Reproduced with permission from Law Business Research Ltd. This

Reproduced with permission from Law Business Research Ltd. This content was first published in Lexology

GTDT: Practice Guide – Swiss M&A, July 2020. For further information please visit

https://www.lexology.com/gtdt/guides/swiss-m-and-a

SWISS M&A PRACTICE GUIDE

PRACTICE GUIDES

Contributing Editors

Ueli Studer, Kelsang Tsün and Sophie Stählin

Swiss M&A

First Edition

Swiss M&A

Practice Guide

Contributing Editors

Ueli Studer, Kelsang Tsün and Sophie Stählin

Reproduced with permission from Law Business Research Ltd

This article was ﬁrst published in July 2020

For further information please contact editorial@gettingthedealthrough.com

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First published 2020

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The information provided in this publication is general and may not apply in a specific

situation. Legal advice should always be sought before taking any legal action based

on the information provided. This information is not intended to create, nor does

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iii

Contents

Introduction ................................................................................................................................................................ 1

Ueli Studer, Kelsang Tsün and Sophie Stählin

1 Structuring Cross-border Transactions .................................................................................................5

Dieter Gericke and Marc Hanslin

2 Pricing ............................................................................................................................................................ 15

Philippe Weber and Manuel Werder

3 Data Privacy and Cybersecurity ............................................................................................................ 25

David Vasella

4 Key Intellectual Property Issues in M&A Transactions .................................................................. 37

Peter Widmer and Peter Bigler

5 Financial Market Regulation ................................................................................................................... 48

Stefan Kramer, Benedikt Maurenbrecher and Manuel Baschung

6 Merger Control ............................................................................................................................................ 55

Marcel Dietrich and Richard Stäuber

7 Private M&A ................................................................................................................................................. 66

Christoph Neeracher, Philippe Seiler and Raphael Annasohn

8 Public M&A ................................................................................................................................................... 73

Mariel Hoch and Florentin Weibel

9 Distressed M&A in Switzerland ............................................................................................................. 82

Emanuel Dettwiler and Lukas Bopp

10 Joint Ventures – Selected Aspects ....................................................................................................... 92

Pascal Richard and Petra Hanselmann

11 Acquisition Financing ..............................................................................................................................102

Philip Spoerlé and Markus Wolf

Contents

12 Labour and Employment........................................................................................................................110

Manuel Werder and Valerie Meyer Bahar

13 Tax Considerations in M&A Transactions ......................................................................................... 119

Susanne Schreiber and Cyrill Diefenbacher

14 Dispute Resolution ...................................................................................................................................131

Gérald Virieux and Mladen Stojiljković

About the Authors ............................................................................................................................................... 141

Contact Details ..................................................................................................................................................... 151

Introduction

Ueli Studer, Kelsang Tsün and Sophie Stählin

This is the first edition of the Practice Guide – Swiss M&A published by Lexology Getting The Deal

Through. It provides a topical analysis of the legal framework, opportunities, challenges and risks

that arise in connection with M&A transactions in Switzerland. As applicable, each chapter also

specifically deals with matters of particular relevance in M&A transactions in the highly regulated

financial services industry, which is of particular interest in Switzerland as one of the leading

financial centres globally. As such, the Practice Guide – Swiss M&A aims to serve as a comprehen-

sive manual for industry practitioners when dealing with transactions with a Swiss dimension, in

continuation of previous Lexology Getting the Deal Through publications answering key questions

around Swiss M&A.

We, from UBS’s Group Corporate Legal team, have assisted in the selection of the chapters

for the Practice Guide – Swiss M&A and in bringing together authors known for their expertise

and vast experience in M&A and related fields of law. We are very pleased to have been able to

attract this selection of experts from very renowned Swiss law firms. We have worked with many

of these authors or their law firms in the past and can look back on a track record of successful

collaborations, in particular in the M&A area.

The Group Corporate Legal team with its dedicated lawyers advises and supports UBS

Group and its business divisions on internal and external corporate transactions and reorgan-

isations. Since 2014, UBS has undertaken a series of internal transactions changing its legal

structure to improve the resolvability of the group in response to 'too big to fail' requirements.

In December 2014, UBS Group AG became the holding company of the group. In 2015, UBS

AG transferred its Swiss booked personal and corporate banking and wealth management

business to the newly established UBS Switzerland AG. In 2016, UBS Americas Holding LLC

was designated as UBS’s intermediate holding company for the group’s US subsidiaries and

European wealth management subsidiaries were merged into UBS Europe SE, the group’s

Germany-headquartered European bank subsidiary. In 2017, the shared services functions in

1 Ueli Studer and Kelsang Tsün are in-house lawyers at UBS Group AG and Sophie Stählin is a senior

associate at Quadra Attorneys at Law Ltd.

Introduction

Switzerland and the UK were transferred from UBS AG to UBS Business Solutions AG. In 2019,

UBS Limited, the Group’s UK-headquartered bank subsidiary, was merged into UBS Europe SE in

response to the Brexit vote. Recent examples of external M&A transactions include:

• the sale of UBS AG’s Asset Management’s fund administration servicing units in Luxembourg

and Switzerland;

• the joint venture between UBS AG and Japan’s leading trust bank combining UBS's wealth

management expertise with comprehensive local trust banking capabilities; and

• the sale of a majority stake in UBS's B2B fund distribution platform Fondcenter to another

post-trade service provider, creating a top two B2B fund distribution platform in Europe,

Switzerland and Asia.

When advising UBS Group and its business divisions on internal and external corporate transac-

tions, reorganisations and, in particular, on M&A transactions, we are naturally confronted with

the legal issues and challenges that are described in the following chapters and in particular

with those that are pertinent to the highly regulated financial services industry. The UBS Group

includes various regulated legal entities holding a licence from the Swiss Financial Market

Supervisory Authority (FINMA) or a foreign regulator. An M&A transaction involving one or

several regulated entities may therefore trigger regulatory consent or notification requirements

as described in the chapter 'Financial Market Regulation' covering M&A transactions involving

Swiss financial institutions. Moreover, UBS as a financial group is subject to consolidated super-

vision by FINMA. Therefore, and even if an M&A transaction does not directly trigger a notification

or consent requirement, a careful assessment and, as the case may be, a discussion with FINMA

on the extent to which the transaction may have an effect on UBS as a whole from a regulatory

perspective might be required. This may also involve discussions on how an acquired busi-

ness or entity can be embedded into UBS’s policy and risk control framework implementing the

legal and regulatory requirements applicable to the UBS Group. Finally and as described in the

chapter 'Financial Market Regulation', banking secrecy protected by Swiss criminal law may add

an additional layer of complexity if the disclosure of bank client information is required within a

transaction. This is in addition to the data protection issues arising within M&A transactions as

set forth in the chapter 'Data Privacy and Cybersecurity'.

In conjunction with the above-mentioned issues relating to financial institutions M&A,

we often deal with the structural complexity of the UBS Group, in particular when it comes to

carve-out transactions concerning parts of the UBS business. The business of UBS is divided

into four business divisions – Global Wealth Management, Personal & Corporate Banking, Asset

Management and the Investment Bank – that operate through various group entities. Moreover,

and as mentioned above, Group Functions (ie, the shared services functions of the group) are

consolidated in separate service companies. Consequently, if UBS sells a business the identifi-

cation and carve-out of the relevant assets is a key process to be undertaken. The chapter 'Key

Intellectual Property Issues in M&A Transactions' addresses the complexity as regards intellec-

tual property.

Swiss M&A market

Below we provide a brief overview of the Swiss M&A market, also covered in more detail in the

chapters 'Private M&A' and 'Public M&A'. Although Switzerland is a small country, M&A activity

in Switzerland has remained high for the past few years. On the one hand, Switzerland is home

Introduction

to many large multinational companies, which are global market players. On the other hand,

Switzerland provides a favourable framework for M&A transactions, inter alia, with its stable

economy, straightforward legal framework and almost no investment restrictions.

While the number of M&A deals in Switzerland in 2019 declined by around 25 per cent

compared with 2018, the M&A deal volume more than doubled (Source: Dealogic). This trend

was significantly driven by companies transforming and reshaping their portfolios. We esti-

mate that corporates are adopting a 'wait and see' attitude with respect to bold M&A moves

and instead of seeking inorganic growth through acquisitions, companies are increasingly

focusing on corporate clarity, streamlining their operations through joint ventures, demergers

and spin-offs. Furthermore, low or negative interest rates are likely to motivate M&A activity, and

financial sponsor-led M&A remains strong, with an increase in worldwide LBO volume of 7 per

cent compared with 2018 and accounting for about 8 per cent of global M&A volumes in 2019.

M&A activity has been strong in sectors exposed to secular growth and benefiting from

transformative technological trends, with the pharmaceuticals and life sciences sector being in

the forefront with three transactions among Switzerland’s top five transactions with respect to

deal volume in 2019, as shown in the table. This also includes the 2019 blockbuster transaction,

the 100 per cent Alcon spin-off from Novartis. This transaction, where UBS acted as joint finan-

cial adviser, has shown to be the largest spin-off in Switzerland and the second largest spin-off

in history after the spin-off of AbbVie from Abbott Laboratories in 2013. In contrast, sectors with

low intrinsic growth, such as power and utilities, consumer and retail as well as the financial

industry, experienced a reduction in M&A activity.

Top five announced M&A transactions in 2019 with a Swiss target*

Acquirer Target Deal value

(US$ billion)

1 Novartis shareholders Alcon 31.4

2 EQT Partners, ADIA Nestlé Skin Health 10.1

3 DSV Panalpina 5.4

4 DXC Technology Luxoft 2.0

5 PolyOne Clariant's Masterbatch business 1.6

Source: Dealogic

* Excluding ZF Friedrichshafen’s acquisition of WABCO Holdings as country and state of incorporation

are US and Delaware

As regards 2020, the first draft of this introduction had set forth a promising outlook with a

healthy pipeline of M&A activity. However, with the coronavirus market turmoil this has suddenly

changed. Many transactions have been either cancelled or postponed for various reasons. Parties

may be uncertain of the lasting effect the coronavirus crisis may have on a given transaction and

its business plan or a party may be forced to focus and employ its resources on crisis manage-

ment rather than M&A activity. It remains to be seen how the coronavirus crisis will evolve, but

at the time of writing it seems likely that the current situation will cause a shift in M&A dynamics,

at least in the short and medium term. We expect that many companies will experience financial

challenges that may cause a longer-term reduction of M&A activity and also distressed M&A

and restructuring work, in more general, may play a more important role in the M&A market

Introduction

as described in the chapter 'Distressed M&A in Switzerland'. Moreover, the covid-19 pandemic

is likely to have an effect on how parties weigh risks within due diligence and deal negotiations.

For instance, force majeure or MAC clauses will become increasingly important for deal teams

to negotiate going forward.

Last but not least, we should like to extend a sincere thank you to all the contributing authors

and our colleagues from the Group M&A Legal team for their thorough review and thoughtful

comments on this introduction. Special thanks go to Alain Bee, the former head of the Group

Corporate Legal team, for performing most of the preparatory work for this publication.

Structuring Cross-border Transactions

Dieter Gericke and Marc Hanslin

Review of acquisition structures for private cross-border transactions

Basics

Under Swiss law, as for other jurisdictions, transactions are formally structured as a two-step

process consisting of:

• entering into a binding agreement (normally a share purchase agreement or an asset

purchase agreement), typically in writing (signing), in which the mutual obligation of the

parties to give effect to the deal, in particular the obligation to transfer a company or busi-

ness, are agreed; and

• the closing, in which the parties give effect to the transactions agreed at signing (ie, the

transfer of shares or assets or the execution of other transfer instruments against payment

of the consideration).

From a Swiss legal perspective, signing and closing may occur on the same day, if there are no

conditions precedent (eg, antitrust approvals) that need to be satisfied prior to closing.

Signing requirements for share deals and asset deals

The most common forms for the acquisition of privately owned businesses in Switzerland are

share deals and asset deals. Swiss share deals and asset deals are governed by Swiss statutory

law on the acquisition and sale of securities and property. Except for the sale of real estate, which

requires a written agreement legalised by a public notary, there are typically no formal signing

requirements (unless the contract directly includes a (conditional) assignment, it does not have

to be in writing ('in writing' under Swiss law meaning a written document, bearing the signatures

of the persons authorised to sign on behalf of the parties). Swiss statutory law on the acquisition

and sale is flexible, includes only minimal mandatory provisions and allows the integration of

customary M&A clauses for global deals. However, as the law includes some default provisions

1 Dieter Gericke is a partner and Marc Hanslin is an associate with Homburger AG.

Structuring Cross-border Transactions

(that govern if the agreement remains silent on the relevant question), Swiss transaction agree-

ments explicitly amend, replace or waive certain statutory provisions, such as the scope and

limitations of the representations, the inspection and notice periods, the time limitations or the

rights for rescission, to ensure that default law does not inadvertently come into play if unde-

sired. Consideration can consist either of shares or other assets of another company, cash, or a

combination thereof. The consideration is payable to the shareholder in the case of a share deal

and to the company in the case of an asset deal.

Approval requirements for share deals and asset deals

Share deals and asset deals require approval of the relevant internal authority level, deals of

strategic importance or magnitude typically approval by the board of directors, or, if a company

wants to transfer substantially all of its shares or assets leading to a factual termination or liqui-

dation of its operations, approval by at least two-thirds of the votes represented and the absolute

majority of the par value of the shares represented at a shareholders’ meeting.

With respect to very limited assets (mainly residential real estate), entering a binding

agreement by a foreign or foreign-controlled buyer may already require government approval

or exemption.

Closing requirements for share deals

In a share deal, at closing, shares are transferred by way of execution of a written assignment

declaration, endorsement on the share certificate(s), handover of the share certificate(s) to the

acquirer or instruction of the central custodian of intermediated securities, or a combination

thereof, depending on the type and form of shares issued. The transfer of shares in a stock

company may be subject to the consent of the board of directors, the transfer of shares in a

limited liability company may be subject to the consent of the shareholders’ meeting, each if

so provided for by statutory law or in the articles of association of the company. The exercise

of the voting rights in the acquired company is subject to the registration of the acquirer in the

company’s share registry. Further, as a requirement under Switzerland’s anti-money laundering

legislation, new shareholders may be under the obligation to notify their beneficial owners to the

company. In the case of limited liability companies only, shareholders need to be registered in

the commercial register.

Share deals do not trigger any legal requirement for employee consultation or consent.

There are no Swiss statutory laws that would generally impede cross-border share deals or

make them subject to government approval (ie, no general foreign investment regulations).

However, certain industries may require a specific approval (in addition to other approvals that

may be industry-specific) prior to effecting a share deal with a foreign buyer (eg, the acquisition

of a bank).

General structuring of closings of asset deals

In an asset deal, at closing, the assets, agreements and liabilities pertaining to the business can

either be transferred one by one (principle of singular succession) or uno actu based on a stat-

utory asset transfer pursuant to the Federal Act on Mergers, Demergers, Transformations and

Transfers of Assets (Swiss Merger Act) (principle of universal succession).

Structuring Cross-border Transactions

Closing requirements for asset deals in singular succession

In an asset deal following the principle of singular succession, for each class of transferred

assets the respective closing formalities have to be respected. The transfer of claims, patents,

designs and trademarks requires the execution of a written assignment (which can be embedded

in the transaction agreement). Real estate can only be transferred based on a written agreement

which needs to be legalised by a public notary and registered with the land registry office.

