1 Legal framework
1.1 Which general legislative provisions have relevance in the private equity context in your jurisdiction?
The Swiss Code of Obligations is the primary legislative source for private equity transactions, as well as for the structuring of Swiss portfolio companies, which are typically incorporated in the form of a corporation (Aktiengesellschaft, société anonyme) pursuant to Articles 620 and following – or occasionally as a limited liability company (Gesellschaft mit beschränkter Haftung, société à résponsabilité limitée) pursuant to Articles 772 and following – of the Swiss Code of Obligations. For public-to-private transactions, the Swiss rules on public takeover offers set forth in Articles 125 and following of the Financial Market Infrastructure Act and its implementing ordinances are of key relevance – in particular, the Ordinance of the Takeover Board on Public Takeover Offers – as well as the published practice and circulars of the Swiss Takeover Board. Further, the Financial Market Infrastructure Act contains market conduct rules that may also become relevant in the private equity context, such as the provisions relating to the disclosure of significant shareholders, insider trading, market manipulation and derivatives trading. Further, with the entry into force of the Financial Services Act, the Financial Institutions Act and the corresponding amendments to the Collective Investment Schemes Act in early 2020, the regulatory framework changed significantly. For sponsors and private equity funds, it is of particular importance that, as part of the revision, the concept of a ‘distribution' was abolished and replaced by the concept of an ‘offering', which must be considered and will have an impact on the fundraising activities of private equity funds and sponsors in Switzerland.
1.2 What specific factors in your jurisdiction have particular relevance for and appeal to the private equity market?
While Switzerland is not a go-to jurisdiction for the establishment of private equity funds, mainly due to tax reasons, it remains an attractive market for M&A activities for both private equity and strategic investors. Switzerland is consistently ranked as one of the most innovative countries worldwide and is well known for providing a stable, business-friendly political and regulatory environment. Small and medium-sized enterprises (SMEs) play an important role in Switzerland's economy, contributing more than half of Switzerland's GDP and almost half of Switzerland's exports, and many of them are highly specialised players in attractive niches. Also, we expect that the continuing need for succession planning, in particular for SMEs, will lead to attractive investment opportunities.
2 Regulatory framework
2.1 Which regulatory authorities have relevance in the private equity context in your jurisdiction? What powers do they have?
The Swiss Takeover Board ensures compliance with the rules on public takeover offers and is therefore relevant for public-to-private transactions. Its decisions may be appealed to the Financial Market Supervisory Authority (FINMA) and ultimately with the Swiss Federal Administrative Court. FINMA is also the supervisory authority with wide-ranging powers for other regulatory matters relevant in the private equity context, such as the rules on market conduct and the establishment of and fundraising by private equity funds or sponsors in Switzerland. Further, transactions involving targets holding a FINMA licence may be subject to FINMA approval. The Swiss Competition Commission, an independent federal authority, is responsible for enforcing the Swiss merger control rules. Merger control filings are triggered if:
- the enterprises involved together have a turnover of at least CHF 2 billion or a turnover in Switzerland of at least CHF 500 million; and
- at least two of the enterprises involved have a reported turnover in Switzerland of at least CHF 100 million.
The Competition Commission may prohibit a merger or approve it subject to conditions if the transaction creates or strengthens a dominant position capable of eliminating effective competition and does not improve the conditions of competition in another market such that the negative effects of the dominant position can be outweighed.
2.2 What regulatory conditions typically apply to private equity transactions in your jurisdiction?
The obligation to make a public tender offer for all listed shares applies to anybody that, directly, indirectly or acting in concert with third parties, acquires equity securities which, added to the equity securities already owned, exceed the threshold of 33.33% of the voting rights of a listed Swiss company, irrespective of whether the voting rights may be exercised or not. Listed companies may provide in their articles of incorporation that the threshold for such obligation is set at 49% of the voting rights (opting up) or even exclude shareholders from the duty to make a mandatory tender offer (opting out).
