Swiss Business Environment
While the Swiss economy has been in an upswing in 2014 with an estimated GDP growth of 1.9 per cent, challenges such as the appreciation of the Swiss franc result in a relatively moderate GDP growth of 0.9 per cent in 2015 as predicted by the State Secretariat for Economic Affairs (SECO). Consequently, the economic development is expected to be stabilized with an anticipated GDP of 1.5 per cent in 2016. The Swiss Market Index (SMI), Switzerland's blue-chip stock market index, meanwhile rose by a respectable 9.5per cent in 2014. In the first nine months of 2015, the SMI has gained another 3.8 per cent.
This sound performance of the Swiss economy is to a large extent due to a steady increase of Swiss exports to Asian countries. In 2014 Swiss exports (excl. precious metals, precious and semi-precious stones, works of art and antiques) reached an alltime high of 208.4 billion Swiss francs. After a slight decline in 2013, exports to Asia picked up the continuing growth rate of previous years (+3 per cent in 2014) and meanwhile amount to 21.7 per cent of Switzerland's total exports (i.e. 45.3 billion Swiss francs).
Looking more closely at the Swiss exports to Asia, the biggest trade partners are China and Honkong with exports of 8.8 billion Swiss francs (+7.4 per cent in 2014) and 7.0 billion Swiss francs (+4.2 per cent in 2014) respecitvely. The enactment of the free trade agreement between China and Switzerland is expected to further boost the Sino-Swiss relationship. The agreement entered into force on 1 July 2014, however the stipulated periods of transition postpone its full effectiveness by 5 to 10 years in some major areas. This agreement can be seen as a major breakthrough, as Switzerland is both the first continental European country and the first country among the world's 20 largest economies to have such free trade agreement with China. It is expected to further expand the bilateral trade relations between Switzerland and China, mainly as a consequence of wideranging savings in customs duties.
Turning to Swiss imports, the significane of Asia is continuously increasing as well. In 2014 imports from Asia reached a record of 27.6 billion Swiss francs, which amounts to 15 per cent of total imports. A growing amount of goods originate from China (+6.6 per cent in 2014), Hongkong (+25 per cent) and Vietnam (+37 per cent), while imports from Japan have been slightly decreasing (-1 per cent).
Selected Swiss Industries
The Swiss watch industry has emerged from the crisis year 2008 in a vigorous condition, with exports hitting a record 19.3 billion Swiss francs (CHF) in 2011 and a monthly record of CHF 1.97 billion in July 2012. This represented a global market share of over 50 per cent in terms of value. In the high-end sector, the Swiss predominance is even more impressive. Indeed, around 95 per cent of the watches sold with a price tag of over CHF 1,000 are made in Switzerland. A more recent prespective shows that the Swiss watch industry remains strong, with a new record in exports of 22 billion Swiss francs in 2014. Ten years ago the turnover in the industry was half this size.
During the past years, one of the main success drivers was the growing Asian demand for Swiss luxury watches. While around the turn of the millennium exports to Europe and Asia were on an equal level, this has changed significantly. Since 2010 more than half of the total exports go to Asia (53 per cent in 2014) and only a third remains in Europe. To a great extent this development is facilitated by the large demand of Hongkong (exports of 4.1bn in 2014). Beyond that, China, Japan, Singapore and the United Arab Emirates are notable importers.
The "Swiss made" label is expected to be strenghened further as a new legislation defining the conditions for its use has been passed by the Swiss parliament and federal counsel. The new regulation will enter into force in January 2017 with a twoyear period of transition. It provides that – in case of industrial products such as watches – 60 per cent of the production costs has to be incurred in Switzerland in order to use the "Swiss made" label. The appetite of Asian buyers is not limited to individual Swiss watches anymore but has lately expanded to several companies active in the watch sector. A stand-out example is the acquisition of Prothor Holdings SA and its subsidiaries La Joux- Perret SA, a leading manufacturer of mechanical movements, and high-end watch brand Arnold & Son, by the Japanese Citizen Holdings Co Ltd in March 2012. Further examples include the acquisition of Eterna and Corum, two Swiss luxury watch companies, by the Chinese company China Haidian in 2011 and 2013, respectively.
