The Acquisition and Leveraged Finance Review: Switzerland
The Swiss market for acquisition and leveraged finance is still very much influenced by the low interest rate environment. The Swiss National Bank (SNB) still applies negative interest rates on larger sight deposit account balances in Swiss francs of -0.75 per cent. Even though interest rates in the Swiss franc market continue to be at low levels, the rates recovered slightly. However, players in the market agree that interest rates in the Swiss franc market will only increase more significantly, once interest rates in the euro market are increasing.
Nevertheless, as a consequence, the lack of investment opportunities at attractive yields has had a significant influence on investor appetite, also in the acquisition and leveraged finance space, and leverage ratios have been further pushed to levels close to levels seen in the market prior to the financial crisis of 2007. In addition, borrowers are able to negotiate contractual terms that are very light (covenant light).
So far, only few transactions involving debt funds or unitranche lenders have been seen in the Swiss market, but it appears that it will only be a question of time until those debt investors will further enter the Swiss market. However, in light of the 10/20 Non-Bank Rules (see below), the lending by funds to Swiss borrowers requires further structuring.
Also, where possible, Swiss borrowers in need of Swiss franc funding tried to tab the euro or the US dollar market, as they can get a considerable benefit out of the cross-currency swap.
Transactions seen in the Swiss market during the past 12 months included leveraged buyouts of large private Swiss targets, as well as a substantial number of smaller buyouts.
Large Swiss acquisition finance transactions are usually arranged through the London or US market and are placed with banks and institutional investors. Like in many other jurisdictions, these structures included either the placement of acquisition term-loan tranches with institutional investors (rather than banks), the issuance of high-yield notes, or both.
In some transactions, bridge financing was provided to facilitate the acquisition process and the closing mechanics, and taken and refinanced by the high-yield notes financing as soon as possible after closing.
Debt packages for large leveraged acquisition finance transactions varied, inter alia, depending on the volume and leverage required. The transactions consisted of either senior debt only; or senior debt and one or several layers of junior debt.
In most cases, the debt package was completed by a (revolving) working capital facility lent at the target level and structured as super-senior debt. The super-senior level derives from the structural preference and is usually also reflected in intercreditor arrangements.
Smaller Swiss domestic acquisition finance transactions, on the other hand, are often financed by Swiss banks, including Swiss cantonal banks and smaller financial institutions. These financings are usually held by the banks on their balance sheet until full repayment of the financing. In those types of transactions, the decision to lend is often supported by cross-selling opportunities. However, non-bank lenders have become more and more competitive, as they may offer more flexibility in terms of pricing. In Swiss domestic finance transactions, strong borrowers and sponsors have been successful in negotiating slim security packages to further reduce transaction costs and enhance flexibility.
Regulatory and tax matters
i Regulatory matters
The mere provision of acquisition finance does not itself trigger a licensing requirement under Swiss laws. A licensing requirement would only be triggered if lenders would refinance themselves in Switzerland by means of accepting money from the public or via a number of unrelated banks. Lending into Switzerland on a strict cross-border basis is currently not subject to licensing and supervision by the Swiss Financial Market Supervisory Authority FINMA.
On 15 June 2018, the Swiss parliament passed the last pieces of legislation of the overhaul of the Swiss financial regulatory framework, namely the Swiss Financial Services Act (FinSA) and the Swiss Financial Institutions Act (FinIA). The FinSA and the FinIA are expected to enter into force on 1 January 2020. The FinSA introduces a new register of financial advisers. Under the FinSA, financial advisers of foreign financial institutions may only be active in the Swiss market once they are registered in the register of financial advisers. It very likely that a person advising exclusively in the context of finance (lending) transaction will be out of scope of the registration requirement, but given the lack of clear guidance, it remains yet to be seen how the new FinSA will be dealt with in practice.
ii Tax matters
The tax structuring of acquisition finance transactions is more challenging, in particular due to the Swiss Non-Bank Rules.2
10/20 Non-Bank Rules
When structuring a syndicated finance transaction involving Swiss borrowers to comply with the Non-Bank Rules, the usual approach is to limit the number of non-banks (investors) to 10. This approach is obviously not feasible in larger leveraged acquisition finance transactions, where term-loan tranches or notes are placed outside of the banking market. Accordingly, funds under these transactions may not be raised by a Swiss borrower or issuer, but rather through a top-tier acquisition vehicle incorporated abroad in a jurisdiction that has a beneficial double tax treaty with Switzerland (for the purposes of up-streaming dividends without withholding any amounts). Given the generally beneficial double tax treaty between Switzerland and Luxembourg, typical structures often involve multilevel acquisition vehicles incorporated in Luxembourg.
