. Exchange offers may consist of any kind of securities, listed or non-listed shares of the bidder or another company and, in theory, also derivatives and any other kind of securities. In exchange offers, bidder shares are often offered as consideration. As far as is known, there have been no transactions in which the bidder has offered derivatives or other alternative consideration schemes.
In voluntary offers with a share consideration, the offeror must provide the shareholders with the option to choose a cash consideration (100%) if the offeror has purchased securities in the target against a cash consideration between the publication and the completion of the offer. Where an offer leads to a change of control – and hence the rules on mandatory offers kick in – the offeror must provide shareholders with the option to choose a cash consideration (100%) if the offeror has purchased securities in the target in excess of 10% of the share capital in the 12 months prior to the publication of the offer. The chosen consideration must be offered to all target shareholders, due to the principle of equal treatment of shareholders. In exceptional circumstances only, and subject to a ruling of the Swiss Takeover Board, the bidder may deviate from this principle and offer selective consideration. An exemption may be granted, for instance, if offer restrictions apply due to the application of foreign securities laws (for instance, corporations with US shareholders).
With respect to the offer price, the minimum price rule applies to mandatory offers and voluntary offers that qualify as change-of-control offers. The offer price must not be lower than the 60-day VWAP (volume-weighted average price) of the shares and the highest price paid by the bidder (or any party acting in concert with it) for shares during the 12 months preceding the pre-announcement of the offer. Special valuation principles apply if the target shares are considered illiquid pursuant to the Swiss Takeover Board's practice. The possibility of paying a premium to large shareholders (control premium) has been abolished.
Although there have been several high-profile exchange and mixed offers recently, cash offers are by far the most common type of consideration in public takeovers. Despite this recent development, the number of cash offers as opposed to exchange offers has increased over the course of recent years.
The detailed takeover offer rules (art. 125 et seq. FMIA) regulate the process for submitting a takeover offer. In particular, there is a duty to publish an offer prospectus (art. 127 para. 1 FMIA). The offeror must treat all holders of equity securities of the same class equally (art. 127 para. 2 FMIA). Prior to publication, the offeror must submit the offer to a review body (a licensed audit firm or a securities dealer), which has to confirm that the takeover offer complies with applicable law. The offer prospectus is reviewed by the Swiss Takeover Board. The Swiss Takeover Board has issued an Ordinance on Takeover Offers (Verordnung der Übernahmekommission über öffentliche Kaufangebote), which sets forth detailed rules on takeover offers, including rules on permissible conditions precedent. To which extent conditions are permissible in a public takeover depends on whether the offer is mandatory or voluntary.
In a mandatory offer, Swiss law only allows for a limited number of inevitable conditions. These are regulatory approvals, such as approval of FINMA or antitrust clearance, that there are no injunctions and the recording of the bidder in the share ledger of the target company with voting rights. Additional conditions are not permissible.
Conditions are permitted in voluntary offers, which represent the majority of offers in Switzerland, provided that they cannot be controlled by the bidder and that the satisfaction of a condition can be assessed objectively. In addition to the conditions usually applied in mandatory offers, the most common conditions include the following:
Financing conditions are not permitted in cash offers, since certainty of funds is considered a key element in public takeovers. The offer prospectus has to disclose the sources of financing of the offer and confirm its availability. In the case of an exchange, the bidder may include a condition regarding the issuance and listing of the offered securities. The bidder has to undertake all necessary steps to ensure that the securities are actually issued and, if applicable, listed. The independent review body has to confirm the availability of the financing or, in case of an exchange offer, the securities in its report on the offer prospectus.
In practice, bidders usually reserve the right to waive the conditions that are not subject to mandatory law. If the bidder takes actions that could prevent certain conditions being satisfied, the condition is automatically deemed satisfied. There are various measures to increase deal certainty, such as no-shop provisions, break-up fees and irrevocable commitments (see below).
Provided that the offer is a friendly offer and the target company and the bidder enter into a transaction agreement, the target commonly undertakes to refrain from soliciting or recommending the acceptance of a competing offer to the shareholders (so-called no-shop provision). Although certain limitations apply to the scope of no-shop provisions, they are generally permissible under Swiss law.
Another means of deal protection is agreeing on break-up fees, to the extent that such break-up fees are a reflection of the costs and expenses incurred by the bidder in connection with the offer. In public transactions, reverse break fees are uncommon. The percentage of the agreed break-up fee in proportion to the overall deal size has continuously increased over recent years. Although not tested in courts, the Swiss Takeover Board has recently approved break-up fees of up to 2%.
Matching rights are also common and enforceable, but force-the-vote provisions are not enforceable in Switzerland.