Mechanical and electrical engineering industry
The Swiss mechanical and electrical engineering industry experienced slightly more difficulties than the watch industry mainly as it is under considerable pressure due to the ongoing sovereign debt crisis and the strength of the Swiss franc. While in 2010, the respective exports rose by 8 per cent, 2011 already indicated the beginning of a downward trend with a moderate 1.2 per cent growth and 2012 saw a decline of 9.7 per cent. Exports to China (including Hong Kong) performed particularly badly with a decrease of 36 per cent. In 2013 (-0.0 per cent) and 2014 (+0.1 per cent) overall exports have not decreased further and flattened on the level of the previous year.
As opposed to the high margins in the watch industry, margins in the Swiss mechanical and electrical engineering industry were already quite low before the crisis and continued to decline during the last years. The appreciation of the Swiss franc therefore led to an increased pressure on firms active in this sector prompting some of these firms to divest parts not seen as key to their business in order to further concentrate on their main strengths. One example is the Swiss company OC Oerlikon, a world leader in machine and plant engineering, divesting its natural fibers and textile components business units to the Chinese Jinsheng Group in 2013.
Chemical and pharmaceutical industry
Switzerland's chemical and pharmaceutical industry has a global market share of around ten per cent, making the country one of the leading nations worldwide in this sector, which is remarkable given Switzerland's size and population of only about eight million inhabitants. In terms of turnover, the Swiss company Novartis is currently the largest pharmaceutical company in the world and Roche, it's domestic rival, thefourth largest.
Exports in the chemical and pharmaceutical industry increased in 2014 by 4.4bn Swiss francs (+ 5 per cent). With a total of 85.3bn Swiss francs the most exports derive from this industy (41 per cent of exports). Again, Asia is an increasingly important trade partner to Switzerland also in the chemical and pharmaceutical industry. Most significantly, the exports to China have risen by 40 per cent in 2013. With increasing global competition, companies active in the sector have continued to focus on their core competencies, leading to ongoing regrouping and restructuring in the industry. Highly specialised companies have emerged out of formerly diversified companies with broad product offerings.
Clariant, for example, a Swiss specialty chemicals company, recently sold its textile chemicals, paper, specialties and emulsions businesses to the United States-based private investment firm SK Capital Partners.
The activity on the M&A market in Switzerland was quite significant in 2014. Particularly, it was characterized by a comeback of mega deals, most notably the 41 billion Swiss francs blockbuster merger between Lafarge and Holcim. Despite an only slight increase in numbers of deals in 2014 (+4.1 per cent), the total deal volume reached an outstanding 175.8bn Swiss francs, which is 8.5 times higher than in the previous year.
Although US or European counterparties were still involved in most deals with a Swiss buyer or seller, the relative importance of Asian-Pacific counterparties has continued to rise at a fast pace. In 2014 the volume of deals involving a Swiss party as well as a party from the Asia-Pacific region amounted to over 11bn USD.
After this extraordinary year of 2014, the Swiss M&A market faced – in line with the European market – a cooling down in 2015. The main reason for the declining number of transactions are the worsening geopolitical development, the ongoing monetary instability in the Eurozone and – in Switzerland – the strong Swiss franc, which puts pressure on the Swiss export industry and makes potential targets more expensive for foreign investors. Nevertheless it is quite possible, that the Swiss M&A Market will gain further momentum. The rising GDP, positive stock market trends, low interest rates and good quarterly results recently published by many major Swiss companies with strong balance sheets and large cash reserves are quite strong indicators of a stable environment and lay the foundation for a busy M&A market.