Further, a person that, directly or indirectly or acting in concert with third parties, acquires or disposes of shares or acquisition or sale rights relating to shares of a company listed in Switzerland and thereby reaches, falls below or exceeds the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33.33%, 50% or 66.66% of the voting rights, whether exercisable or not, must notify this to the company and to the stock exchanges on which the equity securities are listed (obligation to disclose significant shareholders).
For transactions triggering a Swiss merger control filing, clearance is given by the Competition Commission within one month of submission of the complete notification (Phase I), unless the Competition Commission decides to subject the transaction to a four-month in-depth investigation (Phase II). Because only a complete filing starts the clock, it is in practice highly recommended to submit a draft application for review.
Further, transactions in regulated industries (eg, banking) may require the approval of the relevant regulator prior to completion.
3 Structuring considerations
3.1 How are private equity transactions typically structured in your jurisdiction?
For investments in a Swiss target, private equity funds typically incorporate a new Swiss acquisition company in the form of a corporation (Aktiengesellschaft, société anonyme) or occasionally a limited liability company (Gesellschaft mit beschränkter Haftung, société à résponsabilité limitée). The newly incorporated company is typically held via one or more holding companies incorporated in other jurisdictions (often Luxembourg or the Netherlands) or similar structures, depending on the particular capital structure and tax considerations. While we see various forms of participation for management, it is quite common in Switzerland for management to invest directly in the Swiss acquisition company (rather than via management participation company or their participation being ‘rolled up' the chain of holding companies). It is not uncommon for Swiss acquisition vehicles to have only one or two classes of shares and for the preferential rights to be implemented via the shareholder agreement (rather than having separate categories of shares).
3.2 What are the potential advantages and disadvantages of the available transaction structures?
In our experience, the main drivers for the structuring of transactions are tax considerations, because achieving a tax-efficient structure is of paramount importance for investors (eg, with regard to the payment of dividends, withholding taxes and double taxation or the taxation of exit proceeds). For instance, the fact that managers resident in Switzerland may realise a tax-free capital gain on the sale of the shares in the Swiss acquisition vehicle is one of the reasons why management often invests directly at the level of the Swiss acquisition vehicle. Using a limited liability company as the Swiss acquisition special purpose vehicle instead of a Swiss corporation may be beneficial from a US tax law perspective, because a limited liability company will be considered tax transparent. Considerations relating to the capital structure (and the respective advantages/disadvantages) are another important aspect of the transaction structuring.
3.3 What funding structures are typically used for private equity transactions in your jurisdiction? What restrictions and requirements apply in this regard?
Funding structures in most instances consist of an equity and a debt portion, and ultimately depend on:
- the amount of debt that can or should be raised;
- the equity that is therefore needed to finance the transaction; and
- the ability of the target to provide investors with an acceptable risk-adjusted return on the equity portion invested in the transaction.
The type of equity and debt and the amount of debt/equity depend heavily on the particular transaction. A combination of bank loans (senior and junior debt) and (high-yield) bonds is often seen, in particular for large leveraged buy-out transactions. Existing debt at the level of the target typically needs to be refinanced as part of the transaction, with existing security packages being released and usually reused as collateral for the new financing.
Upstream guarantees and other upstream securities provided by a Swiss company are limited to the amount of freely distributable reserves of such company and are subject to certain other requirements. The same applies for cross-stream securities. Swiss corporate law does not provide for capital requirements (other than the minimum share capital). However, under the Swiss thin capitalisation rules, shareholder loans exceeding certain thresholds may be subject to requalification by the tax authorities and trigger tax consequences (interest not tax deductible; withholding tax on interest payments). Similar issues may arise with regard to interest paid on inter-company loans if the applicable interest rate exceeds the maximum interest rates published annually by the Swiss tax authorities which are regarded as a safe harbour.
