In-House View - Swiss M&A - Post-Merger Integration

Introduction

Successful M&A transactions need to deliver the value expected by the buyer when doing the acquisition. Poor performance in dealing with post-merger integration¹ is often the reason why acquisitions do not realise their full potential. Bringing together businesses with different cultures and integrating different management structures, IT systems and trading relationships often proves very challenging, in particular in a multinational environment. Experience shows that effectively managing the post-acquisition integration phase by developing a robust integration plan and effective implementation process is of paramount importance for the overall success of an M&A transaction.

A number of legal aspects frequently arise during integrations. In this chapter, we outline the typical process for the development of a post-acquisition integration plan and summarise some of the most common legal aspects to be taken into consideration in post-merger integration projects from a Swiss legal perspective.

Integration planning

Starting integration planning early – even before the signing of the transaction – allows a faster and more efficient implementation of the integration. The main phases of an integration are typically structured as follows:

• Programme set-up: the set-up of a robust integration programme is crucial as it will avoid later issues and problems in the integration process. An appropriate programme design and structure facilitates an efficient integration programme. In particular, careful consideration should be given to the appointment of an integration director. As the integration process is a heavy-change management exercise typically affecting the personal interests and jobs of many employees, it is recommended that the selected integration director is an experienced and respected senior personality from the business, who brings credibility and trust to the integration process. Equally important is the establishment of the programme's governance. Strong leaders should be selected to sponsor and manage the integration programme and the individual work streams. The establishment of the principal roles and responsibilities need to take place early in the process.
• Planning phase: the management of the acquiring company must determine the key strategic business objectives and develop an integration blueprint in consideration of the future operating model and the synergy case. The integration blueprint is a strategic and operational document that is established in the early weeks of an integration programme. Its main purpose is to build alignment between the involved parties across a number of key dimensions, such as the strategic and financial rationale for the transaction, the principles and priorities of the integration programme, the degree and pace of integration, critical dates and milestones, organisation design and key appointments. A main part of the value created by an M&A transaction is generated with synergies between the two businesses. During the early stage of the transaction, a synergy case is typically prepared with a top-down approach. During the integration process, the synergy case needs to be bottom-up developed and validated. A small working team should validate the defined sources of synergy benefit (cost synergies) and identify new opportunities for increased return (revenue synergies) as early as possible.
• Integration and implementation: based on the integration blueprint, detailed step lists are created for the individual steps in each workstream and jurisdiction indicating the documents required and the timing of each individual step. The detailed step lists serve as a basis for the actual implementation process in the various jurisdictions. The management and implementation of the various steps ultimately depends on the size of the integration process, the geographical scope and the steps involved. In the implementation phase, regular status update calls among the various workstreams are typically scheduled to ensure an ongoing smooth process and to identify any unexpected issues early in the process. Depending on their size and complexity, post-acquisition integration projects may take several years. The implementation of the integration and the execution of the synergy case benefits from systematic programme reporting and tracking. A special focus needs to be put on managing people issues and communication.

Integration projects usually create a substantial workload to be dealt with. For this reason, specialised external advisers are typically engaged to support the in-house teams. As the in-house team's knowledge is crucial, it is important that outside counsel and the in-house legal team work very closely together to achieve the best result.

Legal aspects

Due diligence

In order to start preparing the integration programme, certain initial information must be available, such as the jurisdictions involved or the tax situation of involved companies, and it needs to be verified, inter alia, if real estate is in place, if works councils are appointed or collective bargaining agreements apply or if contracts with change-of-control clauses exist. Ideally, the information required to start the integration planning relating to the acquired business will already have been collected in the course of the acquisition due diligence. Otherwise, a limited due diligence is typically required at the initial stage of the integration planning process. In addition, it might also be necessary for due diligence to be conducted on the buyer's existing entities involved in the post-acquisition integration in order to identify any potential legal and other issues that might affect the integration process. In particular, in the case of the acquisition of a competitor, it is important that the parties comply with potential antitrust restrictions when sharing information prior to signing or between signing and closing.

Statutory mergers

Overview

A key aspect of the integration process is often the consolidation of several entities in the same jurisdiction so that at the end of the integration process only one entity per jurisdiction remains. Entity consolidation in Switzerland can be achieved either by statutory merger or by an asset transfer with subsequent liquidation. Typically, a merger is less cumbersome than an asset transfer with subsequent liquidation and thus, when it comes to entity consolidations, the preferred method in Switzerland from a legal perspective is a statutory merger.

