The Private Equity Review: Switzerland
i Deal activity
Private equity (PE) transactions in the Swiss market comprise the full spectrum in terms of structures and strategies, including on the investment side, venture capital, growth capital, replacement capital and buyouts (in the form of acquisition of controlling or minority equity interests, club deals or joint ventures with strategic buyers), and on the divestment side, trade sales, secondary sales and initial public offerings (IPOs).
Over recent years, private equity (PE) activity in Switzerland continued to be strong, driven by low or negative interest rates, affordable acquisition financing, intense fundraising by PE funds resulting in a high amount of dry powder and the attractiveness of the Swiss innovation sector with a dynamic venture capital ecosystem.2 In 2020, private equity investments in Swiss startup portfolio companies slightly declined relative to previous years but overall remained high, at around 2.1 billion Swiss francs (compared to approximately 2.2 billion Swiss francs in 2019).3 Technology, media and telecommunications (TMT), pharma, biotech and healthcare are among the key industries for PE investments in Switzerland, with buy-and-build strategies being increasingly pursued. The Swiss market is also characterised by its international dimension, with foreign PE funds being involved in the majority of the transactions, especially in the small and mid-cap market.4
Because of the covid-19 pandemic, deal flows in Switzerland declined in the first half of 2020, down by approximately 25 per cent compared to the first half of 2019, with a number of transactions having being postponed or suspended. However, market studies show that PE investments remained an essential driver of M&A activity, especially in relation to Swiss small and medium enterprises (SMEs).5 During the first half of 2020, PE firms continued to be active as financial investors acting as buyers or sellers were involved in around 40 per cent of the deals.6
In recent years, Switzerland was considered a seller's market for PE transactions with significantly more investments than divestments, high valuations and more seller-friendly terms. It remains to be seen whether this trend will continue amid the global covid-19 pandemic and related uncertainties (especially in terms of access to acquisition financing). Some expect to see an increase in distressed and restructuring transactions (including carve-outs), while others are confident that PE activity in Switzerland will remain steady as the economic environment may generate investment opportunities with lower company valuations and numerous SMEs have to plan for succession.
Recent notable PE deals include the following:
- the sale of Nestlé Skin Health by Nestlé SA to a consortium led by EQT Partners and Abu Dhabi Investment Authority (2019; US$10.2 billion);
- the sale of gategroup Holding AG by HNA Group Co, Ltd to RRJ Capital (2019; US$2.8 billion);
- the sale of Parex Group SA by CVC Capital Partners to Sika AG (2019; over US$2.5 billion);
- the sale of Tertianum Group by Swiss Prime Site to Swiss PE firm Capvis (2019; amount undisclosed);
- the US$484 million series E financing round in GetYourGuide AG led by SoftBank Vision Fund (2019);
- the US$110 million series F financing round in Sophia Genetics SA led by health-tech and life sciences venture fund aMoon and Hitachi Ventures (2020);
- the US$110 million equity investment in Climeworks AG (2020);
- the acquisition of Swissbit Holding AG by its management and PE firm Ardian (2020; amount undisclosed); and
- the sale of NBE-Therapeutics AG by PPF Group to Boehringer Ingelheim (2020; €1.18 billion).
Exits of PE investments in Swiss portfolio companies by way of trade sales or secondary sales are by far the most common routes. While exits by way of an IPO (on Swiss stock exchanges such as SIX or a foreign stock exchange) are less common, recent examples include the IPOs of ADC Therapeutics SA (NYSE; 2020), SoftwareONE Holding AG (SIX; 2019), Medacta Group SA (SIX; 2019) and Achiko AG (SIX; 2019).
ii Operation of the market
In a seller's market, an increasing number of buyout transactions are structured as bid processes, where several bidders are invited to conduct a limited due diligence and submit indicative offers along with preliminary comments on the contractual documentation prepared by the sellers' advisers and negotiations ensue with the preferred bidders selected not only in consideration of the price offered, but also on the basis of other factors including the proposed legal terms (such as conditions precedent, scope of the expected representations and warranties and related indemnification regime), the ability to complete the transaction without having to arrange acquisition debt financing or the attractiveness of compensation packages for the management (e.g., equity incentive schemes). In this competitive environment, we observe a trend, at least in small and middle market transactions, towards buyers conducting more and more limited due diligence investigations, sometimes replaced by questionnaires to be filled in by the sellers, to reduce the transactions costs and speed up the deal process.
