The Mergers & Acquisitions Review: Switzerland
Overview of M&A activity
After the sharp drop in M&A activity in the second quarter of 2020 as a result of the covid-19 pandemic, the markets turned back to life astonishingly quickly in the second half of 2020. In fact, the backlog of transactions that were halted, put on hold or postponed during the crisis led to a record-level of deal activity. During the first six months of 2021, 256 transactions with a Swiss party involvement were announced, the second highest number ever, beaten only by the first six months of 2018, which also means an increase of 70 per cent compared to the first half of 2020. In terms of transaction volume, the overall value of announced deals amounted to US$61.3 billion, more than double the transaction volume of the first half of 2020 of US$23.8 billion, bringing the year-to-date value close to the figure for the entire year 2020. It is expected that the high deal activity and the distinctively seller-friendly market conditions will continue under the prevailing macroeconomic circumstances under which both strategic and financial investors are eager to find suitable investment opportunities.
General introduction to the legal framework for M&A
The statutory corporate law set out in the Swiss Code of Obligations (CO) is the main source of law for private M&A transactions. The CO provides the legal framework for both share deals as well as asset deals and applies to private and public companies. Statutory mergers, demergers, conversions and transfers of assets and liabilities are governed by the Federal Act on Merger, Demerger, Transformation and Transfer of Assets (Merger Act).
The rules governing public takeover or exchange offers in Switzerland are contained in the Financial Market Infrastructure Act (FMIA) and its specifying ordinances – the Financial Market Infrastructure Ordinance (FMIO), the FINMA Financial Market Infrastructure Ordinance (FMIO-FINMA) and the Takeover Ordinance of the Swiss Takeover Board (TOO). The FMIA and the implementing ordinances apply to all public takeover or exchange offers for participations in companies domiciled in Switzerland whose equity securities are listed in whole or in part on a stock exchange in Switzerland and all public takeover or exchange offers for participations in companies domiciled abroad whose equity securities are primarily listed in whole or in part on a stock exchange in Switzerland. Companies listed on the SIX Swiss Exchange (SIX) are also bound by the Listing Rules, the Directive on Ad-hoc Publicity, the Directive on Management Transactions and the Directive on Delisting, among others, which are issued by SIX.
It should be pointed out that under Swiss takeover law, a shareholder is required to make a mandatory offer if that shareholder (alone or in concert with others) directly or indirectly exceeds 33⅓ per cent of the voting rights in a listed company. However, an issuer may adopt a higher threshold of up to 49 per cent (opting-up) or may opt-out from the tender duty regime entirely by including a respective clause in its articles of association. Approximately one quarter of all SIX-listed issuers have adopted such a full opting-out.
In a mandatory offer as well as in a voluntary change-of-control offer, the offer consideration must comply with the 'minimum price rule'. Under the minimum price rule, the offer price must at least be equal to the market price (defined as the 60-day volume weighted average price, VWAP (60-day)) or, if higher, the highest price paid by the bidder (or any affiliate or person acting in concert) in the 12 months preceding the tender offer. The minimum price rule does not apply if the target company has validly introduced an opting-out and therefore is not subject to the mandatory offer rules. Besides the minimum price rule, any public tender offer must comply with the best price rule. Under the best price rule, a bidder has to increase the offer price if, during the tender offer period or within six months after completion of the tender offer, the bidder (or any affiliate or person acting in concert) acquires shares in the target at a price exceeding the offer price.
In addition to the above-mentioned laws, depending on the business and transaction set-up, various other laws and rules regularly play an important role in Swiss M&A, such as the Federal Act on the Acquisition of Real Estate by Persons Abroad (FL, better known as Lex Koller; see Section IV for further information on the Lex Koller), the Federal Act on Cartels and other Restraints of Competition (CartA) and industry-specific laws and regulations (e.g., the Aviation Act or the Telecommunication Act).