If funds raised by a non-Swiss borrower are lent on within the group to a Swiss target company, this may be regarded as a circumvention by the Swiss Federal Tax Administration (SFTA). This is especially relevant if the Swiss target company guarantees and secures the acquisition financing. However, the SFTA has previously considered and approved structures that have included these structural elements by way of binding tax rulings. Nevertheless, the process must be carefully structured, with due consideration of the time needed for the tax rulings.
If the transaction includes a (revolving) working capital facility lent directly to the (Swiss) target companies, compliance with the Swiss Non-Bank Rules can only be achieved by limiting the number of non-banks to 10. To ensure the acquisition debt portion of the financing (which typically has more than 10 non-banks as lenders or noteholders) does not affect the working capital facility, it is key to structure these facilities in order for them to qualify as separate financings for the purposes of the Swiss Non-Bank Rules. Against this background, loss sharing provisions and similar (equalisation) provisions contained in intercreditor arrangements must also be carefully structured or confirmed by the SFTA (by way of a tax ruling) against the Swiss Non-Bank Rules.
Deductibility of interest expense
Under Swiss tax law, interest incurred at the level of the acquisition vehicle is not available for set-off against income generated at the Swiss target company level for income tax purposes. This is because there is generally no tax consolidation under Swiss tax law (neither in Swiss domestic nor cross-border situations). However, there are means to (indirectly) 'push down' the acquisition debt portion, particularly if the existing debt can be refinanced at the target level. For the purposes of the Swiss Non-Bank Rules, this would need to be structured as a downstream loan from the acquisition vehicle to the target level (or by refinancing the existing debt at the target level, although that would result in a limitation of the number of non-banks to 10 for that portion of the debt in any event). However, since the proceeds of the acquisition debt may be lent on, the Swiss Non-Bank Rules have to be carefully addressed.
Alternatively, an (indirect) pushdown can be achieved by way of an equity-to-debt swap, where equity (freely distributable reserves or even share capital that can be reduced) is distributed (but not actually paid out) and converted into a downstream loan. In recent transactions, additional pushdown of debt potential has been created by some post-acquisition restructuring steps (such as group internal sales of assets generating additional earnings and the respective debt capacity).
If such a pushdown can be achieved, some of the interest incurred on the acquisition debt may be brought to the target company level and become available for set-off against income generated at the target level. The security package structure may be improved in connection with such pushdown at the same time.
Security and guarantees
i Standard security package at closing
In leveraged acquisition finance transactions involving Swiss target companies, the acquisition debt portion usually benefits from the share pledge over the top Swiss target company. In most cases, the security package is completed by other security provided by the acquisition vehicle, such as security over:
- claims and rights under the share purchase agreement;
- claims and rights under due diligence reports;
- claims and rights under insurances (in particular, M&A insurances, if any); and
- bank accounts.
Under Swiss law, shares in stock corporations and limited liability companies may be pledged by written agreement and if share certificates have been issued by handing over the certificate to the pledgee (duly endorsed or assigned (as applicable) in blank in the case of registered shares). If certificates have been issued, the handover of such certificates is a perfection requirement for the pledge. While a pledge over shares can be perfected, even if no certificates have been issued, the issuance and handover of certificates it is generally considered to bring the pledgees into a factually stronger position in the event of enforcement. In addition, it is standard that any transfer restrictions in the target company's articles of association are removed. Provisions in the articles of association limiting the representation of shareholders at shareholders' meetings to other shareholders must also be lifted to ensure full flexibility once control over the shares has been gained. Given the lack of control over the target company pre-closing, the issuance of certificates and the amendment of the articles of association are generally accepted as conditions subsequent.