3.4 What are the potential advantages and disadvantages of the available funding structures?
Finding an optimal capital structure is in practice often more complex than just having an amount to be invested in equity of the target and a bank facility or a loan by private equity investors. Sufficient funding must be available for the acquisition of the portfolio (including acquisition costs) and the financing of the target's business plan, and ideally should also be flexible enough to absorb unexpected developments. At the same time, the funding structure should be tax efficient, minimise investors' exposure to currency risks and interest rate movements, and optimise the return of investors taking into account the risks they are taking. For each transaction, these elements need to be brought together in a suitable funding structure.
In this context, it is also worth noting that, while most transactions go ahead on the basis of binding term sheets or an interim financing arrangement, for public-to-private transactions, the funds to complete the public offer must be available prior to the launch and must be confirmed by the review body.
3.5 What specific issues should be borne in mind when structuring cross-border private equity transactions?
Switzerland has always seen a lot of cross-border M&A activity. Despite some political pressure and against a certain international trend, Switzerland has not established any investment control or restrictions. As mentioned in question 3.2, private equity transactions are typically tax driven. For the debt portion of an investment, measures to mitigate currency and interest rate risks may also play an important role. Given their fast-paced nature, private equity transactions involving several jurisdictions may also be challenging for the legal advisers involved, because they require significantly more coordination and communication than domestic transactions.
3.6 What specific issues should be borne in mind when a private equity transaction involves multiple investors?
People acting in concert or as an organised group together with the bidder in a public offer are subject to certain obligations under the Swiss takeover rules. In particular, they must also comply with the rules concerning equal treatment, including the best price rule, and notify their transactions; and their shareholding in the listed target are consolidated with the shareholding of the bidder for purposes of the takeover rules. Further, they must be disclosed in the offering prospectus.
In Switzerland, if there is more than one investor, a shareholder agreement is usually concluded among the investors, setting forth their rights and obligations with regard to the target. Typically, shareholder agreements contain provisions regarding, among other things:
- the governance of the portfolio company (composition of board of directors, veto rights and quorum requirements for certain decisions on board and shareholder level);
- transfer restrictions and rules for the various exit scenarios (eg, tag/drag along, call/put options);
- shareholder protection (subscription rights, anti-dilution clauses); and
- good/bad leaver events.
Rather than creating different share classes, the shareholder agreement often also contains provisions relating to preferential rights, liquidation proceeds and so on. Usually, there is only one shareholder agreement for all investors and the management. But it is also not uncommon to have a main shareholder agreement for the investors and a shorter version for the management.
4 Investment process
4.1 How does the investment process typically unfold? What are the key milestones?
While the process always depends on the particularities of the specific transaction, three stages may, generally speaking, be distinguished: the evaluation phase, the acquisition phase and the operative phase post-completion. The evaluation phase typically starts with a confidentiality agreement (with or without exclusivity), the legal due diligence exercise and the negotiations on a transaction term sheet. In the acquisition phase, the parties negotiate and finalise the share purchase agreement and the finance and security documents. Post-completion, the investors must take over the management of the newly acquired portfolio company; the pre-agreed upon principles and rules for the governance and management of the portfolio company are usually laid down in the shareholder agreement and also, where possible, in the target's articles of incorporation. For public-to-private transactions, the detailed process and timetable set forth in the Takeover Ordinance of the Swiss Takeover Board apples.
4.2 What level of due diligence does the private equity firm typically conduct into the target?
The level of due diligence may vary, depending on the circumstances of a specific transaction; but it typically covers areas such as corporate, employment, real estate, material agreements with suppliers and customers, other material agreements (eg, financing agreements), intellectual property/information technology, litigation matters and regulatory and compliance matters. In most instances, the bidder retains a law firm to conduct a limited red flag due diligence review of the target. The rules of the Swiss Takeover Board provide for specific rules for public-to-private transactions, where due diligence primarily is conducted based on publicly available information on the target.
4.3 What disclosure requirements and restrictions may apply throughout the investment process, for both the private equity firm and the target?
