1. TRANSACTION ACTIVITY
1.1 M&A Transactions and Deals
In 2021, M&A activity across all industries in Switzerland increased significantly, reaching a new high compared to the last few years. With almost 290 transactions in in the first half of 2021, compared to just 140 at the same time in 2020, Swiss M&A activity got off to a good start. The second half of 2021 was even stronger than the first, with almost 300 deals finalised in contrast to the 200 deals in the second half of 2020. It is safe to say that 2021 was a successful year for M&A activity in Switzerland with a total of over 600 transactions completed. Low interest rates, appealing lending terms, and economic stimulus measures played an important role in a record-breaking 2021 despite lingering concerns over the COVID-19 pandemic.
The first half of 2022 saw a continuation of the growth of 2021. However, the stock market's downward trend, the possibility of unchecked inflation, and Russia's invasion of Ukraine undoubtedly reduced M&A investors' appetite for risk. A lower total number of M&A transactions is anticipated for the year 2022 compared to the year 2021.
Private equity investors are, however, expected to remain very active in Switzerland in the second half of 2022 with a focus on Swiss small to medium-sized enterprises (SMEs) in the industrial, telecommunications (TMT), and pharmaceuticals, healthcare and life sciences sectors. Swiss SMEs continued to be attractive targets for investors in the first half 2022, especially for European buyers (61%, with the remainder being primarily North American and Asian buyers).
The year 2021 was already marked by a high degree of private equity investor activity in Switzerland, with financial investors actively engaged as either buyers or sellers. The coming deal activity in private equity will most likely increasingly focus on sustainability topics. With private equity buyers currently sitting on a large amount of dry powder and COVID-19 concerns easing, a positive trend for private equity transactions in 2022 is likely. However, the above-mentioned factors (in particular the lending terms for debt finance) might impact this positive trend.
1.2 Market Activity
While the COVID-19 pandemic had an adverse effect on some economic sectors and citizens' social lives, M&A activity in Switzerland unexpectedly recovered quickly after the first lockdown in 2020 and M&A deal activity developed favourably in 2021 as market participants quickly adapted to the new environment (eg, fewer physical and more virtual meetings, and remote signings and closings).
The TMT, industrial markets, pharmaceuticals, healthcare, and life sciences sectors had notably strong deal flow and volume in M&A transactions. In terms of outbound transactions, continued popularity for these sectors is anticipated in 2022. Incoming transactions are likely to see similar popularity with the addition of the industrial sectors. Increased M&A activity in the financial industry, particularly in the asset and wealth management sector, may result from the gradual implementation of the laws under the Financial Institutions Act (FinIA).
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. The market continues to witness a lot of transactions where a seller wishes to keep/re-invest a certain minority stake in the target company. This may be a result of the (still) low interest rates and the overall positive market environment but certainly also helps to ensure management continuity.
2. PRIVATE EQUITY DEVELOPMENTS
2.1 Impact on Funds and Transactions
In general, private transactions are not extensively regulated in Switzerland and the parties have great flexibility to determine the transaction structure as well as the contractual framework. Compared to public M&A transactions, which are highly regulated, private M&A transactions are less densely governed and many provisions of the Swiss Code of Obligations of 30 March 1911 that would apply to share or asset transfers can be excluded in favour of a contractual framework.
However, in recent years financial and corporate regulations have increased. In this respect, it should also be noted that even if Switzerland is not a member of the European Union, EU Directives and Regulations still have an important impact on Swiss policy-making.
Data Protection and Privacy
An 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.
The Federal Act on Data Protection of 19 June 1992 (FADP) and the supporting Ordinance to the Federal Act on Data Protection of 14 June 1993 (DPO) are now undergoing a complete overhaul in Switzerland, partially in reaction to the GDPR and its ramifications. The FADP will be updated to reflect technical advancements and to comply with the GDPR. To ensure that data flow between Switzerland and the EU may continue without further restrictions, the FADP must be revised. On 1 September 2023, the new FADP and the related law are expected to come into effect, although the necessary decision by the Federal Council is still outstanding.