Claims and receivables
Claims and receivables (claims under the share purchase agreement, insurance claims, claims under due diligence reports, etc.) may be assigned under Swiss law for security purposes by means of a written agreement between assignor and assignee. The agreement must specify the relevant claims and may cover future claims as well, provided claims are described in a manner that allows for clear identification once such claims come into existence. However, it must be noted that claims arising post-bankruptcy with a Swiss assignor would no longer be validly assigned and would be trapped in the bankrupt estate.
While assignability is generally given under Swiss law in the event that the underlying agreement is tacit as regards or explicitly allows for an assignment, it is important that the underlying agreement does not contain a ban on assignment. Therefore, during the pre-signing phase, the parties must ensure that all relevant documents do not contain any restrictions on assignment (particularly the share purchase agreement, insurances, etc.) and, for the sake of clarity, it is even recommended that important agreements explicitly allow for an assignment for security purposes to financing parties. The same applies to any due diligence reports, although getting the benefit through reliance will also be satisfactory in most circumstances (either directly derived from the report or through additional reliance letters).
Although the requirement to notify third-party debtors (such as the sellers) is not a perfection requirement under Swiss law, it is strongly recommended that these parties are notified of the assignment for security purposes and the transaction as a whole, because a third-party debtor might, prior to notification, validly discharge its obligation by paying to the assignor.
Security over Swiss bank accounts is typically provided by pledging the claims the account holder has against the account bank. An assignment for security purposes would also be possible (and would even be a slightly more direct security right), but account banks have become increasingly concerned in the past two years about 'know your customer' and beneficial owner identification issues, because the assignment is, legally, a full legal transfer, while the pledge only provides for a limited right in rem. Again, a notification of the account bank is not a perfection requirement, but it is standard practice in the Swiss market to notify the account bank and seek its confirmation as to waiving all priority rights in relation to the relevant bank accounts on the basis of its general terms and conditions and otherwise. Such a confirmation should also outline the mechanisms on blocking the account upon further notification.
Timing of providing security on closing
The security interest provided by the acquisition vehicle may be entered into and perfected pre-closing, except for the share pledge, which may only be perfected upon closing of the transaction, immediately after the acquisition of the shares by the acquisition vehicle. From a Swiss point of view, there is nothing that would make it overly burdensome or impossible to perfect the security interest as soon as the transaction is completed or closed. However, some items (such as the amendment of articles of association or notices) will have to become post-closing items, but, as described above, that does not prevent the perfection of the security interest as such.
ii Standard target-level security package
Security is typically granted by the Swiss target companies. The target-level security package is similar to fully fledged security packages in other jurisdictions and may include, inter alia, security over:
- shares in subsidiaries;
- trade receivables;
- intercompany receivables;
- insurance claims;
- bank accounts;
- intellectual property; and
- real estate.
See above for a description of security over most of these assets.
However, in smaller transactions and depending on the level of leverage provided, sponsors are sometimes able to negotiate a slimmer security package for purposes of avoiding transaction costs. This is particularly true in pure Swiss domestic deals and in case the taking of security would require involvement of additional foreign counsel. In addition, in Swiss domestic finance transactions, borrowers often are successful in negotiating slim security packages as a consequence of the strong negotiation power that borrowers currently have in the finance market.
Security over real estate is typically taken by way of taking security over mortgage certificates. A mortgage certificate is issued either in bearer or in registered form. Alternatively, since January 2012, a paperless version of a mortgage note can be created which is evidenced by electronic registration in the relevant land register. A mortgage note creates personal, non-accessory claim against the debtor, which is secured by a property lien. Unless preexisting mortgage certificates are available, the creation of new mortgage certificates requires a notarised deed and registration of the mortgage certificate in the land register. Once created, the mortgage certificates will be transferred for security purposes under a written security agreement without further notarisation or entry into the land register (except in the case of paperless mortgage certificates).