Particularly, industries such as pharma and healthcare as well as IT/telecom, are expected to remain attractive sectors for transactions. Also, many privately held Swiss SMEs have to find a solution for the succession in their ownership and management which leads to interesting investment opportunities in various sectors (such as the industrial goods and services sector).
Swiss Legal Environment
In Switzerland, there is no general set of rules and regulations dealing with foreign investments. Rather, the regulatory framework depends on the type of business the target company is active in. The Swiss Federal Constitution guarantees freedom of trade and industry throughout Switzerland. This allows anyone, including foreign nationals, to found or hold an interest in a company and to operate a business in Switzerland. For most commercial undertakings, neither an approval, registration or licence by the authorities, nor a membership of a professional association are required.
Sectors for which registration or the approval from a government authority is necessary are, for example, banking, insurance, investment funds, gambling houses, as well as the manufacturing and trading of certain arms. Other types of businesses or professions that may need some sort of either a federal or cantonal approval or licence are, for example, broadcasting companies, schools, hotels and restaurants (only in certain cantons), physicians, dentists, pharmacists and attorneys.
Because of the direct democracy in Switzerland, public opinion has a big influence on the legal and commercial landscape. Historically, the Swiss have been very liberal, both with respect to economic as well as social topics. However, in connection with the crisis after 2008, public opinion in Switzerland with respect to big companies – in particular the finance industry – had been fairly negative and certain regulations have been made which are untypical for Switzerland (such as the below discussed regulation against "fat-cat salaries"). However, it seems that public opinion is again shifting back to a more pro-business approach.
Swiss corporate law provides different forms of business organisations to set up a company and do business in Switzerland. The appropriate form of a business entity depends on many factors such as the size of the company and the nature of the business. Tax issues may play an important role in choosing the right business entity as well. Companies and private individuals from foreign countries are free to choose the legal form that best fits their business. Swiss law distinguishes between the partnershiptype unincorporated companies (sole proprietorship) and capital based incorporated companies (company limited by shares and limited liability company).
Company limited by shares
The most popular and widespread type of business association under Swiss law is the company limited by shares (AG). An enterprise constituted in this form has its own name, its own legal personality separate from its members and a fixed nominal capital divided into shares.
This type is often chosen by foreign companies as the legal form for their Swiss subsidiaries. The legal form of a company limited by shares may be used for very big companies as well as mediumand small-sized companies. A company limited by shares may be found by one or more individuals who do not need to be Swiss citizens or residents in Switzerland. However, it must be represented by at least one person residing in Switzerland. The share capital must be at least 100,000 Swiss francs. In the case of registered shares, a contribution of at least 20 per cent of the par value of each share shall be made. In all cases the contribution of registered share capital shall be at least 50,000 Swiss Francs which have to be paid in upon incorporation (in cash or in kind). Bearer shares must be fully paid up before they can be issued. The supreme body is the board of directors that represents the company externally.
Limited liability company
The limited liability Company, GmbH, is a good alternative to the company limited by shares for smaller businesses. GmbH as well has its own legal personality separate from its members. The company's liability is limited to its assets only. The nominal capital that must be paid in is 20,000 Swiss francs. Unlike the company limited by shares, no board of directors is required and the management lies with the managing directors.
Setting up a company
Setting up a Swiss company is a very straightforward process that generally takes two to four weeks from the submission of the required documents to the date the company is considered legally established. The timeframe depends on the nature of the company and the location in Switzerland.
Purchasing a business or a company
When purchasing a business, an acquirer can choose between an asset deal or a share deal. While share deals are generally more common, the decision should be carefully assessed and will namely depend on whether or not:
- The target is organised as a corporation;
- The acquirer wants to purchase the entire business;
- There is a risk of hidden liabilities;
- The assets are easily transferable;
- Tax and accounting considerations favour one approach over the other;
- Assets must be pledged in order to finance the transaction.