As a general principle, Swiss law agreements can only be transferred with the counter-

party’s consent, such consent to a transfer or assignment can be included in the initial agree-

ment or obtained at a later stage. As an exception to this rule, employment agreements transfer

by operation of law with the business. Employment agreements with employees who object to

the transfer are also assumed by the acquirer, but are terminated with the applicable statutory

notice period. The seller needs to inform or, if measures affecting the employees are contem-

plated, consult the transferred employees or, if existing, an employee representative well before

effecting the transfer.

Besides applicable laws on data protection that may restrict the cross-border transfer of

personal data, there are no Swiss statutory laws that would generally impede the cross-border

transfer of most assets. Nevertheless, acquirers typically use a Swiss subsidiary as formal

acquirer under an asset deal by way of singular succession or the transaction is effected by way

of a two-step demerger (see 'Alternative spin-off structures').

Closing requirements for asset deals in universal succession

Statutory asset deals following the principle of universal succession have to respect the formal

procedure pursuant to the Swiss Merger Act and are completed with registration of the asset

transfer agreement in the commercial register. The asset transfer agreement has to be in writing

and, if real estate forms part of the transferred assets, legalised by a public notary. The transfer

agreement replaces all closing formalities that would otherwise apply to the transferred assets

and the transfer is effected in one go with registration. However, the transferring company

remains jointly and severally together with the acquirer liable for transferred liabilities for a

period of three years (unless the statute of limitations restricts such liabilities earlier than that).

Given that information registered in the commercial register is publicly accessible, the economic

terms of the asset transfer can be included in a separate asset purchase agreement while the

written, or if real estate forms part of the transferred assets, legalised asset transfer agreement

serves as a transfer instrument for the closing only. The asset transfer becomes effective with

registration in the commercial register. If employees are transferred, the employees or, if existing,

an employee representative, need to be informed or, if measures affecting the employees are

contemplated, consulted before the registration of the asset transfer in the commercial register.

Also, for asset deals under the Swiss Merger Act, it is common to obtain the consent of important

contractual counterparties.

Cross-border immigration statutory asset transfers are permissible under Swiss law

provided that the jurisdiction of the foreign company recognises a cross-border transfer of

assets and liabilities to the Swiss company by operation of law with registration in the foreign

commercial register, such as Luxembourg and Belgium. In addition to the foreign law, Swiss law

will apply on the asset transfer. In particular, the transfer agreement has to comply with the

Swiss formal requirements. Pursuant to Swiss law, the asset transfer will become effective with

its registration in the foreign commercial register competent for the foreign company.

Structuring Cross-border Transactions

Cross-border emigration statutory asset transfers are permissible under Swiss law provided

that the jurisdiction of the foreign company recognises a cross-border transfer of assets and

liabilities from the Swiss company by operation of law with registration in the Swiss commer-

cial register. Swiss law will apply on the asset transfer and, on aspects concerning the foreign

company, foreign law.

Cross-border asset transfers by universal succession are hardly ever seen in practice.

Typically, if the parties prefer to use a statutory asset transfer, the assets and liabilities are

transferred to a Swiss subsidiary of the foreign acquirer or the transaction is effected by way of

a two-step demerger (see 'Alternative spin-off structures').

Swiss taxation

For a seller who is a Swiss tax-resident legal entity, share deals are more attractive from a tax

perspective since Swiss tax law offers participation exemption on capital gains from qualified

participations while (at the level of the company operating the transferred business) gains in

an asset deal from the realisation of hidden reserves on all other types of assets are taxable at

normal rate.

If the shares in the company operating the transferred business are held by a Swiss tax-resident

private individual as private assets, a share deal is usually more attractive since capital gains on

the sale of such shares are, subject to certain exceptions, not taxable in Switzerland. In contrast,

the subsequent distribution of the proceeds from an asset deal to the individual shareholder

(by dividend or liquidation of the selling company) would be taxable income. Under the concept

of indirect partial liquidation, however, private capital gains from the sale of participations in

a company can be requalified into taxable income provided that the respective conditions are

fulfilled. In a nutshell, the concept applies if excess cash in the target company is directly or

indirectly used to finance or refinance, including by way of a merger with the acquiring company,

(during a waiting period) the acquisition price. Swiss private sellers often request an indemnity

for the income tax consequences of a requalification to be included in the transaction agreement.

If the company holding the business has certain tax benefits such as losses carried forward

or capital contribution reserves that can be distributed free of Swiss withholding taxes, a share

deal may be more attractive for the acquirer since this acquisition structure allows the acquisi-

tion of such tax benefits.

Domestic asset deals, including to Swiss subsidiaries of a foreign acquirer, are in principle

subject to value added taxes, whereby the tax liability can be settled by way of a notification

(similar to the concept of the transfer of a business as a going concern).

Preferred transaction structures for acquisition of Swiss banks

While in recent years banking transactions in Switzerland have been effected using both share

deals and asset deals, asset deals seem to be the preferred structure for acquirers as they allow

the isolation of legal risks from the rest of the transferred business. Also, mainly in domestic

private banking transactions where consolidation has been the main driver, the acquirers wanted

to acquire the assets under management and certain key employees only and did not want to

also acquire the infrastructure of the acquired business, such as the banking licence or the IT

platform. Sellers typically prefer share deals as, after an asset deal, they have to unwind and

liquidate the company and deal with problem cases, such as dormant accounts or legally tainted

accounts. For foreign buyers, a share deal is often the only realistic option, unless they already

Structuring Cross-border Transactions

have a subsidiary with a banking licence in Switzerland. Bank acquisitions require notification

or approval of the Swiss Financial Market Supervisory Authority (FINMA), and acquisitions by

foreign or foreign-controlled entities require specific approval.

Cross-border statutory merger structures

Statutory mergers – basics

Companies may also be acquired or combined by means of a statutory merger pursuant to the

Swiss Merger Act (see, for example, the merger between Novartis and Alcon in 2011). Statutory

mergers are subject to a formal procedure and can involve two forms: either one company is

dissolved and merged into another company (merger by absorption), or the two combining

companies are both dissolved and merged into a newly incorporated company (merger by

combination). In both cases, the assets and liabilities of the dissolved company or companies

are transferred to the surviving or newly incorporated company by operation of law. The merger

consideration must, as a rule consist of shares of the surviving or the newly incorporated

company. The merger requires approval by at least two-thirds of the votes represented and the

absolute majority of the par value of the shares represented at the shareholders’ meeting of the

two entities. If the merger consideration comprises any compensation other than shares of the

surviving company, 90 per cent of all voting securities outstanding need to approve the merger.

The companies need to inform or, if measures affecting the employees are contemplated,

consult the employees or, if existing, an employee representative before the shareholders’

meeting resolving on the merger. The merger agreement, the merger report by the board of

directors, the auditor confirmation and the financial statements of the previous three years and,

as the case may be, interim financial statements of all companies involved in the merger, have

to be made available to the shareholders for inspection during a period of 30 days. The merger

documentation needs to be filed with the commercial register. The merger becomes effective with

the registration in the commercial register. Shareholders of small and medium-sized companies

may unanimously opt for a simplified merger procedure. The shareholders of all companies

involved in the merger have an appraisal right and can request a Swiss court to determine an

adequate merger consideration within two months from the approval of the merger.

Triangular cross-border merger to acquire a foreign company

Given the 90 per cent approval for cash consideration or shares of a parent company, which is not

the absorbing company, triangular mergers are hardly ever used to acquire Swiss target compa-

nies. However, if the law in the jurisdiction of the non-Swiss target allows triangular mergers

with consideration in cash or in shares of the Swiss buying parent company, such foreign trian-

gular mergers or schemes of arrangement may be used by Swiss buyers for cross-border acqui-

sitions abroad. For example, many acquisitions in the US, including of US public companies, are

effected by Swiss buyers by way of a US statutory triangular merger. In such case, the Swiss

parent would establish a US acquisition subsidiary and have the US target company merge into

such US subsidiary against consideration to the shareholders of the US target company in cash

or in shares of the Swiss parent company.

Immigration merger

A foreign company can merge directly into a Swiss company (merger by absorption) or be

combined with a Swiss company into a new Swiss company (merger by combination) provided

Structuring Cross-border Transactions

that the jurisdiction of the foreign company allows for such a merger and the merger complies

with the respective conditions of the foreign jurisdiction. This is the case if the foreign law recog-

nises a legal transaction under which the foreign company is dissolved without undergoing a

liquidation procedure and all assets and liabilities of the foreign company transfer to the Swiss

company uno actu by operation of law. While this has to be checked in specific cases, in our

experience, for example, Austria, Belgium, France, Italy, Liechtenstein, Luxembourg, Portugal,

Romania and Spain, the US states of Delaware and North Carolina, the British Virgin Islands, the

Bahamas, Bermuda and Guernsey recognise such cross-border merger and transfer of assets

and liabilities uno actu into Switzerland. If a direct transfer is not possible, sometimes a transfer

through a country recognised for cross-border mergers both by the jurisdiction of the dissolving

and the absorbing company may be a solution (eg, merger or redomiciliation into Liechtenstein

and from there into a Swiss company).

The Swiss company needs to provide evidence that the submitted merger is permissible

under the jurisdiction of the foreign company. Such evidence can be provided either by reference

to the unambiguous foreign law or by a confirmation of a competent administrative authority

or by a recognised legal institution or expert. Aspects directly relating to the foreign company

such as approval requirements, the entitlement of the shareholders of the foreign company to a

specific merger consideration, the conditions under which preferential rights of the shareholders

of the foreign company can be withdrawn in the merger or provisions with respect to the protec-

tion of creditors of the foreign company are solely governed by the respective foreign law. On all

other aspects of the merger, Swiss law applies.

Swiss law provides that the immigration merger becomes effective with its registration in

the commercial register.

In the past, statutory immigration mergers have been mainly used for intragroup

reorganisations.

Emigration merger – basics

A Swiss company can merge directly into a foreign company or be combined with a foreign

company into a newly incorporated foreign company provided that the Swiss company can

prove that:

• all assets and liabilities of the Swiss company will transfer without undergoing a liquidation

procedure by operation of law to the foreign company with effect of the cancellation of the

Swiss company (principle of universal succession); and

• the participation and membership rights of the shareholders of the Swiss company are

respected.

Under the first requirement, the Swiss company has to provide evidence to the competent

commercial register by reference to the unambiguous foreign law or by a confirmation of a

competent administrative authority or by a recognised legal institution or expert that the foreign

jurisdiction allows the transfer of all assets and liabilities by way of universal succession. Under

the second requirement, the shareholders of the Swiss company must be offered the possibility

to choose shares in the surviving or newly incorporated foreign company as merger consider-

ation, unless the merger is approved by 90 per cent of all voting securities outstanding of the

Swiss company. The merger consideration needs to be adequate. Preferential rights of the share-

holders of the Swiss company that do not survive the merger have to be adequately considered

Structuring Cross-border Transactions

in the calculation of the merger consideration. The board of directors of the Swiss company has

to report on the adequacy of the merger consideration in the merger report. The merger report

is reviewed by a certified auditor and the confirmation of the auditor forms part of the merger

documentation.

The emigrating Swiss company has to comply with the requirements of Swiss merger law,

including the requirement to publicly notify the creditors of the merger and granting them a

two-month period to request collateral for their claims. On all other aspects of the merger, the

foreign law applies (in addition to the Swiss law, as the case may be).

Emigration merger – taxes

If, as a consequence of an emigration merger, taxable assets are no longer taxable in Switzerland,

the Swiss company is subject to income tax on the hidden reserves on its assets. Given that the

foreign company is not subject to Swiss withholding tax (ie, not a dual-resident entity), with-

holding tax is levied on the amount of the fair market value of the assets (including any goodwill)

minus the sum of nominal capital and capital contribution reserves.

Emigration merger-squeeze out

A statutory merger allows an acquirer to acquire full control over the target company with a

majority of two-thirds of the votes represented and the absolute majority of the par value of the

shares represented at the shareholders’ meeting of the Swiss company or, if minority share-

holders should be squeezed out, with 90 per cent of all voting securities outstanding, while the

threshold for a squeeze-out of the minority after a public takeover offer is at 98 per cent of all

voting securities outstanding. The statutory merger provides for more deal security and is thus

an attractive structuring alternative when consideration consists of shares of the acquirer.

Immigration quasi-merger (share-for-share deal)

A structure more commonly used than a statutory immigration merger and resulting in substan-

tially the same result is the quasi-merger. Under a quasi-merger, the shareholders of the foreign

company contribute their shares in the foreign company into the Swiss company and receive

newly issued shares of the Swiss company in exchange. Other than in a statutory merger, the

shares of the foreign company are not cancelled in the merger. Instead, the foreign company

continues to exist as a subsidiary of the Swiss company. The quasi-merger requires approval

by at least two-thirds of the votes represented and the absolute majority of the par value of the

shares represented at the shareholders’ meeting of the Swiss company. The Swiss company can

increase its equity by up to the amount of the fair market value of the contributed shares in the

foreign company. This newly created equity usually qualifies as capital contribution reserves that

can be distributed as dividends free of any withholding taxes. An external auditor needs to render

a report on the value of the contributed shares. The quasi-merger is completed with registration

of the issuance of the new shares in the commercial register.

For practical reasons, quasi-mergers are only used when the foreign company is privately

held, is a group subsidiary or where under the foreign jurisdiction the consent and participation

of each public shareholder can be replaced by a structure such as a scheme of arrangement or a

reverse triangular merger (see 'Triangular cross-border merger to acquire a foreign company').

Although quasi-mergers also require the involvement of the commercial register, the proce-

dure is significantly less formalised and provides more flexibility to the parties than a statutory

Structuring Cross-border Transactions

immigration merger. A quasi-merger is often also attractive from a tax perspective since under

a quasi-merger the surviving Swiss company may obtain tax benefits in the form of additional

capital contribution reserves that can be distributed free of any withholding taxes. Compared

with a statutory immigration merger, not only the nominal capital (plus, in certain cases, capital

contribution reserves) of the foreign company, but its full fair market value may be booked as

nominal capital and reserves from capital contributions at the level of the Swiss company (on

condition that, for five years from the quasi-merger, the foreign company is not wound up or

merged into the Swiss company).

Cross-border structures for the acquisition of Swiss public companies

Given the limitations of Swiss statutory merger law with respect to any consideration other than

shares of the absorbing company (ie, as regards cash consideration or shares of a non-absorbing

foreign parent company of the acquiring company), statutory mergers are (unlike the other way

round, see 'Triangular cross-border merger to acquire a foreign company') rarely an option

to acquire Swiss listed companies. Accordingly, almost all such transactions are effected by

tender offers governed by Swiss takeover law. Tender offers are essentially direct offers by the

acquiring company to the shareholders of the target company. While, in friendly transactions,

a bidder would enter a transaction agreement with the board of the target company in order

to obtain its support, that is not a requirement. Only where the articles of incorporation of the

Swiss listed target company require approval for an acquisition of shares with voting rights,

the board of the target has a direct say or may need to convene a shareholders' meeting and

propose abolition of such a restriction. The consideration of such a tender offer may consist of

cash (including, subject to certain limitations and requirements, foreign currencies) or tradable

securities (including foreign shares or other securities).