In line with industry standards (although Switzerland may appear as a high-priced market), prices in buyout transactions are commonly determined using multiples applied to financial results (such as EBIT or EBITDA) with adjustments based on net debt and working capital. Locked-box mechanisms are used in an increasing number of deals. Earn-out structures are also fairly common, especially where the seller or founder remains active within the target company post-closing, although such structures may give rise to tax pitfalls in certain situations.
The contractual documentation used in buyout or investment transactions involving a Swiss target company (non-disclosure agreement, letter of intent, term sheet, process letter, share purchase agreement, investment agreement, shareholders' agreement, financing and security agreements in leverage buyouts, etc.) is fairly standardised and contains customary terms and conditions, including a set of representations and warranties to be given by the seller in the share purchase agreement or by the existing shareholders or founders in the investment agreement. However, in a seller-friendly environment, sellers may have traction to negotiate lighter representations, warranties and indemnities, reduced liability cap and higher deductible amounts, and more favourable escrow arrangements. Of note, representations and warranties are usually not given by the Swiss target company (even in investment agreements) because enforcement may raise issues from a corporate and tax perspective. Further, reverse break fees and no-shop/go-shop arrangements are more and more common.
The Swiss market has also seen the continuing development of warranty and indemnity (W&I) insurances covering transaction-related risks such as representations and warranties and specific indemnities given by the seller, although the use of such insurances in Swiss deals is not (yet) as customary as in other jurisdictions. In Switzerland as in most other markets, the vast majority of W&I insurances are purchased by the buyer (with the insurance being often introduced, 'stapled', by the sell-side and then 'flipped' over to the buy-side) with no or very limited recourse against the seller, thereby facilitating a clean exit for the seller. By using W&I insurances, PE firms may make their bids more attractive in competitive auction processes when investing, and limit their post-closing liability exposure when divesting.
The time required to evaluate, structure, negotiate and complete a buyout transaction can vary considerably depending on a number of factors. The process can take several months where the buyer needs to arrange acquisition debt financing or where the seller or the buyer needs to secure a pre-closing tax ruling, obtain regulatory approvals or fulfil other conditions precedent.
Going-private transactions led by PE sponsors over companies listed in Switzerland are relatively rare compared to other jurisdictions (such transactions being generally carried out by strategic existing shareholders or buyers), while the Swiss market has seen in recent years a number of public investment in private equity (PIPE) transactions involving PE funds. A going-private transaction is usually structured as a public tender offer pursuant to the Financial Market Infrastructure Act (FMIA) and its implementing ordinances, followed by the delisting of the target's shares and the squeeze-out of the remaining minority shareholders. A going-private transaction can also be effected by way of a merger pursuant to the Merger Act, although such a structure is less common in practice.
Upon successful completion of the public tender offer, the bidder will seek to squeeze out the remaining minority shareholders. In broad terms, two alternative routes are available:
- if the bidder holds more than 98 per cent of the voting rights in the target company after completion of the tender offer, it may apply, under the FMIA, for a court decision cancelling the remaining equity securities issued by the target company in exchange for the payment to the remaining minority shareholders of a cash compensation per share equal to the offer price; and
- if the bidder holds less than 98 per cent but at least 90 per cent of the voting rights in the target company, it may implement a squeeze-out merger pursuant to the Merger Act, whereby the target company would be merged into the bidder or an affiliate of the bidder and the remaining minority shareholders would receive a cash compensation (in general equal to, but not higher than, the amount of the price of the tender offer) in exchange for their shares in the target company.
