1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you seen any changes in the types of private equity transactions being implemented in the last two to three years?
All of the standard transaction strategies to acquire portfolio companies are commonly used in Switzerland. We assume that regular leveraged buyouts have accounted for a majority of the transactions in recent years.
1.2 What are the most significant factors or developments encouraging or inhibiting private equity transactions in your jurisdiction?
The most significant event for the Swiss economy was the abandonment of the CHF/EUR minimum exchange rate by the Swiss National Bank (SNB) in January 2015, which resulted in the appreciation of the CHF against the EUR. However, while 2015 was characterised by rather low M&A levels (compared to 2014, the amount of transactions decreased by 17%), 2016 has again been very strong.
2 Structuring Matters
2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction? Have new structures increasingly developed (e.g. minority investments)?
Usually, private equity funds investing in Swiss portfolio companies set up a NewCo/AcquiCo in Switzerland as an acquisition vehicle. The NewCo is held either directly or via Luxembourg, Netherlands or a similar structure. AcquiCos incorporated outside Switzerland are also seen.
Management usually invests directly in the AcquiCo rather than via a management participation company. Often, one single shareholders' agreement (SHA) between the financial investor(s) and management is concluded, which governs all aspects of the investment (governance, exit procedures, share transfers, good/bad leaver provisions, etc.). In other cases, a main SHA is concluded between the financial sponsors and a separate, smaller SHA with management.
2.2 What are the main drivers for these acquisition structures?
The acquisition structure is mainly tax-driven (tax-efficient repatriation of dividends/double taxation treaties, tax-exempt exit). Directly investing in the AcquiCo may allow Swiss-domiciled managers to realise a tax-free capital gain on their investment when the AcquiCo is sold at the exit. However, management incentives and regulatory considerations also play important roles.
2.3 How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)?
A Swiss NewCo often has only one class (or a maximum of two classes) of shares. Preferential rights, exit waterfall, etc. are implemented on a contractual level in the shareholders' agreement. NewCos incorporated abroad often have several classes of shares.
2.4 What are the main drivers for these equity structures?
Firstly, Swiss corporate law limits the formation of preferential shares in certain ways. Secondly, the articles of association are publicly available. Consequently, the preferred route is to embody preferential rights, etc. in the shareholders' agreement (which is not publicly available) in which the parties can freely agree on such features.
2.5 In relation to management equity, what are the typical vesting and compulsory acquisition provisions?
Management is often asked to acquire the full stake of their investment at the outset. In mid-sized deals, management participation usually ranges from around 1% to 3%; however, certain funds request much higher management investments. As mentioned in question 2.2, usually each of the managers directly invests in the AcquiCo to realise a tax-free capital gain at the exit. Often, the equity sponsor or the target company grants loans to the managers so they can finance their investment; the exact structure is usually sought to be confirmed by a tax ruling in order to avoid taxation of the exit gain as taxable income.
The shareholders' agreements with management typically contain standard good and bad leaver provisions, providing for a call option of the financial sponsor in case of a departure (with a price reduction in case of a bad leaver – which may also depend on the duration of employment). Sometimes, the management participation is structured as staggered vesting of the shares. The differences between initial investment with good/bad leaver provisions and staggered vesting are of a rather technical nature; the material result is usually the same.
2.6 If a private equity investor is taking a minority position, are there different structuring considerations?
Structuring considerations do not fundamentally differ for minority stakes. Of course, securing the exit possibilities and minority protection rights in the shareholders' agreement are of paramount importance.
3 Governance Matters
3.1 What are the typical governance arrangements for private equity portfolio companies? Are such arrangements required to be made publicly available in your jurisdiction?
The predominant type for acquisitions of portfolio companies in Switzerland is the stock corporation (Aktiengesellschaft). Sometimes, limited liability companies (LLCs, GmbH) are used, which have the advantage that they can be treated as transparent for US tax purposes.
The stock corporation is governed by a board of directors which has a supervisory function and resolves on strategic and important issues (appointment of senior management, etc.). A director is elected ad personam; proxies (e.g. in the case of absence at meetings) are not possible.
Day-to-day management is normally delegated to management, based on organisational regulations. They often contain a competence matrix defining the competences of each management level and which decisions need approval by the board or even shareholders.
Such division of competence is – together with board composition, quorum requirements, etc. – also reflected on a contractual level in the shareholders' agreement.