Anyone that, alone or in concert with third parties, acquires shares in a company that is not listed on a stock exchange and reaches or exceeds the threshold of 25% of the share capital or voting rights must, within one month, give notice to the company and disclose the full name and address of the natural person for whom it is (directly or indirectly) ultimately acting (the beneficial owner). If the shareholder is a legal entity or partnership, each natural person that controls the shareholder must be recorded as a beneficial owner. If there is no such person, the shareholder must give notice of this to the company. The shareholder must also give notice to the company within three months of any change to the full name or to the address of the beneficial owner. Sanctions in case of non-compliance with these rules entail the suspension of rights attached to the shares (voting and dividend rights), as well as criminal sanctions (fines).
As regards the duty to notify significant shareholders in listed companies, please see question 2.2.
4.4 What advisers and other stakeholders are involved in the investment process?
In this regard, in our experience, private equity transactions are not significantly different from other M&A transactions. The types and number of advisers and stakeholders significantly depend on the parties involved and the specifics of the team involved. Besides legal counsel, the parties typically also retain financial and/or tax advisers in connection with a transaction, as well as any other specialist know-how (eg, environmental or finance experts) required for the evaluation of the transaction. Other stakeholders include in particular the management and employees.
5 Investment terms
5.1 What closing mechanisms are typically used for private equity transactions in your jurisdiction (eg, locked box; closing accounts) and what factors influence the choice of mechanism?
Both the locked-box mechanism and net working capital/net debt adjustment mechanisms based on closing accounts are commonly used in Switzerland. A locked-box mechanism is generally regarded as more seller friendly and is typically preferred by sellers, while consideration structures involving closing accounts are more often proposed by buyers. In recent years, the seller-friendly market tended to favour the use of locked-box mechanisms. However, given that both approaches have their advantages and disadvantages, in our experience it often comes down to the parties' preferences and leverage in a specific transaction. For businesses that are suitable for a locked-box mechanism (ie, stable businesses with low volatility), a buyer may also prefer the certainty entailed by a locked box-mechanism – in particular, if the buyer conducted in-depth due diligence and the seller is prepared to agree to an effective leakage protection over the accuracy of a completion accounts approach.
There are advantages and disadvantages for both and ultimately it will come down to personal preference as to what mechanism a party would prefer in each case. Although completion accounts usually speed up the transaction process, they are particularly complex and heavily disputed over between parties, even after drafting the mechanism itself. Completion accounts may be preferable for parties to use if they wish to reach a purchase price that is representative of the target at the time of closing. On the other hand, locked-box mechanisms are becoming increasingly popular for both sellers and buyers, given the certainty they entail. If the circumstances involved are suitable for a locked-box mechanism (ie, no volatility), and the buyer can undertake extensive due diligence and negotiate a leakage provision that effectively locks the box, then parties usually prefer to go ahead with the locked-box mechanism as opposed to the completion accounts mechanism. If a locked-box structure is chosen, the question of whether interest is paid on the purchase price is typically heavily negotiated between the parties; in our experience, buyers more often than not prevail on this and do not pay interest.
5.2 Are break fees permitted in your jurisdiction? If so, under what conditions will they generally be payable? What restrictions or other considerations should be addressed in formulating break fees?
In Switzerland, both direct break fees (ie, payments from the target to a bidder) and reverse break fees (ie, payments from the bidder to the target) are permitted, subject to certain limitations. Break fees have become increasingly popular in recent years – in particular, in public M&A transactions – but are in general significantly lower than, for example, in the United States. The Swiss Takeover Board that oversees public offers in Switzerland has limited direct break fees in public offers. The Takeover Board accepts direct break fees only if they do not unduly influence the decision making of the shareholders or prevent others to make a competing offer. The break fee therefore must be reasonable and should not exceed the costs incurred by the bidder. There is no threshold (eg, amount or percentage) that must not be exceeded. Rather, according to the Takeover Board's practice, all relevant circumstances must be taken into consideration. However, the threshold of 2% is considered the limit for public M&A deals in practice.
