Energy & Infrastructure M&A 2024 - Law And Practice

1. Market Trends

1.1 Energy & Infrastructure M&A Market

In 2023, inflation, high interest rates, geopolitical tensions and market uncertainty posed significant challenges to deal activity in Switzerland. These factors led to longer deal processes and added complexity in deal structures. Despite these challenges, the Swiss energy and infrastructure M&A market demonstrated resilience, with increased deal activity in 2023 and year to date compared to 2022. This development is particularly noteworthy given the overall depressed M&A deal activity in Switzerland in 2023, when the number of deals involving Swiss businesses (outbound, inbound and domestic transactions) dropped by 25% compared to 2022.

Deal Activity

M&A activity in Switzerland saw an overall decrease in 2023 and the first half of 2024, compared to 2022. However, energy and infrastructure M&A in Switzerland has shown robust growth, with increased interest in renewable energy and digital infrastructure assets. Inbound deals have risen, with international investors attracted to Switzerland's stable environment and ambitious sustainability targets. Outbound deals have grown, driven by companies expanding renewable portfolios across Europe. Domestically, there has been an increase in deal activity, especially in the hydropower and digital infrastructure sectors.

Navigating Sustainability, Investment and Innovation

The following trends underscore the dynamic and evolving M&A environment in Switzerland's energy and infrastructure sectors, driven by sustainability goals, technological advancements and strategic investments.

• The drive towards renewable energy sources and decarbonisation remains a central theme. Investors are increasingly focusing on assets that align with net-zero objectives, leading to heightened activity in sectors like wind, solar and hydroelectric power. This shift is evident as capital moves away from traditional fossil fuel assets towards sustainable energy projects.
• There is significant emphasis on upgrading and expanding infrastructure to support the energy transition. This includes investments in energy storage solutions, grid enhancements and electric vehicle charging networks.
• Private equity firms and institutional investors are playing a pivotal role in driving M&A activity within the energy and infrastructure sectors. Their involvement is facilitating the financing of large-scale projects and fostering innovation, thereby accelerating the transition to a more sustainable energy landscape.
• The Swiss government's policies and regulatory frameworks are increasingly supportive of renewable energy initiatives. Legislative measures aimed at promoting sustainability and energy security are creating a favourable environment for M&A activities, encouraging investments that align with national energy goals.
• Switzerland continues to attract international investors seeking stable and lucrative opportunities in its energy and infrastructure sectors. Cross-border M&A activities are on the rise, with foreign players investing in Swiss assets. At the same time, Swiss companies are expanding their footprint abroad, reflecting the global nature of the energy transition.

Foreign Direct Investment Screening

Switzerland does not currently have any general foreign direct investment (FDI) screening mechanisms in place. However, certain regulatory requirements apply to certain industries and sectors – eg, banking and real estate. Several additional business activities require a governmental licence, and the licensing conditions include specific requirements regarding foreign investors. Examples of such business activities are aviation, telecom, radio and television, and nuclear energy.

On 15 December 2023, the Federal Council adopted the dispatch on new legislation regarding investment screening. Under the new draft legislation, investment screening is intended to apply only when a foreign state-controlled investor takes over a domestic company that operates in a particularly critical area, such as electricity grids and production, water supply and transport infrastructure. This means that the takeover of Swiss companies active in such critical areas by a foreign state-controlled investor would need approval, subject to reaching certain turnover thresholds.

Interestingly, the Federal Council has so far been opposed to introducing new FDI control regulations, so that the scope of the draft is narrower compared to similar legislation in other jurisdictions. It will be interesting to follow further discussions on the topic as the legislative process advances in Switzerland against the backdrop of increasingly protectionist tendencies abroad. For now, the regulatory environment regarding investment screening in Switzerland remains favourable for investors.

EU Artificial Intelligence Act

Artificial intelligence (AI) is increasingly influencing the energy and infrastructure sectors, particularly in optimising energy production, enhancing storage systems and managing smart grids. AI plays a growing role in developing smart cities by managing traffic, urban planning and the efficient use of energy and waste. It also assesses infrastructure health and improves the energy efficiency of buildings, contributing to more sustainable and resilient urban environments.

