Switzerland: Mergers And Acquisitions In Switzerland

The vast majority of Swiss business enterprises is privately held. Out of a total of approximately 170'000 stock companies, only about 300 are listed on the Swiss Stock Exchange. However, as in many other countries, "going public" has become increasingly popular. A number of companies has recently taken this step or announced such intentions (e.g. Schaffner Holding, Barry Callebaut, Gretag Imaging, Swisscom, Burkhalter Holding, Bally). Even those companies listed on the Swiss Stock Exchange are mostly controlled by a single or few shareholders, wherefore most mergers and acquisitions in Switzerland are negotiated privately.

In 1996, merger activity in Switzerland reached a first peak with mergers like Ciba and Sandoz (becoming Novartis AG), Unigestion and Republic National Bank, Adia and Ecco and Feldschlösschen and Hürlimann. They were followed by the mergers between Credit Suisse Group and Winterthur and between Zurich Insurance and BAT Industries Finance. These were again topped by the merger between Union Bank of Switzerland and Swiss Bank Corporation, which was announced in December 1997 and should be completed by the end of June 1998.

The joint stock company ("Aktiengesellschaft") is the prevalent form of business organization in Switzerland. Its shareholders' liability is confined to their contribution to the share capital which must amount to a minimum of CHF 100,000 (until 1992, the minimum share capital was CHF 50,000). The company may issue bearer shares, for which possession of shares is sufficient evidence of title and transfer of such shares is perfected by mere transfer of possession, or registered shares, of which the owner's name is registered in the company's share register and transfer of title is effected by transfer of possession plus endorsement.

The transfer of registered shares is subject to certain limitations which vary depending on whether the shares are listed on the Swiss Stock Exchange or not. The transferability of all types of shares can also be indirectly restricted by limiting in the articles of incorporation the number of votes which owners of more than one share may cast in the shareholders' meetings.

Other types of business associations in Switzerland, such as the limited liability company ("Gesellschaft mit beschränkter Haftung") and the cooperative ("Genossenschaft") are of lesser importance. The limited liability company has, however, recently become more popular for smaller enterprises because its minimum share capital is still only CHF 20,000 (as opposed to CHF 100,000 for the joint stock company).

While there are no general restrictions on foreign investment, exchange control or general registration requirements, there nevertheless exist regulations with respect to certain areas:

There are a number of specially regulated industries, such as banking, insurance, radio and television, telecommunications and transportation. The most important is certainly the banking industry. The operation of a Swiss bank by a foreign person or foreign-controlled entity requires a special license from the Swiss Federal Banking Commission. An entity is deemed to be foreign-controlled if more than 50% of its shares are owned by, or the respective voting rights can be exercised by foreigners or foreign-controlled entities.

The Federal Act on Acquisition of Real Estate by Foreigners (the so-called "Lex Friedrich") restricts, inter alia, the acquisition by foreigners of a controlling stake of shares in Swiss real estate companies, as defined therein.

Antitrust Law is concerned with business combinations which pose a threat to competition. In some circumstances, for example when merging companies were hitherto direct competitors in an oligopolistic market, this may mean a significant reduction in the number of competitors in a relevant market and of the strength of competition in the market.

The new Federal Antitrust Act ("Kartellgesetz") which came into force on July 1, 1996 contains notice requirements for - inter alia - large transactions. Merging enterprises are subject to this duty (i) if all involved enterprises attain an accumulated world-wide turnover of a minimum of CHF two billion or a turnover within Switzerland of CHF 500 million and (ii) if at least two of the involved enterprises reach a turnover within Switzerland of CHF 100 million each. The merger is deemed to be approved if the competent Federal Commission does not object within 30 days.

In the course of 1996, the Joint Swiss Electronic Stock Exchange replaced the various local Stock Exchanges in Switzerland. On February 1, 1997 the Swiss Federal Act on Stock Exchanges and Securities Trading (SESTA) came into force. Prior to the SESTA, no Federal or Cantonal legislation existed, so the Association of Swiss Stock Exchanges adopted the Swiss Take-Over Code in 1989, as amended in 1991.

