1) What legislation governs M&A activity in Switzerland?
Public M&A transactions in the form of public tender offers are governed by the Federal Act on Stock Exchange and Securities Trading (SESTA) and its implementing regulations. The SESTA governs both friendly and hostile public tender offers. Its overall goal is to ensure transparency, fairness and equal treatment of shareholders.
The SESTA applies to public tender offers for cash or securities, or a mix thereof, that are made to holders of equity securities of (i) Swiss resident companies whose equity securities are listed on a Swiss exchange or (ii), in exceptional circumstances, companies incorporated outside Switzerland whose equity securities are listed on a Swiss exchange – provided that management control of that company is in Switzerland.
In addition, the SESTA includes rules on (i) the squeeze-out of shareholders that continue to hold shares in the target, upon acquisition by the bidder of 98% of the target's voting rights through its public tender offer; (ii) mandatory offers (see Question 8); and (iii) the public disclosure of beneficial ownership upon reach of certain thresholds (see Question 5).
The Federal Merger Act governs above all (i) statutory mergers (including by means of a triangular merger) and (ii) demergers in the form of spin-offs and split-offs. Various other rules may also apply to public and private M&A activity, including disclosure requirements in relation to pricesensitive information (ad hoc publicity) and insider trading and market manipulation provisions.
2) How, and to what extent, is foreign involvement in M&A transactions in Switzerland regulated or restricted?
Currently, there are no general restrictions on capital transactions between Switzerland and foreign investors that would allow governmental agencies to influence or restrict the completion of business combinations or other M&A transactions. There are, however, industry-specific restrictions, such as with regard to financial services, radio and television, telecommunications and transportation (see further Question 12).
As to real estate, the Federal Act on the Acquisition of Real Estate by Persons Abroad restricts the acquisition by a foreign person or a foreign-controlled company of residential real estate (but not commercial real estate) in Switzerland. The acquisition of shares in a company whose statutory or factual business purpose is trading in non-commercial real estate is also subject to approval, except if the shares of that company are traded on a stock exchange.
3) What restrictions are placed on corporate reorganisation structures, such as statutory mergers, stock swaps, corporate spin-offs, or transfers of the business?
The Federal Merger Act provides for a variety of instruments to accomplish corporate reorganisations – for example, merger, demerger, or transformation (change of corporate form; see Question 1). Statutory mergers and other reorganisation instruments are subject to a formalised procedure. Generally, the following formalities are required:
- A merger or demerger agreement or a conversion plan, as the case may be, by the company or between the companies;
- A merger, demerger or conversion report by the board of directors of the companies involved;
- An auditors' audit and a report;
- Resolutions by each company's shareholders;
- Registration in the commercial register;
- Creditor protection procedures and consultation of employees.
In relation to demerger transactions, it is possible to dispense with some of these formalities if a two-step approach is applied. In the first step, the relevant assets and liabilities of the target are transferred to and assumed by a subsidiary of the target. In the second step, the shares of that affiliate are then distributed to the shareholders of the transferring company (for example, in the form of a dividend in kind or a capital reduction).
4) What merger methods are available to prospective foreign acquirers of companies in Switzerland?
One way of obtaining control of a (public or private) company is by statutory merger. A statutory merger may be effected by absorption (one company is dissolved and merged into another) or by combination (two companies are dissolved and merged into a newly formed company). In both cases, the assets and liabilities of the dissolved companies are transferred by operation of law to the surviving company. Shares and cash may be used as consideration. If shareholders do not receive shares in the surviving company but instead receive cash or any other form of consideration (such as a third company's shares or debt securities), 90% of all voting securities outstanding of the transferring company are required to approve the merger. A merger by absorption may also be effected as a (forward) triangular merger.
However, pursuant to the prevalent scholarly opinion (which is considered a persuasive source of law in Switzerland), a forward triangular merger requires a supermajority of 90% of the outstanding voting securities of the transferring company. Reverse triangular mergers among Swiss companies are thought not to be permissible under Swiss law (although no court precedent so far exists). On the other hand, a cross-border triangular reverse merger with a company domiciled abroad as the surviving entity may be possible, and at the same time not be subject to the 90%-majority.
A merger of a foreign company into a Swiss company (so-called immigration merger) is permissible provided that the law to which the foreign company is subject so permits and the prerequisites of that law are satisfied.
