Acquisition finance in Switzerland: overview
A Q&A guide to acquisition finance in Switzerland.
This Q&A is part of the global guide to acquisition finance. Areas covered include market overview and methods of acquisition, structure and procedure, acquisition vehicles, equity finance, debt finance, restrictions, lender liability, debt buy-backs, post-acquisition restructurings and proposals for reform.
Market overview and methods of acquisition
Acquisition finance market
After an outstanding previous year, 2015 was a difficult year for the Swiss M&A market. While the number of transactions declined 17% year-on-year, the total value of deals with Swiss involvement plummeted by 55%. This development is largely due to an absence of large-scale transactions in 2015. The caution seen on the Swiss M&A market in 2015 continued into the first quarter of 2016. This can be attributed to a weak stock market at the turn of the year (and the doubts triggered by this) and a persistently strong Swiss Franc.
There were 59 M&A deals during Q1 of 2016, which is almost half of the deals made during the same quarter in 2015. However, the acquisition of Basel-based agribusiness Syngenta by the China National Chemical Corporation (ChemChina) has dramatically pushed the transaction volume up. This deal is worth US$45.9 billion and is by far the biggest transaction announced in Q1 2016. This is, however, not the only acquisition of a Swiss company by a Chinese company. HNA Group, a Fortune 500 Company and a leader in aviation and tourism based in Haikou, China, acquired the Swissport, the world's largest ground and cargo handling company, for US$2.8 billion in 2015 and has just announced the launch of a US$1.5 billion all-cash public tender offer for all publicly held registered shares of the Swiss air services company gategroup.
Another noteworthy deal is the takeover bid for Kuoni Travel Holding launched by Swedish private equity firm EQT. This is worth around US$1.4 billion and follows two other Kuoni transactions from 2015:
The sale of its European travel agency business to Germany's Rewe Group.
The sale of its Indian and Chinese tour operating activities to the Canadian investment holding company Fairfax Financial, which also owns travel company Thomas Cook India.
Strategic investors are still the dominant drivers in the Swiss M&A market but financial investors are also active. Larger Swiss acquisitions are usually arranged through the London market, typically contain a bank/bond structure and are placed internationally with institutional high-yield investors. Smaller Swiss acquisition finance transactions are often financed purely through Swiss banks. Credit Suisse, UBS or Zürcher Kantonalbank usually arrange the bank financing and a handful of Swiss bank, including the Swiss Cantonal banks, to participate in such bank financings.
Foreign (debt) funds have recently become active in Switzerland due to the liberal Swiss regulatory regime (which allows foreign non-bank lenders to be active on a pure cross-border basis without any licensing in Switzerland). An example of foreign funds is the buy-out financing extended by funds managed by affiliates of Apollo Global Management LLC (NYSE:APO), a pre-eminent alternative investment manager.
Insurance companies and pension funds have also started making direct lending but usually not in the context of acquisition financing.
Methods of acquisition
The Swiss Merger Act contains specific provisions in relation to the transfer of assets and liabilities in an asset acquisition. A transfer of assets can be effected by operation of law by both:
Listing all assets and liabilities in the transfer inventory.
Filing the inventory with the competent Commercial Register.
The specific form requirements for the transfer of individual assets or liabilities do not have to be observed. However, the Swiss Merger Act does not specifically state whether long-term contracts (such as supply or distribution agreements) can be transferred without the consent of the counterparty to such agreements. Until the Swiss courts provide clarity on this matter, companies are advised to obtain the consent of the counterparties to key agreements prior to effecting the transfer of assets and liabilities, including such agreements. This legal uncertainty, along with the continuing joint and several liability of the transferring company (the seller) with the acquiring company for three years, as well as the fact that the list of transferred assets and liabilities is publicly available, does not make this transfer form very attractive.
There may be certain situations where an asset deal is the more suitable than a share deal. This may the case where, for example, the target company is (or potentially is) the subject of a regulatory or other investigation. Some of the recent Swiss private banking acquisitions have been structured as an asset deal for this reason. However, asset deals do not give rise to any particular advantages or difficulties in relation to structuring the financing.
Acquisitions in Switzerland are typically structured as share deals (where the shares of the Swiss target are acquired rather than the individual assets of the target). The acquisition method is attractive because it is easy to implement and does not require a transfer of the individual assets. In situations where some (but not all) business activities are targeted, the acquisition is often structured so that, as a first step, the specific assets are transferred to a new company which is, in turn, then acquired through a share acquisition. However, from a financing perspective there is no relevant difference between a share deal and an asset deal.