Developments in corporate and takeover law and their impact
Various general reforms relating to corporate law that will have an impact on M&A practice have recently come into force or been passed. For example, the revised Commercial Register Ordinance entered into force on 1 January 2021. Under the new law, the instrument of the 'blockage of the commercial register' is no longer available. The blockage of the commercial register was a simple and highly effective way to temporarily prevent entries into the commercial register, in particular in connection with resolutions requiring rapid entry or implementation, which are often required in connection with M&A transactions. The instrument of blockage of the commercial register has therefore been repeatedly criticised because of its considerable abuse potential. Under the new law, it will still be possible to provisionally prevent an entry in the commercial register – in cases of high urgency even without hearing the company concerned – by way of a court injunction. However, in contrast to the old law, the applicant is now required to justify its request before the court, which makes it more difficult to prevent commercial register entries for purely querulous reasons. In addition, in the event of a possibly threatened injunction, the company has the option of filing a protective brief with the competent court.
On 19 June 2020, the Swiss Parliament finally adopted the text of a general corporate law reform, thereby ending a process that had started almost two decades ago. The two following amendments of the CO have already entered into force on 1 January 2021:
- a target gender quota of 30 per cent for the board of directors and 20 per cent for the executive management of publicly listed companies exceeding certain thresholds on a 'comply or explain' basis – companies have time until 1 January 2026 to implement the quota in the board and until 1 January 2031 to implement the quota in the executive management; and
- the requirement for major companies in the natural resources industry to disclose payments to public authorities by means of an annual report.
Other main aspects of this CO reform include numerous changes to 'traditional' corporate law that are yet to come into force, such as:
- the incorporation of the mostly unchanged rules of the Ordinance against Excessive Compensation in Public Companies (Minder Ordinance) into the CO. The Minder Ordinance contains, among other things, provisions governing the compensation of the board of directors and the executive board or the composition of the board of directors of listed companies;
- increased flexibility with regard to share capital, which can now be denominated in a foreign currency – shares can have a par value below one cent;
- the introduction of a 'capital band' to give companies more flexibility to increase and reduce their share capital within this capital band;
- clarification regarding requirements for distributions out of capital reserves and interim dividends;
- abolishment of the rules regarding the intended acquisition in kind in connection with an incorporation or a capital increase; and
- the enhancement of shareholders' rights in terms of better corporate governance.
The reform provides for a welcome modernisation and clean-up of Swiss corporate law in many areas, which, thus, is expected to have a positive impact on the Swiss M&A practice. Certain other new provisions reflect overall social changes (gender equality, transparency for companies exploiting natural resources) and can also be observed across other jurisdictions. From the viewpoint of companies, shareholders and in particular M&A practitioners, the increased flexibility regarding share capital, the facilitation of distributions, the utilisation of digitalisation and the strengthening of shareholders' rights are largely welcomed. Further positive steps are that certain restrictions with questionable benefits, such as special rules for acquisitions of assets in connection with capital increases or incorporations and the ban on interim dividends, have been abolished. For public companies, the means available to shareholders to exercise influence on the shareholders' meeting have been expanded (e.g., by reducing the thresholds for shareholder proposals). Whether the general fine-tuning in connection with shareholders' and minority rights (e.g., largely increased information rights) will in practice turn out to be in the right balance remains to be seen. In summary, it can be expected that the CO reform as a whole will have a positive impact on Swiss M&A practice.
Foreign involvement in M&A transactions
In Switzerland there are currently no generally applicable rules that prohibit or require screening of foreign investments because of national interest, as have been enacted in various other jurisdictions. As a result, foreign investments are at present generally not hampered by significant barriers, nor by substantial discriminatory effects on foreign investments. That said, foreign investments in companies operating in certain regulated industries and sectors, such as banking services, telecommunication, nuclear energy, radio and TV or aviation, will require governmental approval or state-licensing. While in principle no distinctions are made between foreign and domestic applicants, the granting of certain state licences to foreign investors may among other things depend on whether reciprocal rights are granted in the country of the respective investor. Moreover, certain local permissions and authorisations are regulated on cantonal (state) level and need to be assessed on a case-by-case level as to whether such permissions or authorisations might depend on the nationality or foreign residence or domicile of the applicant.