M&A transactions relating to privately held Swiss businesses or companies are not governed by a specific statute. Instead, the general rules applying to the sale of goods basically apply, as specified by case law. Where deals are handled by professional parties, detailed contractual documentation concretises the relatively rudimentary legal basis.
Apart from setting up a new company or purchasing an existing business or company, other options are available for investing and/or establishing a company in Switzerland, such as setting up a branch office, the formation of a joint venture or the undertaking of a cross-border merger. The most common choices for a foreign company located in Switzerland are subsidiaries (in the form of companies limited by shares or limited liability) and branch offices.
Mergers, de-mergers and transfers of assets between companies and transformations are regulated by the Swiss Code of Obligations and the Swiss Merger Act. In case of (cross-border) mergers, the provisions of Swiss Antitrust Law have to be observed.
Management and Leveraged Buyouts
A management buyout is a transaction by which the target's managers and additional equity and debt investors, such as banks or private equity funds, jointly acquire the shares of the target company. The main difference towards leveraged buyouts is that the initiative for the buyout is taken by debt and equity investors.
Formal purchaser in both cases will usually be a newly formed acquisition company which purchases the shares and is merged into the target after a certain period of time, subject to tax rulings (if relevant). The acquisition is normally financed through the company's assets and the future earnings which service the company's loans. Where a bank is involved in financing an acquisition, usually the share of the target (or the acquisition company) will be pledged as a security. While debt investors expect a regular interest payment and a (partial) repayment of the loans and sometimes an option to purchase shares (in the event of mezzanine facilities), equity investors hope to achieve an appropriate return in view of the company's expected development and the prospects of an exit in the form of a share sale. In 2009, during the financial crisis, the buyout market came to a near standstill due to the lack of leverage possibilities but has slowly recovered since then.
The structure most commonly used for private equity in Switzerland is that of an offshore (regularly a Jersey or Guernsey) limited partnership with its investment advisor, and possibly also its key limited partners located in Switzerland. While new company forms for collective investment schemes have been introduced in Switzerland by the Swiss Collective Investment Schemes Act of 2006, in particular the limited partnership for collective investment intended to be the Swiss equivalent of the common law limited partnership, these legal vehicles have had very limited success as of today mainly due to the lack of the Swiss Financial Market Supervisory Authority (FINMA)'s respective approval practice and uncertainties with regard to the taxation of the carried interest.
Companies can be combined not only by an acquisition or merger but also by a joint venture, either formed as partnership or, more commonly, organised as corporation. It is noteworthy that a Swiss joint venture corporation (JVC) cannot legally bind itself by entering into a contractual agreement when it comes to subject matters falling within the competency of the shareholders' meeting (like a share capital increase) or the board of directors (eg with respect to board majority requirements, delegation of business to management or approval of share transfers). In consequence, a Swiss corporation should normally abstain from executing a joint venture agreement, except with regard to a specified list of rights and obligations involving non-corporate issues, such as the entering into of a licence, loan, lease or purchase agreement with one of the joint venture partners acting as a counterparty.
In instances related to corporate matters, only the (future) shareholders can assume contractual obligations in the joint venture agreement where they will usually agree that necessary steps must be taken to implement the contractual arrangements at the corporate level, eg by exercising shareholders' rights or to instruct the board members to draft internal rules of organisation containing the agreed arrangements or to appoint specific managers, and so on.
Where the contractual arrangements are not or cannot be translated into the corporate documents, each joint venture partner still has the possibility of suing the other party for specific performance. For instance, a party can be sued in its capacity as a shareholder of the JVC, to exercise its voting right in a manner consistent with its contractual obligations. The same is true for board resolutions provided a shareholder is in a position to instruct a board member how to vote, given that a director is subject to non-transferable and inalienable fiduciary duties. If specific performance is impossible, the party who breached the joint venture agreement will be liable for damages.
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Previously published in LexisNexis Mergers & Acquisitions Law Guide 2016
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.