Acquisitions in Switzerland are usually not carried out through mergers. If there is no cash component to be paid, a merger is also not very interesting from an acquisition finance perspective. However, very often there will be a subsequent downstream merger in acquisitions structured as a share acquisition by a newly-incorporated intermediate holding company or special purpose vehicle.
Structure and procedure
Acquisition finance is typically arranged by banks and the documentation for the debt financing can vary depending on the size and structure of the transaction.
Transactions financed by a single or small number of regional banks are typically based on a short and straightforward loan agreement. For larger syndicated loans the arranger is often UBS, Credit Suisse or Zürcher Kantonalbank and the documentation is in English and based on the Loan Market Association (LMA) standard with a Swiss finish (as Swiss market practice differs slightly to the London market practice in certain respects). Larger transactions including the issuance of high-yield notes are very often arranged through the London market and governed by English law, except for the security agreements, which are usually governed by local law.
In Switzerland, it is common practice for the lenders' counsel to be responsible for drafting the documentation and provide the validity and enforceability opinion and, eventually, the capacity and due authorisation opinion.
In small Swiss domestic acquisitions, it may be accepted by the seller that the acquisition is subject to financing. However, this is rarely accepted in larger transactions where the financing is usually secured by a firm underwriting when signing the acquisition agreement. For private M&A transactions, Swiss law does not provide for any requirements for "certain funds". However, in larger acquisitions it is common practice to include provisions for certain funds.
Since the timelines in acquisitions financings are usually fairly tight, it may not be possible to syndicate the bank loan prior to closing. This will result in the arranger underwriting the full loan and bringing it up for syndication only after completion of the acquisition. Alternatively, there may be a bridge financing with a maturity of six to 12 months, to be refinanced through the syndicated loan or the issuance of a debt capital market instrument.
The target's shares or assets are usually acquired by either:
An existing, operative group company of the acquirer.
A newly-established company for the acquisition.
In a leveraged buy-out transaction, the sponsor typically establishes a new company for the acquisition vehicle. The acquisition vehicle is then held directly by the fund or an intermediated company of the fund and any co-investors, the management team and other employees.
Since the Swiss banking market has certain limitations and there is no significant high-yield market in Switzerland, the term loan tranches or notes to finance large acquisitions are usually placed internationally and outside of the banking market.
For Swiss withholding tax reasons, the vehicle acting as borrower of the term loan or issuer of the notes is then usually incorporated outside of Switzerland in a jurisdiction that has a beneficial double tax treaty with Switzerland (for example, Luxembourg).
Several different equity and debt financing instruments are usually employed, depending on the size of the transaction and the required leverage. These instruments differ from one another in terms of their risk-profit profile. For acquisitions by strategic investors/corporates, the financing structure is often less ambitious compared to transactions by financial investors.
For tax reasons, in a leveraged buy-out it is very common for the "equity" part of the financing to mainly be provided by the sponsor using subordinated loans and to a smaller extent as hard equity.
While the managers and other key employees are typically granted the opportunity to acquire common shares in the acquisition company, the sponsors regularly insist on the receipt of preferred shares. Swiss corporate law allows for shares with preferential dividend rights, preferential liquidation rights or privileged voting rights. These preferential rights are set out in the company's articles of incorporation and must be approved by a shareholders' resolution. Preferential entitlements to sale proceeds are not provided for by Swiss corporate law and therefore can only be stipulated in an agreement among the shareholders of the company.
The shareholder loans granted by the sponsor are typically unsecured and subordinated to all other debt of the financed company. Furthermore, repayment of principal and payment of interest under shareholder loans are deferred at least until all of the debt financing is repaid in full.
Structures and documentation
Debt financing structures
The principal elements of the debt financing structure are a senior-term loan or high-yield notes for the acquisition vehicle to finance the purchase price and a revolving credit facility for the target's working capital financing. The senior debt can be guaranteed or secured by security interests in the assets of the target.
Depending on the size of the acquisition and level of the targeted leverage, the senior debt is supplemented by any of the following:
Second lien loans.
Payment-in-kind (PIK) financings (where interest is capitalised and deferred until final maturity).
Second-lien debt ranks junior to senior debt and is only secured by second-ranking security interests over the assets that serve as security for the senior debt.
Mezzanine debt is typically unsecured and subordinated ranking behind senior and second-lien debt. Mezzanine loans are usually subordinated using an agreement between the mezzanine lender and the company. In this agreement, the mezzanine lender declares, with effect for all senior creditors, that in case of the company's bankruptcy or composition with its creditors, the mezzanine lender's claim will rank behind the senior creditors' and all other non-subordinated creditors' claims. Since this declaration is effective without the senior creditors' consent, it does not need to be set out in an inter-creditor agreement.