The merger process in Switzerland is governed in the Swiss Merger Act (SMA). The SMA provides for two types of statutory mergers: merger by way of absorption, whereby an entity is merged into another entity; and merger by way of combination, whereby the merging entities are merged into a newly established entity. In integration situations, merger by way of absorption is the preferred merger form. The merger becomes effective with its registration in the commercial register at the domicile of the surviving entity.² Depending on the domicile of the merging entities, the merger documentation must be in German, French or Italian. The merger documentation can be bilingual (for example, German and English) with the official language of the competent commercial register to prevail.

The SMA provides for an ordinary merger procedure and a simplified merger procedure. The simplified merger procedure is applicable in the case of a merger of a wholly owned subsidiary into its parent company or if a company is merged into its sister company.³ In a simplified procedure, the merging entities, inter alia, are not required to:

• establish a merger report;
• have the merger agreement examined by auditors; or
• submit the merger to their shareholders for approval.

Compared with the ordinary process, the simplified merger procedure in particular saves time and costs for the following reason: if the option of a simplified merger is not available, each shareholder must basically receive a pro rata portion of the shares in the merged entity, which leads to additional cost and timing issues as the exchange ratio must be calculated in advance and confirmed by the auditors in their merger report.⁴

Thus, in order to benefit from the simplified merger procedure in an integration process, as a first step it often becomes necessary that a share ownership structure is created where the dissolving entity becomes either a wholly owned direct subsidiary or a sister company of the surviving entity into which it will be merged. It should be noted that the simplified procedure is not applicable in Switzerland in the case of a reverse merger (ie, the merger of the parent into its wholly owned subsidiary). In such situations, the ordinary merger procedure applies.

Documents

In the simplified merger procedure, the following documents are required:

• a board resolution of the members of the board of directors of the merging entities approving the merger;⁵
• a merger agreement between the merging entities setting out the key terms of the merger; ⁶
• the (audited) balance sheets of the merging entities;⁷ and
• the application to the commercial register of each merging entity.⁸

With the exception of the balance sheets, such documents can be established rather quickly. In cases where additional steps such as a change of directors, a name change or a change of the objects of the surviving entity are implemented, additional documents will be required, depending on the specific steps.

Merger balance sheet

Article 11 SMA provides that all companies involved in a merger need to establish an (audited) balance sheet that must not be older than six months at the date when the merger agreement is signed. If the balance sheet date is older than six months or if material changes have occurred to the financial position of a company involved in the merger, an (audited) interim balance sheet must be established. The relevant balance sheets or the interim balance sheets required for a merger must be audited if the relevant company is subject to an audit. The (audited) balance sheet of the dissolving entity constitutes the merger balance sheet. The merger balance sheet must be attached to the merger agreement, and forms part of the documents to be submitted to the commercial register; in other words, it becomes publicly available.⁹ The balance sheet of the surviving entity does not need to be submitted to the commercial register and thus becomes not publicly available. In particular, it is not necessary to provide to the commercial register any pro forma financial statements showing the financial position of the entity after the merger.

The establishment of the audited balance sheets of the merging entities is often a gating item in the integration process. To save costs, a Swiss merger is ideally timed in such a way that the audited year-end financial statements of the merging entities can be used in connection with the merger. In cross-border acquisitions, however, the business year of the acquired company group often does not match with the business year of the buyer group, which limits the window in which a merger in Switzerland can be completed based on the year-end financial statements. Thus, the time and cost required to establish (audited) balance sheets in connection with the merger of Swiss entities might be important elements in the overall planning of the integration.

Retroactive effect

A merger in Switzerland can have retroactive effect from a tax and accounting perspective. However, from a tax perspective such retroactive effect is only possible if the merger is registered in the commercial register at the latest within six months of the merger balance sheet date (ie, if the merger balance sheet date is 31 December, the merger must be registered in the competent commercial register on or before 30 June of the following year). Owing to this tax regulation, and given that 31 December is the business year-end date of the majority of Swiss companies, the Swiss commercial registers suffer from a heavy workload particularly at the end of June and the end of December. It is, therefore, recommendable to have the merger documents pre-examined by the competent commercial register early enough in the process to ensure that the merger is ultimately registered in time.

Transfer of contracts

In a statutory Swiss merger, all assets, liabilities, employees and contracts are automatically transferred by operation of law to the surviving entity at the date when the merger is registered in the commercial register.¹⁰ However, contracts of the transferring entities might contain non-assignment, change-of-control or similar clauses that trigger the counterparty's termination rights as a consequence of the merger. It is therefore important that the contracts of the transferring entity are reviewed in advance of an intended merger. In cases where important contracts contain any of the aforementioned clauses, the consent of the counterparty should be obtained prior to the merger being implemented. Change-of-control clauses are often not applicable in any change of control within the same group, which is typically the situation in a post-integration process. Nevertheless, in the case of important contracts it is in any event advisable to double-check. Since it can be time-consuming to obtain the consent of a contractual counterparty, the due diligence exercise on the contracts should be started early in the integration phase to avoid any delays in the overall integration process.