One important tax point has to be considered as interest payments to non-Swiss resident creditors of loans secured by Swiss real estate are subject to withholding tax at source, unless the lender is located in a jurisdiction that benefits from a double tax treaty with Switzerland providing for a zero rate. Accordingly, if a Swiss borrower is involved, it must be ensured that only 'Swiss treaty lenders' will be secured by real property to avoid the risk of withholding tax being applied to interest payments. Swiss treaty lenders are persons:
- having their corporate seat in Switzerland or are lending through a facility office (which qualifies as a permanent establishment for tax purposes) in Switzerland, and that are entitled to receive any payments of interest without any deduction under Swiss tax law; or
- lending in a jurisdiction having a double tax treaty with Switzerland providing for a zero per cent withholding tax rate on interest payments.
In particular, owing to these tax issues, security over real estate is normally only considered if there is substantial real estate located in Switzerland.
If a foreign borrower is involved (such as a foreign acquisition vehicle), the issue basically remains the same, but an application for an exemption through a tax ruling application may be considered. While such a tax ruling has been obtained very recently in a few cantons, the process of being granted such a ruling in other cantons might be quite lengthy and, therefore, costly (while the outcome is possibly vague). Without a satisfactory tax ruling, real estate located in Switzerland cannot be granted as security owing to the risk of potential withholding tax on interest payments.
Under Swiss law, security over intellectual property is typically taken by way of pledge. A written pledge agreement is required, specifying the intellectual property right. As a matter of Swiss law, no registration is required for the valid perfection of the pledge over intellectual property. However, if not registered, the intellectual property may be acquired by a bona fide third-party acquirer, in which case the pledge would become extinct. While a Swiss law pledge over foreign intellectual property is valid as a matter of Swiss law, it should be double-checked whether the validity of the security interest would also be recognised under relevant foreign law, or whether – as an example – its registration would be a perfection requirement. Accordingly, with regard to foreign intellectual property of certain importance and value, it is advisable to register the pledge in the relevant register. Security agreements typically provide for a registration obligation for the pledge over important intellectual property on day one and for all other intellectual property upon the occurrence of an event of default.
Difficulties in taking security over movable assets
Owing to strict repossession requirements under Swiss law, taking of security over movable assets (such as an inventory or equipment) without substantially disturbing the daily business of the security provider is difficult. There are structuring solutions surrounding this issue (such as pledge holder structures or opco or propco structures), but these solutions are usually only implemented in situations where there is a specific focus on a specific asset (raw materials with substantial value, larger car fleets, aircraft parts, etc.).
Timing of providing target-level security
Unless there is some cooperation on the part of the seller to start preparing target-level security pre-closing (and depending on the exact release mechanisms from existing financings), target-level security might only be available post-closing, and it is usually agreed that target-level security might be completed as a condition subsequent.
iii Financial assistance and upstream and cross-stream security/guarantees
Standard upstream and cross-stream limitations will apply to Swiss target-level guarantees and security. Essentially, the amount of proceeds under upstream and cross-stream security or guarantees that is available to lenders is limited to the amount that the guarantor/security provider could distribute to its shareholders as dividends at the point in time of enforcement. In addition, certain formal requirements will have to be followed both, upon granting and enforcement of the security or guarantee. These limitations may affect the security substantially, particularly in situations of financial distress. However, if structured properly and if using all available mitigants, such limitations are generally accepted by investors and lenders.
In October 2014, the Swiss Federal Supreme Court ruled, that upstream and cross-stream loans that do not meet the at arm's-length test will also reduce the distributable amounts of the lender. However, at the same time, the Swiss Federal Supreme Court ruled that paid in surplus is generally available for distribution to shareholders. It would appear that parties have applied a more cautious approach around the granting of upstream and cross-stream loans since October 2014, but transaction structures generally remained unchanged. It remains to be seen whether further court rulings will be issued in this respect.