The mezzanine debt is often combined with equity kickers. Although not common in leveraged buy-out transactions, equity kickers can also be used to compensate the lenders where the leverage and risk goes beyond conventional standards. Under Swiss law, an equity kicker (that is, the means to participate in the upside of the target's value) can take different forms. For example, a company can make interest payments on a PIK-basis, but not in cash. However, typical equity kickers are either conversion rights or option rights. In both cases, Swiss law requires the company to provide for conditional share capital in its articles out of which shares can be issued upon a creditor's exercise of its conversion or option right. A shareholder's right to advance subscription of any such equity-linked debt instruments may only be waived or withdrawn for valid reasons.
The law governing acquisition finance transactions depends on various factors, including the:
Structure of the transaction.
Size of the transaction.
Financing instruments used.
In general, Swiss law governs the documentation for deals between Swiss parties that are arranged by Swiss banks. Large transactions that cannot be syndicated in the Swiss banking market or transactions financed through the issuance of high-yield notes are very often arranged through the London market and are governed by English law.
The standard documentation for the syndicated loan market provided for by the Loan Market Association (LMA) is well established in Switzerland for larger Swiss financing transactions and Swiss law loan documentation follows (as far as possible) the structure of the LMA agreements.
English is the common language for the predominant part of the syndicated loans. However, the documentation may occasionally use the German language in cases where:
A syndicate includes some of the smaller and more regional Swiss banks.
There is a local borrower that is less used to English language documents.
If there are multi-layered debt financing instruments (for example, senior loans, second lien, mezzanine, high-yield bonds) it is common to have an agreement among the creditors for purpose of:
Determining the relative rights of the various creditor groups.
Establishing the priorities in relation to payments (waterfall) and sharing in the collateral.
Choosing the mechanisms in relation the enforcement of the collateral.
Recently, large acquisitions have often been financed through secured loans and secured bonds. In these cases, it is common for loans and bonds to be secured on a pari passu basis and for the inter-creditor agreement to follow the Loan Market Association (LMA) precedents.
The risk profile of an acquisition financing may not be suitable for all types of investors. Therefore, it is necessary to create a double-layer debt financing with a junior and senior debt structure. This can be achieved using contractual subordination of the debt tranche that is underwritten by lenders (such as debt funds) that can take a higher risk and can seek a higher return on their investments than commercial bank lenders. The subordination itself can be achieved using two methods:
In Swiss acquisition financings it is common to address the priority of the different classes of creditors on the basis of inter-creditor arrangements rather than structural subordination only.
The contractual subordination is only binding on the parties to the inter-creditor agreement. This avoids the possibility of the subordination being effectively for the benefit of all other creditors (such as suppliers). Contractual subordination under Swiss law is also generally binding in an insolvency scenario and a Swiss bankruptcy administration should recognise the contractual subordination arrangement among creditors. However, there is a very limited amount of published court decisions addressing the enforceability of contractual subordination in an insolvency scenario. While it cannot be excluded that the Swiss bankruptcy administration will treat all creditors equal despite the contractual subordination and consider the payment waterfall as a mere arrangement among the respective creditors, the parties to the inter-creditor agreement may have to enforce the application of the payment waterfall through a redistribution among themselves. The contractual subordination set out in an inter-creditor agreement typically does not have the effect to avoid the obligation of a Swiss company to file for bankruptcy in case of over-indebtedness. To cure over-indebtedness, the contractual subordination should provide that the relevant loan will rank behind all other creditors of the Swiss company. However, such "deep" subordination is not intended for any loans other than shareholder loans.
A structural subordination can be achieved by providing the debt to a vehicle that is upstream of the acquisition vehicle. This structure has the benefit that lenders on the lower level are closer to the "real" assets and operations and are therefore better protected in an insolvency scenario. Compared to contractual subordination, structural subordination has the advantage of avoiding the (residual) legal risk of validity and enforceability of a contractual arrangement between the creditors in an insolvency situation that is imminent in contractual subordination.
Payment of principal
Inter-creditor agreements usually provide that the junior part of the financing can only become due and payable a certain period of time after the senior loans are repaid in full. Therefore, payment of principal under the junior ranking financing instruments ahead of the senior loans is usually excluded.
Inter-creditor agreements do not usually restrict the payment of interest and in the waterfall provision interest is normally paid after payment of cost and fees of the agents but before the principal in an insolvency scenario. However, most inter-creditor agreements provide for restrictions with respect to any increase of the interest rate by the various debt providers after signing that are not explicitly provided for in the loan documentation.