Cross-border spin-off structures

Statutory demergers – basics

Divestments or spin-off transactions may also be structured as a statutory demerger pursuant

to the Swiss Merger Act. Statutory demergers are subject to a formal procedure and can involve

two forms: either the spun-off business is absorbed by another company (demerger by absorp-

tion), or the business is spun-off as a newly incorporated company (demerger by incorporation).

Further, under a demerger the transferring company can be dissolved and all its businesses are

either absorbed by other companies or spun off as newly incorporated companies.

In a symmetric demerger, the shareholders of the transferring company receive shares in

the absorbing company or in the newly incorporated company pro rata to their shareholding in

the transferring company. In an asymmetric demerger, the former shareholders of the transfer-

ring company receive shares in any of the surviving companies involved in the demerger, but

not in all of them.

A demerger requires approval by at least two-thirds of the votes represented and the abso-

lute majority of the par value of the shares represented at the shareholders’ meeting of the

companies involved in the demerger, an asymmetric demerger by 90 per cent of all voting secu-

rities outstanding of the transferring company. Before the shareholders’ meeting approving the

demerger, the company has to:

• make the demerger agreement or plan, the demerger report of the board of directors, the

report by the auditor as well as the financial statements of the previous three years and, as

Structuring Cross-border Transactions

the case may be, interim financial statements available to the shareholders for inspection

for two months; and

• publicly notify the creditors of the demerger and grant them a two-month period to request

collateral for their claims.

In a cross-border demerger, the shareholders of all companies involved in the demerger have an

appraisal right and can request a Swiss court to determine an adequate demerger consideration

within two months from the approval of the demerger.

Demergers are predominantly used for intragroup restructurings. Since in banking

transactions the acquirer often wants to isolate legal risks from the rest of the business,

cross-border statutory demergers are rarely seen in practice as the Swiss Merger Acts provides

for (unlimited) joint and several liability of the Swiss company together with the absorbing

company for all liabilities that were spun off to the absorbing company.

Emigration demergers

Cross-border emigration demergers are possible under substantially the same conditions as

emigration mergers. The Swiss company needs to prove that:

• all assets and liabilities of the Swiss company will transfer without undergoing a liquidation

procedure by operation of law to the foreign company with effect from the cancellation of

the Swiss company; and

• the participation and membership rights of the shareholders of the Swiss company are

respected.

Immigration demergers

Cross-border immigration demergers are possible under substantially the same conditions

as immigration mergers. A foreign company can be demerged into an existing Swiss company

(demerger by absorption) or a newly incorporated Swiss company (demerger by incorpora-

tion) provided that the jurisdiction of the foreign company allows for such a demerger and the

demerger complies with the respective conditions of the foreign jurisdiction. As for an immigra-

tion merger, the surviving or newly incorporated Swiss company may obtain tax benefits in the

form of additional capital contribution reserves that can be distributed free of any withholding

taxes in the amount of up to the net assets of the absorbed foreign business at book values.

Alternative spin-off structures

Given its formalised procedure and the joint and several liability for the transferring company in a

statutory cross-border demerger, cross-border divestments or spin-off transactions are usually

structured either as an asset deal (by singular or universal succession) to a Swiss subsidiary of

the acquirer or as a two-step demerger (hive down) in which the business (including the assets

and liabilities) to be spun off is first transferred to a (newly incorporated) subsidiary and the

shares of such subsidiary are then distributed to the shareholders of the parent company (distri-

bution in kind), which may sell the shares to an acquirer as a share deal.

Swiss reorganisation tax rules generally provide for tax-free structuring options rather than

taking each of the legal steps into account separately.

Structuring Cross-border Transactions

Summary

Preferred transaction structures

Swiss law offers a wide range of structuring alternatives for cross-border acquisitions, combina-

tions and spin-offs. While statutory mergers, demergers and asset transfers, with their advan-

tage of a facilitated transfer of all assets and liabilities uno actu under the principle of universal

succession, are available for (mostly intragroup) transactions into or from many foreign coun-

tries (such availability to be assessed on a case-by-case basis), share deals, asset deals by way

of singular succession to a Swiss subsidiary of the acquirer or two-step demergers are typically

the preferred structure for cross-border transactions, also in the banking sector. This is mainly

the case because of their flexible and less formalised procedure. While acquisitions of foreign

public companies by Swiss companies can often be structured as triangular mergers or schemes

of arrangement, acquisitions of Swiss public companies by foreign companies are almost exclu-

sively effected by tender offers.

From a tax point of view, the immigration quasi-merger structure (ie, a share-for-share

deal) is often the most attractive one, since this structure does not regularly trigger corpo-

rate income tax consequences in the foreign company and allows the creation of a substantial

amount of capital contribution reserves in the Swiss company. In addition to this, the distribution

of such capital contribution reserves created by an immigration quasi-merger is not subject to

the limitations introduced by the Federal Act on Tax Reform and AHV Funding, in force since

1 January 2020. More challenging are cross-border mergers and demergers, since such transac-

tions may trigger taxable realisation of hidden reserves on the respective assets as well as with-

holding taxes, or do not permit safeguarding tax assets. Any cross-border transaction requires

a careful tax structuring.

Challenges

With Switzerland being an attractive jurisdiction for foreign investments, there are not many

challenges to cross-border M&A transactions. In particular, Switzerland has no statutory law

that would allow for general control of foreign investments on the basis of national interest. Only

the acquisition of real estate by a foreign person or entity, be it directly (ie, by a foreign person

or entity as part of an asset deal) or indirectly (ie, by acquisition of a Swiss company holding

real estate by a foreign person or entity as part of a share deal or the combination of such a

Swiss company with a foreign company by way of an emigration merger or demerger), may be

restricted under the Lex Koller, whereby these restrictions do not generally apply on properties

used for commercial activities. Further, the acquisition of a business in certain regulated indus-

tries, such as banking or telecoms, may affect the licences granted to such a business or require

additional filings, approvals or both.

Pricing

Philippe Weber and Manuel Werder

Introduction

Despite its relatively small size, Switzerland is the home to many large and well-established

international corporations spanning a diverse range of industries, from major banks and insur-

ance companies like Credit Suisse, UBS and Zurich Insurance, global food and healthcare players

like Nestlé, Novartis and Roche, technology and industrial firms like ABB and OC Oerlikon, as

well as leading luxury goods and lifestyle groups like Richemont and Swatch.

At the same time, Switzerland is the home to many successful small and medium-sized

and often internationally active businesses, 'hidden champions', which either are or have the

potential to become leaders in their fields, and many of which are working through succession

planning in the coming years.

All of this, combined with the typical features of Switzerland, including economic, polit-

ical and legal stability, limited investment restrictions and a well-functioning financing market,

makes Switzerland a fertile soil for an attractive M&A market to both Swiss and foreign inves-

tors. Notably, according to a recent survey, private equity was involved in almost half of the

50 largest deals involving Switzerland in 2019.

Against this background, this chapter focuses on the pricing mechanisms and methods that

are primarily applied in connection with the acquisition of privately held (ie, not publicly listed)

Swiss target companies and further focuses on share deals with a transaction value between

50 and 500 million Swiss francs.

1 Philippe Weber and Manuel Werder are partners with Niederer Kraft Frey Ltd.

2 The pricing mechanisms described in this chapter generally also apply to larger Swiss private M&A

transactions. However, with respect to certain pricing features, market practice would typically

be different for larger transactions. For example, earn-outs are more typically found in small to

medium-sized deals. Also, while locked box deals have become very common for large deals, closing

accounts mechanisms are still widely used, in particular when US or Asian buyers are involved.

Pricing

Pricing mechanisms most commonly used in Swiss M&A transactions

The main pricing mechanisms commonly seen in Swiss M&A transactions are the 'locked box'

mechanism and the 'closing accounts' mechanism; sometimes these two mechanisms are

combined into a 'hybrid'.

Locked box deals have become increasingly popular in Europe, including in Switzerland.

They provide a high level of pricing and deal certainty by locking in the price at signing; in

turn, closing accounts can better reflect (but also expose parties to) changes between signing

and closing.

According to a recent study, in 2019 approximately 60 per cent of the M&A transactions in

Europe (which matches our experience in Switzerland) applied the locked box mechanism. This

suggests an increase by some 30 to 40 per cent within the past five years.

By contrast, during the same period closing accounts transactions have partly lost impor-

tance in the market and decreased by some 20 per cent to approximately 35 per cent in 2019.

In certain cases parties choose a hybrid structure. For example, if the locked box accounts

are not sufficiently recent or if the locked box accounts are only finalised or audited after signing,

but prior to closing, the parties may agree on an adjustment of the purchase price in case the

locked box accounts are modified in the course of their finalisation or audit.

It remains to be seen whether the covid-19 crisis will result in a return of closing accounts

and other post-signing price-adjustment mechanisms (eg, hybrids and earn-outs), but initial

signs of this are visible.

The key difference between the locked box and closing accounts mechanisms is the time

when the economic risk and benefit in the target company passes from the seller to the buyer.

In the locked box mechanism the economic risk and benefit typically passes to the buyer at the

locked box date, while in the closing accounts mechanism risk and benefit will typically transfer

at the date of closing.

Under both mechanisms, the seller and the buyer typically first agree on a valuation for

the business of the target company (commonly called 'enterprise value') on a cash-free and

debt-free basis and assuming a normal level of working capital. The parties are free in negoti-

ating the ultimate purchase price and in choosing the method for the determination of the enter-

prise value. The most common valuation methods are multiple of the EBITDA or other multiples

and discounted cashflow, but there are numerous other methods, such as net asset value, peer

comparisons, etc.

In a second step the enterprise value is adjusted to reflect the actual cash, debt and working

capital in the business to determine the 'equity value'.

The pricing considerations and enterprise value to equity value bridge (adjustments for

typically cash or debt and working capital) are essentially identical under both closing accounts

and locked box mechanisms. In the locked box mechanism, the seller and the buyer negotiate

a fixed price at signing of the share purchase agreement (SPA) based on the agreed locked box

accounts, which removes price uncertainties for both parties, whereas in the closing accounts

mechanism the adjustments for cash or debt and working capital are done only after the closing.

3 The numbers refer to share deals. By their nature, asset deals more typically use closing accounts

structures.

Pricing

Locked box

Description

The locked box mechanism consists of a purchase price that is fixed at the time of signing the

SPA. There is, except in the case of 'leakages' (see 'Protection against leakages'), no purchase

price adjustment or true-up between the date of signing and the date of closing. Generally,

changes in the balance sheet, in particular the fluctuation in the actual cash, debt and working

capital of the target company between the date of signing and the date of closing, will not affect

the purchase price, and there is no respective purchase price adjustment for these items.

The purchase price is calculated on the basis of recent historical financial statements, some-

times called 'locked box accounts'. The date of these financial statements constitutes the agreed

date of the locked box and is sometimes called the 'locked box date'. Often the last audited finan-

cial statements as at the end of the last completed business year (or reviewed half-year financial

statements) are used as locked box accounts. However, the parties are free to choose financial

statements as at any date that do not need to be audited as locked box accounts. Experienced

parties will normally be reluctant to rely on locked box accounts that are older than three to six

months and not at least reviewed.

As a consequence, the cash, debt and working capital positions as at the locked box date are

amounts that are known to the parties at the time of signing.

Economic impacts

When using the locked box mechanism, the buyer takes the economic benefit and risk from the

locked box date until the closing date, unless and to the extent the buyer has obtained specific

protection under the SPA, for example, in the form of a material adverse change clause or

representations, warranties and indemnities that cover the period between signing and closing

of the SPA. If the target company is a profitable business, the profit generated between the

locked box date and the closing date belongs to the buyer. In the case of a growing business, this

mechanism can provide further significant potential upside benefit to the buyer. By contrast, if

the business of the target company is loss-making, the buyer economically bears any negative

development of the net cash and the working capital.

Key pricing issues in locked box deals

Quality and date of locked box accounts

Locked box accounts are normally not older than six months. The more recent the locked box

accounts are, the better is the visibility of the buyer that at the date of signing the business of

the target company is still essentially in a similar financial condition as shown in the locked

box accounts.

Since the locked box accounts are key to the determination of the purchase price, the locked

box accounts are normally audited or, if they are not audited, they should at least be reviewed. In

the absence of any audit or review the protection of the buyer against misstatements in the locked

box accounts would be limited to claims for misrepresentation or breach of warranty with respect

to the locked box accounts or specific indemnities, which may not offer sufficient protection.

The locked box accounts should be prepared for the target business. If the business sold does

not stand alone from other operations of the seller from an operational or accounting perspec-

tive, the locked box mechanism becomes much more complex and requires bespoke drafting.

Pricing

Protection against leakages

The buyer will require protection through the SPA against value being extracted from the target

company in the period between the locked box date and the closing date via an undertaking from

the seller not to extract any value out of the business. Such extractions are commonly defined

as 'leakage'. Leakages may, for example, consist of dividends, the payment of management fees,

transaction and other bonuses to the benefit of the seller, any of its affiliates or any party closely

related to or having a connection with the seller.

Leakage definitions are essential to preserve the value of the acquired business and there-

fore must be carefully drafted. They typically cover a broad range of forbidden acts, such as the

transfer of cash, cash equivalents or assets, the assumption of liabilities, the waiver of claims, the

provision of services, the granting of securities, payments made to third parties on the account of

a seller, a seller affiliate or a related or connected party, etc.

Because the purchase price is directly affected, the buyer’s obligation to compensate the

seller for any leakage is normally not limited in amount (ie, it is structured as franc-for-franc

clawback by way of indemnification without minimum or maximum limitations in amount). The

duration of such clawback is a matter of negotiation.

The SPA normally provides for a list of exceptions (ie, value extractions that the parties

specifically define as permitted leakage). Among the permitted leakages are typically payments

made by the target company that are on arm’s-length terms, payments in the ordinary course of

business or payments that are specifically agreed and defined in amount, such as repayments

of shareholder loans. Consequently, permitted leakages will be factored into the purchase price.

Inclusion of enterprise value to equity value bridge

Often the parties negotiate and agree on the fixed purchase outside of the legal documentation

and therefore only state the fixed purchase price in the SPA without mentioning the enterprise

value to equity value bridge. This simplifies the legal terms and definitions in the SPA.

However, in the section addressing the remedies regime describing the legal consequences

of potential misrepresentation, breach of warranty and indemnity cases, the parties often agree

that items that had been taken into account in the negotiation of the purchase price and that

had resulted in a reduction of the purchase price are excluded from any damage and may not be

claimed in the case of any misrepresentation, breach of warranty and indemnity. In the case of

such agreement, the inclusion of the enterprise value to equity value bridge as annex to the SPA

is recommendable and often done.

Interest or per diem payment

In Swiss locked box deals it is quite common for the parties to agree on an additional purchase

price component, which often consists of an amount per day between the signing date and the

closing date or during another defined time period. This purchase price component can be justi-

fied as compensation for transferring the profit and benefit of increases in the net cash and

working capital positions from the locked box date to the closing date without the buyer having

to finance its capital costs. Accordingly, sellers will typically expect this rate to be determined on

the basis of expected results (in which the seller wishes to participate until closing) as opposed

to mere interest (according to prevailing interest rates) on a deferred purchase price.

Such purchase price component may further incentivise the buyer to speed up acts it may

have to take – in case it needs to take any such acts – for the fulfilment of the closing conditions,

Pricing

such as the making of filings to obtain merger control or other regulatory approvals, tax rulings,

third party consents, etc.