A merger of a Swiss company into a foreign company (so-called emigration merger) requires as a prerequisite that (i) the law governing the foreign company permits such a cross-border merger, (ii) all of the assets and liabilities will be transferred to the foreign company, and (iii) the equity or membership rights will be adequately protected in the foreign company. Further, a Swiss company merging with a foreign company must fulfill all requirements of Swiss law that would be mandatory for an acquired company if the merger took place in Switzerland (see Question 3). Swiss law further requires that, prior to the effectiveness of the emigration merger, the creditors of the dissolving company be informed by public notice of the merger. Upon such notice, creditors of the dissolving company may request security for their claims. The notice may be dispensed with if a specially qualified auditor confirms that there are no known or expected creditor claims that the assets of the companies involved are not sufficient to satisfy.
Alternatives to a statutory merger are share-for-share transactions (quasi-merger) or the formation of a new company that takes over assets and liabilities of the two combined companies in exchange for its own shares. In private transactions, businesses are usually acquired by the purchase of either shares or (all or part of) the assets and liabilities. Businesses can also be combined by a joint venture agreement pursuant to which certain assets are transferred to a new corporation in exchange for shares. In relation to public companies, a public tender offer is the most common way to obtain control. Public offers may be structured as tender offers for cash or as exchange offers for securities or a combination of both (including mix and match); see Question 8.
5) What requirements are placed on foreign investors, in terms of principal disclosure, filing reports, prior notification, commitments to shareholders of the target?
If a bidder (directly, indirectly or in concert with a third party) acquires or sells securities in a Swiss company listed on a Swiss exchange, and as a result reaches, exceeds or falls below the voting rights-thresholds of 3, 5, 10, 15, 20, 25, 331/3, 50 or 662/3%, these holdings must be notified to the target and the stock exchange on which the shares are listed.
Further, the Federal Code of Obligations requires listed corporations to disclose, in their annual business report, the identity of shareholders or organised groups of shareholders with a beneficial interest of more than 5% in the corporation's shares (subject to a lower percentage pursuant to the articles of incorporation) to the extent such interest is known to the corporation.
In the context of a public offer, the bidder and all shareholders holding more than 3% of the voting rights of the target must report all acquisitions and sales of equity securities in the target and, if applicable, in the company whose securities are offered in exchange for the equity securities of the target.
6) To what extent has the issue of material adverse change (MAC) clauses become more important in light of the current economic climate?
On the buyer's side, there appears to be a tendency to try to negotiate MAC clauses that define short term effects as a MAC event. Sellers, on the other hand, have been trying to limit MAC clauses to deteriorations caused by the seller (rather than exogenous events). Related to this, sellers have become even more reluctant to accept financing conditions. Instead, and in particular when the deal is all or significantly equity financed, they request the right to force the equity provider directly to specifically perform its obligations under the equity commitment letter. Before the financial crisis, and because private equity firms wanted to keep their liability remote, a judgment was first required against the shell subsidiary, which in turn would have to pursue a lawsuit against its owner. Another significant change (in private transactions) is the absence of reverse termination fees, under which the buyer can terminate the agreement by simply paying a preset fee. Instead, agreements require specific performance as the primary remedy.
7) Are there any specific regulatory bodies governing takeovers in Switzerland?
The Swiss Takeover Board (TOB) and the Swiss Financial Market Supervisory Authority (FINMA) supervise public takeover offers. The TOB can issue binding and enforceable orders against the parties. TOB orders may be appealed to the FINMA. The FINMA's decisions can be appealed to the Federal Administrative Court.
8) What are the various methods by which a takeover can be achieved, including any flexibility over deal terms and price, requirement for committed funding and break fees?
Takeovers and prior acquisitions: Potential bidders often seek to acquire a significant stake in the target prior to the launch of the public tender offer. Generally, this can be achieved through (i) irrevocable undertakings from the target's major shareholders to tender their shares, or (ii) an outright purchase before the offer is announced. If irrevocable undertakings or acquisition agreements are entered into during the 12 month period before the public tender offer is announced, the offer documentation must disclose the relevant details of these transactions. Also, the share price (to be) paid in these transactions may affect the minimum offer price (see below).
Shareholders that have entered into an undertaking to tender – even if designated 'irrevocable' – or a binding acquisition agreement conditional on the success of the public tender offer, may rescind their commitment in the event of a subsequent competing offer. If shareholders enter into an acquisition agreement and the sale is not completed before the launch of the public tender offer, the bidder is usually considered to be acting in concert with these shareholders. As a result, these shareholders are required to report any transaction in the target's shares to the TOB. Also, if the price paid by these shareholders for the target's shares exceeds the offer price, this may trigger the best price rule. According to the best price rule, the bidder who acquires the target's equity securities for more than the offer price (either directly or through persons deemed to be acting in concert) must offer that higher price to all recipients of the public tender offer (and not only those who have accepted the offer). The best price rule applies from the time the preliminary announcement or the offer is published until six months after the expiry of the additional acceptance period.