In practice, the squeeze-out pursuant to the FMIA is the preferred route because courts in principle have no power to reconsider the amount of the cash compensation to be received by the minority shareholders. In contrast, in a squeeze-out merger, the minority shareholders have appraisals rights and may challenge by way of a legal action the amount of the (cash) compensation on the grounds that it is not adequate having regard to the value of their shares, even if such compensation is equal to the offer price. In addition, the tax treatment of the compensation is generally more favourable for the minority shareholders in a squeeze-out under the FMIA.
In parallel to the squeeze-out process, the target company will apply for the delisting of the shares in accordance with the rules of the relevant stock exchange (such as SIX or BX Swiss). Under the current law, the competent corporate body for resolving upon the delisting is the board of directors of the target company, but the authority to decide the delisting will be granted to the general meeting of the shareholders under the new statutory provisions of Swiss company law that are yet to enter into force (see Section IV). Pursuant to the rules of SIX, the listing must be maintained for a certain period of time (in principle at least three months but maximum 12 months depending, inter alia, on the remaining free float, with the possibility to reduce the listing period down to five trading days in certain cases; for instance, if the squeeze-out has already been completed or if the delisting was announced as part of the public tender offer), while the target company may apply for exemptions from certain obligations (such as ad-hoc or other reporting duties) during the continued listing period.
The timing for carrying out a going-private transaction by way of a public tender offer will depend, among other factors, on the pre-offer negotiation with the target company and anchor shareholders, the need for the bidder to secure funds to finance the offer and the time required to establish the fairness opinion. The process may take 9 to 12 months from start to finish, including completion of the squeeze-out and delisting.
Management equity incentive schemes
PE firms investing in Switzerland are generally keen to implement equity incentive schemes for the management of the portfolio company with a view to aligning the managers' interests with those of the PE investors.
In owner buyouts transactions (OBO), PE investors may allow (or sometimes require) the owners managing the target company to reinvest a portion of the sale proceeds by acquiring a minority equity stake in the special purpose vehicle (SPV) set up to complete the buyout, either by way of a share capital increase or by purchasing shares held by the PE investors, and by granting (subordinated) shareholders' loans to the SPV pari passu and pro rata with the PE investors.
At the level of the portfolio company, standard management equity incentive schemes include the following:
- stock option plan, whereby the managers are granted for free the option to acquire equity in the portfolio company at a preferred strike price during a certain exercise period; and
- stock plan, whereby the managers are granted, for free or on preferred terms, straight equity subject to blocking periods or restricted stock units (RSUs), sometimes in combination with performance stock units (PSUs).
The underlying instruments can be ordinary shares with voting rights, or equity securities with the same economic rights as ordinary shares but without voting rights.
Typically, equity incentive schemes contain vesting conditions, forfeiture provisions, repurchase rights in favour of the portfolio company or the PE investors in good or bad leaver situations, and acceleration mechanisms in the event of an exit. Further, the managers are usually required to enter into shareholders' agreements or similar contractual arrangements, providing for customary drag-along right, call options and right of first refusal in favour of the PE investors.
Tax considerations are key when it comes to structuring and implementing equity incentive schemes. As a rule, where the benefits under the plans are linked to the managers being employed or otherwise at the service of the portfolio company and the managers can acquire equity on preferred terms (sweet equity), Swiss tax authorities consider that the shares or other equity instruments are subject to taxation (and social security contributions) (1) upon exercise of the options under a stock option plan and (2) at grant under a stock plan. The taxable amount is calculated as the difference between the fair market value and the price, if any, at which the shares or other equity instruments are acquired by the managers. However, managers who are tax-resident in Switzerland will generally realise a tax-free capital gain upon the subsequent sale of their equity participations, typically in the event of an exit. In practice, the tax treatment of equity incentive schemes should be determined by way of a tax ruling, in particular by defining a suitable formula to establish the value of the portfolio company's shares during the lifetime of the investment.