The rules for fees are the same as for interest (see above, Interest).
Loan and inter-creditor agreements usually provide for sharing arrangements where only a specific lender has been satisfied through payments from the borrower or a guarantor, the enforcement of collateral, or (sometimes) by set-off. Under the sharing provisions, lenders that have been disproportionally satisfied must make payments to the other lenders against assignment of a proportion of their claims, in order to equalise the loss ratio of all lenders.
Subordination of equity/quasi-equity
Swiss law does not explicitly address the concept of equitable subordination. Although it has been considered and applied in court decisions, there is no established case law in relation to the concept.
Swiss legal doctrine does support equitable subordination in relation to shareholder loans in an insolvency scenario. According to this doctrine, equitable subordination will apply if a shareholder loan is granted in a situation where the borrower is already over-indebted or in financial distress or, generally, at a time and with terms no third party would grant such loan. In these circumstances, there is a risk that the shareholder loan would be either deemed to be subordinated behind all creditors or recharacterised and being treated as the equity of the borrower company, resulting in the lender only being entitled to a repayment once all other creditors of the borrowing company are satisfied in full.
Extent of security
Depending always on the acquisition structure and the structure of the target group, the lenders usually take security over the:
Shares in the target
Shares in all material subsidiaries.
Assets of all material subsidiaries.
"Material subsidiaries" are often defined according to their earnings before interest, taxes, depreciation and amortisation (EBITDA) and total assets contribution to the consolidated EBITDA and consolidated assets (for example, each group company whose EBITDA and/or total assets represent 10% or more of the EBITDA of the total group or the assets). However, the security package will be agreed on a case-by-case basis taking into account the:
Value of the security.
Costs for perfecting and maintaining the security.
Although the pledge over the shares in the target is usually created on the closing of the acquisition, the asset and share security on the level of the target group can only be implemented post-closing as a condition subsequent once the acquirer has control over the target group.
Types of security
In debt financing, the most common forms of security are:
Security assignment (Sicherungszession).
Security transfer (Sicherungsübereignung).
The Swiss security package often consists of the following in an acquisition:
Pledge over shares.
Security assignment of all intercompany loans and trade receivables.
Pledge over bank accounts.
Security transfer of mortgage certificates (Schuldebriefe).
The perfection requirements under Swiss law depend on the form of the security and the type of collateral. Swiss law does not recognise or accept the concept of a floating charge or lien. Rather, from a mandatory Swiss law perspective, taking security over movable assets requires the secured provider to give up exclusive control and for the secured party to obtain physical possession over the movable assets. However, certain movable assets (such as aircrafts and ships) are subject to particular rules allowing for the perfection of a security by registration rather than the requirement to take control/possession of the assets.
Shares. Shares are usually pledged rather than transferred: this is to avoid the security agent becoming the formal shareholder. Perfection of a pledge over shares of a Swiss company generally requires a written security agreement and physical transfer of the share certificate to the pledgee or security agent (as applicable). In the case of registered shares, the share certificates must be duly endorsed by the pledgor. If the transfer of the shares becomes restricted by the articles of incorporation, it is advisable to require the transfer restriction to be deleted from the articles of incorporation (or to at least obtain a board resolution approving the transfer of the pledged shares to a third party acquirer upon enforcement of the pledge in advance).
Inventory. Inventory can be pledged or transferred by way of security. To perfect such security, the secured provider must give up exclusive control and the secured party must obtain physical possession over the inventory. However, this strict de-possession requirement under Swiss law makes it difficult to perfect a security over inventory without substantially disturbing daily business of the security provider. Because of this restriction, taking of security over inventory is for practical purposes not feasible under Swiss law. In most cases, taking control and possession over inventory is regarded as unduly burdensome, costly and unmanageable. Therefore, inventory is usually not part of the standard Swiss security package.
Bank accounts. Security over bank accounts is usually granted in the form of a pledge (pledging the claims of the account holder against the account bank), but can also be granted by security assignment. However, it is more common for bank accounts to be pledged for the following reasons:
A security assignment is technically a full legal transfer, while a pledge only provides for a limited right in rem.
General account banks have become increasingly concerned about know-your-customer issues and beneficial owner identification issues in the last few years.
The pledge is perfected by entering into a security agreement in writing and notifying the account bank of the pledge.
Receivables. A security over receivables is normally created by way of general assignment for security purposes. Using this method, all existing and future receivables can be taken as security. However, certain limitations will apply to secured creditors in relation to future receivables that come into existence only after the security provider is declared bankrupt. These receivables will fall into the bankruptcy estate and will not be available to secured creditors.