Employees

Under Swiss law, the employees of the dissolving entity are automatically transferred to the surviving entity upon registration of the merger in the competent commercial register.¹¹ See 'Employment', below, for details of the information and consultation process.

Creditors' notikcation

The merging entities must notify their creditors by publishing three times a call to the creditors in the Swiss Official Gazette of Commerce and inform them of their right to request sureties for their claims within a three-month period following the effective date of the merger. The creditors' call can be waived if an independent auditor confirms in an auditor's report that there are no claims known or expected that are not covered by the freely distributable equity of the merging entities.¹²

Timing

The overall timing required for the implementation of an intra-group merger in Switzerland depends on the specific situation, but is on average approximately one to four months. Timing is mainly driven by the time required to establish the (audited) balance sheets of the merging entities, the employee notification process and the time required to collect the required signatures.

Asset transfers

Overview

As part of the integration process, assets may need to be transferred from one group entity to another. Swiss law provides for two different processes to implement an asset transfer. An asset transfer can be implemented either by way of an asset transfer in accordance with article 69 et seq SMA, also referred to as a bulk transfer, or an individual asset transfer.

Bulq transfer versus individual asset transfer

In the case of a bulk transfer, all assets (and liabilities, if any) are transferred by operation of law upon registration of the asset transfer in the competent commercial register of the transferring entity.¹³ Article 71 SMA requires that the asset transfer agreement must contain a detailed inventory of the assets, liabilities, contracts and employees to be transferred. As the asset transfer agreement must be submitted to the commercial register to be registered, the details of the assets, liabilities, employees and contracts to be transferred become publicly available. While it is possible to anonymise the names of employees and counterparties to contracts, the details of the assets and liabilities, as well as the number of employees and contracts, still remain largely evident.

In the case of an individual asset transfer, assets and liabilities are not transferred by operation of law. Rather, an individual transfer of ownership is required. The steps required depend on the kind of assets being transferred. The benefit of an individual asset transfer is that the transfer contract remains confidential and that no dealing with the commercial register is required. The timing of the process remains fully under the control of the involved entities.

A bulk transfer is particularly beneficial if real estate located in different locations is to be transferred. In such cases, the transfer of the real estate becomes effective at the same time as registration of the asset transfer agreement with the competent commercial register. In comparison, if real estate is transferred by way of an individual asset transfer, each individual piece of real estate must be separately registered in the land register at the place of the real estate in order for the real estate transfer to become effective.

Transfer of contracts

In the case of an individual asset transfer, the transfer of a contract requires the consent of the counterparty to the respective contract. Depending on the importance of the contracts, such consent can either be obtained explicitly or a counterparty can merely be informed about the intended transfer of the contract. In the latter case, implied consent is assumed if the informed counterparty does not explicitly object to the transfer and continues to perform the contract after it has been notified. Given that in post-acquisition integrations the transfer of contracts is made among companies of ultimately the same group, the 'implied consent' approach is often chosen. However, depending on the situation and the importance of the contract, it can be advisable to work with explicit consent.

In the case of a bulk transfer, it is not entirely clear if (as in the case of a merger) contracts are transferred automatically by operation of law upon registration of the asset transfer in the commercial register or if the consent of the counterparty must be obtained as well. Although majority doctrine in Switzerland is of the opinion that contracts shall transfer automatically upon registration in the commercial register without consent being required, the situation remains unclear as long as no decisive judicial practice exists. Thus, to be on the safe side, it is still recommended to at least notify a contractual counterparty about the intended transfer and to obtain their explicit or at least implied consent.

Employees

If a business or part of a business is transferred, the employees pertaining to the business are automatically transferred to the acquiring company under Swiss law.¹⁴ See 'Employment', below, for details of the information and consultation process.

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Footnotes

1. Also referred to as post-acquisition integration.

2. Article 22 SMA.

3. Article 23 SMA.

4. The calculation of the exchange ratio requires comparable financial information of the merging entities, which might not be available and thus needs to be prepared in advance.

5. Article 12 SMA.

6. Article 12 SMA.

7. Article 11 SMA.

8. Article 21 SMA.

9. Companies that do not wish to disclose unnecessary information to the public may redact the numbers from the past financial year in the audited balance sheet submitted to the commercial register and should not voluntarily submit the income statement in addition (as only the balance sheet is required from a legal perspective).

10. Article 22 SMA.

11. Article 333 paragraph 1 of the Swiss Code of Obligations (CO).

12. Article 25 paragraph 2 SMA.

13. Article 73 SMA.

14. Article 333 paragraph 1 CO.

Originally published by Lexology.

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.