On 1 August 2024, the AI Act came into force in the EU. It is the first-ever legal framework on AI that aims to provide AI developers, deployers and users with clear requirements and obligations regarding specific uses of AI systems by adopting a risk-based approach (eg, the higher the risk of an AI system, the stricter the rules that apply to its development and deployment) and by introducing rules for so-called general purpose AI models. The AI Act will have an extraterritorial reach and will not only be applicable to a Swiss company that makes an AI system available in the EU market but will also apply if the output generated by the AI system of a Swiss company is used in the EU. At the end of 2023, the Federal Council instructed the relevant federal department to prepare a report on the possible regulatory approaches to AI systems for Switzerland that are particularly compatible with the AI Act and the Council of Europe's AI Convention, which should create the basis to issue a concrete mandate for a Swiss AI regulatory proposal in 2025.

See also 8.1 Significant Court Decisions or Legal Developments and the Switzerland Trends & Developments chapter in this guide.

2. Establishing a New Company

2.1 Establishing a New Company

The features that make Switzerland one of the most innovative countries in the world include its business-friendly legal framework, which ensures fast and cost-effective incorporations, making Switzerland an attractive location for incorporating a start-up company. Swiss corporate law provides all the necessary features for a start-up company to operate successfully, particularly to attract initial seed financing and subsequent capital contributions from financial sponsors or strategic investors. Prominent features include different share classes with voting/ non-voting structure, as well as dividend and/or liquidation preferences.

The entire incorporation process for a new company typically takes two to four weeks. This timeline depends on various factors, including the canton of the company's intended seat, the country of residence of the investors (especially for opening the required blocked bank account) and the efficiency of the founders in delivering the necessary documents. Unless the founders choose a partnership with full personal liability, an initial capital contribution is required to establish a new company (see 2.2 Type of Entity for the required capital amounts).

2.2 Type of Entity

Entrepreneurs are typically advised to incorporate an entity in the form of a corporation (Aktiengesellschaft) or a limited liability company (GmbH). Both types of entities have a separate legal personality and provide limited liability with their share capital. The minimum share capital to incorporate a corporation is CHF50,000 (partially paid-in) or CHF100,000 (fully paid-in). Investors generally prefer fully paid-in capital in order to have recourse to a higher adhesion substrate.

Alternatively, an entity may also be incorporated as a limited liability company. The main differences from a corporation include a lower minimum share capital requirement of CHF20,000, the disclosure of the shareholders in the commercial register, and somewhat limited flexibility in terms of capital-raising features.

2.3 Early-Stage Financing

As professional investors such as venture capitalists usually expect recurring annual revenues, early-stage financing is typically provided by family and friends, as well as wealthy individuals ("angel investors"). These investors do not require accreditation, professional experience or a specific net worth. They are private individuals investing their own money into a start-up and, unlike professional venture capitalist investors, do not get paid for making the investment. Ideally, angel investors provide valuable knowledge to help develop a company and promising products.

In terms of investing volume, angel investors are followed by seed and series A funds, corporate ventures and family offices. Over recent years, Switzerland has seen a large increase in seed investments, in terms of both numbers and value.

The documentation for early-stage financing for a start-up company in Switzerland is quite basic. It typically consists of a subscription form (rather than a detailed subscription agreement) to subscribe for newly issued shares resolved at a shareholders' meeting and a basic shareholders' agreement, which may include some form of tag- and drag-along rights.

2.4 Venture Capital

Although the Swiss start-up scene has developed impressively over the last ten years, the venture capital industry is still relatively young in Switzerland. While some sponsors are in their second or third fund generation, many are still in their first round. However, Swiss start-ups are attracting large international investors due to their attractive valuations and innovative ideas. Generally, foreign venture capital firms primarily provide funds in mid- and late-stage financing rounds.

2.5 Venture Capital Documentation

The Swiss Private Equity & Corporate Finance Association (SECA) has developed a well-regarded set of model documents, which is available on its website. Primarily, a term sheet lays out the financial terms of the investment and forms the basis for implementing an equity investment. These terms may subsequently be incorporated into a legally binding investment and shareholders' agreement, which outlines the rights, obligations and relationships among the shareholders. Minority shareholders such as start-up investors strive to implement special rights to protect their investment.