For tax reasons, phantom or other virtual stock plans with cash settlement are less attractive for the management, hence less common, in Switzerland because under such plans, the managers realise a mere taxable income and are not in a position to realise a tax-free capital gain in case of an exit.
ii Legal framework
i Acquisition of control and minority interests
Generally speaking, Switzerland is an attractive jurisdiction for PE investments thanks to its liberal and flexible legal framework. In particular, the acquisition of controlling interests in Swiss target companies is not subject to foreign investment restrictions. However, specific regulations may apply where the target company is a financial institution or carries on business in the telecommunication or residential real estate sectors. Further, PE transactions whereby control over the target company is acquired may be subject to merger clearance by the Swiss competition commission if the thresholds set by Swiss anti-trust law are reached.7
PE investors will generally control the target company when acquiring a majority equity interest (i.e., typically shares representing more than 50 per cent of the voting rights of the target company). However, Swiss company law provides for certain rights aiming at protecting the minority shareholders, including, for example:
- the right to request that a shareholders' general meeting be convened or items be put on the agenda provided that the requesting shareholders hold at least a certain percentage of the company's share capital; or
- the right to subscribe for new issued shares pro rata their participation, although such right can be withdrawn or limited for valid reasons by a shareholders' resolutions requiring a qualified majority; or
- the principle of equal treatment that the board of directors must comply with, unless for valid reasons.
In addition, certain resolutions of the shareholders' general meeting require a qualified majority of two-thirds of the votes and the absolute majority of the capital represented at the meeting. In contrast, minority shareholders have, as a rule, no statutory obligations with regard to the majority shareholders. Contractual duties may be imposed on the minority shareholders in shareholders' agreements, such as, for example, co-selling obligations (drag-along), share transfer restrictions (e.g., lock-up), obligation to sell their shares upon occurrence of specific events (call options), or undertaking to waive their preferred subscription right in certain circumstances.
In the case of a minority interest acquisition, especially in venture capital transactions, specific rights may be granted to PE investors, including veto rights or supermajority requirements concerning significant shareholder and board matters, right to appoint board representatives, economic preference rights (e.g., in terms of dividend, liquidation proceeds or exit proceeds), co-selling rights (tag-along), right of first refusal, anti-dilution rights (e.g., in the event of a future down round) and information rights. These rights are usually contractual in nature and provided for in the shareholders' agreement. They may be mirrored in the target company's articles of association but only to the extent permitted by Swiss law, meaning in effect that a full replication is generally not possible.
The acquisition of equity interests in a Swiss non-listed company may trigger disclosure duties. Indeed, any person or entity acquiring 25 per cent or more of the capital or voting rights of a Swiss non-listed company must notify the company of the acquiring entity's beneficial owner or owners and update such information in case of changes. In a typical PE structure, the general partner takes the relevant decisions regarding the fund and the underlying portfolio companies. As a result, the individuals controlling the general partner (respectively controlling the ultimate shareholder of the general partner) should be disclosed as beneficial owners to the Swiss non-listed target company if the PE fund is acquiring 25 per cent or more of the capital or voting rights in that company. If such individuals cannot be identified in accordance with the Swiss disclosure rules, the Swiss company shall be provided with a negative declaration. However, the information disclosed is not publicly available in the commercial register and will remain with the target company.