Neither the organisational regulations nor the shareholders' agreement are required to be made publicly available in Switzerland; only the articles of association.
Our comments in question 3.1 regarding stock corporations apply largely for LLCs too.
3.2 Do private equity investors and/or their director nominees typically enjoy significant veto rights over major corporate actions (such as acquisitions and disposals, litigation, indebtedness, changing the nature of the business, business plans and strategy, etc.)? If a private equity investor takes a minority position, what veto rights would they typically enjoy?
If a private equity investor holds a minority of the voting rights, its veto rights usually depend on the stake held, while a small investor (up to 20%) normally enjoys only fundamental veto rights aimed at the protection of its financial interest (dissolution, pro-rata right to capital increases, no fundamental change in business, maximum leverage, etc.); investors holding a more important minority stake (20–49%) usually also have veto/influence rights regarding important business decisions and the composition of senior management. The exit rights for private equity investors holding a minority position are usually heavily negotiated.
3.3 Are there any limitations on the effectiveness of veto arrangements: (i) at the shareholder level; and (ii) at the director nominee level? If so, how are these typically addressed?
On a shareholder level, veto rights may be created by introducing high quorums for certain shareholders' decisions in the articles of association and the shareholders' agreement. Such veto rights are generally regarded as permissive as long as the arrangement does not lead to a blockade of decision-taking in the company per se. On a board level, individual veto rights of certain board members cannot be implemented based on the articles of association or other corporate documents. However, such individual veto rights are regularly incorporated in the shareholders' agreement; i.e. the parties agree that the board shall not take certain decisions without the affirmative vote of certain nominees. A board decision taken in contradiction to such contractual arrangement would still be valid, but may trigger consequences under the shareholders' agreement. Furthermore, directors are bound by a duty of care and loyalty vis-àvis the company. If abiding by instructions given by another person based on contractual provisions leads to a breach of such duties, the board member may not follow such instructions and will likely not be in breach of the shareholders' agreement (at least if the latter is governed by Swiss law).
3.4 Are there any duties owed by a private equity investor to minority shareholders such as management shareholders (or vice versa)? If so, how are these typically addressed?
From its position as a shareholder alone, in principle, a private equity investor does not have such duties; shareholders of a Swiss stock corporation do not have any duty of loyalty. However, directors, officers and management have a duty of care and loyalty towards the company and, to a certain extent, also to the minority shareholders. Under special, limited circumstances, a private equity investor or an individual acting for it may be regarded as de facto/shadow director of the company and, consequently, also be bound by such duties. The claim that a shareholder or one of its representatives is a shadow director might be made successfully if such person de facto acts as officer of the company, e.g. by directly taking decisions that would actually be in the competence of the board, etc.
3.5 Are there any limitations or restrictions on the contents or enforceability of shareholder agreements (including (i) governing law and jurisdiction, and (ii) non-compete and non-solicit provisions)?
Shareholders' agreements are common in Switzerland and are normally governed by Swiss law. The parties are largely free to determine the rights and duties but there are certain limitations. The most important ones are:
- a SHA may not be unlimited in time/valid during the entire lifetime of the company, but may have a maximum term of ca. 20–30 years; and
- as per mandatory corporate law, directors must act in the best interest of the company (duty of care and loyalty), which may hinder the enforcement of the SHA if its terms would conflict with such duties.
A shareholders' agreement is only enforceable against its parties. There is a debate in Swiss legal doctrine as to what extent the company itself may be party to a SHA and bound by its terms. While a majority acknowledges that the company may fulfil some administrative duties, entering into further obligations is questionable.
Non-compete obligations of the shareholders in favour of the company are typically enforceable if the respective shareholders are (jointly) controlling the company. Furthermore, non-compete obligations need to be limited to the geographical scope and scope of activity of the company.
To secure share transfer provisions of the SHA, the parties often deposit their shares with an escrow agent under a separate share escrow agreement. Often, SHAs also provide for penalty payments in case of breach.
3.6 Are there any legal restrictions or other requirements that a private equity investor should be aware of in appointing its nominees to boards of portfolio companies? What are the key potential risks and liabilities for (i) directors nominated by private equity investors to portfolio company boards, and (ii) private equity investors that nominate directors to boards of portfolio companies under corporate law and also more generally under other applicable laws (see section 10 below)?