Perfection of the assignment requires a written assignment agreement and the assignability of the relevant claims under the law by which they are governed. Usually, the security assignment is silent (which means the third party debtors will only be notified of the assignment in the case of default or in order to protect the secured parties rights in the security). Until such time, the third party debtor can satisfy its obligations by paying the assignor.
Intellectual property rights (IPRs). Security is commonly granted over IPRs such as patents, trade marks, copyrights and designs. The two available forms of security over IPRs are a transfer and a pledge. However, security over IPRs is usually created in the form of a pledge.
The security over intellectual property is created by written agreement. The registration of the security interest in any register is not required to perfect the security. However, registration is recommended, so that the security holder can enforce its security interest against a third party who could otherwise rely, in good faith, on the information registered in the relevant public register.
Real property. Security over immovable property is usually created using either a:
Mortgage assignment (Grundpfandverschreibung). This can be used to secure any type of debt, whether actual, future or contingent. The creditor of a claim secured by a mortgage assignment can demand an extract from the land register. However, the extract only acts as evidence and does not constitute a negotiable security.
Mortgage certificate (Schuldbrief). This establishes a personal claim against the debtor, secured by a property lien. The mortgage certificate constitutes a negotiable security, which can be pledged or transferred for security purposes and is issued in either bearer/registered form or in uncertificated form. An outright transfer has certain advantages in case of the security provider's bankruptcy and in multi-party transactions.
The preferred way to create a security over Swiss real estate is through an outright transfer of the mortgage certificate(s) instead of a pledge. In both forms of security, the secured party's claims can be backed by property belonging to the borrower or a third party (third party security).
Mortgage assignments and mortgage certificates are created and perfected by the parties entering into an agreement regarding the creation of the security, which is made by a notarised deed and entered into the land register.
Movable assets. While the security over ships and aircrafts can created by the entry of the security in the respective register, the perfection of a security over other movable assets (such as machinery) requires transfer of possession and is therefore not practicable. The same rules apply as with respect to inventory
Guarantees are widely used in secured lending transactions. According to Swiss law, a guarantee is a promise to another person that a third party will perform, and a promise to compensate the person for any damages caused as a result of the third party's failure to perform. There are no specific requirements as to the form of the contract. Once validly concluded, the existence of a guarantee is, in principle, independent from the existence of the obligation secured by the guarantee.
The agent concept is recognised and is frequently used for syndicated facilities and agency arrangements governed by Swiss or foreign law.
A substantive trust law does not exist in Switzerland. Therefore, it is not possible to set up a trust under Swiss law. However, Swiss law does recognise trust concepts established in other legal systems.
A security agent or security trustee can enforce its rights in the following ways, depending on the nature of the security:
Pledge. Swiss law is based on the doctrine of accessory (Akzessorietätsprinzip) (that is, the secured party must be identical to the creditor of the secured claim). Under this doctrine, a pledge cannot be vested in a third party acting as a security holder in its own name and right without at the same time being the creditor of the secured obligation. Instead, the pledge must be granted to the lender (or in the case of syndicated loans, each of the lenders, as each member of the syndicate has its own claim against the borrower for repayment of its portion of the loan). The lender(s) can, however, be represented by a third party acting in the name and on behalf of the lender(s). Alternatively, it is possible to implement a joint-creditor structure in which the security agent becomes a joint-creditor for each obligation owed to each of the lenders. However, while accepted in legal doctrine, the joint-creditor concept is still untested in Switzerland and it is not absolutely clear whether a Swiss court would recognise this concept in the context of a pledge. The parallel debt concept that has been implemented in other continental jurisdictions (such as Germany) cannot be implemented under Swiss law. However, a Swiss court should recognise a parallel debt structure implemented under foreign law, provided the concept is valid and enforceable under the applicable foreign law.
Security assignment. The doctrine of accessory does not apply (see above). Therefore, for this type of security, a security trustee can enter into the security agreement and hold the security in its own name and on its own account for the lender(s).
Security transfer. The rules are the same as for a security assignment (see above).
Intermediated securities. It is unclear whether the doctrine of accessory applies under the Federal Intermediated Securities Act. It is probable that it will not apply where securities are transferred to the secured party's account, but may apply when a control agreement is entered into.
Swiss company law does not specifically provide for any thin capitalisation rules or restrictions on debt financings.