2.6 Change of Corporate Form or Migration

In principle, start-ups typically remain in the same corporate form and jurisdiction. If the start-up is incorporated as a corporation in particular, there is no need to change the corporate form at a later stage of venture capital financing. There is no general necessity to change jurisdiction, which rather is subject to the start-up's long-term strategy and goals.

3. Initial Public Offering (IPO) as a Liquidity Event

3.1 IPO v Sale

Generally, liquidity events in Switzerland are still primarily conducted through a sale process rather than an IPO. While dual-track processes are sometimes pursued, there is no general trend to initiate a dual-track process from the outset.

In recent years, the number of IPOs at the SIX Swiss Exchange has been relatively low. To address this, the SIX Swiss Exchange launched a new segment for small and mid-cap companies in 2022 to revive the IPO market as an alternative to sale processes. However, the impact has been limited so far. The costs, time and effort required for an exit via an IPO remain significantly higher than via a sale process.

3.2 Choice of Listing

A Swiss company is most likely to list in Switzerland, unless it has specific interests in listing in another country. Typically, the decisive factors for a listing abroad include a larger investment base and higher industry/sector valuations. The main advantages of a "home country" listing in Switzerland are:

• the efficiency of the listing procedure and maintenance; and
• the avoidance of heavier regulatory burdens and additional exposure to litigation risks in multiple jurisdictions.

While there are Swiss companies listed on multiple stock exchanges in different jurisdictions, the costs of such multiple listings are generally considered higher than their benefits.

3.3 Impact of the Choice of Listing on Future M&A Transactions

A listing on a foreign exchange means that the company will continue to be subject to Swiss corporate law, but will also need to comply with the rules of the foreign exchange. This dual applicability of legal systems may increase complexity in structuring a future sale, especially if there are potential conflicts between domestic and foreign laws. Moreover, Swiss tender offer rules (including squeeze-out rules in the context of tender offers) will not apply to the sale of a company that is only listed on a foreign exchange. Therefore, additional steps, such as implementing a squeeze-out merger pursuant to the Swiss Merger Act, may be required to successfully achieve a sale of 100% of the company's shares.

4. Sale as a Liquidity Event (Sale of a Privately Held Venture CapitalFinanced Company)

4.1 Sale as a Liquidity Event (Sale of a Privately Held Venture Capital-Financed Company)

There is no standard rule for whether a sale should be conducted as an auction or through bilateral negotiations. Auctions are typically chosen when investors aim to maximise the purchase price. However, the uncertainties and costs associated with an auction process may deter potential buyers from participating. Bilateral negotiations are usually conducted by strategic investors, which approach the potential targets directly if they see a strategic fit.

4.2 Liquidity Event: Transaction Structure

The sale of a privately held energy or infrastructure company is usually structured as a share purchase where all the shares in the company are sold to the purchaser. However, it has become increasingly popular to give venture capital fund shareholders the option to co-sell or roll over their investment, particularly in connection with sales to financial sponsors. Key members of the management team holding equity in the company are typically required to roll over part of their sale proceeds into the equity of the buyer.

4.3 Liquidity Event: Form of Consideration

The consideration in the sale of a Swiss privately held venture capital-financed company is usually cash. However, certain rollovers for the key management are structured in a way so that the management holding equity in the company is paid with a mix of cash and equity.

4.4 Liquidity Event: Certain Transaction Terms

Customarily, shareholders' agreements between the founders and venture capital investors provide for drag-along and tag-along rights in liquidity events. These rights include provisions on the key terms and conditions that apply to shareholders in case of a sale. The terms are usually heavily negotiated and may detail the representations, warranties and indemnities shareholders are required to provide during a sale. Generally, any such liability is limited to each shareholder's share of the purchase price and is several, not joint with the other shareholders. Drag-along and tag-along rights may also include obligations to enter into escrows or holdbacks.

The use of warranty and indemnity (W&I) insurance is growing in Switzerland and is generally accepted among professional players in the market.

