In 2021, M&A activity in Switzerland increased significantly across all sectors, reaching a new high compared to recent years. This set the stage for a positive start to 2022, supporting an optimistic outlook for the market. Despite facing economic challenges such as supply chain disruptions, global inflation, rising interest rates and general macroeconomic uncertainty, Swiss M&A continued to thrive throughout 2022, marking another exceptional year. Although there was an 18.5% decrease in the overall value of deals, equating to USD138.5 billion, the number of transactions involving Swiss entities increased by 7% between 2021 and 2022, resulting in a total of 647 deals and setting a new record.
At the same time, however, a number of factors, such as the stock market downturn and concerns about unchecked inflation and the war in the Ukraine, have contributed to increased uncertainty and higher deal costs, significantly impacting the risk appetite of M&A investors. As a result, the market became much more cautious in the second half of 2022 and early 2023.
Private equity investors played a pivotal role in the Swiss market, as evidenced by a significant surge in in their activity throughout 2021. Acting as buyers or sellers, financial investors actively participated and continued to maintain a high level of engagement in 2022, being involved in approximately one third of all transactions. These findings highlight the ongoing importance and continuous engagement of private equity firms in the Swiss market, particularly in relation to small to medium-sized enterprises (SMEs) operating in the industrial, pharmaceutical, healthcare, life sciences and technology, media and telecommunications (TMT) sectors.
Future deal activity in private equity will most likely have an increasing focus on digitalisation and sustainability topics. Additionally, private equity investors may develop increased interest in healthcare and life sciences targets in Switzerland which offer stable business models that are resilient to potential economic uncertainties. With private equity buyers still sitting on significant cash reserves and the economic situation easing, a positive trend for private equity transactions in the second half of 2023 is likely.
The TMT, industrial markets, healthcare, pharmaceutical and life sciences sectors accounted for almost half of all deals in 2022. The TMT sector was the most active M&A market, with 124 deals undertaken at a collective value of over USD14.5 billion. This was followed by industrial markets M&A, which saw 89 deals completed at a collective value of USD6.5 billion. The pharmaceutical and life sciences sector saw 82 deals, with the overall value of such transactions just under USD13 billion.
Swiss companies continued to buy significantly more from their foreign counterparts than vice versa, with 283 acquisitions being completed, compared to 152 divestments. Domestic transactions (transactions between two Swiss organisations) accounted for almost one in five M&A deals involving Swiss companies (127 deals). Meanwhile, about 13% of all transactions were international transactions with Swiss sellers (85 deals).
Market activity at the beginning of 2023 was affected by increased transaction costs, which was a result of higher interest rates as well as the lower leverage ratios. These circumstances led to a decrease in valuations of potential private equity investors and thus a decrease in the number of deals, as many potential sellers were still used to the high valuation levels of 2021 and 2022 and wanted to wait and see whether the debt market and thus the valuation levels would recover. However, given that interest rates will likely remain at a higher level for a certain period, and some potential sellers are required to do a transaction (eg, due to succession planning or financial sponsors forcing a sale due to the expiry of a fund), many potential sellers are adapting to the reduced valuation level. This suggests a positive outlook for private equity transactions in the second half of 2023. Private equity firms active in Switzerland follow a wide range of strategies, including control and non-control deals, club deals and joint ventures with corporates. The market continues to witness a lot of transactions where a seller wishes to keep or reinvest a certain minority stake in the target company, which certainly helps to ensure management continuity.
In general, private transactions are not extensively regulated in Switzerland and the parties have great flexibility in determining the transaction structure as well as the contractual framework. Compared to public M&A transactions, which are highly regulated, private M&A transactions are less densely governed and many provisions of the Swiss Code of Obligations of 30 March 1911 that would apply to share or asset transfers can be excluded in favour of a contractual framework.
However, financial and corporate regulations have increased in recent years. In this respect, it should also be noted that even if Switzerland is not a member of the European Union, EU directives and regulations still have an important impact on Swiss policy-making.
Data Protection and Privacy
An example of EU regulations affecting the regulatory landscape in Switzerland is the General Data Protection Regulation (GDPR). Even though Switzerland is not a member of the EU, the guidelines are directly applicable to all Swiss-based companies doing business in the EU, as the scope includes all businesses processing personal data of EU data subjects (eg, employees), or organisations that monitor the online behaviour of EU data subjects (eg, customers). In addition, EU companies are asking their Swiss business partners to be GDPR-compliant. Therefore, the GDPR has a major impact on numerous Swiss-based companies.
The Federal Act on Data Protection of 19 June 1992 (FADP), and the supporting Ordinance to the Federal Act on Data Protection of 14 June 1993 (DPO), has undergone a complete overhaul in Switzerland, partially in reaction to the GDPR and its ramifications. The purpose of the reform was to update the FADP to align with technological advancements, to ensure compliance with the GDPR and to maintain unrestricted data flow between Switzerland and the EU. The revised FADP, along with the associated legislation, has been in effect since 1 September 2023, without a transition period.
Special purpose acquisition companies (SPACs) had record years in the USA in 2020 and 2021. In Switzerland, the Directive on the Listing of SPACs was put into effect in December 2021, allowing SPACs to be listed on the SIX Swiss Exchange. As a result, these “blank-cheque firms” have entered the Swiss “investor” market. This directive requires that the de-SPAC be finished three years after the initial trading day. The first and sole SPAC in Switzerland was listed on 15 December 2021 and, to the authors’ knowledge, has not found an ultimate takeover target yet. There has not been an additional SPAC listed in Switzerland since.
The Swiss Financial Market Authority (FINMA) approved the new SIX Swiss Exchange equity section “Sparks” in 2021. Since October 2021, SMEs are now eligible to list on the SIX under streamlined, SME-specific regulations, to get access to Swiss and foreign investors with sufficient financial means and experience. The benefits of Sparks also include enhanced liquidity due to the tradability and visibility of the shares, with the company needing to adhere to more stringent regulatory standards (such as ad hoc advertising, disclosure of large shareholdings, and financial reporting). Businesses and investors have additional chances to expand by enabling SMEs to take advantage of SIX’s benefits.