The rules of the Takeover Board on direct break fees do not apply to reverse break fees, but similar restrictions apply nevertheless. Whenever the approval of the shareholder is required, the amount of the break fee must not be such that shareholders are compelled to approve the deal. The board of directors may agree to the payment of a break fee only if it is convinced that such fee is in the best interests of the company. With their growing importance, reverse break fee structures have become more sophisticated, entailing different fee amounts which depend on the triggering event or on the duration (eg, in connection with approval proceedings). Typical triggering events include failure to obtain shareholder approval, antitrust and other regulatory approvals, or acquisition financing. Occasionally, reverse break fees are also simply used as a remedy in case of the abortion of a transaction, essentially giving the bidder a walk-away right.
5.3 How is risk typically allocated between the parties?
The tools used in Switzerland to allocate risks between the parties do not differ significantly from international market standards, even though Swiss law-governed share/asset purchase agreements tend to be significantly shorter than comparable US or English law-governed agreements, due to the civil law system.
Abstract risks relating to the target are typically allocated by way of a customary catalogue of representations and warranties with a tailor-made regime of liability. Liability for breaches of representations and warranties is typically subject to a de minimis amount exemption, a threshold and a cap. The actual amounts depend on the particular deal, its size and the parties' bargaining power; however, a cap of 10% to 30% of the purchase price and a threshold of approximately 1% may be considered a rule of thumb for Swiss mid-market transactions. It is also not uncommon for the parties to modify the agreed-upon general regime for violations of representations and warranties with regard to certain core representations and warranties, such as ownership and title, power and authority, tax and social security contributions (eg, no de minimis threshold or cap, longer term). Risks known to the parties (ie, risks identified by the buyer in the due diligence exercise or disclosed by the seller (disclosure letter)) typically either are taken into account in the determination of the purchase price or an adjustment thereof or are addressed via specific indemnifications. If there is more than one seller (eg, management as co-sellers), each seller is typically liable only in proportion to its shareholding. Other arrangements commonly used are escrow arrangements to secure claims for violations of representations and warranties as well as covenants – in particular, non-solicitation and/or non-compete covenants.
5.4 What representations and warranties will typically be made and what are the consequences of breach? Is warranty and indemnity insurance commonly used?
The set of representations and warranties given by private equity sellers typically covers all aspects of the target or target group and its business, and does not deviate significantly from what is customary in other transactions. Please see question 5.3 for details on the liability regime for violations of representations and warranties. Warranty and indemnity insurance was rarely used in the past, but has become increasingly common in the past couple of years and should be on a standard checklist for private equity transactions in Switzerland today.
6 Management considerations
6.1 How are management incentive schemes typically structured in your jurisdiction? What are the potential advantages and disadvantages of these different structures?
Broadly speaking, management incentive schemes in Switzerland are structured such that managers receive shares or options to acquire shares at preferential conditions (with a discount) or are remunerated with an amount of cash which mirrors the increase of the value of the company during a certain time period (phantom stock). Typically, one differentiates between:
- share plans whereby the managers receive freely disposable shares;
- share plans whereby the managers receive restricted shares (meaning that the managers may not dispose of the shares during a certain time period);
- option plans; and
- incentive schemes with phantom stock/stock appreciation rights.
The use of shares or options does not affect (in case treasury shares are used) or only marginally affects (if the nominal share capital is increased without creating reserves) the company's liquidity. Also, shares and options may help to align the interest of the managers with those of other shareholders. At the same time, the creation of additional share capital is subject to formalities (eg, shareholders' meeting; participation of a notary public; waiver of preferential subscription rights by existing shareholders); and with the managers becoming shareholders, the shareholders' structure changes. By contrast, the use of phantom stock requires no specific formalities and the shareholder structure of the company remains unchanged. However, at some point in time, the company will actually have to use liquidity to pay the phantom stock remuneration to the managers.