If the structure also includes a downstream loan from the acquisition vehicle to the Swiss target companies (often used for tax purposes as a pushdown of debt and for the repatriation of the cash flows), the Swiss target company may provide (unrestricted) security to secure such a downstream loan, because it would secure its own rather than parent debt. Accordingly, this would not qualify as upstream security. The acquisition vehicle in turn may provide security over the downstream loan, along with the (unrestricted) security package securing such a downstream loan. From a Swiss corporate law perspective, there is a good chance that upstream limitations will not apply to that security structure. However, such a security structure should be discussed with the SFTA in the light of the Swiss Non-Bank Rules.
Priority of claims
i Statutory priority of claims
Upon bankruptcy over a Swiss entity, certain creditors would benefit from statutory priority:
- secured claims are satisfied with priority directly out of the enforcement proceeds; any surplus will be shared among (unsecured) creditors generally, and any shortfall would be treated as a third-class claim; and
- claims incurred by the bankruptcy or liquidation estate or during a debt restructuring moratorium with the administrator's consent rank above unsecured claims.
In relation to unsecured claims, there are three priority classes: the first class mainly consists of certain claims of employees as well as claims of pension funds; the second class consists of claims regarding various contributions to social insurances and tax claims; and the third class consists of all other unsecured claims.
ii Contractual structuring of priority of claims
Within the third class, creditors and the debtor are free to contract on the ranking of such claims among themselves. Typically, in Swiss acquisition finance transactions, the priority of claims among various debt investors is reflected on the basis of intercreditor arrangements rather than on the basis of structural subordination. It should be noted, however, that in larger transactions, the acquisition structure is most often set up outside Switzerland. In addition, where the investor base would expect a structural subordination, such a structure is implemented, but rather for marketing purposes.
Under Swiss law, intercreditor arrangements that provide for the priority of claims are generally binding on the parties involved and also on insolvency officials of an estate. However, given that there are hardly any relevant precedents, it cannot be ruled out that an insolvency official would treat all non-secured creditors indiscriminately as third-class creditors, and consider the priority of payments as a mere arrangement among creditors of the estate in relation to their respective claims in relation to the estate and pay them out on a pro rata and pari passu basis. Such being the case, the parties to the intercreditor arrangement may have to rely on the redistribution by the creditors among themselves.
iii Equitable subordination
The concept of equitable subordination is neither reflected in codified Swiss law nor well established in Switzerland. Even though there are no conclusive precedents, equitable subordination is generally only discussed in connection with shareholder loans. It is unclear whether the holding of a very small equity stake would be sufficient for a qualification of a loan as shareholder loan. It would appear that the terms of the loan and the circumstances under which it has been granted are more relevant than the specific percentage of shareholding. Against this background, it may be concluded that a loan granted in proportion to the shareholding of a small shareholder (together with all other shareholders) could be problematic, while the holding of a portion in a larger (syndicated) loan (at arm's length) by a bank seems to be unproblematic, even if that bank would hold an equity stake in the relevant Swiss company.
Basically, a parent company will be treated as any other third-party creditor of such Swiss subsidiary in the framework of a Swiss bankruptcy proceeding. The risk of a shareholder loan being deemed to be either subordinated against all other (non-subordinated) creditors, or to be treated like equity (in which case, the parent company would only be satisfied together with all other equity contributors), arises only under very specific circumstances.
Elements that could be relevant are:
- that the shareholder loan is granted in a situation where the Swiss subsidiary is already over-indebted;
- that the parent company had (or should have had) knowledge of the over-indebtedness of its Swiss subsidiary while granting the shareholder loan;
- that the granting of the shareholder loan resulted in the Swiss subsidiary having upheld its business activities, and accordingly in a deferral of the opening of bankruptcy proceedings over the Swiss subsidiary; and
- that the deferral of the opening of bankruptcy proceedings results in a (potential) damage of other creditors of the Swiss subsidiary.
A few scholars suggest applying a stricter regime (per se subordination of shareholder loans in bankruptcy; application to the concept to third-party loans, etc.), but it must be noted that court decisions where the concept of equitable subordination has been applied are fairly rare and, accordingly, that this concept cannot be regarded as well established as such. Therefore, we see little leeway for the application of such a concept, in particular, where loans are granted on an arm's-lengths basis and to Swiss companies that are not over-indebted.