Corporate Law Reform
On 1 January 2023, after 13 years of preparatory work, the long-awaited reform of Swiss corporate law entered into force, amending the Swiss Code of Obligations (Corporate Law Reform). The Corporate Law Reform inter alia seeks to modernise corporate governance by strengthening shareholders’ and minority shareholders’ rights, promoting gender equality in boards of directors and in senior management and increasing flexibility in various areas (eg, share capital in foreign currencies and the possibility of virtual shareholders’ meetings).
As mentioned in 2.1 Impact on Funds and Transactions, private M&A transactions are not extensively regulated in Switzerland as there is no specific act regulating the acquisition of privately held companies. The main legal source is the Swiss Code of Obligations, which provides quite a liberal framework for transactions. Currently, Swiss law provides for only very limited restrictions on foreign investment (for example, the banking sector or the purchase of residential real estate): foreign investors and financial sponsors are, broadly speaking, in most cases not restricted or treated differently from domestic investors.
However, following international developments, this may change in Switzerland. An initiative to establish an approval authority for transactions subject to investment control (motion 18.3021 Rieder) was approved by the Swiss Parliament in March 2020, instructing the government to create a legal basis for controlling foreign investments, with the aim of safeguarding Switzerland’s public order and security.
In May 2022, a first draft of the Investment Review Act (IPG) was published, encompassing investments by state-owned foreign investors in general, as well as investments in specific sectors by any foreign investor, regardless of whether it is controlled by a foreign state or a private entity. The publication of the first draft of the Investment Review Act was followed by a consultation period which lasted until September 2022.
In May 2023, the Federal Council took note of the results of the consultation on the new law on investment screening. The proposal has faced widespread scepticism, primarily due to concerns about its potential negative impact on Switzerland’s attractiveness as a business destination. Consequently, the Federal Council has instructed the Federal Department of Economic Affairs, Education and Research (EAER) to prepare a substantially revised draft that aligns with Switzerland’s international obligations and to present it to the Parliament.
According to the revised draft instructions provided by the Swiss government, the scope of investment review will be significantly limited. It will only be applicable when a foreign state-controlled investor acquires a domestic company operating in critical sectors such as defence equipment, electricity production and transmission, or health and telecommunication infrastructures. This reduced scope of the revised draft will significantly limit the adverse effects on companies compared with the initial draft. The Swiss Federal Council has directed the EAER to prepare the corresponding revised draft by the end of 2023.
One exception to the liberal legal framework in Switzerland is the acquisition of real estate. Swiss law restricts the acquisition of real estate that is not permanently used for commercial purposes (non-commercial property), such as residential or state-owned property, undeveloped land or permanently vacant property (the Lex Koller). Legal entities with their corporate seat outside Switzerland are deemed as foreign under the regulations, regardless of who controls them. Further, legal entities with their corporate seat in Switzerland are deemed as foreign if they are controlled by foreign investors. The law takes a very economic view to determine whether a Swiss entity is foreign controlled; namely, it looks through the entire holding and financing structure, but is strictly formal as soon as an entity with its corporate seat outside Switzerland is involved.
The topics of sustainability and environmental protection, as well as social and responsible corporate governance, have gained increased attention and importance in Europe (and throughout the world) over the past few years (criteria of environmental social governance, ESG). With the introduction of ESG reporting requirements as of 1 January 2022, Switzerland has followed the trend and has introduced stricter ESG requirements for Swiss companies.
Depending on their size and significance, certain companies will be subject to the new ESG reporting requirements.
Swiss businesses that are of public interest must create an annual, public ESG report that addresses non-financial issues. The requirement to create such a report primarily pertains to listed companies and banks that, together with the domestic or foreign businesses they control, have an average of at least 500 full-time positions annually over the course of two years and have sales revenue exceeding CHF40 million or a balance sheet total of at least CHF20 million. The report discusses non-financial issues such the business strategy, newly developing threats to the environment, employees, and human rights, as well as the due diligence steps the firm has made to address ESG issues.
Compared to companies of public interest, SMEs are not yet compelled to issue such an ESG report. However, additional due diligence obligations apply if companies (including SMEs) with their registered office, head office, or primary place of business in Switzerland process or import specific minerals or metals originating from conflict or high-risk regions. Similar due diligence obligations apply to Swiss companies that provide goods or services for which there is a plausible suspicion that child labour was used in their manufacturing. SMEs are exempt from the due diligence obligations regarding child labour if their balance sheet totals, sales revenue and full-time employees fall below certain statutory thresholds.
It is anticipated that the due diligence obligations regarding child labour will be the most relevant obligation for private equity firms intending to invest in certain businesses. Moving forward, it is highly recommended that private equity buyers also focus on the new reporting requirements when conducting a due diligence analysis of an acquisition target.
The vast majority of legal due diligences are conducted on an exception basis only (ie, only highlighting red flags). Only in specific cases are summaries or overviews produced (eg, overview of key terms of the important business contracts, the employment agreements with key employees or lease overviews). The typical scope of a legal due diligence covers corporate matters, financing agreements, business agreements, employment (excluding social security and pension), real property/lease, movable assets, intellectual property (IP)/IT (review of an IP portfolio and contracts from a legal perspective), data protection and litigation. Compliance and regulatory topics are included to the extent relevant for the specific business.
A vendor due diligence is not a standard feature in private equity transactions in Switzerland but is conducted in complex, large transactions to accelerate and facilitate the sales process.