6.2 What are the tax implications of these different structures? What strategies are available to mitigate tax exposure?
The allocation of shares may be subject to personal income taxes (for managers) and social security contributions (for both the company and the managers). Further, stamp taxes may be imposed on the company in case shares are created through a capital increase. In terms of timing, taxes and social security contributions may be levied when the manager acquires shares or sells them.
Managers receiving shares are subject to personal income tax as follows (for the value of the shares received; for capital gains, see below):
- for freely disposable shares, where the manager immediately owns the company shares, income tax is imposed on the basis of the difference between the market value of the shares and the price at which the shares were issued/vested to the manager;
- for restricted shares, which may be used or disposed of by the manager only after a certain vesting period, the market value of the shares is discounted on the basis of the duration of the vesting period (such discount is determined by the Federal Tax Authority and currently amounts to 25.27% for a five-year vesting period and to a maximum of 44.15% for a 10-year vesting period);
- options through which the employee can, within a certain exercise period and at a certain price, acquire shares of the employer are taxed when exercised and the gains realised by the managers are subject to personal income tax (in case of vesting periods, the same discounts as for restricted shares apply); and
- for phantom stock, where the company grants the managers a contractual right to a certain amount of money based on the value of existing shares, the payment of the remuneration is subject to personal income tax.
Based on the aforementioned, tax exposure for managers can be mitigated through the application of longer vesting periods. However, this is applicable only if shares in the company are actually vested to managers (ie, not in case of phantom stock). As progressive taxes apply in Switzerland, for phantom stock schemes, tax exposure can be mitigated if the cash remuneration is paid out during a multi-year period and not in one lump sum.
Private capital gains realised on the stock granted to managers residing in Switzerland (in case the managers sell their shares/options) are exempt from personal income tax in Switzerland. The question whether a sale of shares under a management incentive scheme qualifies as tax-exempt capital gain depends on various elements – in particular, the extent of ownership rights granted to the managers (eg, right to vote, dividends). In order to obtain legal certainty on whether the sale of shares received by managers under a management incentive scheme qualifies as tax-exempt capital gain or is considered taxable personal income, companies usually request a tax ruling from the competent tax authorities in advance of setting up a management incentive scheme.
6.3 What rights are typically granted and what restrictions typically apply to manager shareholders?
Usually, manager shareholders can exercise the full rights related to their shares (voting rights, information rights, rights to dividend), but may be subject to restrictions depending on the actual incentive scheme or the applicable shareholder agreement. Further, managers are not normally entitled to transfer their shares for a certain period.
If the shares are listed on a stock exchange, managers who have insider information are prohibited from dealing in shares and options during certain periods. Further, listed companies must comply with specific disclosure obligations when managers deal with their shares.
6.4 What leaver provisions typically apply to manager shareholders and how are ‘good' and ‘bad' leavers typically defined?
Good and bad leaver provisions are standard for shareholder managers in Switzerland.
A manager is usually considered a bad leaver if his or her employment agreement has been terminated by the company for cause (Article 337 of the Code of Obligations), or if the manager has himself or herself terminated the employment agreement other than for cause.
A manager is usually considered a good leaver if his or her employment agreement with the company has been terminated and he or she is not deemed to be a bad leaver.
If a manager is considered a bad leaver, the other shareholders are usually granted the right to purchase his or her shares at a discounted price; whereas in a good leaver scenario, such purchase price is normally not subject to a discount.
7 Governance and oversight
7.1 What are the typical governance arrangements of private equity portfolio companies?
Portfolio companies normally take the form of a stock corporation (Aktiengesellschaft, société anonyme). Less often, portfolio companies take the form of a limited liability company (Gesellschaft mit beschränkter Haftung, société à résponsabilité limitée). In case of a stock corporation, the shareholders are registered in the shareholders' register of the company. This register is not public (it is accessible to other shareholders at the company). By contrast, the register of shareholders of a limited liability company is public (via the commercial register), which means that anyone can see who the shareholders of a limited liability company are and transfers of shares must be filed with the commercial register.