Restrictions on conduct of business between signing and closing

Unless signing and closing of the transaction occur simultaneously (which is the exception in

medium-sized and large deals), the seller will continue to conduct the business of the target

company until closing, while the buyer will already have assumed the risk of deterioration of

that business. In order to protect the buyer, the SPA will therefore contain covenants of the

seller to conduct the business in the ordinary course consistent with past practice and to refrain

from taking certain actions specifically listed in the SPA that could materially alter the business.

If permitted under applicable competition laws (ie, if not considered as jumping the gun), the

parties may agree that such listed actions (or omissions) will require the consent of the buyer.

Closing accounts

Description

In the closing accounts mechanism the seller and the buyer agree at the signing only on the

enterprise value and some key parameters of the enterprise value to equity value bridge. After

the closing of the transaction, financial statements as at the closing (the closing accounts) are

prepared. On the basis of the closing accounts the enterprise value is adjusted to reflect the

change in these key parameters at the closing date to determine the purchase price amount

actually owed to the seller.

In the closing accounts mechanism, the SPA will foresee a preliminary purchase price based

on accounts as at a date prior to the date of signing or certain projections of the target company’s

financial statements at the date of closing. If the adjustment is solely made with reference to

cash and debt and/or net working capital, the SPA will assume a certain net cash or net debt and

a certain net working capital position. The preliminary purchase price is then adjusted on the

basis of the actual relevant financial parameters at the date of closing.

The financial parameters that are most often seen as decisive for the calculation of the

post-closing purchase-price adjustment are cash, cash equivalents and financial debt (ie, net

cash or net debt), and trade receivables, inventories and trade payables (ie, net working capital).

According to a recent survey, 76 per cent of all closing accounts transactions provide for a net

cash or net debt adjustment and 53 per cent of all closing accounts transactions provide for a

net working capital adjustment, normally in connection with a net cash or net debt adjustment.

Less often seen are adjustments for changes in the net assets (ie, all assets minus all liabil-

ities). Only 16 per cent of all closing accounts transactions foresee a full net asset value adjust-

ment. Even less frequently, the purchase price will be adjusted on the basis of earnings between

signing and closing (regarding earn-out post-closing see 'Earn-out clauses').

In the financial services industry, adjustments will often be made based on the level of

net equity and assets under management (the latter as at closing and/or a subsequent date to

protect the buyer against an excessive post-closing assets-under-management attrition rate as

a result of clients leaving following a change of control).

Price adjustments can also be used to control the level of investment from the date of

signing to the date of closing. Capex clauses usually require investments within an agreed or

planned frame. The purchase price is adjusted by the difference between the planned and the

made investments. However, the capex clause is rarely seen in practice.

Pricing

The parties are free to choose any other financial parameters that they consider relevant

for the determination of the final purchase price (eg, turnover, EBITDA, net profit). Equally, the

parties are free to choose the date from which such financial parameters shall apply. The most

commonly used date for this is the closing date, but in practice parties sometimes also choose a

different date such as the last date of the month immediately preceding the closing date.

Economic impacts

When using the closing accounts mechanism, the seller keeps the economic benefit and risk in

the target company up to the closing date.

Key pricing issues in closing accounts deals

Calculation of purchase price adjustment

Since the cash or debt and net working capital position (or such other financial parameters

agreed to determine the final purchase price) as at the closing date will only be known in final

form after the closing, the SPA normally provides for the payment of a preliminary purchase

price at closing on the basis of estimates and followed by an adjustment payment after closing

once the final closing accounts have been prepared. For the preliminary purchase price the

parties will normally rely on good-faith estimates provided by the seller shortly before closing.

Given that the final purchase price will be determined based on closing accounts yet to be

prepared, key issues for the SPA will be:

• the accounting rules according to which the closing accounts shall be determined; and

• the procedure for who will be responsible for the preparation of these accounts.

Swiss SPAs providing for closing accounts price adjustments will typically contain detailed

definitions and rules about the applicable accounting rules, often supplemented by calculation

examples in the annex to illustrate and record the respective understanding of the parties. In this

context, critical negotiation items often include the treatment of debt and debt-like items such as

accrued tax and other liabilities (eg, vacation, bonuses, etc), unfunded pension liabilities, lease

liabilities, customer advances, etc, or cash and cash equivalents like trapped cash.

Even though this is often a matter of negotiation and contentious, the right to prepare the

first draft of the closing accounts is more often granted to the buyer on the basis that following

the closing the buyer will have better access to the target company’s business and its financial

records. The other party will then be granted a right to review (including access to relevant

information and persons) and objection within a stated period.

Dispute resolution regime

State courts and even arbitration courts may often not be well suited to resolve disputes over

purchase price adjustment clauses that often contain complex accounting questions. Examples

are the treatment of liabilities that, although they have a financing character, technically may not

constitute financial liabilities (debt-like items), or the assessment of acts that may have artifi-

cially affected certain financial parameters. Therefore, parties often agree that any dispute about

the determination of the closing accounts shall be submitted to an accounting expert acting as

independent appraiser for final resolution. In the event that the SPA is governed by Swiss law

the appraiser will act in the capacity of expert arbitrator within the meaning of article 189 of the

Swiss Federal Law on Civil Procedure.

Pricing

The SPA should include sufficiently detailed rules about the applicable accounting prin-

ciples, the parties’ opportunities to make submissions and to see and comment on the other

party’s submissions, the timing of the resolution, the language of the submission, etc.

Restrictions on conduct of business between signing and closing

While compared with locked box deals closing accounts may better protect a buyer against

adverse financial developments between signing and closing, the buyer still has an interest to

obtain contractual assurance from the seller that the business of the target company will be

conducted in the ordinary course between signing and closing. In this context buyers will draw

particular attention to ensuring that the seller will not be permitted to artificially inflate the cash

or working capital positions (for example, by delaying the payment of suppliers or by acceler-

ating the collection of receivables).

Advantages and disadvantages of pricing mechanisms most commonly used in

Swiss M&A transactions

Locked box mechanism

• The main advantage of the locked box mechanism is its simplicity and the absence of any

post-completion adjustment process. This saves the parties from spending financial means

and human resources on post-closing calculations and review procedures.

• In auction procedures, the seller may easily compare the different bids that have been

submitted. It further provides both parties with certainty on price.

• The risk of post-closing disputes concerning the purchase price adjustment may be

minimised.

• There may be a mismatch between the economic risks and the responsibility to manage the

business or the target company.

Closing accounts mechanism

• The closing accounts mechanism allows the risk and benefit with respect to the target

company to pass to the buyer at the same time as the completion of the transaction takes

place. The management and control of the target company corresponds to the economic risks.

• The purchase price closely corresponds to the enterprise value.

• The closing accounts mechanism may allow the parties to proceed faster to signing.

• Neither party has certainty over the final purchase price until the closing accounts are

final. This uncertainty can be mitigated in part by providing for deductibles (ie, minimum

amounts within which any difference between preliminary and final numbers will not result

in an adjustment of the purchase price) and caps (ie, maximum amounts, by which the final

purchase price can be adjusted).

• Purchase price adjustment clauses are often complex and their handling may be costly. For

smaller transactions, it may be worthwhile to use a simpler purchase price mechanism.

• There is a higher risk of post-closing disputes concerning the purchase price adjustment.

Pricing

Summary overview

Locked box Closing accounts

Pros

(Fixed) price certainty Buyer 'pays for what it gets' (and seller keeps

upside)

High bid comparability Alignment control or economic transfer

Early transfer of risk (seller) Potentially more bespoke (eg, if pre-closing

restructuring or reorganisation of target intended)

Simpler, faster and cheaper overall process Potentially faster process to signing

Seller controls preparation of balance sheet Flexible (less dependent on balance sheet)

Reduced risk of disputes

Cons

Early transfer of economic upside (except to the

extent compensated by way of per diem interest)

Reduced bid comparability

Increased risk for buyer Final price unknown

Valuation risk Unexpected price adjustments

Mismatch control or economic transfer Overall process longer and more costly

Effect of process delays (balance sheet

relevance, etc)

Higher dispute risk

Earn-out clauses

Description

The earn-out is a variable purchase price component, which is conditional upon the occurrence

or reaching of pre-agreed performance measures (eg, turnover or milestones), typically during

a limited period after closing.

In Switzerland, earn-outs are frequently used in smaller transactions and less so in

medium-sized and large M&A transactions.

The parties are free to define the performance indicators for an earn-out. In the majority of

the cases the parties use financial performance indicators, such as turnover, EBITDA, EBIT, net

income or operating cashflow. The performance indicators may also be of a non-financial nature,

for example, the achievement of certain milestones in the development of a product, product

approvals obtained from governmental authorities, the sum of orders received, the intake of new

customers, etc.

The use of earn-out clauses is particularly useful if, despite extensive financial due diligence,

different price expectations remain between the seller and the buyer. Earn-out mechanisms

are therefore often used to bridge a valuation gap between the seller and the buyer that may

result from a diverging assessment of the future development of the target company’s business.

Earn-outs may also be used to ensure a seller’s continued commitment to the sold business.

Earn-outs are sometimes combined with a deferred sale of part of the shares of the target

business. Thereby, the buyer ensures that the seller still has some 'skin in the game'; conversely,

by keeping a stake in the company, sellers keep a 'stick' with some (minority) rights helping them

to ensure that the business will be operated as agreed.

The amount of the earn-out payments is normally capped. The agreed period for earn-out

payments is usually one to three years.

Earn-out purchase price components are predominantly paid in cash and sometimes by

alternative means such as shares in the buyer or the target company.

Pricing

Economic impacts

When using an earn-out mechanism, the seller keeps all or part of the economic benefit and

risk relating to the agreed performance indicators for the period after the closing date. The

remainder of the economic benefit and risk regarding the business of the target group shifts

to the buyer at or before the closing depending on the chosen transaction structure. Often, the

seller does not obtain the entirety of the financial benefit generated by the achievement of the

agreed performance indicator. As a result, there may be an alignment of interests between the

seller and the buyer.

Key pricing issues in earn-out arrangements

Calculation of the earn-out

Earn-out clauses require detailed and careful drafting to precisely define the relevant perfor-

mance indicators and the relevant time to achieve them, as well as the time and method of

calculation of the earn-out. As discussed under 'Closing accounts', the SPA will need to provide

the rules for the calculation of the earn-out and the preparation of the relevant financial state-

ments and state the applicable accounting principles. In the case of non-financial performance

indicators, the definition of the facts that evidence the fulfilment of the agreed conditions for the

payment of the earn-out should be defined.

The SPA will further need to determine the responsibility for the preparation of the relevant

financial statements, whereas this is predominantly, but not always done by the buyer. The SPA

should also contain the possibility for a review procedure and provide for a dispute resolution

mechanism in case of a disagreement or dispute over the achievement of the relevant perfor-

mance indicators or the calculation of the earn-out (see 'Dispute resolution regime').

Risk of requalification of earn-out payment as taxable salary

If the seller is a Swiss-domiciled individual, capital gains on the sale of shares held as part of

its private portfolio are usually tax-exempt in Switzerland. Individual sellers therefore have a

strong interest to structure the pricing such that the sale will remain tax-free. If this type of

seller, however, continues to work for the target company, there is a risk that all or part of the

earn-out payment will be requalified as salary for tax and pensions purposes. Earn-out or similar

pricing mechanisms involving Swiss-domiciled individual sellers therefore need to be carefully

reviewed from a tax perspective.

Similar adverse tax consequences may apply if the sale is refinanced by the assets of the

target company, namely, if shares representing at least 20 per cent of the share capital of a

company are sold from the private assets of an individual investor (or a group of individual inves-

tors) to the business assets of a corporate or individual buyer, and the target distributes current

assets not needed for business operations out of distributable profit or reserves within a period

of five years after the sale of the shares with the cooperation of the seller.

Avoidance of manipulation

Earn-out clauses may be subject to manipulation. The earn-out clause should therefore restrict

the target company from taking certain acts that may have a manipulative effect on the agreed

performance indicators. Such list of restricted acts may be similar to those disallowed between

the date of signing and the date of closing. However, the restricted actions should not interfere

with the ordinary course of business.

Pricing

The earn-out clause should principally address the consequences of potential restructurings

(such as mergers, demergers, sale or purchase of material assets or parts of the business or

other types of reorganisation), the declaration of dividends or other types of distributions, capital

increases or capital reductions, etc. In addition, any change to the nature of the target compa-

ny’s business, any entering into of any joint venture, partnership or other similar profit-sharing

arrangement, and consolidation with the buyer and any winding-up should be restricted. Most

importantly, in the absence of any a specific permission in the SPA or the consent of the seller,

there should be no diversion by the buyer of any business or opportunities of the target company

away from the target company to the buyer and no transaction between the target company and

the buyer that is not on arm’s-length terms.

Depending on the agreed performance indicator, the inclusion of further restricted actions

may be appropriate or warranted.

Advantages and disadvantages

• The earn-out mechanism may bridge gaps in purchase price negotiations between the seller

and the buyer and potentially align economic interests.

• Earn-out arrangements and related restrictions may delay the integration of the target

company’s business into the buyer and the realisation of synergies. Earn-out arrangements

may further lead to the target company’s business being conducted with a view to maximise

the earn-out payments rather than the long-term development of the business.

• Depending on the complexity of the individual arrangement, earn-out arrangements bear

some risk of litigation.

Further variances

Deferred purchase price or vendor loan

Parties sometimes agree to deferred purchase price components that are not subject to any

conditions, but are paid at a later stage. For examples, the buyer may be granted the right to pay

the purchase price in instalments. The same result can achieved via vendor loans. Both struc-

tures provide the buyer with a security to enforce potential post-closing claims against the seller,

provided that the buyer’s legal set-off rights have not been contractually excluded.

Deposits

Deposits are sometimes stipulated in case of complex closing conditions and/or anticipated chal-

lenges in enforcing the buyer’s obligations to consummate the transaction and pay the purchase

price at closing (ie, in the case of foreign-based buyers, SPVs or individual persons).

Escrow

The payment of part of the purchase price into an escrow account of an independent escrow

agent is quite common if a foreign-based seller, a private seller or multiple sellers are involved

in order to secure any potential post-closing claims of the buyer against the seller. For certain

types of buyers, for example, buyers that are subject to capital export restrictions in their home

jurisdiction or who will require foreign investment approvals abroad, sellers of Swiss target

companies sometimes require a down payment into an escrow account at signing.

Escrows are uncommon if the seller is a listed entity domiciled in Switzerland or in another

OECD country.

Data Privacy and Cybersecurity

David Vasella

Introduction

Applicable law in transactions with international reach

Most M&A transactions involve parties – including employees, service providers such as providers

of data rooms, M&A advisers, and law firms – located outside of Switzerland. Whenever this

happens, the data protection laws that apply ratione loci must be determined first.

Where a claim for an alleged breach of data protection law is brought to a Swiss court by

the affected person (the data subject or subject), the applicable law would be determined by that

court in accordance with article 139 of the Swiss Private International Law Act (PILA). Under this

provision the following laws may apply:

• the laws of the country where the subject has their ordinary residence, provided the alleged

infringer could reasonably have known that its processing may affect subjects in that

country;

• Swiss law, where the alleged infringer has their seat or residence in Switzerland.

It is for the subject to opt for either of these laws.

If the subject does not opt for the applicable

law, the court will be able to opt in its place.