The result of a vendor due diligence is typically a report which summarises material legal key terms and also highlights certain red flags. The vendor due diligence reports are often used as a starting point for the buyer’s own legal due diligence and to define the focus of the buyer’s own due diligence. However, vendor due diligence reports usually do not fully replace a buyer’s own due diligence – even if reliance is granted (which is typically the case).
Most acquisitions of Swiss target companies by private equity funds are carried out by Swiss law-governed share purchase agreements with jurisdiction in Switzerland. In the case of a reinvestment or a partial sale, a shareholders’ agreement is concluded in connection with the transaction.
The terms of the acquisition are different between a privately negotiated (one-on-one) transaction and an auction sale, as the “hotter” the auction, the more seller-friendly the terms of the acquisition agreement. This relates to the price certainty (locked-box v closing adjustment), transaction certainty (conditions precedent (CP), hell or high water clause, etc) as well as the liability concept (warranty and indemnity (W&I) insurance, cap, specific indemnities, etc).
Given the vast flexibility in Switzerland, the full range of transaction structure can be seen. The most common structure for private equity funds to invest in or acquire a Swiss target company is to set up a special purpose acquisition vehicle – the NewCo or AcquiCo. The AcquiCo may be held either directly or – mostly for tax or financing reasons – via another special purpose vehicle in Switzerland or abroad. In view of an exit and the potential liability in connection therewith, the fund rather tends not to become a party to the acquisition or sale documentation.
Swiss transactions are usually still – at least partially – debt-financed. Due to negative interest rates over the past years, banks have been more inclined towards financing transactions, and the financing conditions remained favourable for funding investments in Swiss companies. Even though the rising interest rates as well as lower debt ratios may make it more difficult for private equity firms to raise financing to purchase large targets, borrowing conditions are still relatively generous. Bidders looking to invest are very flexible with regard to transaction financing. This is due to the fact that Swiss corporate law only stipulates limited restrictions on a company’s debt-to-equity ratio (however, from a Swiss tax-law perspective, de facto limitations exist due to thin capitalisation rules). In view of the security package provided in connection with a debt-financed transaction, it is important to follow the restrictions on upstream and cross-stream guarantees, as well as other security interests granted by the target to the parent or an affiliate (other than a subsidiary). At signing, it is standard in Swiss transactions that the buyer provides sufficient proof of funds, ideally in the form of a binding term sheet with the finance provider.
Regarding the equity portion of the purchase price, the sellers typically request a customary equity commitment letter directly from the fund. However, such equity commitment letters are usually not to the direct benefit of the sellers but to that of the purchaser.
Traditionally, most of the private equity deals in Switzerland were majority investments. However, given the current “investment plight”, increasingly, minority investments by PE funds are also being seen.
Club deals or syndicates of several private equity funds are primarily seen in larger transactions. In the context of private transactions, the parties have vast flexibility in structuring such club deals. The relationship among the club participants is in most cases governed by a shareholders’ agreement.
In the context of public transactions, other rules apply to such co-investments, and the club participants are most likely to be qualified as acting in concert regarding the mandatory takeover rules (see also 7. Takeovers).
The two predominant forms of consideration structures used in private equity transactions in Switzerland are the locked-box mechanism and the net working capital (NWC)/net debt adjustment as per closing. In the current (still) seller-friendly environment, a locked-box mechanism has been used in the majority of the transactions in order to give price certainty to sellers. However, the strongly influenced sellers’ market in recent years, is seen to be slightly shifting towards a more balanced approach. Discussions which were not possible in the past few years – for example, regarding closing conditions or purchase price adjustments – have become more common again.
Earn-outs and vendor loans have been seen less often recently but are not uncommon. Given that, earn-outs especially are usually used in cases where the seller remains as an employee of the target company post-closing, in which case, however, certain restrictions from a Swiss tax-law perspective may apply.
Due to the current sellers’ market, locked-box pricing mechanisms are often combined with an interest payment or cash flow participation, respectively, for the period between the locked-box date and actual payment of the purchase price (ie, closing), and buyers tend to accept longer periods between the locked-box date and closing.
Leakage, however, is typically not subject to interest and will be compensated on a CHF-to-CHF basis (unless considered permitted leakage).
For locked-box consideration structures, it is unusual to have a dispute resolution mechanism in place because, in general, a one-off payment at closing is agreed, which has the effect that any leakage since the locked-box date is being considered and added to the consideration. Therefore, no additional dispute resolution mechanism is necessary.
Regarding completion accounts consideration structures, however, dispute resolution mechanisms are indeed common. Specifically, so-called appraiser mechanisms are agreed upon. If such a mechanism comes into use, a designated expert, mostly likely an auditing firm, determines the final and binding completion accounts and determines the adjustment of the purchase price in accordance with the respective agreement, if any.
The typical level of conditionality in Swiss private equity transactions is usually limited to the mandatory regulatory conditions, which are reflected in the transaction documentation as conditions precedent to closing. These typical regulatory conditions are approvals from regulating bodies; ie, a merger filing with the local competition authority, which evaluates whether the transaction would violate antitrust regulations, but also industry-specific regulations need to be considered; eg, licences in the pharmaceutical sector. Especially in transactions involving multiple jurisdictions, possible merger and foreign direct investment filings need to be taken into consideration and might significantly prolong the period required to close after signing.
Depending on the transaction, it can be quite common to have further conditions such as financing or third-party consent. The latter in particular can be critical, in the case, for example, that the target has material agreements in place which are essential for the business and which contain change-of-control provisions, but the buyer has a strong interest in keeping such agreements in place, even after the transaction (eg, supply/customer or lease agreements).
Furthermore, material adverse change provisions, so-called MAC clauses, were quite often in use in the past; however, these have been used less lately. This is because sellers rarely accept these types of clauses in view of the transaction certainty in the current seller-friendly environment.
In the current (still) seller-friendly market, with a high number of auction sales, “hell or high water” undertakings are often included in the merger clearance closing conditions.