The SESTA regulates - inter alia - tender offers and contains rules on mandatory offers. Chapter 4 contains provisions requiring shareholders to disclose acquisitions of shares in a publicly listed company and thereby attaining, falling below or exceeding the threshold percentages of 5, 10, 20, 33 1/3, 50 or 66 2/3 of the voting rights, whether or not such rights may be exercised, shall be obliged to notify the company and the stock exchanges on which the equity securities in question are listed (Article 20 para. 1 SESTA).

Furthermore, the Swiss Code of Obligations requires companies whose shares are listed on a stock exchange to include in their annual business report shareholders and shareholder groups with restricted voting rights whose participation exceeds five percent of all voting rights. The articles of incorporation may provide for a lower percentage threshold.

Insider trading is a criminal offence which can be committed - inter alia - by board members, directors, auditors or any person acting as agent of a joint stock company or its affiliate. It occurs when such persons, for their own or a third party's benefit, use their knowledge of confidential facts (such as e.g. an impending acquisition or merger) which would, were they known to the public, have a material impact on the market value of securities traded on the Swiss Stock Exchange or on the over-the-counter market.

The desire to create a comprehensive regulation on mergers has led to an initial draft for a Federal Act on the Merger, Division and Conversion of Legal Entities (Merger Act) covering all legal forms provided for in the Swiss Code of Obligations. It includes provisions regarding the merger of various types of legal entities, Swiss foreign. In addition, the draft envisages provisions for the division of undertakings.

Business enterprises can be taken over either by purchase of title, or by merger, or by purchase of assets and liabilities. Most common in Switzerland is the purchase of a controlling block of shares.

The type of acquisition chosen by the purchasers depends on several factors, such as the type of business organization of the target, fiscal considerations, the financial structure of the transaction, whether the purchaser wants to acquire only part of the target's business, etc.

The purchase and sale of shares of a Swiss company is governed by the Swiss Code of Obligations. A written agreement is not required by law. According to a practice of the Swiss courts, including the Federal Supreme Court, warranties implied in the sale of shares relate as a general rule only to the shares as such and not to the quality of the underlying company. Therefore, specific representations and warranties must be obtained from the seller with respect to the business itself. Warranties often contain qualifications in terms of materiality and as to being to the best knowledge of the seller. The latter, however, may under certain circumstances not be enforceable as such under Swiss law.

Obtaining information by the acquirer as much and as early as possible is contradictory to the seller's interest not to disclose too many details about the target before an agreement has been reached. The seller often limits the acquirer's access to the business data of the target until the signing and instead warrants the state of the business in the agreement in great detail. This solution is of course only feasible where the acquirer is satisfied with indemnity or damage payments as possible remedies.

Remedies for the breach of warranties provided for by law are either reduction of the purchase price or rescission of the agreement. Additional remedies are often agreed, e.g. that the acquirer is not bound by the agreement if a material breach of a warranty is discovered before completion. If rescission after completion is to be excluded, it must be explicitly stated in the agreement. It is also advisable to determine indemnity payments in the agreement if the parties do not want to leave it to the court to calculate these.

There might also be included in the agreement terms regarding shareholders' approval, governmental authorizations; tax clearance; third party approval (e.g. from key employees or banks, if contracts with such third parties contain a change of ownership clause).

The purchase of all or part of the assets of a company cannot be done in globo, but requires the transfer of each individual asset according to the specific rules that apply for such asset (e.g. chattels, real estate, securities, etc.). Under certain circumstances, the transfer of liabilities cannot be excluded or, if liabilities are to be included, such transfer requires the creditors' consent. Since the transfer of assets is thus rather complicated and not always fully adequate for the buyer's needs, share transfers are usually preferred. An asset transfer may, however, still be chosen for tax considerations or to avoid the risk of taking on unknown liabilities.