For example, if a Swiss company sells shares in a French subsidiary to a German buyer

and is alleged to have disclosed sensitive data about employees of the French subsidiary to the

prospective buyer unlawfully, the affected employees may bring a claim before a Swiss court

1 David Vasella is a partner with Walder Wyss Ltd.

2 Article 139(1)(a) and (c) PILA.

3 Article 139 (1)(b) PILA.

4 Article 139(1) PILA.

5 Article 129(1) PILA.

Data Privacy and Cybersecurity

and then opt for either French law (including the EU General Data Protection Regulation (GDPR))

or Swiss law to govern the claim.

Moreover, the parties to a transaction will be subject to the GDPR if they have an estab-

lishment in an EEA country.

For example, a share purchase agreement between a Swiss and a

UK company, or between a German and an Italian company, will usually include data protection

provisions that refer to or are based on the GDPR. Moreover, the GDPR may apply where assets

transferred to a bidder or buyer in an asset deal include personal data for which the seller is

subject to the GDPR, that is, whose processing by the seller is or was related to offering goods

or services to individuals in the EEA, or to the monitoring of their behaviour.

For example, where

a Swiss company targets end customers in Germany and sells its business to a Swiss buyer, the

asset transfer agreement should include provisions to protect the privacy of the end customers

under the GDPR.

Revision of Swiss data protection law

In Switzerland, data protection is primarily governed by the Federal Data Protection Act (FDPA)

and the Ordinance on the Data Protection Act (FDPO). The FDPA is currently under revision in

order to implement the revised Council of Europe’s Convention 108 and to align with the GDPR.

While there is no final draft of the revised FDPA (rev-FDPA) yet, most of the proposed amend-

ments have passed through the parliamentary debate. Based on the current draft, we expect that

GDPR compliance will generally imply compliance with the rev-FDPA, with minor exceptions. The

further debate is likely to focus on profiling, which will be a new concept under Swiss law, and

on the scope of the information obligation and access right. Along with the FDPA, the FDPO will

be revised. There is no finite schedule for the further debate, but we expect the rev-FDPA and the

revised FDPO (rev-FDPO) to enter into force as of 2022.

As of today, the FDPA is much less onerous than the GDPR, and sanctions are low and rarely

enforced in practice. Compliance with the FDPA is therefore driven by reputational risk as much

as legal risk. Under the rev-FDPA, however, legal risk will increase substantially: On the one hand,

the Swiss data protection authority, the Federal Data Protection and Information Commissioner

(FDPIC), will have a right to issue binding orders (eg, to cease a particular processing activity, or

to inform data subjects, etc), which he or she cannot under the current FDPA. On the other hand,

the individuals responsible for certain breaches of data protection law may be liable to fines

of up to 250,000 Swiss francs, provided they have acted intentionally and provided a criminal

complaint is filed. Not all breaches will be liable to fines, however. For example, failure to erase

personal data in time will not lead to a fine, whereas giving incorrect information to subjects

making an access request, failure to comply with the information obligation, or transfers abroad

in breach of transfer restrictions will be liable to a fine.

6 They may also bring a claim before a French court, provided the court has jurisdiction under French law.

7 Article 3(1) GDPR.

8 Article 3(2) GDPR; cf the Guidelines 3/2018 on the territorial scope of the GDPR (article 3) by the

European Data Protection Board (EDPB), Version 2.1 dated 12 November 2019.

Data Privacy and Cybersecurity

Data protection in M&A

In the context of M&A transactions, the relevance of data protection law may be grouped broadly

in the following categories:

• Due diligence phase: a prospective buyer or bidder or, in case of a vendor due diligence, the

seller of shares or assets will require some personal data for their due diligence assess-

ment, at least with regard to key employees.

• Asset deal: where a transaction is for assets that include personal data (eg, a customer base

or a database with direct marketing information), the transfer of assets and the subsequent

use of personal data by the buyer raises data protection questions.

• Share deal: in the case of a share deal, there are usually fewer concerns about data protec-

tion, but the due diligence phase may be even more important.

• Purchase agreements: with an asset deal as well as a share deal, the buyer will usually seek

reassurance by incorporating warranties into the purchase agreement.

• Service providers: where service providers are involved, they may act as 'data processors'

on behalf of a party or the parties to the transaction acting as controllers, which requires a

data-processing agreement.

Other service providers such as tax, finance and legal advisers

usually act as separate controllers, which does not require a data-processing agreement

but may raise other data protection questions.

In addition, the communication between the parties requires the processing of personal data at

least with respect to the contact persons. However, since this processing is not different from

similar processing in other circumstances, it will not be addressed further.

Overview of applicable restrictions

Most data protection laws, including the GDPR, the FDPA and the rev-FDPA, follow a similar

pattern.

They set forth general principles, which are broad and somewhat vague in nature but

may be directly enforceable nonetheless, and which are complemented by a number of more

detailed requirement (very detailed, in some instances). For example, the GDPR requires all

data processing to be lawful, fair and transparent and as little intrusive as possible,

but what

is lawful is subject to detailed provisions,

and transparency is regulated comprehensively as

well.

In addition, transfers of personal data abroad are restricted,

data processors must be

bound by an appropriate agreement,

and data subjects have a number of rights,

most impor-

9 See the guidelines issued by the FDPIC in March 2010, ‘Datenweitergabe im Rahmen von

Unternehmenszusammenschlüssen’ ('Data transfer in the context of business combinations').

10 Article 28 GDPR; article 10a FDPA; article 8 rev-FDPA.

11 These are based on international conventions and guidelines, most importantly the Council of Europe

Convention 108, whose revised version has already been ratified by over 50 countries.

12 Article 5 GDPR.

13 Articles 6, 9-10 and 47-49 GDPR.

14 Articles 12 et seq GDPR.

15 Articles 44 et seq GDPR.

16 Article 28 GDPR.

17 Articles 12 and 15 et seq GDPR.

Data Privacy and Cybersecurity

tantly the right to learn about the processing of their data. In addition, controllers are under an

obligation to document their data processing and maintain a record of processing activities

In order to allocate the obligations to comply with these requirements, data protection laws

make a distinction between the controller, on the one hand, and the processor on the other.

'Controller' means the party that drives the processing, that determines its purposes and its

'means', that is, how the processing plays out – for example, which protective measures are

applied, how long data are kept and who will have access to the data. A 'processor', on the

other hand, is a party that processes data on behalf and only for the purposes of the controller,

for example, the provider of a data room.

These concepts are rather fluid, and what compli-

cates matters is that several parties can share the role of controller if they determine jointly the

purposes or means of the processing. Where this applies, under the GDPR, the joint controllers

must allocate the various obligations under the GDPR through an agreement with each other and

must tell the data subject who has which responsibilities.

Due diligence phase

In the due diligence phase, the data protection principles mentioned above require the controller

to plan ahead and consider data protection restrictions throughout the due diligence phase. The

most important points are set out below, without claiming completeness.

Lawfulness

Under the GDPR, all processing must be 'lawful', which means it must be based on one or several

of the legal grounds provided by the GDPR. With regard to a due diligence assessment, 'legiti-

mate interest' will generally be the most likely ground. The interest in carrying out a due diligence

assessment constitutes an important legitimate interest for both the seller and the prospective

buyer(s).

Where this interest is not outweighed by contrary interests of the subjects, it provides

a legal ground for the processing. As a rule, the interests of the parties to the transaction will

prevail so long as the scope of the data disclosed is as narrow as reasonably possible, is not

disclosed prematurely (eg, only to a buyer with a genuine interest in the transaction, or to the

remaining bidders after a first round) and is protected by a non-disclosure agreement that

prevents the recipient from disclosure or repurposing.

However, legitimate interest does not justify the processing of sensitive data (‘special cate-

gories of data’ in GDPR lingo). For sensitive data, such as health data, genetic or biometric data,

data revealing racial or ethnic origin, or data concerning a natural person’s sex life, etc,

the only

18 Article 5(2) and 30 GDPR.

19 cf articles 4(7) and 4(9) GDPR.

20 Article 26 GDPR.

21 See Peter Schantz, in: Simitis/Hornung (eds), Datenschutzrecht, 1st ed 2019, article 6 GDPR No. 128.

22 cf Schantz, article 6 GDPR No. 128.

23 Article 9(1) GDPR. However, not all data that may reveal sensitive information are sensitive in all cases.

For example, employee photos are not considered to be sensitive, even though a photo of someone

wearing glasses reveals something about their health, and a name indicative of a particular country or

region is not always sensitive as well. This is more relevant when it comes to transactional data that

may be used to derive information about a person’s sexual preferences or health, so long as no such

profiling information is disclosed to the prospective buyer.

Data Privacy and Cybersecurity

legal ground available in M&A transactions is explicit consent.

In other words, the seller will

not be permitted to disclose sensitive data to a prospective buyer, unless the subject has been

informed in sufficient detail about the disclosure and has provided their free, specific and explicit

consent and has not withdrawn consent.

Different from the GDPR, the FDPA (and the rev-FDPA) do not require a legal basis for

the processing of personal data. However, the situation is slightly different for employee data.

Employers cannot process employee data unless the processing is necessary for the employ-

ment,

which raises the question if disclosing employee data ahead of a potential transaction is

necessary for the employment. The question remains open, but the writers addressing this ques-

tion specifically remain sceptical in this regard, except perhaps for key employees. Moreover, it

is questionable if the processing of employee data for purposes not necessary for the employ-

ment may be justified by prevailing interest. If a seller applies a cautious approach, collecting

employee consent may be an option, although this raises additional questions.

Where personal data are transferred abroad to a recipient in a country that is not consid-

ered to provide adequate data protection (and that is not certified under the Swiss-US or EU-US

Privacy Shield, for transferees located in the US)

, the transferor will need to ensure that the

transfer is based on adequate safeguards, such as the EU Model Clauses

(usually slightly

tweaked where data are transferred from Switzerland in order to account for Swiss law). A

seller and prospective buyer may therefore need to enter into an agreement incorporating the

EU Model Clauses in order for the seller to be able to transfer personal data to the buyer.

Data minimisation, proportionality, purpose limitation, and data security

The principles of proportionality, data minimisation and purpose limitation

require the parties

to consider carefully the extent of personal to be disclosed to the prospective buyer, and the

time when personal data is first made accessible. As a general guideline, less and later is less

intrusive to the privacy of the subjects and preferable under these principles. For example, it

may be sufficient in an initial stage to provide anonymous, aggregate information (such as the

overall compensation structure, or the total compensation paid out to a group of employees) or

pseudonymised information (‘employee 1534’ instead of the name), provided the prospective

buyer cannot draw personalised conclusions, or to permit the buyer to access a sample but not

all customer data to carry out verification or testing. If and when disclosure of personal data is

24 Except in the unlikely case that a transaction is warranted by applicable law of an EEA member state.

25 Articles 4(11), 7(3) and 9(2)(a) GDPR.

26 Article 328b of the Swiss Code of Obligations (CO).

27 For example, consent is invalid if it not given freely, which may be questionable for employees.

28 The Privacy Shield is a programme where US companies can self-certify to adhere to the Privacy

Shield principles. Certified companies are considered by the EU Commission and the FDPIC to provide

adequate protection for personal data within the scope of the relevant certification.

29 The EU Model Clauses are a set of three standard contractual clauses recognised by the European

Commission and the FDPIC as providing sufficient protection for transfers abroad to countries with

inadequate data protection. Note that under the FDPA the data exporter must notify the use of the EU

Model Clauses to the FDPIC (article 6(3) FDPA).

30 Article 5(1)(3) GDPR; article 4(2) FDPA; article 5(2) rev-FDPA.

Data Privacy and Cybersecurity

not a viable option, then the controller is not in breach of the minimisation and proportionality

principles but must assess if there is a legal ground for the disclosure (see above).

Moreover, disclosing personal data for a due diligence will generally not amount to a change

in the processing purpose. However, in order to prevent the recipient from processing data for

additional purposes the disclosing party should enter into an appropriate non-disclosure agree-

ment, which will certainly be in place at this stage of the transaction, but which should include a

specific clause to limit data processing and require erasure should the transaction be aborted.

Finally, data minimisation and proportionality require restricting the individuals with access

to the due diligence documentation and the due diligence report, both at the buyer as well as the

seller, and under the data security principle,

data should be transferred securely.

Transparency (information)

The principle of transparency

requires the controller to inform the data subject about the

purposes of their processing, among other points. In many cases the privacy notices provided

earlier to the subjects (usually employees) will lack an express reference to M&A transactions. It

is therefore advisable for the party providing information for the due diligence process to review

the relevant privacy notices, even though it is questionable if ‘transactions’ really are a sepa-

rate processing purpose that must be notified to the subjects.

If they are found to be lacking,

that party may wish to update the notice(s)

or provide additional information about a potential

transaction in generic terms if that is a viable option at this stage.

This applies for all subjects

whose data are expected to be disclosed or otherwise processed within the framework of the

transaction. However, the controller may have an argument that providing the required informa-

tion is impossible (if these subjects are not known) or ‘likely to seriously impair the achievement’

of the transaction, if confidentiality is of the essence, at least with respect to third parties where

the controller has no direct contact.

31 Article 7 FDPA; article 7 rev-FDPA; articles 5(f) and 32 GDPR.

32 Articles 5(1)(a) and 12 et seq GDPR; articles 4(3) and 14 FDPA; articles 5(4) and 17 rev-FDPA.

33 Transactions arguably do not change the processing purposes, because a transaction aims at

transferring a company or a business, not aim at processing personal data, even though the transaction

incidentally requires data processing.

34 For example, include language such as 'to prepare and consummate company transactions such as

sales and purchases of assets or stakes in a company' in the statement of purposes and mention the

legitimate interest (article 6(1)(f) GDPR) in carrying out transactions.

35 cf articles 13(3) and 14(4) GDPR.

36 Article 14(5)(b) GDPR; cf EDPB, Guidelines on Transparency under Regulation 2016/679,

11 April 2018, No. 65. With regard to subjects with a direct link, however, this exception may not

be not available (some propose to apply article 14(5)(b) GDPR by analogy, but this is an uncertain

proposition. The controller might find an exception of the obligation to notify under applicable

EEA member state law that complements the GDPR (article 23(1)(i) GDPR). However, most EEA

countries do not provide an additional exception that would apply in this context, cf, eg, §32–33 of

the German Bundesdatenschutzgesetz (Federal Data Protection Act) or article 32 of the French

LoiNo.78-17 relative à l’informatique, aux fichiers et aux libertés (Law on Information Technology and

Civil Liberties)).

Data Privacy and Cybersecurity

Focus areas

The comments above deal with the data protection framework around due diligence reviews.

A different point though is the focus a due diligence review should have in view of data protec-

tion restrictions. The answer here is twofold – a due diligence should detect and help mitigate

compliance risks of the target company in a share deal generally, and it should help a potential

buyer to understand the risks involved with acquiring data as an asset or as part of an asset.

These questions will be addressed below in 'Focus areas for a due diligence review'.

Asset deals

Regulatory restrictions

In asset deals the key question usually is whether personal data may be transferred to and be

further processed by the buyer, and if consent by the affected data subjects (usually the seller’s

end customers, for example, users of a software product or online service) is necessary. Under

Swiss law, consent is generally not a requirement, provided that:

• the subjects are informed at the appropriate time and in the appropriate manner about the

transaction;

• the seller discontinues its use of the relevant data; and

• the buyer does not process the data in ways that would not have been permitted for

the seller.