Where a PE firm seeks to take control of a company listed in Switzerland for the purpose of a going-private transaction, the rules set out by FMIA and its implementing ordinances on disclosure duties and mandatory public tender offer must be complied with. During the stake building, if equity securities are acquired, directly or indirectly, or in concert with others, resulting in certain thresholds being reached or exceeded (i.e., 3, 5, 10, 15, 20, 25, 33⅓, 50 or 66⅔ per cent of the voting rights of the target company, whether exercisable or not), notification must be made to the target company and the stock exchange on which the equity securities are listed. Further, if equity securities are acquired, directly or indirectly, or in concert with others, such that the threshold of 33⅓ per cent of the voting rights (whether exercisable or not) of the target company is exceeded, then a mandatory public tender offer must be launched for all the listed equity securities of the target company at a price to be at least equal to the minimum price as determined by applicable regulations. However, companies listed in Switzerland may provide, in their articles of association, for the increase of the relevant threshold up to 49 per cent of the voting rights ('opting up), or even for the non-applicability of the mandatory public tender offer rules ('opting-out') subject to certain conditions where the opting-out is introduced after listing. In addition, the Swiss Takeover Board may grant exemptions to the duty to make a public tender offer in justified cases, in particular where the target company is in financial distress and equity securities are acquired for restructuring purposes.
ii Structuring considerations
Most PE transactions in Switzerland are share deals whereby PE investors buy out shares in the target company, or invest monies in the target company in exchange for new shares issued through a share capital increase, often in combination with convertible loans (especially in venture or growth capital transactions). Asset deals are far less common and are more likely to be seen in distressed or restructuring scenarios or as a preliminary step for the carve-out of a business that is transferred to a newly created company whose shares are to be sold in a second step.
The acquisition of shares in the target company is often structured as a leverage buyout (LBO) and is thus financed by a mix of equity and debt. In that structure, PE investors typically acquire the target company through an SPV that is directly or indirectly held by the investing PE fund. The purchase price and the costs of acquisition are financed, in part, by equity and (subordinated) shareholders' loans provided by PE investors to the SPV and, in part, by (senior) loans provided by lenders to the SPV. A security package is put in place at closing to secure the lenders' rights (see below for an overview of certain issues that may arise in connection with 'upstream' or 'cross-stream' security interests).
The structuring of the acquisition of a Swiss target company by a foreign PE firm is mainly driven by tax and financing considerations, including, among others, the following.
- Tax treatment of capital gain and dividend income: the Swiss tax regime offers participation reliefs for Swiss tax-resident corporate shareholders holding qualifying participations. For dividends, the relief is available to Swiss tax-resident corporate shareholders holding at least 10 per cent of the share capital of the (Swiss or non-Swiss) company paying the dividend or shares in such paying-company with a fair market value of at least 1 million Swiss francs. For capital gains realised on the sale of equity securities, the relief is available to Swiss tax-resident corporate shareholders having sold at least 10 per cent of the shares of the (Swiss or non-Swiss) company provided such participation has been held for at least one year. The participation relief works as a partial or full reduction of the taxes rather than of the taxable basis. The participation relief is in principle not available to investments in collective investments, generally considered as tax transparent schemes, or to other transparent entities.
- Withholding tax: Swiss withholding tax at a rate of 35 per cent applies to dividend payments, deemed profit distributions and payment of liquidation proceeds made by a Swiss company. Swiss withholding tax is not levied on repayment of paid-in share capital (nominal value), or on distributions made out of qualifying capital contribution reserves. Swiss tax-resident entities or individuals can fully reclaim withholding tax provided they comply with applicable requirements. Non-Swiss shareholders may benefit from full or partial refund or reduction at source under double taxation treaties. When structuring a buyout transaction, it is important to determine whether the (foreign) seller of the Swiss target company is effectively entitled to a full withholding tax exemption under a double taxation treaty with Switzerland, because otherwise the buyer may inherit from a latent withholding tax burden. In addition, the Swiss federal tax administration has recently introduced a practice based on anti-abusive considerations, whereby withholding tax may also apply to dividends and similar distributions paid by the Swiss target company to the Swiss acquisition vehicle if such vehicle is held by the PE firm directly or by a foreign shareholder that does not benefit from a full withholding tax exemption ('extended international transposition'). In absence of treaty protection, a withholding tax issue may also arise from the merger post-closing of the target company into the acquisition vehicle, if the acquisition vehicle benefits from a more favourable withholding tax treatment on dividends than the seller. The risk is that all hidden reserves may be subject to withholding tax ('deemed liquidation theory'). To clarify the tax treatment, it may be advisable to obtain a tax ruling pre-closing.