Typically, private equity sponsors will aim to purchase 100% of the shares in the target company. Otherwise, they will have to deal with minority shareholders, which has a significant impact on their flexibility regarding financing the target and – in case of distributions – leads to leakage. Therefore, private equity sponsors will aim to achieve either of the following two thresholds:
As mentioned above, the Swiss Takeover Board generally allows a minimum acceptance rate condition of 66⅔% of the outstanding target shares in voluntary offers. If this acceptance rate is achieved, but not the 90% threshold, the bidder runs a risk of having to complete the offer without having the possibility of acquiring full ownership in the target company. Upon the expiry of the offer period of at least 20 trading days, the bidder must grant the shareholders of the target company an additional acceptance period of ten trading days, during which they can still tender their shares in the target.
In a scenario where the bidder cannot obtain full ownership of the target company, the bidder and the target often enter into a relationship agreement in order to channel the bidder’s influence on the target company. A relationship agreement normally governs at least the representation of the shareholder on the target board of directors, and contains standstill language. In addition, relationship agreements may contain voting agreements, although the validity and enforceability of these is disputed.
For the sake of completeness, any management incentive scheme is usually structured via a participation at the level of the acquisition structure.
Under Swiss takeover law, “irrevocable” tender undertakings are revocable if a competing offer is announced.
Nevertheless, in friendly takeover bids, it is very common for bidders to seek irrevocable commitments from major shareholders. This is achieved through transaction agreements. The stage at which such irrevocable commitments are negotiated usually depends on whether the shareholders are involved in the negotiations: if they are, the commitments are negotiated simultaneously with the negotiations with the target (acting through its board of directors); if they are not involved (eg, because there are no clear majority shareholders), the commitments are usually negotiated once there is an agreement in principle with the target (acting through its board of directors). In any case, transaction agreements are typically entered into prior to the launch of the tender offer. The rights and obligations under the transaction agreements are contractual undertakings and are not binding upon any third party, including the target company.
The parties are well advised to apply care when structuring the irrevocable commitments. The committing shareholders may be deemed to be acting in concert with the bidder, which may affect the disclosure obligations applicable to the parties and the determination of the minimum price, or may trigger the application of the best price rule.
Hostile bids are permitted under Swiss takeover law. The takeover ordinance of the Swiss Takeover Board and the Swiss Financial Infrastructure Act explicitly dedicate articles to hostile takeovers bids and competing takeover offers. Nevertheless, there have been no hostile takeover offers in Switzerland in recent years, and hostile takeover offers are not common in Switzerland. This is – among other factors – the result of a significant number of listed corporations still being controlled by a stable majority shareholder (eg, a family). As is demonstrated by EQT’s offer for Kuoni Travel Holding Ltd., it is key to have the significant shareholders on board prior to the launch of the offer.
Management incentives are an important part of private equity transactions. This way, the private equity fund shareholder can ensure that management has “skin in the game”, and that management’s interests are fully aligned with its own interests.
In Switzerland, it is common for managers to be asked to finance a significant part of their financial investment as equity. Management will typically be offered a minority participation in the target. The level of equity ownership will vary (eg, in start-ups and early stage-companies the participation will be higher whilst the salary is lower), but a typical participation will be around 3-5%.
Usually, management invests directly in the target. Sometimes, management participation is also pooled into a management pooling vehicle.
Management incentives are typically structured by granting shares or share options (ie, the management is entitled to both economic benefit and voting rights). Participation is sometimes also granted as profit participation certificates (ie, the management is only entitled to economic benefits). Phantom shares are rather unusual in Switzerland.
A common management incentive scheme in Switzerland is “sweet equity”. In a sweet equity scheme, managers typically receive a discount and/or different share classes than the private equity shareholder (for instance, common shares instead of preferred shares). Swiss tax law sets rather narrow limits regarding tax exemptions for capital gains on sweet equity, so it is strongly advisable to obtain a tax ruling prior to setting up a management incentive scheme.
Management’s participation rights are usually agreed to in one single shareholder’s agreement between the private equity fund shareholder and management (or the management pooling vehicle). The shareholder’s agreement typically contains all aspects of the investment (such as governance, exit procedures, share transfers, vesting conditions, and good/bad leaver provisions). In Switzerland, managers usually have very limited governance rights but are obliged to vote as instructed by the private equity fund shareholder, or the private equity fund shareholder is the controlling partner of the pooling vehicle.
Vesting provisions are typically contained in share option plans. For companies at a growth stage, the vesting period is usually between one and three years. For companies at a start-up stage, the vesting period is much longer, up to several years.
There are differences between bad leaver and good leaver provisions.
If a manager leaves the target as a bad leaver, the remaining shareholders will typically have at least one month in which to exercise a call option, with which they can buy the shares of the bad leaver in an amount proportionate to their respective participation in the target. Typically, the other shareholders are entitled to buy the remaining shares if a shareholder renounces its call option right. The purchase price typically amounts to either the market value or the lower of the market value and the price the bad leaver paid for the shares.