On a practical note, at least (i) one person with individual signatory power residing in Switzerland, or (ii) two individuals with joint signatory power both residing in Switzerland must be able to fully represent the company (entry into the commercial register). It is not necessary that such persons are board members (but, e.g., managers). Additional individual or collective signatory rights may also be granted for persons residing outside Switzerland. Directors, officers and managers of the company (including nominees of the private equity investor) have a duty of care and loyalty towards the company and must safeguard the (sole) interest of the portfolio company even if such interest is contrary to the interest of the appointing private investor. Under special, limited circumstances, a private equity investor or an individual acting for it may be regarded as de facto/shadow director of the company and, consequently, also be bound by such duties. To prevent such a scenario, decisions should be taken solely by the competent bodies. Further, directors, officers and managers may be held liable in case of non-payment of certain social security contributions and taxes by the company.
3.7 How do directors nominated by private equity investors deal with actual and potential conflicts of interest arising from (i) their relationship with the party nominating them, and (ii) positions as directors of other portfolio companies?
In case of a conflict of interest, the concerned director must inform the other board members and abstain from participating in the respective discussion and decision-making process. In typical Swiss private equity setups with one or few financial sponsor(s) that are each represented in the board, issues related to conflicts of interest are of limited relevance in practice.
4 Transaction Terms: General
4.1 What are the major issues impacting the timetable for transactions in your jurisdiction, including competition and other regulatory approval requirements, disclosure obligations and financing issues?
If certain turnover thresholds are met, a Swiss merger filing must be made. Unless the Competition Commission (CC) decides to initiate a four-month phase II investigation, clearance is granted within one month (phase I) after filing the complete application. It is strongly recommended to submit a draft filing for review by the Secretariat (which usually takes one to two weeks) to make sure that the filing is complete (thereby triggering the one-month period) and not rejected as incomplete 10 days after filing.
For transactions in certain industries, governmental approvals must be obtained (e.g. banks, telecom, etc.). The impact on the timetable depends on the respective regulation and on the authorities involved. Other than that, practical timing constraints such as setting up a NewCo (ca. 10 days) are similar to other European jurisdictions.
4.2 Have there been any discernible trends in transaction terms over recent years?
Since debt financing is currently easily available, buyers have become increasingly willing to enter into binding purchase agreements prior to having the financing secured. Further, given the current sellers' market, share purchase agreements tend to be more seller-friendly (e.g. with regards to R&W, etc.). As a general observation, typical Swiss share/asset purchase agreements still tend to be significantly shorter than US/UK agreements – a consequence of Switzerland's civil law system.
5 Transaction Terms: Public Acquisitions
5.1 What particular features and/or challenges apply to private equity investors involved in public-to-private transactions (and their financing) and how are these commonly dealt with?
Anyone who acquires equity securities which, added to equity securities already owned, exceed the threshold of one-third of the voting rights of a Swiss listed company, is obliged to make an offer for all listed equity securities of the company (mandatory tender offer), barring exemptions granted by the Swiss Takeover Board. The target company may, however, have either increased the threshold to a maximum of 49% of the voting rights (opting-up) or completely excluded the obligation to make an offer (opting-out). Further, anyone who exceeds certain thresholds of the voting rights in a Swiss listed company (the lowest threshold is 3%) is obliged to make a notification to the company and the stock exchange (disclosure obligation).
Moreover, to carry out a squeeze-out merger subsequent to a public tender offer, the bidder must hold at least 90% of the share capital and voting rights of the target company. Voluntary tender offers are regularly made subject to a minimum acceptance condition which, however, does normally not exceed two-thirds of the target company's shares. Thus, the bidder runs the risk of ending up holding less than 90% and, consequently, not being able to squeezeout the remaining minority shareholders.
5.2 Are break-up fees available in your jurisdiction in relation to public acquisitions? If not, what other arrangements are available, e.g. to cover aborted deal costs? If so, are such arrangements frequently agreed and what is the general range of such break-up fees?
Both takeover parties can agree on break fees unless they will result in coercing shareholders to accept the offer or deter third parties from submitting an offer. As a rough rule of thumb, break fees should not considerably exceed the costs in connection with the offer. The parties must also disclose such agreements in the offer documents.
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Originally published in The International Comparative Legal Guide to: Private Equity 2017, 3rd Edition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.