Transaction agreements: If a bid is recommended, the bidder commonly enters into an agreement with the target. This transaction agreement sets out (i) the bid's terms and conditions; (ii) the target's duty to support the bid and to recommend its acceptance to its shareholders; and (iii) the target's future management structure. The main terms of such an agreement must be disclosed in the offer prospectus. No-shop undertakings by the target are generally though permissible under Swiss corporate and takeover law, provided that the target's directors are permitted to (i) negotiate with unsolicited rival bidders, (ii) provide equal information to all bidders, and (iii) advise shareholders on the merits of a third party bid.
Mandatory offer: Subject to limited exemptions, a person holding – either directly or indirectly, or acting in concert with another person – more than one-third of the voting rights (including through call options) of a Swiss company listed on a Swiss exchange (whether or not these voting rights can be exercised) is required to submit a public tender offer for all listed equity securities of that company. A potential target's articles of association may however provide for an 'opting-out' (no mandatory offer obligation) or an 'opting-up' (increase of the triggering threshold to up to 49% of the voting rights). Shareholders cannot approve an opting-up or opting- out provision that only applies for a limited time or to a specific shareholder. The obligation to submit a mandatory public offer is generally triggered only upon completion of a share purchase agreement (unless the parties are deemed to be acting in concert and thus exercising control of the target before completion).
Minimum price rule: In cases of a mandatory offer (including offers that would result in the triggering threshold being exceeded), the offer price may not be set below the minimum offer price, which is calculated as follows:
- The volume-weighted average price of stock exchange transactions in the 60 trading days prior to formal pre-announcement or publication of the offer; and
- 75% of the highest price paid by the bidder for shares in the company (including privately negotiated block trades) in the preceding 12 months.
Conditions to a takeover: Voluntary public takeover offers may be made subject to conditions precedent only if such conditions are beyond the bidder's control. Where the nature of the conditions precedent is such that the bidder's cooperation is required for their satisfaction, the bidder must take all reasonable steps to ensure that the conditions are satisfied. At the close of the offer period, the bidder must announce whether the conditions have been satisfied. The terms of the offer may reserve the bidder's right to waive certain conditions. With the approval of the TOB, the offer may also be made subject to subsequent conditions, if the advantages of the conditions for the bidder outweigh the disadvantages for the target's shareholders (for example, over obtaining regulatory approvals).
Typical conditions include the following:
- Minimum acceptance threshold (the TOB requires that the preset threshold not be unrealistically high);
- Merger control, regulatory (including regarding listing or registration of shares offered in exchange for the target's shares) or shareholder approval.
- Material adverse effect conditions (the TOB has required that the relevant negative impact on turnover or profit be of some significance (for example, 10% of EBITDA, 5% of turnover or 10% of the target's net asset value). Generally, a bidder required to submit a mandatory offer cannot make that offer subject to conditions.
Funding commitments: Funding must be in place before the offer is announced. A bidder can make a preliminary announcement before it has committed funding, but in practice this is not common. The offer prospectus must contain details of the sources of financing and confirmation by the review body (generally an audit firm or an investment bank mandated by the bidder) that financing is available. Commitment letters from banks in support of the bid, even if subject to satisfactory due diligence, generally suffice for the review body to issue its funding confirmation.
Break fees: There are no statutory or judicially determined limits as to whether break-up fees or reverse break-up fees are permissible in principle and, if so, what break-up fee amount would be acceptable. Therefore, break-up fees are mainly restricted as a result of directors' fiduciary duties and shareholder rights. In transactions requiring shareholder approval, the board of directors may not agree to a break-up fee in an amount that would prejudice the outcome of the respective shareholder resolution. Break-up fees that correlate to the costs incurred by the other party in connection with the intended merger or demerger should be permissible. Under the SESTA, the availability of defensive measures against unfriendly takeovers is limited. From the formal (pre-)announcement of a public tender offer until the publication of its final result, a target's board may not (without shareholder approval) engage in any transaction that would significantly alter the assets or liabilities of the target (prohibition of lock-up agreements).
9) How differently are hostile and voluntary takeover bids treated?