However, under Swiss tax law, if certain levels of debt are exceeded the tax authorities can deny the deduction of interest on the portion of loans granted to group companies that exceed these levels. The level of acceptable debt in relation to the equity capital of a Swiss company generally depends on the market value of the company's assets (for example, for finance companies, the debt-to-equity ratio must not exceed 6:1). If the applicable threshold is exceeded:
The interest payments for the portion of debt exceeding the threshold are no longer tax deductible.
Capital tax becomes due on the exceeding portion of the loan.
In addition, the interest rate on debt financings must be determined on an arm's length basis (that is, it must not exceed the maximum interest rates published by the Swiss Federal Tax Administration annually), failing which Swiss dividend withholding tax (currently levied at the rate of 35%) will be levied on the interest payments if the loan has been granted by a parent or sister company. Both maximum debt-to-equity ratios and maximum interest rates do not apply to third-party debt. Therefore, due to these limitations on investor financing, in practice, third-party acquisition financing prevails over investor financing.
Under Swiss company law, if a company's liabilities exceed its assets, the company must take measures to restore its balance sheet. In particular, if the claims of the company's creditors are no longer covered (based on either the company's going-concern value or the liquidation value of its assets), the company's board of directors must notify the competent bankruptcy judge, unless some of the company's creditors agree to subordinate their claims to those of the company's other creditors.
There are no specific shareholder liability issues in a relation to thin capitalisation or restrictions on debt financing under Swiss law. The obligations of a shareholder are limited to the payment of the subscription amount. There has been much debate about the potential conversion or recharacterisation of a loan granted by a parent to a subsidiary into equity in the case where a subsidiary is too thinly capitalised. However, the Swiss courts and the prevailing doctrine have so far declined to support such a conversion or recharacterisation merely because the company is thinly capitalised.
There are no particular rules concerning the prohibition of financial assistance under Swiss law. However, a company must not purchase more than 10% of its own voting shares.
Restrictions under corporate benefit rules apply to the granting of security by a Swiss company when security is granted for the benefit of either:
A direct or indirect parent company (upstream security).
Another group company not fully owned by the party providing the security (cross-stream security).
This can significantly impact the value of such security, as an upstream or cross-stream security is only permissible when both:
The value of the security does not exceed the granting company's freely available reserves and profit carried forward at the time of the security's enforcement
The security is granted on an arm's length-terms (that is, granted on conditions under which an independent party would also have provided the security). Otherwise, this will be re-qualified as a hidden distribution to the Swiss company's shareholders.
However, the "arm's length-terms" requirement can lead to practical difficulties for the following reasons:
Shareholders often do not wish to provide any consideration for the granting of the security.
It is difficult to determine what consideration would be adequate.
Due to these difficulties, it is advisable and standard practice to treat the granting of security in the same way as a distribution by the company to its shareholders. This means that the:
Board of directors and a general meeting of the shareholders must approve the granting of the security.
Enforcement of the security must be limited to the freely distributable reserves of the company at the time of the enforcement, the amount of which must be confirmed by the company's auditors. This can be done by including appropriate limitation terms.
The purpose clause of the company may need to be amended to permit the granting of this security.
Certain aspects of upstream and cross-stream security are currently unclear and will probably remain so until the Swiss Federal Court has the opportunity to review and decide a case dealing with these matters. However, a decision from the Swiss Federal Supreme Court in 2014 had an impact on the determination of the freely disposable equity amount available for the payment under any upstream or cross-stream guarantees or the application of any enforcement proceeds of any upstream or cross-stream security. The decision does not directly affect the granting of upstream or cross-stream guarantees or security. However, indirectly it is relevant for the determination of the freely disposable equity amount of a Swiss guarantor or Swiss security provider on the time of the enforcement of such guarantee or security.
If the Swiss guarantor or security provider has upstream or cross-stream loans outstanding that were not granted on arm's length terms, and the Swiss entity is therefore obliged to build a respective reserve, the freely disposable equity amount of that company will be reduced accordingly.
The granting of upstream and cross-stream security can also raise issues of director's liability (criminal or civil). The directors of a Swiss company are subject to a general obligation to act in the interest of that company in relation to all their actions on behalf of the company, including when granting security for the benefit of third parties.
The requirements and limitations applicable to upstream and cross-stream security above also apply to upstream and cross-stream guarantees (that is, guarantees for obligations of direct or indirect shareholders of the guarantor or sister companies of the guarantor) and to refinancings.
However, the above restrictions under corporate benefit rules do not mean that the lenders will not have access to the cash flow of the target. Debt "push-down" structures or "on-lending" structures are generally accepted in Switzerland. It is quite common for lenders to make funds available to the target and/or its subsidiaries. To allow the target to repay its debt, subsidiaries will upstream funds to the target either by way of dividends or repayment of intra-group loans. However, this upstreaming is subject to company law restrictions.
