1. TRANSACTION ACTIVITY
1.1 M&A Transactions and Deals
While the Swiss M&A market suffered from the impact of COVID-19 and the Swiss lockdown in the beginning of 2020, a decline in deal flow and volume could be observed, with some sectors experiencing a decrease in deal activity by 50%. The uncertainty deriving from the pandemic resulted further in a decrease of approximately 42% in the number of inbound transactions and a 24% reduction in outbound transactions. For the second half of 2020, however, it was possible to see a catch-up effect: envisaged deals that were put on hold in the first half of 2020 were resumed. As M&A activity normally correlates directly to the sector-specific economic performance, a vast part of the deals was related to the healthcare sector and the technology, media and telecommunications sector (TMT). In general, M&A deals in Switzerland have been delayed rather than cancelled.
Despite the COVID-19-induced uncertainties, Swiss small- to medium-sized enterprises (SMEs) remained attractive targets for investors, in particular in the COVID-19-resilient sectors (such as healthcare and TMT). Furthermore, many SMEs dealt and are still dealing with their succession planning and are therefore engaging increasingly in private equity transactions. The trends observed in 2020 are continuing and the economic performance of other sectors has also started to catch up in 2021; in addition, deal activity is markedly increasing again in the consumer markets and industry sectors.
1.2 Market Activity
In 2020, the healthcare and TMT sectors in particular were active. As the overall economy is recovering from the impact of COVID-19, an increase of M&A activity can be seen in further sectors, such as consumer goods and the industry sector. According to forecasts, it is expected that the overall transaction volume in 2021 will amount to approximately CHF56 billion.
Private equity firms active in Switzerland follow a wide range of strategies, including control and non-control deals, club deals and joint ventures with corporates. In the past few years, there have been many transactions where a seller wishes to keep a certain minority stake in the target company (which may be a result of the low interest rates and the overall positive market environment).
2. PRIVATE EQUITY DEVELOPMENTS
2.1 Impact on Funds and Transactions
In general, private transactions are not extensively regulated and the parties have great flexibility to determine the transaction structure as well as the contractual framework.
However, in recent years financial regulation has increased. In this respect, it should also be noted that even if Switzerland is not a member of the European Union, the European directives and regulations still have an important impact on Swiss policy-making.
On 1 January 2020 two federal acts entered into force, the Federal Act on Financial Services of 15 June 2018 (FinSA) and the Federal Act on Financial Institutions of 15 June 2018 (FinIA). The new laws were created with the goal of enhancing customer protection in the financial sector, and the FinSA in particular is to a significant extent modelled on the EU Markets in Financial Instruments Directive (MiFID/MiFID II) directives (albeit with various differences). The FinSA also introduced a new prospectus regime for public offerings of securities in Switzerland (including public offerings in Switzerland by foreign issuers). It sets out the required content of prospectuses, bringing the requirements in line with international standards and those historically applied by the SIX Swiss Exchange for listing prospectuses under the old regime, and replaces the outdated rules of the Swiss Code of Obligations, which required only very limited disclosure. The new regime also includes a duty to have the prospectus reviewed for completeness, coherence and comprehensibility by a private reviewing body authorised by the Swiss Financial Market Supervisory Authority FINMA to act in this capacity. On 28 May 2020, FINMA published a media release to inform market participants that it had granted to SIX Exchange Regulation AG and BX Swiss AG licences as prospectus reviewing bodies effective as of 1 June 2020.
The duty to publish a FinSA-approved prospectus took effect as of 1 December 2020. Given the new rules, if for instance in the context of a public tender, securities are offered as consideration in Switzerland, it should be reviewed whether such an offer might trigger the FinSA prospectus requirement and, if so, whether an exemption is available. The FinSA provides for several exemptions, from the duty to publish a prospectus requirement, including with respect to takeover situations if information that is equivalent to that contained in an issuance prospectus is otherwise available.
Another example of EU regulations affecting the regulatory landscape in Switzerland is the General Data Protection Regulation (GDPR). Even though Switzerland is not a member of the EU, the guidelines are directly applicable to all Swiss-based companies doing business in the EU, as the scope includes all businesses processing personal data of EU data subjects (eg, employees), or organisations that monitor the (online) behaviour of EU data subjects (eg, customers). In addition, EU companies are asking its Swiss business partners to be GDPR-compliant. Therefore, the GDPR has a major impact on numerous Swiss-based companies.
On 19 June 2020, after some 13 years of preparatory work, the Swiss parliament has finally approved a general corporate law reform amending the Swiss Code of Obligations (Corporate Law Reform). The Corporate Law Reform inter alia seeks to modernise corporate governance by strengthening shareholders' and minority shareholders' rights and promoting gender equality in boards of directors and in senior management. As of 1 January 2021, the Corporate Law Reform has partially entered into force (transparency and gender-representation requirements) and will probably enter into force in full by the end of 2022/the beginning of 2023.
3. REGULATORY FRAMEWORK
3.1 Primary Regulators and Regulatory Issues
As previously mentioned, private M&A transactions are not extensively regulated, as there is no specific act regulating the acquisition of privately held companies. The main legal source is the Swiss Code of Obligations, which provides quite a liberal framework for transactions. Further, Swiss law provides for only very limited foreign-investment restrictions and, thus, foreign investors and financial sponsors are, broadly speaking, in most cases not restricted or treated differently from domestic investors.
One exception is the acquisition of real estate. Swiss law restricts the acquisition of real estate that is not permanently used for commercial purposes (non-commercial property), such as residential or state-used property, unbuilt land or permanently vacant property (the Lex Koller). Legal entities with their corporate seat outside Switzerland are deemed as foreign under the regulations, regardless of who controls them. Further, legal entities with their corporate seat in Switzerland are deemed as foreign if they are controlled by foreign investors. The law takes a very economic view to determine whether a Swiss entity is foreign-controlled; namely, it looks through the entire holding and financing structure, but is strictly formal as soon as an entity with its corporate seat outside Switzerland is involved.
4. DUE DILIGENCE
4.1 General Information
The vast majority of legal due diligences are conducted on an exception basis only (ie, only highlighting red flags). Only in specific cases are summaries or overviews being produced (eg, overview of key terms of the employment agreements with key employees or lease overviews). The typical scope of a legal due diligence covers corporate matters, financing agreements, business agreements, employment (excluding social security and pension), real property/lease, movable assets, intellectual property (IP)/IT (review of an IP portfolio and contracts from a legal perspective), data protection and litigation. Compliance and regulatory topics are included to the extent relevant for the specific business.
4.2 Vendor Due Diligence
A vendor due diligence is not a standard feature in private equity transactions in Switzerland but is conducted in complex, large transactions to accelerate and facilitate the sales process.
The result of a vendor due diligence is typically a report which summarises material legal key terms and also highlights certain red flags. The vendor due diligence reports are often used as a starting point for the buyer's own legal due diligence and to define the focus of the buyer's own due diligence. However, vendor due diligence reports usually do not fully replace a buyer's own due diligence – even if reliance is granted (which is typically the case).
Originally published by Chambers Global Practice Guides, Switzerland Chapter: Law & Practice 2021.
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.