Swiss law allows a bidder to announce a hostile offer without being required to first approach the target's board or to approach it shortly before launching the bid. Hostile transactions may only be structured by way of a public tender offer as it must be achieved without the agreement of the board of directors.
Under Swiss law, a bidder is generally not entitled to conduct due diligence. As a consequence, a hostile public tender offer cannot be made subject to satisfactory due diligence. However, if the target grants access to non-public information to another interested or potentially interested party, the target is required disclose the same information to any other bidder.
10) What penalties are imposed for parties who violate takeover regulation?
Violation of beneficial ownership disclosure requirements: Breach of the requirement to disclose beneficial ownership interest in Swiss public companies upon the reach of certain thresholds (see Question 5) is a criminal offence that is prosecuted by the competent authorities. Whoever fails to notify a qualified interest in a Swiss company listed on a Swiss exchange is subject to a fine not exceeding twice the purchase price or sale proceeds (if acting with criminal intent), or up to CHF1 million (about US$970,000) (if acting negligently).
Mandatory offer: There are no criminal penalties for failing to submit a mandatory offer (see Question 8). However, the TOB, the target company or any of its shareholders may request that a court suspend the voting rights of the person not complying with the mandatory offer obligation.
11) What are the thresholds for a) disclosing stakebuilding in a target, and b) disclosing bids and offers?
If a bidder (directly, indirectly or in concert with a third party) acquires or sells securities in a Swiss company listed on a Swiss exchange and as a result reaches, exceeds or falls below the voting rights-thresholds of 3, 5, 10, 15, 20, 25, 331/3, 50 or 662/3%, these holdings must be notified to the target and to the stock exchange on which the shares are listed. The disclosure obligations also relate to transactions in options (puts and calls) and conversion rights, irrespective of the settlement method (cash or physical). The triggering event for disclosure is the right or obligation to buy or sell shares, not the completion of the transaction.
If a potential bidder publicly announces to consider launching a public takeover, the TOB may require the potential bidder to either (i) publish an offer for the target or (ii) publicly declare that for six months it will neither make an offer nor exceed the mandatory offer threshold ('put up or shut up').
12) Which regulated industries have maximum foreign ownership thresholds?
Banks: All banks incorporated or having a place of business in Switzerland, including Swiss branches of foreign banks, must have a FINMA license before starting operations. Qualifying shareholders of a bank – i.e. persons or entities whose direct or indirect shareholdings amount to 10% or more of a bank's capital or voting rights – are also subject to scrutiny by the FINMA. Shareholders who acquire or sell a qualifying shareholding, or who increase or decrease their shareholding beyond 20, 33 or 50%, must notify the FINMA before completing the transaction. Additional license requirements apply to foreign-controlled banks.
Insurance companies: If a (potential) bidder intends to, directly or indirectly, acquire shares in a Swiss (re-)insurance company, it must notify the FINMA if, as a result, it reaches or exceeds the thresholds of 10, 20, 331/3 or 50% of the capital or voting rights of the (re-) insurance company. The FINMA can prohibit, or impose conditions on, such shareholdings.
13) What have been the major recent developments in competition policy and legislation as they relate to M&A in Switzerland?
Thresholds for investigations by the Swiss Competition Commission in connection with merger control: Under the Federal Act on Cartels and Other Restraints of Competition and its implementing regulation, an undertaking intending to acquire sole or joint control must file a notification with the Competition Commission before the concentration is completed. This is if, in the last accounting period before the concentration, (i) the undertakings concerned reported worldwide joint sales of at least CHF2 billion (about US$1.72 billion) or joint sales in Switzerland of at least CHF500 million; and (ii) at least two of the undertakings concerned reported individual sales in Switzerland of at least CHF100 million each. Special rules apply for insurance companies, banks, saving institutions and media enterprises.
Substantive test in connection with merger control investigations: The substantive test for investigation by the Competition Commission is whether the proposed concentration (i) creates or strengthens a dominant position that risks eliminating effective competition, or (ii) does not lead to a strengthening of competition in another market that outweighs the harmful effects of the dominant position.
Time limit for a decision and obligation to suspend: Within one month of receiving the notification, the Competition Commission decides whether there are grounds for investigating the concentration. During the preliminary assessment period, the undertakings must not carry out the concentration without the Competition Commission's authorisation. A detailed investigation is completed within four months. The Competition Commission will then decide whether the concentration can be carried out unconditionally, carried out subject to conditions or obligations, or is to be prohibited.
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