Regulated and listed targets
Swiss law does not prohibit or restrict the acquisition of a Swiss business by a foreign investor to safeguard the public order or national security. However, there are specific restrictions for the acquisition of nuclear power plants and Swiss residential real estate companies. There are also restrictions for Swiss banks, securities dealers, fund management companies and insurance companies. All of these activities are licensed and supervised by the Swiss Financial Market Authority (FINMA).
Effect on transaction
The acquisition of a Swiss bank by a financial investor presents particular challenges.
A general condition is that any individual or legal entity that directly or indirectly holds at least 10% of its capital or voting rights must ensure that its influence will not have a negative impact on the prudent and reliable business activities of the bank. Meeting this condition is less of an issue if the acquirer is itself a financial organisation subject to adequate supervision.
For private equity funds, FINMA has been reluctant to approve the acquisition of a qualified participation (that is, 10% of the capital or voting rights) in a bank. If, due to a shareholder acquiring a qualified participation, the FINMA takes the view that the conditions for the respective company's licences are no longer met, it can require the acquirer to sell its participation. If the acquirer does not do this, the FINMA can:
Suspend the voting rights in relation to such qualified participation.
Where appropriate and only as measure of last resort, withdraw the existing licence and require the entity to liquidate.
Specific regulatory rules
If a party acquires shares, directly or indirectly, taking its holding to 33.33% of the voting rights in a company listed in Switzerland, it must make a mandatory offer for all the target's listed shares. However, in its articles of incorporation, a company can:
Amend the threshold from 33.33% to 49% (opting-up).
Waive the application of the mandatory offer rule (opting-out).
The mandatory offer must be made within two months of the date the relevant threshold is exceeded.
An acquisition of shares in Swiss a target representing less than 33.33% of the voting rights (or 49% in the case of an opting-up) do not present particular problems. However, if the ownership percentage in the voting rights held by a party crosses 3%, 5%, 10%, 15%, 20%, 25%, 33.33%, 50% or 66.66%, it must notify the relevant company and the relevant exchange.
Methods of acquisition
The target's shares can be acquired in bilateral transactions or via the stock exchange.
In a voluntary public tender offer for all the share of a Swiss listed company, the minimum price rule for a mandatory offer must be observed and, if the relevant threshold is reached, any terms (particularly conditions) that do not comply with the mandatory offer rules must be waived by the bidder.
Voluntary public takeover offers can only be made subject to objective conditions precedent, which must have clear terms and must be outside of the acquirer's control.
The three main categories of conditions to an offer are as follows:
Conditions on obtaining control of the target, such as obtaining a certain minimum of voting rights in the target. An acceptance threshold of more than 66.66% of the voting rights will, however, be subject to approval by the Swiss Takeover Board. Although it may be difficult to gain approval for a threshold above 75% in certain circumstances (for example, if the acquirer has a high pre-existing shareholding), a threshold of up to 90% may be acceptable.
Conditions on implementing the offer, such as regulatory approval.
Conditions included for the benefit of the acquirer, such as "material adverse change" conditions.
In contrast, mandatory offers are generally not subject to conditions other than:
Obtaining regulatory approval.
Showing that no injunction has been made preventing completion.
The recognition of the acquirer as a shareholder with voting rights.
In particular, a mandatory offer cannot be made subject to a minimum tender rate.
Funding must be in place before the offer is announced. The offer prospectus must contain:
Details of the sources of financing.
Confirmation from the review body (a licensed security dealer or auditor approved to review security dealers) that the financing is available.
Commitment letters from banks in support of the bid are usually sufficient for the review body to issue its funding confirmation, provided the conditions set out in the commitment letters either:
Correspond to the conditions of the tender offer.
Are under the sole control of the acquirer.
Following a successful tender offer, the bidder has the following to alternatives to gaining 100% control in the target:
98% squeeze-out procedure. The bidder can request a squeeze-out of the remaining shareholders if the bidder has obtained more than 98% of the voting rights in the target. The squeeze-out procedure must be initiated within three months from the end of the additional acceptance period by filing a squeeze-out action against the target. The consideration to be paid to the minority shareholders in the squeeze-out is the same as in the offer and there are no appraisal rights (the court does not review the adequacy of the consideration and offer price). The 98%-squeeze-out procedure is typically completed within about six to eight months following the offer.