If these conditions are satisfied the only real effect of the transaction is a change in the controller,

which does not constitute a breach of a processing principle and is therefore not in need of justi-

fication (whether by consent or by a prevailing interest).

However, in order to mitigate risks the

seller may seek an agreement with the buyer that restricts the buyer’s processing to the earlier

processing by the seller.

Should the seller consider a change in the processing, the question arises if this change

amounts to a different processing purpose. In the affirmative, the purpose limitation principle

may be infringed, which would require the buyer to justify the novel purpose.

Justification by

commercial interests is a possibility, as well as benefits arising from the changed processing

for the data subjects, but all depends here on the nature and scope of the novel processing.

For example, should the buyer intend to leverage data by performing analytics not carried out

previously by the seller, or to market different types of services to the data subject, there might

be a change in purpose that is difficult to justify by prevailing interest. In that case, the buyer (or

the seller) may consider collecting consent from the subjects, for example by sending an email

notification to the subjects with information about the transaction and the further processing by

the buyer, and asking the subjects to opt in.

Under the GDPR, the analysis is similar. If personal data is transferred as part of a business,

then the seller and the buyer should be able to rely on legitimate interest for the transaction.

37 cf articles 4, 12 and 13(1) FDPA and articles 5, 26 and 27(1) rev-FDPA.

38 Articles 4(3) and 12(2)(a) FDPA; articles 5(3) and 26(2)(a) rev-FDPA.

39 Opt-out may be an option as well, depending on the circumstances, unless the data transferred

includes sensitive data.

40 Article 6(1)(f) GDPR.

Data Privacy and Cybersecurity

Where the original processing by the seller relied on consent, however, the buyer will have to

make an assessment if consent is specific to the seller or, rather, covers the processing inde-

pendently of the name of the controller. In any event, risks can be mitigated by giving an option

to the data subjects to object to the transaction and the subsequent processing by the buyer.

Finally, data should again be transferred securely, for example by an encrypted file or using

a secure data-sharing platform.

Focus areas for a due diligence review

If personal data are transferred as an asset or part of an asset, the buyer will value the transac-

tion fully or partly in accordance with the value of the buyer's anticipated processing of the data.

The due diligence will therefore focus on restrictions applicable to that processing. For example,

and depending on the circumstances (including the risks for the data subjects and the companies

involved with the transaction), the buyer will ask to review the following documents and items:

• privacy notices presented to the data subjects;

• where the processing is based on consent (for example, processing for electronic direct

marketing), whether consent has been properly collected and documented, and gener-

ally the consent management used by the seller. Likewise, the management of objections

against the seller’s processing;

• if, how and when the subjects will be informed about the transaction, and the likelihood for

subjects to opt out of or object to the transfer, which will may directly affect the transaction’s

value proposition;

• any restrictions arising under specific regulation. For example, personal data may be subject

to secrecy obligations, which may prevent the seller from transferring personal data to the

buyer without a waiver by the subject;

• terms and conditions applicable to the agreement between the seller and the data subjects

(if any), which may state expressly that personal data will not be shared with a third party,

but which may also include a waiver for transactions; and

• the age of the relevant data, and whether it has been kept beyond the periods stated in the

seller’s retention policy or applicable under law.

Asset purchase agreements

When considering the purchase of data as an asset or part of an asset, the prospective buyer will

usually seek reassurance by incorporating warranties into the asset purchase agreement. For

example, the seller may warrant – depending on the circumstances and the negotiation – that

the seller has complied with applicable data protection laws when acquiring and maintaining the

data and is entitled to transfer the database to the buyer, that the buyer is entitled to use the data

under applicable data protection legislation for the intended purposes, and that the seller has

no notice of any claims or complaints by data subjects in relation to the data and no notice that

41 Article 7 FDPA; article 7 rev-FDPA; articles 5(f) and 32 GDPR.

42 The buyer should be aware that a lack in transparency might lead to the relevant processing being

unlawful, at least where the processing is based on particular legal grounds. This is the position taken

by a part of the doctrine under the GDPR. Under the FDPA and the rev-FDPA, it is less likely that a

purpose not stated to the subject would render the processing for that purpose inadmissible.

Data Privacy and Cybersecurity

any data protection authority considers the seller to have infringed applicable data protection

legislation in relation to the data. On the other hand, general compliance with data protection

laws by the seller will be of less interest, different from a share deal.

Share deals

Regulatory restrictions

Different from an asset deal, with a share deal the controller for the personal data processed

by the acquired company does not change. There is therefore no transfer of personal data

from one company to another. However, the buyer must be aware that data flows from the

acquired company to other members of the acquiring group constitute a data transfer that is only

permitted within the constraints of data protection law, which does not give carte blanche for

intra-group transfers.

Likewise, if the acquired company adjusts its business model following

the integration in a new group, it must be conscious that a change in its data processing may lead

to a new purpose, which may violate the purpose limitation principle.

Focus areas for a due diligence review

With respect to share deals, a buyer will expect the target company to be reasonably compliant

with data protection regulation, in particular with the GDPR but also with other applicable regu-

lation, for example Swiss or US legislation (such as HIPAA

, which protects health information,

or the CCPA

). Under normal circumstances a buyer should not expect full compliance with

applicable data protection law and instead should focus on the key compliance issues potentially

arising for the target company. 'Compliance' in absolute terms is not possible to achieve in any

real-world scenario, and looking for it would potentially delay the transaction and take the focus

away from other, equally important areas.

However, a buyer should look for documents and information that demonstrate robust,

workable procedures designed to ensure compliance. The following list sets out documents that

might be reviewed by a prospective buyer (including on a group level if the target company is

part of a group), provided that not all of these documents may be necessary or available, and that

additional documents may need to be reviewed, in particular in regulated areas:

• a privacy policy that sets out the principles guiding the company’s dealing with personal

data and the key roles and responsibilities;

• ‘records of processing activities’ (sometimes abbreviated as ROPAs), which is the inventory

of the company’s various data-processing activities mandated under the GDPR and under

the rev-FDPA, along with any data protection impact assessments carried out or ongoing;

• if the company has appointed a data protection officer (DPO), the job description or appoint-

ment document;

43 Under the GDPR, such transfers require a legal ground, just as any other form of data processing,

for example legitimate interest (article 6(1)(f) GDPR). However, Recital 48 states that there may be

‘a legitimate interest in transmitting personal data within the group of undertakings for internal

administrative purposes’.

44 Articles 5(1)(b), 6(4), 13(3) and 14(4) GDPR.

45 Health Insurance Portability and Accountability Act.

46 California Consumer Privacy Act.

Data Privacy and Cybersecurity

• if the company has appointed an EU representative under the GDPR, the document appointing

the representative;

• internal policies and procedures for dealing with data breaches and for carrying out data

protection impact assessments;

• the company’s retention policy along with information about its retention and deletion

practices;

• customer-facing privacy notices, in particular where the target company is active on the

mass market, and in that case policies or procedures for dealing with data subject requests;

• if the company generally relies on consent for key processing activities, information about

the collection, documentation and management of consent;

• information about high-risk profiling activities and automated decision-making (if any);

• agreements regulating intra-group data flows, which may consist of a framework agree-

ment along with terms for joint controllership, controller–processor arrangements, and

standard clauses for data exports to third countries;

• data protection agreements with key suppliers, customers and partners and standard

clauses used by the company in agreements with these parties, for example, a standard

data-processing agreement;

• a document explaining the company’s security measures to protect key data;

• ‘legitimate interest assessments’ carried out for key or high-risk processing activities;

• a privacy notice for employees, along with other employee regulation such as accept-

able use policies and policies for whistleblowing or the use of personal devices for busi-

ness purposes;

• agreements with works councils or other employee organisations with respect to the

company’s data processing (if any);

• any regular or ad hoc reports submitted by the DPO to the management;

• breach notifications and data protection impact assessments submitted to authorities;

• breach notifications communicated to the affected data subjects;

• a description of data protection training given to all or key employees;

• records of government action related to data protection, including requests from data

protection supervisory authorities and fines imposed on the company;

• records of litigation related to data protection, for example, subject access requests that

were escalated to a court.

The availability of these documents, their granularity and generally the way they are drafted

and used and communicated internally will give a sound idea of the company’s general maturity

of data protection compliance and the legal risk it may be exposed to. If important documents

are missing, the buyer will expect the company to explain its data protection implementation

programme in order to understand legal risk related to any gaps, which will depend to a large

extent on the company’s business case and its exposure in countries with tighter data protection

supervision.

Share purchase agreements

In share purchase agreements sellers usually provide warranties for compliance in general or

specifically with respect to data protection. For example, the buyer may ask for a warranty that

the target company complies with applicable data protection legislation, that no litigation on data

Data Privacy and Cybersecurity

protection is pending or threatened, or that no data breaches have occurred in a past period. If

the target company operates under increased risk, for example, a regulated entity, an additional

warranty may be required for compliance with internal policies. Warranties may be subject to

disclosure letters stating exceptions for a data protection warranty, and to a cap on indemni-

ties, which may be different for violations of data protection laws than for breaches of other

warranties.

Where specific infringements have been detected during the due diligence review, the buyer

may expect the seller to remedy the infringements prior to closing, unless the buyer is content

to accept the risks related to the infringements. Infringements of a lesser nature that can be

remedied quickly (for example, where a data protection officer is necessary but has not been

appointed) and a remedy of the infringement may be agreed as a condition precedent to closing.

For other infringements a specific indemnity may be a more appropriate solution.

Service providers

In M&A transactions the parties will usually employ a range of service providers, for example law

firms, M&A advisers and data room providers. Depending on their role, particular agreements

with these providers may be required.

Even though they are service providers, law firms and M&A advisers generally act as indi-

vidual controllers, as opposed to data processors in terms of article 28 GDPR and joint control-

lers under article 26 GDPR. A transfer of personal data to these providers is therefore subject

to the general processing principles but does not require an agreement with specific minimum

content. However, where a transaction is particularly sensitive, the seller or buyer, respectively,

may wish to have an agreement with these providers to restrict their processing of information,

for example by requiring Chinese walls between different teams or erasure of data transmitted

(subject to retention requirements). In some cases, these providers will additionally be required

to apply certain data security standards. However, these requirements will usually be driven by

general confidentiality concerns, not data protection law specifically.

On the other hand, a provider of an electronic data room (for example, Merrill or Intralinks)

acts as a data processor under article 28 GDPR (or, under Swiss law, under article 10a FDPA and

article 8 rev-FDPA). The controller is therefore under an obligation to enter into a data-processing

agreement. Typically these providers use their own data-processing terms as part of their general

conditions of business or as a separate agreement, and tailor these terms to article 28 GDPR.

Moreover, where the provider is located in a country that is not considered to provide adequate

data protection, such as the US, the provider will typically incorporate the EU Model Clauses

mentioned above in the applicable terms (unless the provider is certified under the Swiss-US or

EU-US Privacy Shield).

A review of these terms may be prudent, however, for example to ensure that the controller

does not accept to be bound by the GDPR (should the GDPR not apply), and that the controller is

content with other terms such as a limitation of liability.

On a related note, the seller and the buyer should not be seen as joint controllers in the

transaction, including with respect to data room and other providers, even though there are

other views, and will not require a joint controller agreement in terms of article 26 GDPR.

Data Privacy and Cybersecurity

Concluding remarks

Data protection is gaining importance in all areas, including M&A transactions. While restrictions

under data protection law generally do not conflict with transactions per se, risks can be

mitigated, and negotiations can be helped, if data protection is considered early on, before and in

the transaction. Law firms know today that their M&A team should speak to the data protection

team and involve specialists in transactions where data are an important asset. As regulation

becomes tighter and data become more important, the due diligence specifically with respect to

data and data protection gains increasing importance as well. In this respect, the buyer – in the

case of buyer due diligence – should take care to understand the maturity of the target’s data

protection and restrictions potentially applicable to data acquired, but without perfectionism and

without expecting full compliance in every regard.

Key Intellectual Property Issues in M&A Transactions

Peter Widmer and Peter Bigler

Introduction

Switzerland is a small but key market for businesses worldwide. Featuring a highly educated

workforce, competitive tax laws, a stable government and an efficient judicial system,

as well as

access to the EU market, Switzerland is home to both global corporations as well as SMEs and

innovative start-ups. At the heart of the success of these companies lies their innovation, often

reflected in intellectual property (IP) and intellectual property rights (IPRs). Apart from trade-

marks, patents and other classical IPRs, trade secrets and in particular software form the back-

bone of many modern businesses.

Proper identification, description, allocation of and access

to IPRs are therefore not only crucial for the architecture of M&A deals as such, but also, when

designing the IP-relevant part of the deal, it must be ensured that:

• the company’s own operations can continue without undesired restrictions after the planned

transfer of assets consisting of IPRs to a buyer; and

• the buyer may require appropriate continued access to IP remaining with the seller for a

defined phasing-out period in order to be able to use and implement the acquired IP at all.

1 Peter Widmer is an attorney-at-law and partner at FMP Fuhrer Marbach; Peter Bigler is an attorney-at-

law, former associate at FMP Fuhrer Marbach and currently legal adviser at the Swiss Federal

Institute of Intellectual Property. This chapter purely reflects the personal experiences and opinions of

the authors.

2 In particular, Switzerland offers efficient patent litigation (among other things, in the English language);

for this purpose, the highly specialised Federal Patent Court was established in 2012 and has exclusive

jurisdiction in civil matters relating to both validity and infringement of Swiss and European patents.

3 See, eg, the now famous Wall Street Journal essay by venture capitalist Marc Andreessen on why

software is eating the world: https://a16z.com/2011/08/20/why-software-is-eating-the-world/.

Key Intellectual Property Issues in M&A Transactions

When preparing M&A deals, pitfalls lurk. Therefore, many M&A deals fail completely.

Others

succeed, but fail to pay back the money invested in them. One of the main reasons is lack of

understanding of the involved firms’ IP, its scope and limits.

Flawed M&A deals may in particular

lead to either buyer, seller or their affiliates lacking access to vital IP after the deal or even to

unintended forfeiture of said rights.

The starting point must therefore always be the identification of the IPRs relevant for the

intended transaction, their analysis, description and appropriate listing. Registers such as the

Swiss IP register

may give stakeholders an overview over registered rights. But such registers

do not necessarily show complete or up-to-date information: Past changes of ownership of IPRs

of interest may not (yet) be reflected in the current registry records. This applies all the more for

longer chains of assignments that may have occurred over the years and were never completely

reflected in such registers. The entries also do not necessarily show whether the rights in ques-

tion are encumbered (ie, used as collateral), given that the registration of pledged IPRs in the

Swiss IP Register is not constitutive for a valid pledge under Swiss law. Also, there may be other

encumbrances such as licences granted to third parties or intra-group entities. Again, the validity

of such licences does not require recordal in the Swiss IP Register. Finally, there may be other

contractual restrictions in relation to the permitted use of such IPRs.

Such pitfalls occur even more frequently in relation to unregistered rights such as copy-

rights

, which form the basis for software protection in Switzerland. Software usually grows

over the years with many parties involved, other software elements (both proprietary and

open-source) integrated and adapted, leading to complex ownership questions.