In public M&A transactions, break fees are not uncommon, but are only allowed by the Swiss Takeover Board if the amount of the break fee is proportionate and if it serves the purpose of lump-sum compensation for damages and does not constitute an excessive contractual penalty. In any case, a break fee is not allowed to restrict shareholders significantly in their freedom to accept or not accept an offer and/or deter potential competing offerors. The amount of the break fees is in most cases significantly less than 1% in relation to the transaction amount. For private M&A transactions, however, break fees are an unusual instrument, since there are other mechanisms to keep the buyer indemnified due to a breach of contract. Reverse break fees are relatively rarely seen in private equity transactions since sellers often insist on actual financing proof.
Usually, a private equity seller or buyer can terminate the acquisition agreement prior to closing if the conditions precedent to closing have not been met until a certain agreed date (ie, longstop date). A typical longstop date is often set at around 6–12 months from the date of signing, but can vary depending on factors such as deal complexity, size, negotiations between parties, required regulatory approvals and other relevant considerations. Other than that, Swiss acquisition agreements typically do not contain any (ordinary) termination rights. However, under Swiss law, under certain conditions there is a possibility to terminate a share purchase agreement in the event of a severe breach of the agreement; any such termination right is usually – to the extent permissible – excluded as regards a breach of representations or warranties. In such a case of a termination, compensation for damages may be claimed.
The typical methods for the allocation of risks are (i) representations and warranties for general (unidentified) risks and (ii) indemnities for specific risks identified during due diligence; eg, tax liabilities or pending litigation. In addition, with respect to risk allocation, there is a current trend towards so-called quasi indemnities, which are representations and warranties that are excluded from disclosure and the general cap, but still subject to the other limitations, such as the notification obligation, de minimis, threshold/deductible, damage definition, etc. In addition, risks can be allocated through the purchase-price mechanism as well as certain covenants.
Even though the details of risk allocation depend on the leverage and negotiating power of the buyer or seller, these methods are used regardless of whether the buyer or seller is a private equity fund.
The standard share-purchase agreements usually contain a catalogue of representations and warranties, covering the following (but not limited to those) areas: capacity, title to shares and corporate existence, shareholder loans, financial statements, ordinary course of business, material agreements, employment and social security, real estate, assets, environment, intellectual property, compliance with law, litigation, insurance and tax. In terms of limiting warranties, private equity sellers tend to limit these representations and warranties as much as possible while requesting buyers to take up a buyer policy W&I insurance.
With regard to disclosure of the data room, as a matter of principle, all information provided in the data room is considered as disclosed and therefore known, which is taken by the seller as an occasion to exclude any liability for what has been fairly disclosed.
As far as other protections go, indemnities for fundamental, business warranties and tax matters are extremely often provided by the seller. Depending on the actual wording of such indemnity clauses, these clauses are mostly designed as guarantees, which oblige the seller to indemnify and compensate the buyer fully for any damage, irrespective of the fault of the seller. It should be noted that, under Swiss law, the sole usage of terms such as “indemnification” do not constitute this effect. Whether the indemnity clause has an effect as a guarantee depends decisively on the formulation and design of the clause. Further, other kinds of guarantees – such as guarantees of a parent or group company, personal guarantee or bank guarantee – can be seen.
Furthermore, W&I insurances have been enjoying increasing popularity lately. However, such an insurance is subject to certain conditions, such as a positive due diligence. W&I insurances have another positive effect, in so far as a private equity bidder in an auction sale that would offer a W&I insurance might have a competitive advantage compared to other bidders, and therefore higher chances of winning the auction.
While it is common that disputes in general arise from private equity transactions, it is rather uncommon that these disputes are litigated before ordinary courts or by arbitration. The Swiss approach for dispute resolution in connection with private equity transactions in general are settlements. However, in most cases it is subject to a careful contract drafting to reflect potential conflicts in the contracts during the drafting process and to agree on dispute resolution mechanisms at an early stage.
The provisions from which most disputes arise are consideration mechanisms as completion accounts, consideration provisions and representations and warranties.
In recent years, the number of public-to-private transactions was relatively limited, due to the fact that the share prices have been rather high, taking into account the remaining uncertainties with regard to the COVID-19 pandemic. However, given the large number of long-term commitments of private equity funds and the vast investments of private capital in public companies since the outbreak of the COVID-19 pandemic, an increase in buyouts of public companies has been seen, catalysed by a downturn in the public equity market. There has been more interest in public-to-private transactions in 2022 and the beginning of 2023, and similar development is expected for the end of 2023.
In the context of a public-to-private Swiss M&A deal, the target company, a publicly traded entity, assumes a pivotal role as the acquisition target for the bidding party seeking to take it private. The target company’s board of directors plays a critical function in assessing the acquisition proposal and acting in the best interests of the company and its shareholders. Their responsibilities encompass a thorough review of the acquisition terms, conducting due diligence, and engaging in negotiations with the bidder to ensure an equitable and advantageous outcome for the shareholders.
In buyouts of publicly listed companies, the key documentation to be prepared includes the following:
The Financial Market Infrastructure Act (FinMIA) provides for a number of thresholds that trigger a notification and disclosure obligation, in the event that a private equity fund (PE fund) (directly, indirectly or in concert with a third party) reaches, falls below or exceeds a certain percentage of voting rights in a listed company. The relevant thresholds are 3%, 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% or 66⅔% of the voting rights in a public company, irrespective of whether they are exercisable or not. If these thresholds are met, the PE fund must then notify the company, as well as the competent disclosure office within four trading days.
It should also be noted that financial intermediaries who acquire or dispose of shares or acquisition or sale rights on behalf of third parties are not subject to this notification duty.