The submission by a Swiss company to the exclusive jurisdiction of the courts of England or any other non-Swiss forum is generally binding on such a Swiss company. It should be noted, however, that under Swiss law, jurisdiction clauses may have no effect as regards actions relating to, or in connection with, insolvency procedures that, as a rule, must be brought before the court at the place of such an insolvency procedure. Furthermore, contractual submissions to a particular jurisdiction are subject to the mandatory provisions on the protection of consumers, insured persons and employees pursuant to the Lugano Convention, the Swiss Federal Private International Law Act (PILA) and such other international treaties by which Switzerland is bound. Pursuant to the PILA and the Lugano Convention, Swiss courts may also order preliminary measures even if they do not have jurisdiction over the substance of the matter.
Enforceability in Switzerland of a foreign judgment rendered against a Swiss company is subject to certain limitations set forth in: (1) the Lugano Convention; (2) the other international treaties under which Switzerland is bound; and (3) the PILA. In particular, a judgment rendered by a foreign court may only be enforced in Switzerland if:
- in the case of (2) and (3) and, in certain exceptional cases, (1), the foreign court has jurisdiction;
- the judgment of such foreign court has become final and is non-appealable or, in the case of (1), has become enforceable at an earlier stage;
- the court procedures leading to the judgment followed the principles of due process of law, including proper service of process; and
- the judgment of the foreign court on its merits does not violate Swiss law principles of public policy.
In addition, enforceability of a judgment by a non-Swiss court in Switzerland may be limited if the Swiss company demonstrates that it has not been effectively served with process (a service of process on the Swiss company will have to be made in accordance with the Hague Convention).3
Acquisitions of public companies
While the financing of public takeover transactions generally involves the same structural considerations as other leveraged acquisition financing transactions, a number of additional, specific elements arising from the public takeover regime must be considered. One of the main obstacles to overcome under Swiss law is the fact that the Swiss takeover board would not allow an acceptance threshold for the public takeover, which is as high as the level of control needed to proceed with a squeeze-out of minority shareholders and gain 100 per cent control over the target. In the context of financing a leveraged public takeover this constitutes a challenge, because there is a chance that the bidder will be stuck with a majority stake only (i.e., less than 100 per cent).
i Structuring of public tender offers and options for squeeze-outs
Under Swiss law, a public tender offer may contain only limited conditions and, in the event that these conditions are satisfied, the bidder is obliged to complete the transaction. One of the permitted conditions is to include an acceptance threshold (that is, the requirement to complete the transaction when a certain percentage of shares is tendered to the bidder). However, an acceptance threshold of more than two-thirds (66.66 per cent) will require the approval from the Swiss takeover board. Although there is a good chance that this threshold will be pushed to 75 per cent, it is unlikely that the takeover board will accept any threshold above 75 per cent.
Following the completion of a public tender offer (that is, after the lapse of the additional acceptance period), the bidder has the following options available to gain 100 per cent control over the target:
- squeeze-out merger: Under Swiss merger law, a minority squeeze-out is available if the majority shareholder holds at least 90 per cent of the Swiss target shares. A squeeze-out merger is usually effected by merging the Swiss target company with a newly incorporated (and 100 per cent-owned) affiliated company (preferably a sister company incorporated for this purpose). The process for merging the two companies would typically take between three and six months. However, minority shareholders have appraisal rights and can block the recording of the merger in the commercial register, which may delay the closing of the merger and, hence, the entire process. In addition, given the appraisal rights of minority shareholders, it is important to kick off the merger process (and the entry into force of the merger agreement) only six months after the lapse of the additional acceptance period in order to eliminate any risk of being in conflict with the 'best price rule'. Under the best price rule, if the bidder acquires target shares in the period between the publication of the offer and six months after the additional acceptance period at a price that exceeds the offer price, this price must be offered to all shareholders; hence, there is a risk that through the appraisal rights that shareholders have in the merger process, a higher price may be determined, which must be potentially offered to all shareholders (also retroactively); and
- squeeze-out under Swiss takeover law: If, following a public tender offer, the bidder holds 98 per cent or more of the Swiss target shares, a squeeze-out of minority shareholders may be initiated. This process takes two to three months and involves a court ruling. The 98 per cent level must be reached within three months of the additional acceptance period expiring. Contrary to a squeeze-out merger, minority shareholders have no appraisal rights as they receive simply the offer price. Similarly, blocking the recording in the commercial register is not possible as the commercial register is not involved.