Finally, in a globally connected economy, IP issues can have considerable cross-border

effects, such as in bankruptcy of an affiliate company owning certain core IPRs. Such IPRs can

be business-critical for a going concern of the parent group’s surviving entities in many different

jurisdictions. Of course, strategies such as ringfencing of IPRs can be deployed to mitigate such

risks. Ownership of business-critical IPRs can be transferred from operational (in particular

regulated) group entities to business-remote and resolution-resilient entities such as mere IP

holding companies, non-operational holding entities or dedicated business support entities.

However, this all comes at a price. Obviously, such intra-group transfers are complex and costly.

Moreover, decentralised and ringfenced ownership of IP may complicate transfer of such IPRs

in subsequent M&A transactions, monetisation of valuable IPRs in licensing scenarios with third

parties as well as in enforcement measures in the case of infringement of own IP.

In light of the above, this chapter aims to highlight the key IP issues in Swiss M&A

transactions.

4 The most recent notable example was the failed merger between the Swiss Telecom Providers Sunrise

and UPC in late 2019.

5 For these and other failure risks see Bryer/Simensky, Intellectual Property Assets in Mergers and

Acquisitions, Wiley 2002, p2.26.

6 www.swissreg.ch.

7 In relation to trademarks there could be coexistence and delimitation agreements that can considerably

limit the permitted scope of use of a certain registered trademark in several jurisdictions.

8 Registration of copyright is neither necessary nor possible in Switzerland; see also 'Unregistered IPRs'.

9 See 'Joint ownership in IPRs'.

Key Intellectual Property Issues in M&A Transactions

Definition issues

Identifying and taking stock of the relevant IPRs

From an IP point of view, the preparation of any M&A transaction starts with the identification

and listing of all relevant IPRs, irrespective of whether it is a share or an asset deal.

In a share deal, IPRs do not change hands directly, but the ownership of the company

holding those rights does. Thus the careful identification and analysis of IPRs flagged for such

transaction is crucial under numerous aspects. First, such transaction may have an impact on

underlying licence rights connected to the use of certain of the flagged IPRs. This can be relevant

if the change of ownership results in the termination of business-critical licence agreements.

Second, some of these IPRs may in fact not be owned by the company that is sold to the buyer

(see 'Ownership by employees or third parties'). Third, the seller may want or need to keep

certain IPRs for continued use in its own organisation.

In an asset deal, where a part of the business is to be carved out and sold to an independent

third party or joint venture with minority interest of the seller, stakeholders must ensure that the

necessary IPRs are properly identified and allocated to the target entity that acts as the seller

within a group of companies. In such scenarios, ownership of IPRs is often scattered across

various companies. This requires identifying ownership of IPRs flagged for transfer within the

group so they can properly be allocated to the carved-out business. Again, such IPRs may often

be relevant to other business units of the seller (eg, software that powers the entire business).

In those situations, an outright sale of such IPRs may not be an option while a licensing concept

may work.

Finally, to add an additional layer of complexity, ownership of IPRs within a group of compa-

nies is not only a question as to who is their legal owner in IP registers or intra-group inven-

tories. Rather, there may be aspects of (tax- and accounting-related) economic ownership as

far as a particular group entity has contributed to the value of IPRs flagged for transfer to the

third-party buyer. The differentiation between legal and economic ownership is also relevant in

relation to the split of proceeds resulting from the sale of such IPRs, both in share and asset

deals. Therefore, pre-transaction valuation of IPRs is not only price-relevant in relation to the

buyer but also for internal accounting and tax purposes.

In sum, the identification, description, categorisation, valuation and listing of relevant

IPRs flagged for transfer is crucial for a successful transaction. This can be quite laborious

and difficult, especially when concerning unregistered IPRs and other intangible assets (see

'Unregistered IPRs').

If the company lacks detailed internal records in relation to its IPRs, a search of the public

databases may be a good starting point. Apart from the official registers,

dedicated search

providers may assist in accessing additional databases relating to registered IPRs. The majority

of the work of such IP due diligence consists, however, of investigating databases, contract files

and similar repositories by internal staff in order to complete the relevant transaction inventory.

While this may be a costly exercise in complex transactions, there are also valuable side effects.

Indeed, many companies may seize this as an opportunity to review and streamline their IP

10 Swiss trademarks, patents, supplementary protection certificates, designs and topography rights for

certain semiconductor designs can directly be accessed via the official Swiss IP rights database

(www.swissreg.ch).

Key Intellectual Property Issues in M&A Transactions

portfolio. It may also be the first step to provide for a group or company-wide IP policy in an effort

to facilitate evaluation, management, protection, use and enforcement of IPRs while avoiding

duplications of IP workstreams and cutting costs at the same time.

Types of IPRs to be considered

In order to identify and list IPRs flagged for transfer, the seller must know what kind of rights and

intangible assets are to be considered. Swiss law does not provide for a legal definition of IP or

IPRs per se. However, various laws provide statutory protection for the following types of IPRs

and other intangible assets in Switzerland.

Registered IPRs

The most frequently relevant core IPRs in Switzerland are trademarks and patents. Both are

registered rights, meaning their owner is granted protection upon registration in the relevant

registers. Patents

are governed by the Federal Act on Patents for Inventions and its corre-

sponding regulation.

Trademarks on the other hand are governed by the Federal Act on the

Protection of Trade Marks and Indications of Source and its corresponding regulation.

Less

frequent but still relevant are industrial designs, which aim at the protection of a new character-

istic visual presentation of products or parts of these.

Apart from these core IPRs, other registered rights are often overlooked, but may prove

crucial to a business and its operation: Most businesses are closely connected to their company

name (which can be different from the core mark) as well as domain names and names of

social media channels. Under Swiss law, the registration of names of legal entities (company

names) can be constitutive for setting up a company. Such names are recorded in the register

of commerce as operated by each canton in Switzerland, with a centralised registration and

online tool.

These company names grant their owners certain defensive rights

against other

similar junior company names and are thus considered as valuable IPRs. As company names and

trademarks may not overlap in relation to scope of the protective and exclusionary rights they

confer, it is crucial these company names are addressed in any M&A transaction. This applies all

the more as the names of affiliates in a group of companies regularly consist of the distinctive

element of the group’s umbrella brand.

The same applies mutatis mutandis for domain names and names of social media channels.

While these signs are not considered as IPRs in the traditional sense, they often consist of the

umbrella brand too and are used as names of links to web content (ie, a client-facing application)

that may be part of the proposed transaction.

11 Including Supplementary Protection Certificates for Medicinal Products.

12 Federal Act on Patents for Inventions (Patents Act, SR 232.14) and Patents regulation, (SR 232.141).

13 Trade Mark Protection Act (SR 232.11) and Trade Mark Regulation (SR 232.111).

14 Federal Act on the Protection of Designs (Design Act, SR 232.12).

15 An aggregated search of all cantonal indexes is accessible via ZEFIX, the central business name index

of the Swiss Federation, www.zefix.ch.

16 See articles 944–956 Federal Act on the Amendment of the Swiss Civil Code (Code of

Obligations, SR 220).

Key Intellectual Property Issues in M&A Transactions

In sum, M&A agreements should not only clarify future use and protection of the traditional

IPRs, but should also address if and how the buyer will be allowed to use the existing company

name in the case of a share deal, and/or if and how the distinctive branding elements are permitted

to be further used or even registered as part of new trademarks, company names, domain names

and/or names of social media channels, in particular in the case of an asset deal.

Unregistered IPRs

More difficult to identify and inventorise are unregistered IPRs and other intangible assets. The

most business-relevant rights in this category are copyrights, as these form the backbone of

the protection of software in the broadest sense. Switzerland does not have a register for copy-

righted works as in, for example, the United States. Instead, the Swiss Copyright Act grants

known as the 'creator principle'.

While this saves the creator a lot of administrative work, it

makes tracking of the owner(s) of copyrighted works much more complex. Additionally, in prac-

tice copyrighted works are often the result of cooperation between several individuals who may

be employees of one but also of several different entities. Thus this may result in joint authorship

situations, which complicate ownership questions and transfers considerably.

In M&A transactions, these questions frequently materialise in relation to software.

Companies often use proprietary software that has been written or at least adapted for their

specific requirements. As these requirements change over the years, software is adapted and

expanded, often implementing software elements provided by or procured from third parties

(both proprietary and open-source elements). All this creates new interdependencies in relation

to ownership of rights vested in such software. Depending on the licensing terms in relation to

such third-party software elements, the seller may not even have the necessary IPRs vested

in certain software to perform the proposed transaction. Also, the seller many lack the right

to grant the proposed buyer the necessary sublicences to use such software. To answer these

complex ownership questions and properly transfer software, it is therefore crucial to trace the

chain of assignment, all contracts and other documents regarding development and expansion

of software flagged for transfer.

Apart from software, know-how in the sense of trade secrets, specific work products, busi-

ness relationships, etc may qualify as intangible assets and enjoy protection under the rules of

the Unfair Competition Act.

However, identifying and listing these assets may prove difficult.

Nonetheless, stakeholders should ask themselves whether any such intangible assets may need

to be part of the planned transaction. However, the appropriate valuation of IPRs is even more

pronounced regarding these intangible assets.

17 Article 6 of the Federal Act on Copyright and Related Rights (Copyright Act, SR 231.1).

18 See 'Joint ownership in IPRs'.

19 Federal Act against Unfair Competition, SR 241.

20 The complex topic of valuing intellectual property is not within the scope of this chapter; for more

information in the context of M&A deals, see, eg, Berens/Brauner/Knauer/Strauch (Eds), Due Dilligence

bei Unternehmensakquisitionen, 8th ed, Schaeffer-Poeschel Verlag, 2019, p638–647.

Key Intellectual Property Issues in M&A Transactions

IP due diligence, IP representations and warranties, indemnification

The true value of IPRs lies in their economic exploitation, either as 'negative' defensive tools

(eg, preventing competitors from using a patented technology) or as 'positive' tools for external

communication (eg, using a trademark and the reputation associated with it to distinguish a

company’s own offerings). This fact has profound implications on M&A transactions. IPRs are of

no or limited value to the buyer if they are flawed. IP due diligence is therefore a vital part of any

preparation for an M&A transaction.

After all relevant IPRs have been inventorised, the next step must be listing all their known

and documented encumbrances and potential (legal) risks. Have the rights in question been

licensed to third parties? If so, are these licences exclusive (meaning the buyer will be excluded

from licensing such rights to other parties)? Have the rights in question been pledged as collat-

eral, transferred by way of security or encumbered in any other way that could impede their

unrestricted exploitation? Are there delimitation agreements with third parties limiting the scope

of use rights in relation to trademarks? Listing these encumbrances is not only the basis for

the negotiation of substantiated representations and warranties of the seller in the transaction

agreements in relation to IPRs. Rather, this process may also prompt the seller to address certain

IP issues proactively, for example, that existing contracts with third parties need amendment or

termination and that IPRs flagged for transfer must first be consolidated in the hands of the seller

before the planned transaction is possible.

With regard to software and its source code, this leads to multiple issues. First, does the

seller own the rights to the original version of the software? Does the seller own the full rights

to the code or just a licence to use the software? Who owns possible adaptations, extensions

or derivative versions of the original software as developed over time? Second, does the code

contain third-party software, implemented libraries, application programming interfaces or open

source elements, etc? If so, what are the licensing terms and do they impede the transfer of the

software? Especially in the case of tailored software that has grown over the years, these ques-

tions are often difficult to answer and frequently a nightmare for the seller to grant realistic and

robust representations and warranties to the buyer. Prior proper documentation of the software

development history and of the relevant agreements is therefore imperative.

IP due diligence should also address (potential) legal disputes, such as past, active or emerging

lawsuits or other procedures, such as, for example, threatening administrative trademark cancel-

lation actions,

etc. Similar to a 'freedom-to-operate analysis' when considering patent protection,

the buyer must ascertain in IP-related representations and warranties that there is transparency

in relation to potential IP conflicts. While listing past and currently active legal disputes should not

pose difficulties, identifying emerging lawsuits may prove trickier and often requires a risk-based

judgement call by the seller as to whether to reveal a potential conflict.

The acid test for the seriousness of the seller’s representations and warranties is the scope of

the liabilities and indemnification accepted by the seller eventually. The seller is likely to be most

careful in this respect. In fact, IP risks often do not materialise right after the M&A transaction, but

can emerge years after, posing liability risks long after an M&A deal has been concluded. In addi-

tion, IP litigation never comes cheap. The parties must therefore keep in mind that indemnification

21 Article 35a Trade Mark Protection Act.

Key Intellectual Property Issues in M&A Transactions

clauses in particular pose considerable risks for the party granting them and thus have to be

carefully evaluated and limited at least in relation to the scope, amount and duration.

Ownership issues in relation to IPRs

Within a group of companies

In general

Identifying and taking stock of the relevant IPRs flagged for transfer frequently leads to the

question of who owns which rights within the group. What again seems like an obvious issue

regularly leads to complex questions.

This is particularly true in a group of companies, where many if not all group members need

access to the group’s IPRs (such as trademarks that form the umbrella brand if group entities

appear under a common brand identity). Typically, these IPRs are centralised and reside in a

specific entity of this group (this can be the operational parent, a dedicated IP holding company

or business support entity, etc). But IPRs may also be held by different entities of a group, with

no or incomplete centralisation of the management of such assets.

Therefore, the entity acting as seller in an M&A transaction may not necessarily be the

intra-group holder of the relevant IPRs. However, in an asset deal, these rights can only be sold

if the seller is actually their legal owner. In a share deal, these rights get transferred only if

they are owned by the company to be sold. Thus proactive internal consolidation of the relevant

IPRs in the hand of the seller is imperative before the M&A transaction. But there are several

questions to consider: do internal agreements, such as intra-group service management and

licensing agreements, permit such transfer in the first place? Are there specific contingencies in

case of a subsequent sale of IPRs to a third party? Are other companies of the group depending

on the continued use of IPRs flagged for transfer? If such IPRs cannot be transferred to the

seller, does another company (such as the parent) have to become a party of the deal? The best

way to handle these questions depends on the group structure and thus cannot be answered in

general. The overarching goal must always be that all companies of the group keep access to all

vital IPRs irrespective as to whether the M&A deal is successful or fails. The same is true in case

of bankruptcy of one group-entity or restructuring of the group as such.

Safeguarding against bankruptcy in particular

As the set-up of IP ownership and licences within a group of companies can be complex, safe-

guarding against bankruptcy is vital, not only in relation to M&A transactions but in general.

Relevant IPRs must be accessible to all companies of a group at all times. That may not be

the case if an operational company holding the IPRs falls into bankruptcy: The administrator in

charge of managing the bankruptcy must do what is best to ensure proper procedure and protec-

tion of the creditors' rights, not necessarily what is best for the other companies of the group.

In the worst-case scenario, bankruptcy of one group company (or failure of the M&A deal) may

cut off the other companies from vital technical infrastructure such as business-critical software

or from IPRs such as trademarks and domain names used by affiliated entities as part of the

corporate identity.

22 For example, for the moratorium on debt collection, see article 295 et seq of the Federal Law on Debt

Collection and Bankruptcy (SR 281.1).

Key Intellectual Property Issues in M&A Transactions

Strategies such as ringfencing, where vital IPRs are separated from the operating business,

are therefore a tested option. Ownership of business-critical IPRs is transferred from opera-

tional (in particular regulated) group entities to business-remote and resolution-resilient enti-

ties such as mere IP holding companies, non-operational holding entities or dedicated business

support entities. As mentioned above, such intra-group transfers of IPRs are complex and costly.