Furthermore, aside from the disclosure obligation concerning significant interests in listed companies, there is a specific notification requirement for non-listed Swiss companies. Any person, who alone or by agreement with third parties acquires shares in a non-listed Swiss company and thus reaches or exceeds the threshold of 25% of the share capital or voting rights, is obligated to disclose to the company the identity of the ultimate beneficial owner within one month of the transaction. Failure to comply with this notification requirement within the one-month period will result in the suspension of membership rights, including voting rights, and forfeiture of monetary rights, such as dividend rights, until the required notice is provided.
Under Swiss law, a mandatory offer is to be made, when an investor directly, indirectly or acting in concert with third parties acquires equity securities which (together with the equity securities already owned (if any)) exceed the threshold of 33⅓% of the voting rights of the target company, whether exercisable or not. However, the shareholders’ meeting of the target companies may either (i) raise this threshold up to 49% of voting rights – the so-called opting up – or (ii) decide that an offeror shall not be bound by the obligation to make a public takeover offer – the so-called opting out; both of these have to be reflected in the articles of association accordingly.
In private M&A transactions, consideration may consist of either cash, shares, securities or a combination thereof. Cash settlements tend to be more frequent, as share deals are usually only accepted by the seller if the shares given as consideration are readily marketable (which would be the case with listed companies). Tax considerations also typically play an important role in determining the type of consideration that is eventually agreed upon.
For public M&A transactions, the consideration can also be paid in cash or in securities or a combination thereof. However, Swiss corporate and takeover law demands equal treatment of all shareholders, which imposes certain restrictions on the offeror. Offering cash consideration to specific majority shareholders while offering securities to minority shareholders would not be allowed. In mandatory and change-of-control offers (see 7.3 Mandatory Offer Thresholds), the offer price must meet the minimum price rule. This rule requires that the offer price be at least equal to the 60-day volume-weighted average price (VWAP) if the stock is liquid, or the highest price paid for securities of the target company by the bidder(s) in the 12 months before the offer, whichever is higher. If the target shares are not deemed liquid from a takeover law perspective, the 60-day VWAP is replaced by a valuation to be provided by the review body. However, in partial tender offers or public tender offers for target companies with an opting-out provision in their articles of association, the minimum price rule does not apply, and the bidder is free to set the offer price (the best-price rule, however, applies).
In conclusion, the type of consideration accepted will in each case largely depend on the individual circumstances of the transactions; eg, the shareholders involved and their intentions or the type of transaction. However, cash consideration has historically been, and is still, more frequent than a consideration in securities.
The permissibility of conditions that may be attached to a public takeover offer depends on whether it is a voluntary or a mandatory offer.
With respect to mandatory offers, the competent authority only deems a limited number of conditions permissible, in particular a condition that there are no injunctions or court orders prohibiting the transaction and/or that necessary regulatory approvals will be granted, as well as conditions ensuring the ability of the offeror to exercise the voting rights (ie, entry in the share register, abolishment of any transfer/voting restrictions). Regarding voluntary takeover offers, the legal framework for conditions is more liberal, meaning that voluntary takeover offers may contain conditions which include minimum acceptance thresholds and no material adverse change (MAC) conditions. However, generally, it is not permitted for takeover offers to be conditional on the bidder obtaining financing, except for necessary capital increases in the bidder in connection with an exchange offer (Umtauschangebot).
The most common conditions are that the necessary approvals from regulatory bodies will be granted, such as merger control filings with the relevant competition commission, or other specific approvals from supervisory authorities in regulated sectors; eg, the bank or pharmaceutical sector.
In a privately held company, a private equity buyer can, in general, secure additional governance rights by concluding a shareholders’ agreement (eg, veto rights, the right to appoint the majority of the members of the board of directors or certain rights connected to dividends, as well as rights of first refusal, call options, drag-along rights, etc). The extent of the governance rights under a shareholders’ agreement, however, is primarily subject to negotiations.
In a public company, the possibilities to conclude a relationship agreement are limited, because if the shares covered by the agreement constitute an aggregate participation of more than 33⅓%, the signatories generally would be considered as a group, which would trigger the obligation of a mandatory offer. Moreover, it is not always necessary to formalise the investors’ influence further: depending on the shareholding structure; ie, if the structure is very fragmented with many shareholders, 30% of the voting rights may be sufficient to secure decisive control in the company.
Regarding a squeeze-out in a public company mechanism, under Swiss law an investor has two options: (i) under the FinMIA, a bidder holding 98% of the voting rights of the company may, within three months upon expiry of the offer period, file for the cancellation of the remaining shares against compensation in the amount of the offer price to the respective minority shareholder in a statutory squeeze-out procedure before the competent court (Kraftloserklärung), or (ii) by way of a squeeze-out merger, if the bidder holds less than 98% but at least 90% of the voting right, against compensation in accordance with the Swiss Merger Act. The threshold to initiate a squeeze-out merger is lower; however, it carries a higher litigation risk than the cancellation procedure.
Irrevocable commitments to tender shares are not enforceable under Swiss tender offer rules in case of a competing offer and therewith the Swiss Takeover Board establishes a level playing field for competing offers. According to Swiss takeover law, shareholders must be free to accept a superior competing offer.
Equity incentivisation of the management is very common in Swiss transactions since it is an extremely suitable instrument for retaining the management team in the long term and may also be attractive from a (Swiss) tax law perspective. Although the equity incentivisation of the management depends to a great extent on the individual transaction, the typical management stake varies between 3% to 10%. Ideally, management gets to invest on the same terms as the investor to provide even more attractive conditions to the managers (see also 8.2 Management Participation). Furthermore, the individual structure of the management participation is very much tax-driven.
In Swiss transactions, there are two predominant structures for management incentive schemes: the “strip investments” and “sweet equity”. In the case of the former, managers invest on the same terms and conditions as the financial investor, whereas in the case of the latter, managers receive a certain discount and/or different share classes. A sweet equity incentive scheme could, for example, be structured as follows: managers receive all ordinary shares while the financial investor receives a mix of ordinary shares and preferred shares with a fixed interest (or alternatively provides a shareholder loan). This leads to a certain envy ratio in favour of the managers. However, it should be noted that Swiss tax law sets rather narrow limits with respect to tax-exempt capital gains on sweet equity. To have “skin in the game” and to align fully the managers’ interests with those of a financial investor, managers are generally asked to finance a substantial part of their investment with equity; ie, roughly 50% or more.