- Deductibility of interest: Under the Swiss tax regime, interests on loans are, as a rule, tax deductible and not subject to Swiss withholding tax. However, certain exceptions apply, for example where the debt-to-equity ratio for related-party loans is not in line with the applicable thin capitalisation rules (hidden equity), or the interest rates for related-party loans are not at arm's length (hidden distribution), or loans are treated as bonds or notes ('10/20 non-bank rule'). Limitations may further apply if the Swiss acquisition vehicle is merged into the Swiss target company (debt push-down).
- Tax treatment of management equity management schemes; see above.
In that context, the legal form of the PE fund, in particular whether or not it is deemed a transparent entity for tax purposes (flow through structures), as well as the tax residency of the general partners or PE investors, are key elements to be considered. For an overview of certain Swiss taxation aspects in relation to Swiss private equity vehicles, see the chapter on Switzerland in the Fundraising part of this book.
Further to the entry into force of the corporate tax reform on 1 January 2020, preferential tax regimes previously available at the cantonal level (such as holding company, mixed company and domicile company) have been abolished. As a result, all Swiss companies are now subject to ordinary taxation. To mitigate the de facto increase of the corporate tax rates for the companies that no longer benefit from such preferential tax regimes, the cantons have reduced the corporate tax rates applicable to all companies. In addition, specific measures have been introduced to alleviate the consequences of the transition from preferential taxation to ordinary taxation (including patent boxes and increased tax deduction for research and development).
An exit of a controlling equity interest by way of a share buyback is generally not possible because under Swiss law a company may repurchase its own shares only to the extent that (1) it has freely distributable reserves in an amount sufficient to pay the purchase price and (2) the aggregate par value of all shares owned by it does not exceed 10 per cent of the issued share capital. In addition, selective share buybacks are only permitted under certain circumstances having regard to the principle of equal treatment of shareholders. Further, the tax treatment may not be optimal for the foreign selling shareholders where the shares so repurchased by the company exceed the 10 per cent threshold or are subsequently cancelled by way of a share capital reduction.
iii Fiduciary duties and liabilities
As a rule, under Swiss company law, shareholders of Swiss companies limited by shares have no statutory obligation other than to pay in the subscription amount of their shares and are not liable for the company's debts. In exceptional circumstances and subject to restrictive conditions as set by case law, shareholders may be liable for the company's actions; for instance, where invoking the separate legal existence of the company is held abusive (piercing the corporate veil) or where shareholders are deemed de facto management bodies of the company. The same principles apply to shareholders of Swiss limited liability companies with the caveat, however, that such shareholders are under statutory obligations (which can be waived with the other shareholders' consent) to safeguard business secrecy (confidentiality duty) and to refrain from actions or omissions detrimental to the company's interests (fidelity duty). Subject to the foregoing, PE sponsors and investors in their capacity as shareholders do not owe fiduciary duties to the other shareholders of the portfolio company or to the portfolio company itself. Accordingly, unless otherwise agreed by contract (e.g., by way of shareholders' agreements), PE sponsors and investors are free to pursue their own interests when exercising their shareholders' rights under the articles of association and the law. However, the majority shareholders' right to pass resolutions resulting in their interests prevailing over those of the minority shareholders may be limited under the doctrine of abuse of right: this may be the case where the majority shareholders pass resolutions that withdraw or limit the minority shareholders' rights without any reasonable economic or other objective ground, resulting in the minority shareholders' interests being blatantly harmed without legitimate justification.