A relevant restriction applicable to foreign investments is the 'Lex Koller'. It provides for a general authorisation requirement if a non-Swiss individual or company intends to acquire real estate in Switzerland. However, this obligation does not apply, which is decisive for M&A transactions, if the real estate serves as a permanent establishment of a commercial, manufacturing or other business conducted in a commercial manner, or the conduct of a handcraft business or a liberal profession. Hence, if a foreign investor is interested in acquiring a company that owns real estate in Switzerland, it must always be assessed whether the real estate in question qualifies as such an exempted permanent establishment. Should this be the case, the acquisition is possible without approval.
Recent developments suggest that Switzerland might divert from this liberal path and follow other jurisdiction towards a foreign investment control regime. Led by the Swiss Parliament, the Federal Council has recently published its cornerstones for a foreign investment control law. Based on the published cornerstones, the scope of mandatory government approval of foreign investments would be extensively broadened. 'Foreign companies' as investors, regardless of their size and their state-affiliation, and any Swiss 'domestic company' as target, irrespective of its size, may potentially become subject to the new rules, while it remains to be clarified how a Swiss subsidiary of a foreign company is to be captured under this regime. Although many of the specifics remain unclear at this time, such as sector and ownership-specific notification and approval processes, the cornerstones communicated by the Federal Council would, if they enter into force, pose new challenges and add complexity to cross-border transactions involving Swiss targets. The transaction parties would have to examine at an early stage of the transaction process the necessity of a foreign investment notification and, if applicable, prepare such notification. The full draft bill for consultation is announced for late March 2022. It is currently unclear if and when the new law will be adopted and enter into force.
Significant transactions, key trends and hot industries
As in the previous year, the TMT sector (technology, media and telecommunications) had great momentum in Switzerland in 2020 and 2021, with around one-fifth of all transactions as well as one-fifth of the transaction volume being attributable to this sector in the first half of 2021. With regard to transaction volume, however, almost 90 per cent result from only two transactions, namely the acquisition of GlobalLogic Inc by Hitachi Ltd for US$9.6 billion and the acquisition of UNIT4 NV by TA Associates Management LP and Partners Group Holding AG for US$2 billion. One-fifth of the deals in the first half of 2021 took place in the industrial sector, albeit with lower volumes than in the TMT sector. Also, the pharmaceutical and the biopharmaceutical sectors saw brisk M&A activity. To name two noteworthy transactions, Roivant Sciences, a Swiss based biopharmaceutical company, merged with Montes Archimedes Acquisition Corp (MAAC), a NASDAQ-listed special purpose acquisition company (SPAC) sponsored by Patient Square Capital, in a reverse takeover that was valued at US$7.3 billion, and Bain Capital and Cinven acquired the Lonza Specialty Ingredients, a division of Lonza AG, for a total enterprise value of 4.2 billion Swiss francs.
As regards the boom of SPAC initial public offerings (IPOs), Switzerland is lagging behind other European markets and certainly the United States. While other European stock exchanges like the Frankfurter Wertpapierbörse, Euronext in Paris and Amsterdam and the London Stock Exchange offer the possibility to list a SPAC, there has not yet been a single SPAC listing in Switzerland. The SIX Swiss Exchange was ready to list the first SPAC and Swiss corporate law allows for the implementation of many of the typical SPAC features. However, the Swiss regulatory authority FINMA requested in March 2021 that SIX prepares and issues separate rules for SPACs, which SIX has in the meantime prepared. That said, in practice, US SPACs have already been quite frequently considered as an alternative to a classical IPO by Swiss companies that intend to go public.
In line with the going-private trend of previous years, there were more delistings than new listings on SIX in 2020. There were six delistings (four of which were foreign companies), no IPOs and two new listings of spin-offs (V-Zug Holding AG and Ina Invest Holding AG). However, a trend reversal may be on the horizon for 2021. To date, two IPOs (PolyPeptide Group AG and Montana Aerospace AG) and one new listing of the spin-off medmix AG have been completed and further IPOs or new listings have been announced.