The Code of Obligations provides for two different methods of statutory mergers: (i) one company is merged into another (so-called absorption/annexation) or (ii) two companies are merged and thereby "dissolved" into a newly formed company (so-called consolidation). In both cases, all assets and liabilities of the absorbed/dissolved company are by operation of law taken over by the surviving/newly formed company.

Accomplishing a merger involves complicated steps, such as - inter alia - preparing a merger agreement by the board of directors, obtaining shareholders' consent, complying with creditor protection rules and, in the event that the capital stock of the merging company is to be increased, obtaining a special report from the merging company's auditors. The assets of the merged company must be administered separately by the acquiring company until all creditors have been satisfied or security has been provided for their claims. The members of the board of directors of the acquiring company are jointly and severally liable for the separate administration.

In addition to statutory mergers, other forms of takeovers have been developed, e.g. quasi-mergers, where the purchasing company acquires the target's shares whereby the purchase price is paid by securities of the purchasing company, or mere share swaps between the shareholders of two companies with shares of a newly established holding company, etc.

The acquirer may seek to purchase a (listed) company by making an offer to the shareholders to purchase their shares at a certain price, provided that he will obtain a controlling block with such purchase. All shareholders making use of the offer normally receive the same premium, unless the offer was limited to a certain percentage of first offered shares.

Depending on whether management approves of such offer, the transactions are called "friendly" or "unfriendly/hostile" takeovers.

In friendly takeover bids, the target's management or board of directors consents to the transaction and recommends to the shareholders to accept the takeover bid.

As stated above under 2.5, the SESTA replaced the Swiss Take-Over Code and introduced a mandatory public offering rule.

The language used in takeover transactions of business enterprises in Switzerland is influenced by Anglo-American practices, especially in the field of hostile takeovers where expressions like "white knight", "golden parachute", "poison pill", "poison put", have become standard language.

The first hostile takeover in Swiss corporate history was attempted by the US corporation International Paper Company as - unsuccessful - US bidder, trying to take over Holvis, a Swiss paper and fiber company. BBA as white knight successfully acquired Holvis for CHF 0.5 billion.

The target company can take several defensive measures against unfriendly take-over attempts. The most effective are the pre-bid defense structures which must be implemented in the articles of incorporation, such as the following measures:

The company may refuse a potential acquirer of registered shares if the acquisition goes beyond a percentage threshold (usually between 2% and 5%)

The articles of incorporation may provide that the right to vote shall be based on the number of shares held, irrespective of the par value, so that each share represents one vote. In such case, shares which have a lower par value than other shares of the stock company shall be issued only as registered shares and shall be fully paid in. The par value of other shares shall not be higher than ten times the par value of the shares with increased voting power.

As a general rule, every shareholder, even if he owns only one share, is entitled to at least one vote. The articles of incorporation may, however, limit the number of votes owners of more than one share may cast (whether they vote by proxy or for themselves).

The articles of incorporation may set a quorum for the adoption of certain important resolutions.

To suspend the shareholders' preemptive rights, the general meeting of shareholders may, by amendment of the articles of incorporation, authorize the board of directors to increase the share capital within a period of not longer than two years. The newly issued shares may be used to fight off a hostile take-over attempt by offering them to a third party.

A company may acquire its own shares if freely disposable equity in the amount necessary for this purpose is available and if the total par value of these shares does not exceed ten percent, or, if registered shares are acquired in connection with a restriction of transferability, twenty percent of the share capital.

Other defensive measures need not be set forth in the articles of incorporation (e.g. poison-pills, the permissibility of which is, however, not certain; poison-puts; lock-up arrangements approved by shareholders; golden parachutes, if complying with the board's/management's duties). However, according to the SESTA, the board of directors of the offeree company shall, from the moment an offer is published until the result is announced, not enter into any legal transactions which would have the effect of altering significantly the assets or liabilities of the company. Decisions taken by the general meeting of shareholders are not subject to this restriction and may be implemented irrespective of whether they were adopted before or after publication of the offer.

The contents of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.