The corporate bodies of a stock corporation are the shareholders' meeting, the board of directors (which consists of at least one member) and the auditor.
The shareholders' meeting, among other things, appoints the members of the board, adopts the articles of incorporation and approves the annual report of the company. Most decisions of the shareholders' meeting require a simple majority. A two-thirds majority of voting rights represented at a shareholders' meeting and an absolute majority of the nominal value of shares are required for certain important matters. The board of directors supervises the operations of the company and has certain non-transferable powers – in particular, to carry out senior management of the company, to determine the organisation of the company and to appoint and supervise the persons responsible for the management. Typically, portfolio companies have internal organisational regulations which provide for additional rules regarding the governance of a company. These organisational regulations mirror the content of shareholder agreements and set out the voting procedures and majority/veto rules applying at the level of the board of directors.
7.2 What considerations should a private equity firm take into account when putting forward nominees to the board of the portfolio company?
At least one (in case of single signatory powers) or two (in case of collective signatory powers) persons residing in Switzerland must be able to represent the company. Further, directors have a duty of care and loyalty towards the company. Accordingly, any conflicts of interest associated with the role of member of the board of the company must be avoided. In addition, from a practical standpoint, private equity firms will prefer a nominee with a certain expertise in the business of the portfolio company. Depending on whether, based on a shareholder agreement and/or the organisational regulations, the other shareholders have a consultation right or, under certain circumstances, the right to refuse a nominee, a nominee with a certain expertise in the relevant business is usually more acceptable to such other shareholders.
7.3 Can the private equity firm and/or its nominated directors typically veto significant corporate decisions of the portfolio company?
The extent of such veto rights depends on the actual stake held by the private equity investor. Generally, veto rights of private equity investors/their representatives on the board of directors of the portfolio company are common for the following types of decisions:
- acquisitions of businesses or parts thereof (by means of share or asset deals);
- sale of certain assets of the company;
- transfers of shares, to the extent that the acquirer becomes a majority shareholder in the company;
- conclusion of partnership/joint venture agreements, if outside of the ordinary course of business;
- investments/sales/incurrence of debt or similar in excess of certain threshold amounts;
- appointment and removal of senior management;
- approval of the budget and business plan;
- listing of shares on a stock exchange;
- granting of securities outside the ordinary course of business and in excess of a certain threshold amount;
- transactions other than within the ordinary course of business and at arm's length;
- related-party transactions; and
- amendments of the company's board regulations
7.4 What other tools and strategies are available to the private equity firm to monitor and influence the performance of the portfolio company?
Typically, monitoring is conducted via information rights of the shareholders. Such information rights usually include the granting of access to investors to:
- annual financial statements;
- quarterly financial statements;
- management accounts (usually monthly);
- proposed budget (in advance of the following financial year); and
- further information rights related to specific business activities.
Further, investors are sometimes given the opportunity to meet with the management of the company on a regular basis in order to consult on significant matters.
8.1 What exit strategies are typically negotiated by private equity firms in your jurisdiction?
Private equity firms usually require the company to be managed and operated so that the company's value for the shareholders is maximised and, ultimately, an exit can be achieved through a trade sale or an initial public offering after a certain period.
Further, private equity firms may also negotiate put option rights which entitle them to choose to sell their shares to the other shareholders after a certain period. Conversely, the other shareholders may have call option rights on the shares held by the private equity firm shareholder.
8.2 What specific legal and regulatory considerations (if any) must be borne in mind when pursuing each of these different strategies in your jurisdiction?
The articles of incorporation of Swiss stock corporations usually foresee that the transfer of registered shares in Switzerland is subject to the approval of the board of directors (Article 685a of the Code of Obligations). The company (acting through the board of directors) may refuse to give such consent on the basis of a valid reason cited in the articles of association or, if the company offers to acquire the shares from the selling party for the company's own account, for the account of other shareholders or for the account of third parties at the real value of the shares at the time the request was made (Article 685b of the Code of Obligations).
