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. In 2017, private equity funds were involved in around one-third of the transactions in Switzerland.
1.2 What are the most significant factors or developments encouraging or inhibiting private equity transactions in your jurisdiction?
Although M&A levels were already high in 2016, they further increased in 2017, with private equity transactions reaching a 10- year high. Low interest rates for transaction financing as well as favourable borrowing conditions generate an incentive for high private equity activity.
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/application of 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 its 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 have the opportunity 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, in particular in case of sweet equity for the managers, is usually sought to be confirmed by a tax ruling in order to obtain certainty on the 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 is of paramount importance.
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Previously published in the International Comparative Legal Guide
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.