The representatives of the PE sponsor or investors on the portfolio company's board of directors are bound by the same fiduciary duties as the other members of the board and executive management. These fiduciaries duties include the following:
- the duty to act with due care and diligence;
- the duty to loyally safeguard the company's legitimate interests (fidelity duty), meaning that the members of the board and executive management must act in the portfolio company's best interests which shall prevail over their own personal interests or the interests of the shareholders that have appointed them. This may lead to a conflict of interests, in which case the members of the board and executive management must take measures to properly prevent and deal with such conflicts, including by informing the board and refraining from discussing and voting on the concerned items; and
- the duty to treat all shareholders equally. This principle, however, is not absolute and only applies to shareholders that are in the same position. Exceptions may be permitted depending on the circumstances and provided that a differentiated treatment can be justified by valid reasons having regard to the company's interests.
Members of the board and executive management may incur personal liability if they breach their fiduciary duties by willful misconduct or negligence, thereby causing harm to the company, the shareholders or the creditors. In practice, the discharge granted by the shareholders' general meeting to board members does not afford an absolute protection against liability claims, as the discharge is only effective for facts known to the general meeting and is not opposable to creditors or to the bankruptcy administration. To mitigate the risk of personal liability, directors' and officers' insurances can be arranged and entering into director indemnification agreements with the company may be considered to the extent permitted by applicable law.
Given the risk of personal liability faced by board members, PE firms sometimes appoint observers as representatives on the board of the portfolio company, especially in minority venture capital transactions. Usually, observers may attend board meetings, participate in discussions and have access to information, but cannot vote on board matters. Under Swiss company law, there are no statutory provisions dealing with board observers. In most cases, the shareholders' agreement will set the (contractual) rules governing the appointment and status of board observers. However, in certain circumstances observers may be considered de facto board members, and hence will be subject to the same personal liability regime as formally appointed directors: this may be the case where observers have exercised a decisive influence on the decision-making process from a functional perspective even in the absence of voting rights.
In Swiss LBO deals, depending on the transaction size and type, acquisition debt financing used by PE sponsors typically takes the following forms:
- senior loans only, typically used in smaller deals or where the PE sponsors use very little leverage;
- unitranche loans, typically used in smaller or middle-market deals and which combine senior and subordinated debts into one instrument and are often provided by non-traditional lending institutions such as debt funds; usually, unitranche loans are granted by a single lender under a single set of documents and are structured as bullet-repayment loans with a single interest rate, sometimes with equity warrants; and
- multiple layers financing, which are typically used in larger deals and may include senior loans provided by banks and other financial institutions under syndicated credit facility agreements, second-lien loans, mezzanine loans and high-yield bonds.
Acquisition debts are often combined with revolving credits to finance general corporate purposes and with the refinancing of the target company's existing indebtedness at closing.
The key non-pricing terms of acquisition debts for Swiss LBO transactions (including affirmative, negative, financial covenants, security requirements and default provisions) are comparable to those found in international transactions.
Generally, the debt-equity ratio in Swiss LBO transactions is less aggressive than in US or UK transactions. Where the borrower is a Swiss entity (SPV) and PE investors provide (subordinated) shareholders' loans in addition to equity to finance the acquisition, thin capitalisation rules may limit the applicable debt-to-equity ratio (see above).
In a typical Swiss LBO structure, PE sponsors create an SPV to acquire the target company and incur the acquisition debt as borrower. At closing, a security package will be put in place to secure the lenders' rights under the acquisition debt financing. The scope of the security package typically depends on the transaction size and type (e.g., acquisition of a minority, majority or 100 per cent stake in the target company). In smaller deals, the required security interests may comprise only the pledging by the SPV of the shares of the target company. In larger deals, especially where a 100 per cent stake is acquired in the target company, the security package is often more extensive and may cover security interests granted by the target company over its own assets (such as pledge or assignment for security purposes of bank accounts, IP rights, trade receivables or shares in subsidiaries).