5. Spin-Offs

5.1 Trends: Spin-Offs

In Switzerland, spin-offs are less common in the energy and infrastructure sectors compared to other sectors. However, the evolving landscape in these sectors – driven by the energy transition, decarbonisation and digital transformation – is prompting companies to reconsider their corporate structures and focus on core activities. Therefore, divestments in the energy and infrastructure sectors are expected in the form of spin-offs.

5.2 Tax Consequences

Spin-offs can be structured as tax-neutral reorganisations at the corporate level (including a so-called holding spin-off) if certain requirements are fulfilled, regardless of the execution under civil law (eg, asset deal, two-step demerger or statutory demerger). The most important requirements for Swiss tax purposes are that:

• " the spin-off business remains taxable in Switzerland;
• the values previously relevant for income tax are taken over;
• one or more businesses or parts of businesses are transferred; and
• the legal entities that exist after the spin-off continue to operate a business or part of a business.

It should be noted that, especially in the case of tax-neutral spin-offs, the key element is the so-called double business requirement, meaning that an independent business must remain operative within the transferring entity (in addition to the business transferred to the new entity).

If the above conditions are fulfilled, the tax neutrality of spin-offs also applies to the shareholders, provided there will be no gain in the nominal value or so-called capital contribution reserves (for individuals).

There is no blocking period for Swiss tax purposes, provided the spin-off qualifies as a taxneutral spin-off and, in particular, not as a taxneutral hive down to a subsidiary.

5.3 Spin-Off Followed by a Business Combination

In principle, and bearing in mind that a tax-neutral spin-off is based on the requirement of two separate businesses without being subject to a blocking period, a spin-off immediately followed by a business combination should be possible for Swiss tax purposes, if structured properly. Whether or not independent business operations exist is assessed based on various criteria, as developed by the Swiss tax authorities.

It should always be considered whether the general rules for tax avoidance may be applicable to the case at hand. Generally, tax avoidance would be assumed if:

• a legal arrangement chosen by the parties involved appears to be unusual ("insolite"), improper or outlandish, or in any case completely inappropriate to the economic circumstances ("objective element"); and
• it can be assumed that the chosen legal arrangement was made abusively, merely in order to save taxes that would be due if the appropriate circumstances were in place ("intention to avoid"; "subjective element"); and
• the chosen course of action would actually lead to significant tax savings, if accepted by the tax authority ("effective element").

Particular attention should be paid to the transfer of tax losses carry-forward as part of the spin-off and subsequently the transfer of such tax losses carried forward and the offset with taxable profit of the acquiring business. In general, the offset of tax losses carry-forward is possible to the extent that the business will be taken over and continued and that the structure would not be considered as a tax avoidance.

5.4 Timing and Tax Authority Ruling

The timing of a spin-off usually depends on the preparation of the transaction from an operational perspective, and from a tax and legal perspective, including the informing and consultation of employees. From a legal perspective, a spin-off may be structured in different ways, including via:

• a direct business transfer by means of an asset deal ("singular succession") or as a bulk transfer pursuant to the Swiss Merger Act ("universal succession");
• a two-step demerger (transferring the business to a newly incorporated subsidiary – "newco" – and transferring the business to the seller), with subsequent sale of the shares in the newco to the buyer); or
• a statutory demerger.

Where there is a transfer of a business with employees, the employer has certain information obligations, and a consultation procedure must be implemented if measures apply that affect the employees. While no specific waiting period applies, it is usually recommended to inform and consult the employees at least one month prior to the effective date of the spin-off.

From a tax perspective, it is standard practice to file advance tax rulings with:

• the competent cantonal tax authority for corporate income tax and annual capital tax purposes – ie, the cantonal tax authority responsible for the assessment of corporate income tax and annual capital tax of the company; and
• the Swiss Federal Tax Administration for the purposes of Swiss withholding tax and stamp duties (usually levy and refund). It is critical that the tax rulings are obtained prior to the implementation of the spin-off, as a confirmation will only be granted for transactions that have not yet occurred.

Depending on the complexity of the spin-off, a confirmation can usually be obtained between four and eight weeks after filing with the Swiss Federal Tax Administration and usually between three and 12 weeks after filing with the cantonal tax authorities, although this varies largely between the different cantonal tax authorities.

The preparation and completion of a spin-off usually takes six to 12 months.

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