Financing of M&A: main sources and developments
As in other jurisdictions, acquisitions in Switzerland are financed either by equity (or hybrid equity in the form of deeply subordinated shareholder loans) or by debt or, frequently, by a combination of equity and debt.
The structure of a debt package will typically vary as a function of, among other things, the required leverage.
Where low leverage is sufficient, the debt package will often consist of senior debt only. Such senior debt usually takes the form of a term loan. If, in addition to the acquisition loan, there is a need to refinance existing target debt or if there are working capital needs, the senior lenders will often also provide a working capital facility.
Where a higher leverage is sought, the senior debt may be increased by creating first lien and second lien senior debt, and junior debt is added on certain transactions. Such junior debt can consist of one or several layers (e.g., mezzanine debt and high-yield debt) and it may provide for an in-kind payment component, in addition to or in lieu of cash interest.
Where shares of the target company are acquired, the agreements between the target and its employees are not affected. This may be different if the employment agreements of the target and acquiring companies provide otherwise. However, this would not be customary in Switzerland.
Where the (business) assets are purchased, Swiss law provides that the employment agreements will pass automatically as a result of the transfer of the business to the purchaser, provided that the employee does not object to the transfer. If a collective bargaining agreement exists in the transferred business, the acquirer is bound to accept it for at least one year, unless it expires for other reasons prior to that date.
The employee may object to the transfer. Accordingly, the purchaser who needs a particular employee is best advised to obtain the employee's consent prior to or simultaneously with the agreement to purchase the business.
If the employee objects to the transfer, the employment is deemed to be terminated on the expiry of the statutory termination period. Until such time, the purchaser and the employee are required to carry out the terms of the employment agreement.
Prior to the transfer of the business, the employee representatives, or all employees if there are no appointed representatives, are to be informed of the transfer, its reasons and its legal, economic and social consequences. If the transfer involves measures that concern the employees, the employees' representatives must be consulted prior to the decision on such measures.
i Asset deals
Asset deals tend to be more favourable for buyers, as a step-up in basis is allowed. By contrast, share deals are beneficial for sellers, in particular for individual sellers, as individuals are not subject to tax on gains arising from private assets, but are subject to income tax on dividends.
Asset deals permit the company to record part of the purchase price as goodwill. Payment in excess of the assets' market value is recorded as goodwill; goodwill can be depreciated.
ii Share deals
Taxation of the seller
From the perspective of corporate sellers, capital gains realised by Swiss-resident companies may benefit from participation relief if the participation fulfils the required conditions (i.e., participation of 10 per cent or more and a holding period of at least one year).
Share deals are particularly beneficial for individual sellers, as Swiss-resident individuals are not subject to capital gains tax on gains arising from private assets, but are subject to income tax on dividends.
However, for individuals resident in Switzerland, special attention must be paid to the rules concerning indirect partial liquidation and transposition during share deals involving sales by individuals resident in Switzerland, as tax-free capital gains can be retroactively reclassified as taxable participation income.
The criteria for indirect partial liquidation are:
- the sale of at least 20 per cent of the share capital in a Swiss or foreign company to a third party;
- the shares are transferred from the seller's private assets to a company or to the acquirer's business assets (in the case of acquisition by an individual);
- the target company has commercially distributable reserves at the moment of the transfer and assets beyond those required to run the business; and
- these assets are distributed to the acquirer during the five years following the acquisition.
Generally, indirect partial liquidation can be avoided by adding a clause to the share purchase agreement that prevents distributions during the five years following the transfer.
Taxation of the purchaser
From the purchaser's perspective, acquisitions can be carried out using a local or foreign entity. An acquisition in and of itself does not trigger withholding tax.
When the purchaser is a Swiss company, the purchase price is recorded in the books of account at the share value. This value cannot be decreased (unless the market value decreases).
Further, in the case of a leveraged acquisition, the absence of consolidated taxation for company groups means that interest on the acquiring company's debt cannot be deducted by the target company if the latter does not have operating income. Additionally, the Swiss tax authorities may treat debt push-down strategies in a leveraged acquisition as tax avoidance. Withholding tax also must be considered when structuring a leveraged acquisition with a Swiss borrower, as withholding tax is levied on bonds and certain non-bank loans requalified as bonds under the 10/20 non-bank rule.