Following the completion of a public tender offer, if the bidder holds less than 90 per cent of the Swiss target shares, no squeeze-out will be available. Although the bidder may try to buy additional shares over the market (the best price rules will have to be closely monitored), or an additional public tender offer may be launched, there is no absolute certainty that the bidder would achieve 90 per cent. Once the 90 per cent threshold has been reached, a squeeze-out merger will become available again.
ii Certain funds requirements
Under Swiss law, certain funds requirements can be summarised as follows:
- certain funds must be available on the launch of the offer (i.e., publication of the final offer and the offer prospectus), and certain funds must be confirmed by a special auditor (it is, however, prudent for a bidder to ensure certain funds prior to announcement of the offer, because the bidder must proceed with the offer within six weeks of the prior announcement being published); and
- the offer prospectus must provide for financing details and confirmation from the special auditor.
Typically, only the very basic terms of the financing will have to be disclosed in the offer prospectus, and it would not be necessary to disclose details on pricing and fees and similar commercial terms.
Given the certain funds requirements, the financing may only contain limited conditions precedent. The Swiss takeover board has issued guidelines in this respect (it should be noted that supervisory authorities and courts are not bound by such guidelines, but the guidelines are still generally considered an important indication) and, according to these, the following conditions are generally acceptable:
- conditions that match the conditions contained in the offer;
- material legal conditions relating to the bidder, such as status, power, authority, change of control;
- conditions relating to the validity of finance documents, in particular security documents and the creation of security thereunder;
- conditions relating to material breaches of agreements by the bidder, such as pari passu, negative pledge, no merger, non-payment; and
- material adverse changes in relation to the bidder.
Generally, however, market and target material adverse change clauses are not permitted.
iii Consequences on financing and further considerations
Potential financing structures
Given the required structure of a public tender offer, the financing must be available and committed even though it is not absolutely certain that the bidder would ever gain 100 per cent control over the target. This situation is quite challenging from a financing perspective. This challenge could be approached in two ways:
- one approach could be to simply apply a more conservative overall leverage; however, this might affect the overall economics of the transaction considerably, and will ultimately influence the bid price and the chances of the tender offer of being successful; or
- alternatively, two different financing structures could be prepared.
The difficulty in preparing two financing structures is that parties would only know the exact structure upon the lapse of the additional acceptance period; hence, it might be challenging for the arrangers and book-runners, as there will only be a limited amount of time available between the lapse of the additional acceptance period and the close of the transaction for purposes of marketing the financing transaction.
If the bidder holds at least 90 per cent of the Swiss target's shares, the period from the first drawdown to the point where the bidder controls 100 per cent will still take a couple of months. In the squeeze-out merger scenario, it is prudent to wait until the best price rule has lapsed before entering into the merger agreement, as this would eliminate the risk of a successful appraisal action having retroactive effect on the offer price in the public tender offer (violation of the best price rule). Accordingly, it can be expected that the merger will be completed within eight to 10 months after the lapse of the additional offer period, but it is prudent to add an additional two months as a minority shareholder could potentially delay the process.
While minority shareholders are in the structure, access to target-level cash flows is limited because it is difficult to structure upstream loans to a majority shareholder in a manner compliant with the principle of 'equal treatment of shareholders', and any leakage of dividends to minority shareholders should be avoided (this is true for two reasons: first, any leakage to minority shareholders would result in the bidder incurring a cash drain; and second, if the market ever found out that there were a chance for dividends to be paid ad interim (and any person involved in the structuring of the financing knew about this), this would be a bad sign for the success of the tender offer). Therefore, the transaction will require some overfunding to ensure a proper debt servicing during the post-closing period, when target-level cash flows are not available.