9 Tax considerations
9.1 What are the key tax considerations for private equity transactions in your jurisdiction?
The capital gains realised by corporate investors residing in Switzerland from the sale of equity investments of at least 10% which were held for at least one year are in principle tax free (the participation exemption). This also applies to dividends paid out for equity investments of at least 10% or worth at least CHF 1 million.
The capital gains realised by individual investors residing in Switzerland are in principle tax free. Tax-free capital gains can also be realised by individual investors residing in Switzerland through collective investment schemes and non-commercial limited partnerships.
9.2 What indirect tax risks and opportunities can arise from private equity transactions in your jurisdiction?
In terms of risks, the board members of a Swiss portfolio company can be held liable in case of non-payment of certain social security contributions and taxes by the portfolio company. Depending on the existence of hold-harmless arrangements between the private equity company and the directors nominated by it, this may also trigger financial risks for the private equity firms.
In terms of opportunities, the principle that capital gains realised by individual investors are normally tax exempt bears opportunities for the individual shareholders of Swiss portfolio companies (if they reside in Switzerland) and also for individual Swiss-based co-investors of private equity firms.
9.3 What preferred tax strategies are typically adopted in private equity transactions in your jurisdiction?
Private equity transactions are usually made through acquisition vehicles having their seat in a jurisdiction which is party to a double taxation treaty with Switzerland and which provides for no Swiss withholding tax for a dividend distribution to qualified shareholders (ie, shareholders with shareholdings of at least 10%).
10 Trends and predictions
10.1 How would you describe the current private equity landscape and prevailing trends in your jurisdiction? What are regarded as the key opportunities and main challenges for the coming 12 months?
With interest rates at low levels, GDP steadily growing and a mix of small and medium-sized enterprises dealing with succession planning on the one hand and innovative tech companies on the other, the Swiss private equity landscape was very dynamic up until the breakout of COVID-19 in the first quarter of 2020. The relaunch of private equity investment activities in Switzerland will largely depend on the general economic development and on the speed at which the global economy recovers.
10.2 Are any developments anticipated in the next 12 months, including any proposed legislative reforms in the legal or tax framework?
The final vote of the Swiss Parliament on the stock corporation law reform is expected this year and entry into force of the new provisions would then be expected for 2022. Among other things, the reform will strengthen the rights of minority shareholders and provide an obligation for around 300 listed companies to set aside at least 30% of the positions on the boards of directors and 20% in the executive management for women. No sanctions in case of non-compliance are foreseen, but companies which do not meet the thresholds will have to provide justification.
11 Tips and traps
11.1 What are your tips to maximise the opportunities that private equity presents in your jurisdiction, for both investors and targets, and what potential issues or limitations would you highlight?
Switzerland can generally be described as an attractive venue for private equity investors, both in terms of business opportunities and from a legal perspective. Swiss law provides parties to private equity transactions with a high level of both legal certainty and flexibility with regard to the relevant arrangements and the content of the underlying agreements.
On that basis, it is strongly recommended to subject these agreements to Swiss law and to the jurisdiction of the Swiss courts or Swiss arbitrators. Given the large number of private equity transactions in Switzerland, courts and arbitrators have vast experience with potential disputes arising from such transactions. Further, the Swiss tax authorities offer the possibility to obtain advance rulings on any relevant tax matter and obtaining such tax rulings is highly recommended in case a private equity transaction bears a risk of unfavourable interpretation under Swiss tax laws.
At the same time, investors should be aware that, for tax reasons, Switzerland is not an attractive country for the establishment of a private equity fund itself. Hence, such funds are usually set up elsewhere (eg, in Luxembourg or the Netherlands), while only the acquisition vehicle for a Swiss private equity transaction is usually incorporated in Switzerland.
In any event, it is important that private equity investments are thoroughly analysed from a tax perspective, and that the parties agree not only on robust acquisition agreements, but also on sustainable and durable shareholder agreements with a clear and meaningful governance structure and exit provisions.
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.