90% squeeze-out merger. As an alternative to a 98% squeeze-out, the Swiss Merger Act allows a bidder holding more than 90% of all of the target's voting rights to effect a squeeze-out merger between the target and a (newly incorporated) Swiss wholly owned subsidiary of the bidder. The minority shareholders do not receive the absorbing company's shares. Instead, the minority shareholders receive cash or any other form of consideration (such as, shares in the bidder company). The compensation must be equal to the value of the shares that are squeezed-out. Due to appraisal rights, there is an increased risk of litigation and a delay to the merger if the minority shareholders block the registration of the merger in the commercial register. If the squeeze-out merger is executed six months after the end of the acceptance period when the best price rule no longer applies, the bidder can offer the minority shareholders consideration exceeding the offer price. However, a squeeze-out merger can only be effected if 90% or more of the shareholders in the target company resolve to allow this, meaning in practice the bidder has no certainty that it will be able to obtain 100% of the voting rights in the target company through a tender offer.
The concept of lenders' liability is not specifically recognised. Therefore, the liability of lenders can only arise when lenders exercise rights and obligations against their clients in violation of the general rules and applicable Swiss laws. For example, lender liability issues can arise if the lender:
Incorrectly terminates a facility agreement.
Does not act in good faith when exercising their rights under a facility agreement.
As a general rule, lenders must exercise their rights with due care and balance their own interests with those of their borrowers.
There is no established secondary market in Switzerland for borrowers to buy back their own debt. Debt buy-back transactions are also not specifically regulated under Swiss law. In larger acquisition finance transactions, the parties deal with debt buy-backs contractually, where debt buy-backs by the borrower are generally prohibited or restricted to avoid a borrower using its cash to repurchase its own debt (particularly if it is in a distressed financial situation). Debt purchase transactions by the financial sponsor are generally less problematic provided the contractual arrangement stipulates that the financial sponsor's debt is being disregarded when it comes to voting matters.
Following the acquisition of a listed company, acquirers usually wish to de-list the company and take it fully private by way of a squeeze-out.
In addition, restructurings are often carried out as a debt push-down, where the acquisition debt is refinanced at a level closer to the operating assets. This eliminates the effect of structural subordination on the lenders and potentially increases the value of security available to lenders.
Tax reforms are currently pending, which may have an impact on acquisition financing in Switzerland.
Furthermore, the current very liberal regulatory regime for cross-border financial services into Switzerland will change and certain restrictions on cross-border lending into Switzerland are due to be introduced.
Daniel Haeberli, Partner
Professional qualifications. Switzerland, 1999; LLM in Corporate Law, New York University, US, 2001; lic iur University of Zurich, 1996
Areas of practice. Banking and finance (including banking; stock exchange and collective investment law; derivatives; structured products and bonds; syndicated debt financing; financial restructurings).
- Counsel to HNA Group in its raising of EUR1.5 billion debt for financing of the CHF2.7 billion acquisition of the Swissport Group in 2016.
- Counsel to a major French financial institution as participant in connection with a funded participation in a US$1.6 billion term loan facility in 2015
- Counsel to Apollo in connection with the EUR80 million secured debt financing and the EUR40 million equity investment in Airopack Technology Group AG in 2015.
- Counsel to the borrower of a CHF2.5 billion Swiss-law governed credit facility backed by leasing contracts in 2015.
- Counsel to the borrower (a Swiss listed leading global travel and destination management services company) of a CHF200 million Swiss law governed multi-currency senior revolving credit facility and advised the issuer on its outstanding bond in a phase the group was implementing a new strategy including certain substantial divestitures in 2015.
Languages. German and English
- Financial Derivatives - Certain Swiss aspects, 4. Edition, 2016.
- The Proposed New Financial Services Act and Financial Institutions Act – What Will Change? Homburger Bulletin, 1 December 2015.
- Negative Interest Rates – Practical consequences and legal issues, Homburger Bulletin, July 30, 2015.
- New Restructuring Law, Homburger Bulletin, 6 November 2013.
- Key Points of the New Rules on the Distribution of Structured Products, Homburger Bulletin, 8 March 2013.
- Legal issues when securing syndicated loans, Gesellschafts- und Kapitalmarktrecht, 2007.
Ülkü Cibik, Associate
Professional qualifications. Switzerland, 2007; lic iur, University of Zurich, 2006
Areas of practice. Financial markets and banking law; financial services regulation; corporate and commercial law. Areas of expertise include banking; stock exchange; derivatives; structured products; bonds; syndicated debt financing; financial restructurings.
Languages. German; English; Turkish
Publications. Rechtswahl oder Rechtsmissbrauch – Gestaltungsoption oder "Inländerbenachteiligung"? in: Innovatives Recht: Festschrift für Ivo Schwander.