Furthermore, target-level security is not available in the interim period, because that would again raise questions under the principle of 'equal treatment of shareholders'.
In addition, while the Swiss target company is still publicly listed, it is subject to ad hoc publicity obligations and, accordingly, information may only be provided to all investors at the same time, and any prior information for selected investors might raise concerns. Availability of information to majority shareholders and banks might also be limited owing to the concept of equal treatment of shareholders.
As demonstrated, the squeeze-out options are limited and essentially only available if the bidder controls 90 per cent or more in the Swiss target company. However, a delisting of the Swiss target company would already be feasible in a scenario where the majority shareholder controls less than 90 per cent. SIX Swiss Exchange's delisting directive was recently amended, and the period between announcement of the delisting and the last trading day will be set by SIX Swiss Exchange between three and 12 months. However, this period may be shortened if delisting occurs following a takeover process.
The most important change of law currently under discussion that would affect lending in Switzerland generally (and in particular leveraged acquisition finance transactions) relates to Swiss withholding tax. Switzerland is about to consider fundamental changes to its withholding tax system. Draft legislation was already published by the Swiss Federal Council on 24 August 2011. It was expected that the new regime would enter into force during the course of 2015 or 2016. However, in view of the negative outcome of the consultation on the draft legislation in the course of 2014 and 2015, the Swiss Federal Counsel decided on 24 June 2015 to postpone a complete overhaul of the Swiss withholding tax regime, as originally planned. The draft legislation suggested that the current deduction of 35 per cent by the issuer of bonds on interest payments at source would be substituted for a respective deduction by Swiss paying agents (subject, in principle, to an exception for foreign investors). This change should have, among other things, discouraged foreign bond and facilities issuances by Swiss groups and was thus supposed to strengthen the Swiss capital market. It now remains to be seen when and, if so, in what form the withholding tax reform will be relaunched. The paying agent principle should be discussed again before the planned exemptions for CoCo bonds, write-off and bail-in bonds expire.
Given the increased level of scrutiny from tax authorities, the pricing of intercompany guarantees (and other security) is likely to become one of the most contentious issues in transfer pricing. Tax authorities on their part will be concerned that corporate guarantee or security fees adequately reflect the heightened business failure and default. Taxpayers will in turn face the arduous challenge of determining what constitutes an arm's-length guarantee or security fee at the time when rules of thumb and quick answers have become less reliable. Given the sums typically involved and the complexity of the issues faced, it will be important to consider multiple approaches in pricing intercompany guarantees and other securities.
1 Lukas Wyss and Maurus Winzap are partners at Walder Wyss Ltd. The information in this chapter was accurate as at November 2018. The information in this chapter was accurate as at November 2019.
2 The Swiss Non-Bank Rules comprise two rules: the Swiss 10 Non-Bank Rule and the Swiss 20 Non-Bank Rule. The Swiss 10 Non-Bank Rule defines, inter alia, the circumstances in which a borrowing by a Swiss borrower or issuer will qualify as 'collective fundraising' (similar to a bond). If the borrowing qualifies as collective fundraising, interest payments on the borrowing will be subject to Swiss withholding tax at 35 per cent.
Under these Rules, withholding tax will be triggered when either a lending syndicate consists of more than 10 non-bank lenders (Swiss 10 Non-Bank Rule) or a Swiss obligor has, on aggregate (that is, not in relation to a specific transaction only), more than 20 non-bank creditors (Swiss 20 Non-Bank Rule).
For the purposes of the Swiss Non-Bank Rules, a financial institution qualifies as a bank (whether the financial institution is Swiss or non-Swiss) if it is licensed as a bank and it performs genuine banking activities with infrastructure and own personnel.
A breach of the Swiss Non-Bank Rules may result in the application of Swiss withholding taxes. Such taxes would have to be withheld by the Swiss obligor and may (depending on any applicable double taxation treaty) be recoverable in full or partially by a lender.
3 Hague Convention of 15 November 1965 on service of judicial or extrajudicial documents abroad in civil and commercial matters.