Where the Swiss target company grants security interests over its own assets to secure the obligations of its direct or indirect shareholders (typically, the SPV's obligations under the acquisition debt financing), this structure gives rise to a number of issues from a Swiss corporate, tax and insolvency law perspective ('upstream security'). In particular, the amount that can be paid out to the lenders upon enforcement of the security is in principle limited to the amount of the target company's freely distributable reserves at the time of enforcement. In addition, the granting of upstream securities must be covered by the corporate purpose of the target company and appear in its (own) corporate interest. Furthermore, corporate formalities may have to be completed upon the granting or enforcement of the security, including shareholders' and board approvals and issuance of audit reports. The same issues arise where a group company grants security interests to secure the obligations of its direct or indirect sister companies ('cross-stream security'). Because of the limitations flowing from Swiss law, financing structures involving upstream or cross-stream security interests should be carefully analysed and properly documented and implemented, especially in the presence of minority shareholders where the transaction does not comprise the acquisition of a 100 per cent stake in the target company.
iii Regulatory developments
As a rule under Swiss law, PE transactions (whether investment or exit transactions) in and of themselves are not subject to specific regulatory obligations or oversight. However, specific rules may apply in relation to transactions in certain regulated industries, such as banks, insurances or other financial institutions, telecommunications and real estate. For an overview of the Swiss regulatory framework applicable to PE funds, managers and investors, see the chapter on Switzerland in the Fundraising part of this book.
Shareholders' and board approvals at the level of the portfolio company may be required for certain types of exits; for example, in the case of a merger, spin-off, transfer of all or substantially all the assets or liquidation of the portfolio company. Further, an exit transaction may be subject to anti-trust clearance if the applicable thresholds are reached.
The revision of Swiss company law was adopted by the Swiss parliament in June 2020, and features, inter alia, the following notable changes that may be relevant in the context of PE transactions:
- companies may state their share capital in their functional currency (i.e., the most important currency of the business; currently only in Swiss francs);
- the shareholders' general meeting may decide to specify a 'capital band' of up to 50 per cent of the share capital in the company's articles of association, and authorise the board of directors to increase or reduce the share capital within such band during a period of no more than five years;
- the distribution of interim dividends is expressly permitted (while this is a disputed matter under the current law), provided that the distribution is based on interim financial statements that must be audited subject to certain exceptions;
- the authority to decide (with a qualified majority) the delisting of the company's shares lies with the shareholders' general meeting (while the board of directors is the competent body under the current law);
- minority shareholders' rights are reinforced in a number of areas; in particular, in the case of non-listed companies, shareholders holding at least 10 per cent of the share capital or voting rights may request information from the board of directors on company matters at any time, and those holding at least 5 per cent of the share capital or voting rights may request to inspect the company's books at any time and that an item be included on the agenda of the shareholders' general meeting;
- revision of the statutory provisions applicable in case of impending insolvency, capital loss and over-indebtedness;
- large commodities companies must disclose in a report to be published any payments, in cash or in kind, exceeding 100,000 Swiss francs per financial year made to public authorities (including companies controlled by governmental authorities); and
- revision and implementation of specific rules applicable to listed companies, including in relation to management remunerations and gender quotas.
The provisions applicable to commodities companies and gender quotas entered into force on 1 January 2021, while all other provisions are expected to enter into force in the course of 2022.
Overall, this major revision aims at reinforcing corporate governance, introducing more flexible rules and modernising Swiss company law. Thanks to this positive legislative evolution, combined with its robust, diverse and internationally oriented economy, Switzerland is likely to remain a prominent market for domestic and cross-border PE investments in years to come, despite the uncertainties associated with the covid-19 global pandemic.
1 Phidias Ferrari is a partner, Vaïk Müller is a senior associate and Pierre-Yves Vuagniaux is a partner at Tavernier Tschanz.
3 Swiss Venture Capital Report 2021, p. 7.
7 In a nutshell, the obligation to notify a 'concentration of undertakings' (including mergers and acquisitions) applies, subject to certain exceptions (for instance, in the case of an established market dominant position), where the following thresholds are reached: (1) the concerned undertakings together have a turnover of at least 2 billion Swiss francs, or a turnover in Switzerland of at least 500 million Swiss francs; and (2) at least two of the concerned undertakings each have a turnover in Switzerland of at least 100 million Swiss francs.