Equity participations of managers are usually subject to customary good and bad leaver provisions, which are mostly tied to the termination of the manager’s employment or mandate agreement, or other events related to the manager personally (death, insolvency, divorce, etc). Leaver events typically trigger call/put options, whereby the leaver qualification has an impact on the purchase price (ie, in the case of a bad leaver, the purchase price is a lower percentage of the fair market value).
Vesting provisions, either time and/or performance-based, are also common practice in management participations. Vesting provisions may vary depending on the parties involved and the kind of leaver events that have been agreed. In practice, the most commonly seen arrangements involve time-based vesting with monthly or quarterly vesting over four years, a one-year cliff and end of vesting if the employment ends. The lapse of time together with the leaver event will then collectively have an impact on the purchase price (ie, portion of unvested shares are sold at a lower price versus portion of vested shared).
Furthermore, the parties often agree on a certain lock-up period (eg, three to five years) during which the manager may not transfer their shares and/or are limited with regard to the termination of their employment relationship (ie, a manager will be considered a bad leaver except in the case of a termination by the manager for good reasons or by the company without good reasons). After expiry of that lock-up period, the manager may also terminate the employment relationship without good reason and is still considered to be a good leaver. For the determination of a good reason, reference is usually made to the provisions of Swiss statutory employment law (Articles 340c and 337 of the Swiss Code of Obligations), indirectly including Swiss case law. Hence, a manager is typically considered to have good reason to terminate the employment relationship in the case of, for example, a material salary decrease by the employer for no objective reasons or in the case of severe harassment at work). No good reason would be attributed to the manager; eg, if the employer has delayed making a salary payment.
In addition, the breach of provisions of a related agreement also commonly triggers good and bad leaver provisions; eg, if the manager materially breaches an investment agreement, corporate regulations of the company, or their employment or mandate agreement, the manager will be considered a bad leaver.
One of the most common restrictive covenants in Switzerland – which are part of the equity package and the employment contract – is the non-compete and non-solicitation undertakings during the time of the manager’s investment and for up to three years thereafter. In particular, if the manager is simultaneously invested in the group as a shareholder and thus has various information and governance rights, a non-compete undertaking may be justified, even for the time after the manager has ceased to be an employee/director of the company.
However, based on Swiss statutory law, non-compete and non-solicitation undertakings may not exceed three years following the end of the employment relationship or the manager’s exit as a shareholder. Further, they also need to be geographically limited as they otherwise would be considered an excessive undertaking on the part of the manager (eg, to the areas where the manager could harm the company with his or her knowledge). Excessive non-compete and non-restriction undertakings may be reduced by the court in the event that they are challenged, and the courts have broad discretion in doing so. The enforceability of non-compete and non-solicitation undertakings is often increased by stipulating contractual penalties for the manager or triggering bad leaver provisions in the case of a breach by the manager.
Managers who are not re-investing sellers generally have limited minority-protection rights. The most common minority-protection right is the right of the manager to participate on the same terms and conditions as the investor in an exit, which is ensured through drag- and tag-along rights.
However, depending on the negotiating power of management, additional minority-protection rights (such as veto rights, board-representation rights or anti-dilution protection) have been seen.
The level of control of a private equity fund largely depends on the type of investment; ie, whether it invests as a minority shareholder or a majority/sole shareholder.
Typically, private equity shareholders taking non-control positions seek protection via restrictions of the transferability of the shares, tag-along rights, and put options, as well as certain governance rights, usually including the appointment of a representative on the board of directors and certain veto and information rights, which are, however, limited to fundamental rights with respect to the protection of their financial interest (dissolution, material acquisitions or divestures, capital increases, no fundamental change in business, etc).
In the case of a majority stake in the company, the private equity shareholder has extensive control over the company; ie, the majority in the board of directors and only limited restrictions due to veto rights to any minority shareholders. In addition, usually, protection rights regarding the shareholding of the company will be implemented (in particular, transfer restrictions, right of first refusal, and drag-along rights, as well as call options on the shares of the minority shareholders) to have maximum flexibility, in particular with regard to a possible exit.
As a general principle, under Swiss law there is a separation between a company and its shareholders, and the shareholder may not be liable for the actions of the company.
However, according to case law, under special, limited circumstances the legal independence of the company and its exclusive liability are considered abusive and therefore unlawful, and consequently the controlling shareholder might be held responsible (piercing the corporate veil).
Further, a private equity investor or an individual acting for it may be considered as a de facto director of the company (eg, in the case of a material decisive operational influence) and, consequently, be bound by directors’ duties as well as held responsible for possible damages resulting from a breach of those duties.
Lastly, a private equity investor that (solely or jointly) controls a portfolio company which has infringed competition law could be made jointly and severally liable for paying the resulting fine, as, in Switzerland, holding companies tend to be found to be jointly and severally liable for the antitrust fines of their subsidiaries. Private equity investors should, therefore, implement a robust compliance programme in their portfolio companies to avoid antitrust law infringements.
The typical holding period for private equity investments before they are sold or disposed of is three to ten years. Thus far in 2023, the majority of exits have been conducted by trade sale.
As for other types of exits (eg, for “dual track” – an IPO and sale process running concurrently) it can be said that they depend heavily on the general market conditions. These can be seen quite often if an IPO is considered. However, if an IPO is not being considered, a trade sale (auction) process will often be the preferred route. However, a full exit at the listing – the sale of all shares held by the private equity seller – is not generally possible via an IPO. Therefore, the private equity seller will need to sell the remaining shares gradually or in one or more block trades.