When using a foreign parent company to hold a Swiss company, investors should ensure that the foreign parent company is located in a jurisdiction that has a Double Taxation Treaty (DTT) with Switzerland to reduce or eliminate withholding tax on dividend distributions. Otherwise, it is advisable to use an intermediary holding company located in a jurisdiction that has a DTT with Switzerland, provided it complies with the criteria for treaty exemption.
In international situations, investors should also be aware of the 'Old Reserves Theory'. Under this theory, if a foreign shareholder transfers shares in a Swiss company to a shareholder located in a jurisdiction with a more favourable DTT, withholding tax may continue to be levied on distributable reserves at the same rate applicable to a tax resident of the first jurisdiction if at the time of the transfer the company had commercially distributable reserves and assets not economically required.
Attention must also be paid to 'liquidation by proxy' in the event of an acquisition in which a Swiss entity acquires a Swiss target entity that was previously held by non-Swiss resident shareholders who were ineligible for a withholding tax refund with respect to dividends paid by the Swiss target entity. In accordance with the Swiss anti-avoidance rules, were that entity to be partially or totally liquidated shortly after the sale, it is possible that the Swiss acquiring company would be ineligible for a withholding tax refund.
i Scope of legislation
Transactions that are subject to merger control are:
- statutory mergers of previously independent enterprises;
- acquisition of control over a previously independent enterprise or parts thereof, including through the acquisition of equity interests or the conclusion of agreements – acquisitions of minority shareholdings are not subject to merger control, except for any contractual arrangements or factual circumstances conferring factual control on the minority shareholder; and
- acquisition of joint control over an enterprise (joint venture).
There are three different types of joint ventures caught by merger control:
- acquisition of joint control over an existing enterprise;
- acquisition of joint control over an existing joint venture if the joint venture performs all the functions of an autonomous economic entity on a lasting basis; and
- creation of a new joint venture if the joint venture performs all the functions of an autonomous economic entity on a lasting basis and if the business activities from at least one of the controlling enterprises are transferred to the joint venture.
The Competition Law defines control as the ability to exercise a decisive influence on the activity of another enterprise by acquiring its shares, or in any other manner. In particular, this ability is deemed to exist if an enterprise is in a position to determine the production, prices, investments, supply, sales or distribution of the profits of the other enterprise. Control is also assumed if major aspects of a company's business activity or its general business policy may be decisively influenced. Whether control is actual or potential, direct or indirect, de jure or de facto is irrelevant.
ii Thresholds, triggers and approvals
The test applied to mergers is based on turnover. Two turnover thresholds must be reached cumulatively: for the last business year prior to the merger, the enterprises concerned must have reported an aggregate turnover of at least 2 billion Swiss francs worldwide or an aggregate turnover in Switzerland of at least 500 million Swiss francs, and at least two of the enterprises involved in the transaction must have reported individual turnovers in Switzerland of at least 100 million Swiss francs. These monetary amounts are relatively high compared to other jurisdictions. Turnover is calculated on a consolidated basis but excluding intra-group business.
In the case of insurance companies, the gross annual insurance premiums are taken into account for the purpose of determining the relevant thresholds.
The turnover calculation for banks and financial intermediaries is based on gross income.
M&A activity has been very strong aside from a relatively brief slowdown in the second quarter of 2020 caused by the covid-19 pandemic. Many deals were not actually cancelled, but rather were postponed during the first shutdown and eventually executed later in 2020 or in the first semester of 2021.
The general market fundamentals remain favourable, financial institutions are willing to finance transactions with low interest rates, and private equity houses sit on considerable dry powder. These are the ingredients for a robust M&A activity also in the next few months, but buyers should also be cautious not to pay too much in a very competitive environment for scarce attractive targets.
1 Andreas Rötheli and Hans-Jakob Diem are partners at Lenz & Staehelin.