If a manager leaves the target as a good leaver, he/she will either be entitled to keep his/her shares whilst at the same time continuing to be bound to the shareholder’s agreement, or will be required to sell his/her shares if the other shareholders exercise their call options. The purchase price to be paid to a good leaver typically amounts to either the market value increased by a premium or the higher of the market value and the price the good leaver paid for the shares.
In Switzerland, management shareholders typically agree to non-compete and non-solicitation obligations. Non-compete obligations need to be limited in scope (geographical scope and the scope of the activity of the target) and in time (maximum two to three years).
In Swiss deals, members of management do not always have board seats and, even if they do, veto rights are not common. Rather, management shareholders are typically protected by appropriate provisions in the shareholders’ agreement, such as qualified majority on selected matters. The shareholders’ agreement may also include tag-along rights and obligations on investors to allocate a certain percentage of the capital to the management and/or key employees.
In addition, Swiss company law contains statutory subscription rights for shareholders in case of a capital increase. These rights grant a certain degree of anti-dilution protection to minority shareholders, although they may be – and often are – waived in the shareholders’ agreement.
The levels of control depend on the level of equity ownership held by the private equity fund shareholder. If the private equity fund shareholder is a small investor (stake of up to 20%), it will only enjoy fundamental veto rights (dissolution, pro-rata right to capital increase, no fundamental change of business, maximum leverage, etc) but will usually get a board seat (or at least an observer position). If the private equity fund shareholder holds a greater share of the equity ownership (stake of 20-40%), it will usually also have veto and participation rights regarding important business decisions (acquisitions and disposals, litigation, indebtedness, business plans and strategy, etc) and the composition of senior management.
In an antitrust law infringement by a portfolio company, the private equity investor may become jointly liable for any fines.
Under Swiss corporate law, however, shareholders are not liable for the actions of the company in which they are holding shares. The shareholder could be deemed a shadow director and held liable only in exceptional circumstances, if the private equity shareholder acts as a de facto organ of the portfolio company.
More risk exposure exists at the level of the members of the board of directors of the portfolio company delegated by the private equity fund as a shareholder, but the liability of the members of the board of directors can be limited to some extent by adopting organisational regulations and delegating the management of the portfolio company to the executive management.
Until recently, compliance issues were particularly reviewed during the due diligence process at the time of the acquisition of a portfolio company. However, in recent years, the private equity investors have also become active in implementing their compliance policies post-acquisition at the level of the portfolio companies (including anti-bribery, money laundering, corporate social responsibility, etc). This is a result of developments to make holding companies jointly responsible with the portfolio company for breaches of antitrust law, and to implement corporate social responsibility goals.
Private equity investments are, by nature, pursued for a limited period of time. In Switzerland, the typical holding period for a private equity transaction is between two and seven years, with a maximum period of ten years.
Despite its comparatively small size and relatively low number of players, the Swiss market offers good exit options and is liquid. Therefore, there have been successful and even substantial exits of private equity investors in Switzerland in recent years, notably in the areas of life sciences, biotech and pharmaceuticals.
In the recent past, the most common form of private equity exit was trade sales or M&A transactions. Exits through IPOs are not so common due to the significant risks of value loss that may occur during the lock-up period. However, if an IPO is considered, dual tracks are often seen.
Drag rights are typical in equity arrangements, and private equity investors regularly seek to get strong drag rights to secure this exit option (with a typical threshold of 50% if they hold a majority position). On the other hand, private equity investors usually try to get some protection from drag mechanisms if they hold minority positions in a portfolio company – eg, by agreeing with other investors in a shareholders’ agreement on a drag threshold that does not allow the other investors to drag the private equity investor without its consent, or by agreeing on certain procedural features that allow the private equity investor a certain amount of time to get a better offer if it is not happy with an exit option presented by the majority shareholder(s).
In Swiss deals, management shareholders usually enjoy a tag right, which allows for a proportional sale of their shares if the private equity investor sells its stake. The same does not necessarily hold true with respect to institutional co-investors, as private equity shareholders sometimes consider tag rights of other institutional shareholders to be an undue restriction of their shareholder rights. Tag rights are often negotiated and agreed upon on a case-by-case basis, taking into account the particularities of the transaction in question.
A typical lock-up arrangement for private equity sellers is that shareholders who hold share capital of more than 3% prior to the IPO have to sign up for lock-up undertakings. The same holds true (without percentage limitations) for members of the board of directors and (key members of) the executive management. A typical lock-up period would be between six and 18 months.
In addition, relationship agreements are typically entered into if an investor gets specific rights in connection with an IPO, particularly the right to appoint a board member.