Drag rights or drag-along provisions/mechanisms are common in private equity transactions in Switzerland, as an investor typically wants to ensure that, in the case of an exit, potential buyers may acquire 100% of the shares in the target company, which increases the attractiveness of the sale. Hence, unless the potential buyer intends to continue (eg, with the investment of managers) the drag-along right will typically be utilised within the course of a transaction.
The threshold to trigger the drag-along mechanism usually relates to the shareholding of the investor but is usually at least 50%.
In accordance with the high frequency of drag-along rights, tag-along rights are also very common, especially for the management shareholders, while they are less common for institutional co-investors. As tag-along rights are typically subordinated to drag-along rights, and due to the fact that the retention of management shareholders will regularly be addressed at an earlier stage of the transaction, as well as in view of the deal certainty, the utilisation of such rights by the management shareholders is rather rare.
Even though it may depend on the leverage of the negotiating parties, the threshold to exercise the tag-along rights is usually also at least 50%.
On an exit by way of a Swiss initial public offering (IPO), the underwriters require sponsors and other large shareholders to enter into lock-up arrangements, usually for a period of six months after the IPO. For the company, its directors and managers, however, often a lock-up of 12 months is agreed. After the lapse of the lock-up, the sponsor will sell down shares, depending on prevailing market conditions pursuant to “dribble-out” trading plans or by way of accelerated book buildings or block trades to single buyers.
Typically, such lock-ups are put in place for shareholders holding more than 3% of shares in the company.
While, in Switzerland, shareholders’ agreements are typical and usually terminated upon the IPO, relationship agreements concluded post-IPO are quite unusual. Nevertheless, the conclusion of a few relationship agreements have been seen recently. Such arrangements may include board-appointment rights and joint sell-down or other “orderly market” arrangements.
After a record-breaking 2021, it may come as a surprise that overall deal volume in Switzerland again exceeded all previous levels in 2022, with private equity transactions accounting for about a third of all deals. However, deal value was down significantly compared to 2021, and of the top ten transactions with a Swiss dimension in 2022, only one had private equity participation (per KPMG’s Clarity on M&A 2023).
These figures are a testament to the Swiss market’s characteristically strong activity in the lower and middle markets, which is less dependent on raising financing in the international debt markets than large-cap transactions. In other words, they also reflect the challenges private equity investors have faced in securing debt financing for bigger tickets. In Switzerland, small and mid-cap transactions are often financed by Swiss banks, a source of financing that remained open throughout 2022. For larger transactions, private equity sponsors typically need to tap the international debt markets, which has proved to be challenging since the second quarter of 2022 and has led to private credit providers stepping in more frequently. The continuing rise of this asset class has been relevant for the private equity sector not only as a source of debt financing. It has also been a way for investment houses to expand the scope of their activities by growing their own private credit arms in parallel to their traditional buy-out funds.
Undoubtedly, it is not just the accessibility of financing that has been a major hurdle for the private equity sector recently, but more importantly, the cost of financing. Rate hikes by the Swiss National Bank have been more restrained than those of national banks in other jurisdictions and inflation in Switzerland has remained at a lower level than elsewhere. However, with many forecasts now expecting rates to remain at an elevated level for the foreseeable future, the purported “end of the era of cheap money” and what that means for the private equity sector is also on top of dealmakers’ agendas here. Not least because private equity dealmaking in Switzerland is to a large extent a cross-border affair and therefore heavily impacted by international developments.
Interestingly, Deloitte’s study on M&A activity of Swiss small and medium-sized enterprises (SME) in H1 2023 has shown that while overall deal volume and value are down compared to H1 2022, which was to be expected, inbound activity into Switzerland has been hit particularly hard. Swiss SMEs have traditionally been attractive targets for non-Swiss sponsors. Therefore, a lack of Swiss SME inbound M&A activity is also indicative of subdued private equity dealmaking in Switzerland in the past months. The good news is that Deloitte attributes this weakening of inbound dealmaking (and, conversely, a higher relative share of outbound dealmaking) primarily to a strong Swiss franc and the generally robust Swiss economy, so we do not expect the Swiss market to run out of interesting targets any time soon.
Looking ahead, while dry powder from previous fundraising efforts is still readily available to be deployed, the current fundraising environment is proving to be considerably more challenging for many GPs.
We are currently seeing fewer fully-fledged auctions in the Swiss market than in recent years, as potential sellers appear to be gauging the right time to bring their assets to market. For sought-after assets, however, auctions remain a popular exit strategy and bidders are still willing to offer seller-friendly terms in order to secure the deal. In line with a trend towards fewer auctions, we have seen a tendency towards more protracted transaction timelines. While structured processes generally tend to accelerate the time to signing, one-on-one negotiations are more prone to delays, in particular when parties take more of a “wait and see approach” as a way of dealing with the current uncertainties regarding the economic outlook.
In the same vein, a significant part of private equity deal activity in Switzerland recently has been focused on implementing buy-and-build strategies around existing platforms. These transactions frequently involve targets in the smaller-cap segment of the market that are in turn often sourced on the basis of proprietary intelligence. The healthcare, software and professional services sectors are all examples of industries that have seen plenty of add-on transactions lately.
Parallel to the decline in auctions, there has been a discernible shift towards the use of continuation funds and so-called GP-led secondaries in the Swiss market. As is not uncommon for trends and developments in the private equity sector, utilisation of these structures appears to have been less prevalent in Switzerland than elsewhere initially. However, the popularity of these structures has certainly grown in recent months.
In spite of the considerable interest that private equity houses have shown in taking Swiss-listed companies private both in 2022 and this year to date, only limited tangible deal activity has come from these efforts so far. One notable exception is Bain Capital’s offers for SoftwareOne which were, however, rejected by the latter’s board of directors.