SPACs
Special purpose acquisition companies (SPACs) had record years in the USA in 2020 and 2021. In Switzerland the Directive on the Listing of SPACs was put into effect in Switzerland in December 2021, allowing SPACs to be listed on the SIX Swiss Exchange. As a result, these "blank-cheque firms" have entered the Swiss "investor" market. This directive requires that the de-SPAC be finished three years after the initial trading day. The first and sole SPAC in Switzerland was listed on 15 December 2021 and to the authors' knowledge has not found an ultimate take-over target yet.
Sparks
The Swiss Financial Market Authority (FINMA) approved the new SIX Swiss Exchange equity section "Sparks" in 2021. Since October 2021, SMEs are now eligible to list on the SIX under streamlined, SME-specific regulations to get access to Swiss and foreign investors with sufficient financial means and experience. The benefits of Sparks also include enhanced liquidity due to the shares' tradability and visibility by the company needing to adhere to more stringent regulatory standards (such as ad hoc advertising, disclosure of large shareholdings, and financial reporting). Businesses and investors have additional chances to expand by enabling SMEs to take advantage of SIX's benefits.
Corporate Law Reform
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 enter into force in full by 1 January 2023.
3. REGULATORY FRAMEWORK
3.1 Primary Regulators and Regulatory Issues
Regulatory Reform
As mentioned in 2.1 Impact on Funds and Transactions, private M&A transactions are not extensively regulated in Switzerland 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. Currently, Swiss law provides for only very limited foreign-investment restrictions: Foreign investors and financial sponsors are, broadly speaking, in most cases not restricted or treated differently from domestic investors.
However, following international developments, this may change in Switzerland. An initiative to establish an approval authority for transactions subject to investment control was presented with the goal of providing a legal foundation for the evaluation of foreign direct investments. However, the conclusion of the discussions and the establishment of an investment control regime are still unclear. It is anticipated that the parliamentary deliberation process will last until 2023.
Real Estate
One exception to the liberal legal framework in Switzerland 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-owned property, undeveloped 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.
ESG
The topics of sustainability and environmental protection, as well as social and responsible corporate governance, have gained increased attention and importance in Europe (and throughout the world) over the past few years (criteria of environmental social governance, ESG). With the introduction of ESG reporting requirements, Switzerland has followed the trend and has introduced stricter ESG requirements for Swiss companies.
Depending on their size and significance, certain companies will be subject to the new ESG reporting requirements.
Swiss businesses that are of public interest must create an annual, public ESG report that addresses non-financial issues. The requirement to create such a report primarily pertains to listed companies and banks that, together with the domestic or foreign businesses they control, have an average of at least 500 full-time positions annually over the course of two years and have sales revenue exceeding CHF40 million or a balance sheet total of at least CHF20 million. The report discusses non-financial issues such the business strategy, newly developing threats to the environment, employees, and human rights, as well as the due diligence steps the firm has made to address ESG issues.
Compared to companies of public interest, SMEs are not yet compelled to issue such an ESG report. However, additional due diligence obligations apply if companies (including SMEs) with their registered office, head office, or primary place of business in Switzerland process or import specific minerals or metals originating from conflict or high-risk regions. Similar due diligence obligations apply to Swiss companies that provide goods or services for which there is a plausible suspicion that child labour was used in their manufacturing. SMEs are exempt from the due diligence obligations regarding child labour if their balance sheet totals, sales revenue and full-time employees fall below certain statutory thresholds.
It is anticipated that the due diligence obligations regarding child labour will be the most relevant obligation for private equity firms intending to invest in certain businesses. Moving forward, it is highly recommended that private equity buyers also focus on the new reporting requirements when conducting a due diligence analysis of an acquisition target.
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Originally published by Chambers 'Private Equity 2022' Global Practice Guide.
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.