Meanwhile, although IPOs may be on the table again as a potential exit route for certain assets, we have yet to see a Swiss listing of a private equity-backed asset this year.
Regulatory Environment and Legal Developments
UBS takeover of Credit Suisse
In March 2023, UBS and Credit Suisse signed a merger agreement following an intervention by the Swiss Federal Council, the Swiss National Bank and the Swiss Financial Market Supervisory Authority FINMA. In parallel, the Swiss Federal Council issued an emergency ordinance allowing for federal loss protection guarantees and liquidity assistance loans to be provided to UBS and Credit Suisse.
In the meantime, the merger has been consummated and the agreements regarding loss protection guarantees and liquidity assistance loans have been terminated by UBS, without taxpayer money having to be deployed. However, the merger of the country’s two largest banks will of course remain a key focus of Switzerland’s economy in many aspects. Notably from the private equity sector’s perspective, it will be interesting to observe the merger’s potential impact on the Swiss debt financing market and the Swiss M&A advisory markets.
Foreign direct investment control
Switzerland still has very limited restrictions on investments by persons from abroad. It has not yet introduced a comprehensive foreign direct investment (FDI) control regime and existing restrictions are currently confined to specific sectors such as residential real estate and the financial sector. Specific additional licensing requirements also apply to foreign investors in such sectors as aviation, telecommunications, nuclear energy and radio/television. However, Switzerland, mirroring recent international developments, has been actively pursuing the introduction of new FDI control legislation for some time. The Federal Council published a preliminary draft of the law in May 2022 after being tasked to do so by the Swiss Parliament. The respective consultation process is now ongoing and deliberations in the Swiss Parliament will follow thereafter. Interestingly, the Federal Council itself has so far been opposed to the introduction of new FDI control regulations, therefore the scope of application of the published draft is rather narrow compared to similar legislation in other jurisdictions. It will be interesting to follow further discussions on the topic as the legislative process advances in Switzerland against the backdrop of increasingly protectionist tendencies abroad. For now, the regulatory FDI environment in Switzerland certainly remains favourable for private equity investors.
In May 2023, the Federal Council published a revised draft for an amendment of the Swiss Cartel Act. It provides, inter alia, for a change in the substantive test applied by the Swiss Competition Commission (ComCo) in assessing whether to prohibit a transaction that is subject to merger control review. This means that the currently applicable CSDP (creation or strengthening of dominant position) test would be replaced by a SIEC (significant impediment of effective competition) test, which is in line with international practice. Importantly, however, the draft does not propose to lower the turnover thresholds that have to be met for a compulsory notification of a transaction to ComCo. These thresholds are rather high compared to international standards and therefore generally favourable from a dealmaking perspective.
Company law reform
A major reform of Swiss company law entered into force in January 2023. The reform addresses a wide array of topics and while many of these changes are not immediately relevant for M&A transactions, there are certain exceptions. Most notably, the delisting of companies now requires shareholder approval, with a qualified majority of two-thirds of the voting rights and an absolute majority of the capital represented at the relevant general meeting of shareholders being applicable. Given the typical acceptance thresholds in Swiss P2P transactions, we do not expect this to make it more challenging for private equity investors to take Swiss-listed companies private.
The new law makes it easier for boards of directors to issue shares by introducing the concept of a capital band. It allows boards to increase or reduce capital within a range of between 50% and 150% of the issued share capital. The capital band is one of several ways the revised law aims to give companies more flexibility when it comes to share capital and dividends; another is the possibility of non-Swiss franc-denominated share capital. Further changes include a much-needed modernisation of the rules around shareholders’ meetings and a stronger focus on companies’ liquidity in the context of restructuring and financial distress.
In January 2022, Switzerland saw the introduction of new ESG regulations on non-financial reporting obligations as well as due diligence requirements in connection with child labour and minerals and metals from conflict areas. Whereas the former are only mandatory for larger listed companies and prudentially supervised large financial institutions, the latter have a broader scope of application. In principle, the new due diligence requirements are applicable to all natural and legal persons as well as business partnerships whose registered office, central administration or principal place of business is/are in Switzerland, and which carry out a trade. The regulations do, however, provide for certain exemptions, in particular for SMEs. Companies that fall under the scope of these new regulations need to comply with them for the first time in the financial year 2023. However, a number of companies have already been producing reports on non-financial matters on a voluntary basis for several years now as this is perceived as good corporate governance and viewed favourably by many investors.
Additionally, gender quotas for boards of directors and executive management were introduced on a “comply-or-explain” basis in January 2021. They will apply to most listed companies but are subject to transition periods of five and ten years, respectively. Swiss law also recently saw the introduction of disclosure duties for Swiss companies in the natural resources industry, which now have to disclose certain payments to government entities since the financial year 2022.
Of course, the breadth of topics that fall within the scope of ESG goes far beyond single legislative developments, and ESG considerations are expected to continue to be at the top of the private equity industry’s agenda going forward for various reasons besides compliance with these regulations.
Phasing-in of licensing requirements for Swiss wealth managers
Switzerland’s new Federal Act on Financial Institutions (FinIA) entered into force in 2020, ending decades of industry self-regulation in the Swiss wealth management sector. Under the new FinIA rules, Swiss wealth managers need to apply for a licence from FINMA and existing managers had until the end of 2022 to submit their licence application. These new requirements have led to consolidation activities in the sector, which in turn could be seen by private equity firms as an opportunity to build up their portfolios of wealth management businesses.
The path ahead for private equity in Switzerland has certainly become more challenging in the course of the last year, as both financing issues and an uncertain economic outlook currently impact dealmaking. However, the Swiss economy continues to be in good shape and the regulatory environment in Switzerland remains investor-friendly. We therefore believe that private equity houses and their portfolio companies are well positioned to benefit from attractive investment opportunities as they continue to evolve and display the often-cited resilience that the private equity sector as a whole has become known for.