Moreover, decentralised and ringfenced ownership of IP may complicate the transfer of such

IPRs in subsequent M&A transactions, monetisation of valuable IPRs in licensing scenarios with

third parties, as well as in enforcement measures in the case of infringement of own IPRs.

Joint ownership in IPRs

Joint-ownership of IPRs can be a stumbling block in M&A transactions. Where multiple inventors

have made an invention jointly, they also own the rights to the patent jointly.

The same goes for

copyrights and therefore for software protection in Switzerland: where two or more individuals

have contributed as authors to the creation of a work, copyright belongs to all such individuals

jointly.

Unless agreed otherwise, joint owners may only use and dispose of the work with the

consent of all other owners.

Especially in regards to software, where there is no registration

reflecting ownership, the concept of joint ownership raises complex issues as to who owns which

rights to what part of the work in question. In an ideal world it should therefore be ensured that

all employees involved as well as any external contributors transfer their IPRs in the software

and in derivative versions thereof to the designated IP holding entity in a group of companies

(see 'Legal situation in Switzerland').

Finally, in the case of a joint development of a specific project (eg, developing an industry

standard or common platform based on hardware and/or software), employees of different enti-

ties and contractors often exchange ideas and work closely together. In hindsight it is often

controversial as who simply provided ideas or added a (legally relevant) contribution to a work

result. Establishing and if necessary proving the chain of assignment of individual shares for a

complex piece of software can thus become quite difficult, if not impossible. This again raises

risks for M&A transactions if the buyer requests comprehensive representations and warranties

in relation to ownership of software-related IPRs that are flagged for transfer.

Best practice when dealing with joint ownership is therefore simply to avoid it where

possible. Otherwise the parties should carefully make sure that underlying agreements allow

to use the jointly owned IPRs independently of one another. Last, detailed documentation of the

project, including all agreements, correspondence, meeting notes, etc can help prove contribu-

tions and allocation of disputes later on.

23 Article 3 section 2 Patents Act.

24 Article 7 section 1 Copyright Act.

25 Article 7 section 2 Copyright Act; the Patents Act does not contain a similar explicit restriction to jointly

owned patents, but the prevailing doctrine seems to support such an interpretation, see, eg, Heinrich,

PatG/EPÜ, 3rd ed, Stämpfli Verlag, 2018, art. 3 N 29.

Key Intellectual Property Issues in M&A Transactions

Ownership by employees or third parties

Legal situation in Switzerland

As mentioned, the rights to inventions and copyrights arise with the natural person creating

them, not the company that employs them. Switzerland does not know a 'works made for hire'

doctrine such as in the United States, where under certain circumstance copyright gets automat-

ically assigned to the employer. Nevertheless, Swiss law provides for regulations on exceptional

automatic transfer of ownership in relation to specific IPRs.

In view of the lack of an overall

concept of automatic transfer of ownership vesting in IPRs, it is safe to provide for express

clauses in employment contracts as well for express language in internal regulations such as IP

policies in order to secure that employees have to actively assist in the transfer of IPRs created

by them to the employer.

In case of external contractors or other third parties participating in the creation of relevant

IPRs, stakeholders must ensure that agreements with said parties cover the transfer of any rele-

vant IPRs to the target owner. Particular care must be given to the scope of transfer: in Swiss

otherwise explicitly agreed, the comprehensive copyrights are not transferred in whole, but only

those specific rights (such as use rights) necessary to the agreed-upon purpose are transferred.

For example, this might include the right to use a piece of software, but not to modify it or have

third parties adapt and expand it. It is thus crucial that the transfer clauses reflect any rights the

company needs and may need in the future, preferably the full rights to the copyrighted work or

any other work result.

M&A transactions and joint ventures in particular

While properly assigning IPRs from employees or third parties to a target entity is necessary in

general, it becomes especially important in the case of M&A transactions and other scenarios

such as the setting-up of joint ventures. Often, missing rights of the seller to certain IPRs flagged

for transfer are only discovered in the process of the IP due diligence (see 'IP due diligence, IP

representations and warranties, indemnification'). Obtaining the necessary rights in the course

of ongoing negotiations on IP-related transactions will regularly put time pressure on the stake-

holders and may compromise the M&A negotiations eventually. Additionally, there is always the

risk that:

• the other party takes advantage of the situation by lowering the price offered for the

proposed transaction; or

• the required rights have to be procured by a third party at disadvantageous commer-

cial terms.

In the case of joint ventures, it is one thing to permit use of its own IPRs under a licence agree-

ment. It is a totally different issue to transfer ownership of own IPRs to such joint venture

company or to permit such entity to register and own rights consisting of IPRs of one of the joint

venture partners. As a general rule, the latter scenario should be avoided in order to minimise

the risk of losing control over valuable own IPRs.

26 As an example, Article 332 section 1 Code of Obligations.

Key Intellectual Property Issues in M&A Transactions

Licensing issues

As shown above, most IP issues relating to M&A transactions boil down to the question whether

all parties involved own the necessary rights to execute the M&A deal and continue their busi-

ness operation afterwards as intended. In this regard, stakeholders must differentiate between

the full rights to an IP title (such as a trademark) and licensed rights to said title. Inventorising

the relevant IPRs

and performing a careful IP due diligence

will give a good overview over the

different categories of IPRs as well as of the scope of rights vested in such assets. Based on that

overview, stakeholders will have to verify whether any of the findings collide with the target of

the proposed M&A transaction.

In particular, the stakeholders must check whether any of the IPRs flagged for transfer

have been licensed to third parties or other companies within the group and, in the affirmative,

whether such licences restrict or even jeopardise the goal of the M&A deal. Further, stake-

holders must evaluate the effects of the M&A deal on any such licences in change-of-control

scenarios. Licensing agreements with third parties may have explicit change-of-control clauses

that exclude the transfer of the agreement to the M&A target in the first place or that require

prior consent of the licensor. In addition, it needs to be clarified whether the licence agreement at

least permits sublicensing (if transfer is excluded) and, if so, under which conditions. Finally, the

seller needs to ascertain that its own business operations can continue even if some IPRs have

been transferred in the M&A transaction to a third party.

Other issues to consider

Public disclosure in the case of an M&A transaction

M&A deals always require sharing confidential business information with other parties, in

particular regarding the own IP inventory. For example, during the IP due diligence, the buyer

will learn about the potential weaknesses and issues of the IPRs flagged for transfer. While all

parties involved sign strict non-disclosure agreements regarding the use of such confidential

information, the protection in practice is anything but watertight. If the M&A deal fails, the other

party still knows the facts they have learned and may thus be in a much better position to

compete.

Furthermore, M&A transactions may require the parties to file documents with the public

authorities. For example, the Swiss Mergers Act requires the parties in a variety of transactions

to file an inventory of assets and liabilities that are the object of the transfer, including IPRs.

As third parties may obtain access to these documents, they could theoretically gain valuable

insights about the IP or IT set-up of the parties involved. When preparing M&A transactions, it is

therefore advisable to draft the internal documents as precisely as possible, while keeping any

external documents as generic as permitted by law.

27 See 'Identifying and taking stock of the relevant IPRs'.

28 See 'IP due diligence, IP representations and warranties, indemnification'.

29 See also Bryer/Simensky, p2.27.

30 For example, article 71 Federal Act on Merger, Demerger, Transformation and Transfer of Assets

(Mergers Act, SR 221.301).

Key Intellectual Property Issues in M&A Transactions

Tax issues

Finally, IPRs in M&A transactions may also have considerable tax implications. While not within

the scope of this chapter, it is worth mentioning that any transfer of IPRs has to be carefully

analysed from a tax perspective. Last but not least, Swiss tax law offers new tools in relation to

the holding and management of IPRs, such as 'patent boxes'. This option should be considered

by the parties to an M&A transaction when discussing IPRs.

Conclusion

IPRs are a major part of any M&A negotiation. Handling IPRs properly can therefore make or

break M&A deals. Even if shortcomings in the past IP strategy may not immediately affect an

M&A deal, they may manifest years later in the form of costly litigation with third parties or

between seller and buyer over IP in relation to representations and warranties. Thus the timely

and proper set-up of policies for the systematic and comprehensive identification, protection,

management, use and enforcement of the company’s own IPRs, the comprehensive documenta-

tion of contracts in relation to acquisition, transfer, amendment, restriction and sale of IPRs will

save time, costs and trouble when preparing for an M&A transaction. Shaping the IP chapter of

the M&A transaction aims not only at a smooth transfer of IPRs. Rather, it must consider that:

• the company’s own operations can continue without undesired restrictions after the transfer

of IPRs to a buyer; and

• the buyer may require appropriate continued access to IP remaining with the seller for a

defined phasing-out period in order to be able to use and implement the acquired IP at all.

Financial Market Regulation

Stefan Kramer, Benedikt Maurenbrecher and Manuel Baschung

M&A transactions involving Swiss financial institutions

Licensing requirements for financial institutions

Main licence categories

This chapter provides an overview of the relevant regulatory and associated legal considerations

for M&A transactions in the following financial institutions requiring a licence from the Swiss

Financial Market Supervisory Authority FINMA (FINMA):

• banks and other entities licensed under the Federal Act on Banks and Savings Banks 1934

(as amended; the Banking Act);

• the financial institutions licensed under the Federal Act on Financial Institutions 2018 (as

amended; the Financial Institutions Act): portfolio managers, trustees, managers of collec-

tive investments, fund management companies, and securities firms; and

• insurance companies licensed under the Federal Act on the Supervision of Private Insurance

Companies 2004 (as amended; the Insurance Supervision Act).

No consideration is given to transactions involving financial market infrastructure such as trading

venues regulated under the Federal Act on Financial Market Infrastructures and Market Conduct

in Securities and Derivatives Trading 2015 (as amended; the Financial Market Infrastructures Act)

and in collective investment schemes regulated under the Federal Act on Collective Investment

Schemes 2006 (as amended; the Collective Investment Schemes Act). Institutions of social secu-

rity and pension schemes are also outside the scope of this chapter.

1 Stefan Kramer and Benedikt Maurenbrecher are partners and Manuel Baschung is an associate with

Homburger AG.

2 The respective licensing requirements are not limited to financial institutions incorporated in

Switzerland but generally also apply to foreign institutions having a physical presence in Switzerland.

Financial Market Regulation

Recent developments

The Financial Institutions Act entered into force on 1 January 2020. Its licensing requirements

are set to be phased in as follows:

• Financial institutions already licensed for the corresponding activity at the time of the

Financial Institutions Act's coming into force (eg, fund managers of collective investment

schemes) are not required to obtain new authorisation but must fulfil the requirements of the

Act within one year of its coming into force (article 74 paragraph 1 Financial Institutions Act).

• Financial institutions that under prior law are not subject to a licensing requirement but

are newly subject to a licensing requirement at the time of the Financial Institutions Act's

coming into force (ie, in particular, portfolio managers and trustees) are required to report

to FINMA within six months of the Act's coming into force. They must satisfy the require-

ments of the Act and submit a licensing application within three years of the Act's coming

into force (article 74 paragraph 2 Financial Institutions Act).

• Portfolio managers and trustees that start their activity within one year of the Act's coming

into force must report immediately to FINMA and after starting their activity generally must

satisfy the licensing requirements. No later than one year after FINMA has authorised a

supervisory organisation tasked with the supervision of portfolio managers and trustees,

they must affiliate to such an organisation and submit an application for authorisation

(article 74 paragraph 3 Financial Institutions Act).

Share deals

In principle, in a share deal, the transferred financial institution maintains its structure, its

prudential authorisations and its contractual relationships (subject to possible change-of-control

clauses). In the event of a merger (either by absorption or by combination), the surviving entity

or the new entity takes over by law all the assets and liabilities as well as the contractual rela-

tionships of the acquired financial institution. Thus, from the point of view of financial regulation,

there are advantages to a share deal, in particular when the buyer does not have a regulatory

licence in Switzerland.

Nevertheless, such transactions may affect the particulars of the licence and thus require

regulatory consent. They may also trigger requirements to notify the regulator.

Regulatory consent requirements

The financial institutions referred to above require a licence from FINMA to carry on their activ-

ities. This licence is granted only if certain conditions are met. For banks and the financial insti-

tutions licensed under the Financial Institutions Act, these include that the natural and legal

persons who directly or indirectly hold at least 10 per cent of capital or voting rights or exer-

cise decisive influence on their business activities by other means (each such instance, a quali-

fied holding) ensure that their influence is not exercised to the detriment of prudent and sound

management.

The requirement for these financial institutions to meet the licensing require-

ments on an ongoing basis also means that almost all transactions involving significant changes

in shareholders require FINMA approval to be obtained.

3 Banking Act, article 3 paragraph 2c-bis; Financial Institutions Act, article 11 paragraphs 3–4.

Financial Market Regulation

In addition, banks and securities firms organised under Swiss law but subject to a controlling

foreign influence are subject to additional licensing requirements. A controlling foreign influence

is assumed if foreigners directly or indirectly hold more than half of the voting rights in the

bank or otherwise exercise a dominant influence. If a controlling stake is acquired by foreigners

only after the initial licensing, the bank or securities firm must apply for an additional supple-

mental licence. Such an additional supplemental licence must be renewed upon changes in the

foreign holders of the controlling stake. Conversely, no additional permit needs to be obtained if

a foreign-controlled bank or securities firm comes under Swiss control.

Mergers and acquisitions may also trigger regulatory consent requirements indirectly.

In particular, insofar as the transaction affects a financial institution's activities (including their

geographic scope, not least by foreign acquisitions) or organisation described in the licence, the

changes thereto may require approval from FINMA. Such transactions also regularly lead to

changes among persons subject to ‘fit and proper person’ requirements. Furthermore, changes

to the financial institution’s constitutional documents (particularly its articles of associations and

organisational regulations) require consent from FINMA and may only be entered into the commer-

cial register if they have been approved by FINMA.

Such changes are therefore usually submitted

to FINMA in draft form for review and approval. As FINMA may request the financial institution’s

auditors to comment on the financial institution’s continuing ability to meet its capital and liquidity

requirements, the auditors should generally be involved prior to the submission to FINMA.

Regulatory notification requirements related to the acquisition and divestment of

qualified equity holdings

Any natural person or legal entity must notify FINMA before directly or indirectly acquiring

or disposing of a participation in a bank or financial institution licensed under the Financial

Institutions Act of at least 10 per cent of the capital or votes (qualified holdings). This notifica-

tion obligation also applies if a qualified holding is increased or reduced in such a way that the

thresholds of 20, 33 or 50 per cent of the capital or votes are reached or crossed.

The obliga-

tion to report is linked to the participation. It exists regardless of the way in which this partic-

ipation is acquired. The obligation can therefore be triggered by a purchase (share purchase),

quasi-merger (share exchange) or merger.

The bank or financial institution licensed under the Financial Institutions Act itself is also

obliged to notify FINMA of persons subject to the reporting obligation as soon as it becomes aware

of the acquisition or sale. In addition, the reporting obligation must be fulfilled at least once a year.

As these reporting obligations also cover indirect acquisitions, they must be observed, for

example, if the holding company of a banking group is acquired.

The notification by the seller and the acquirer must be made prior to the acquisition or

sale. This means that the notification must be made at least before the transaction is completed.

While this does not constitute an outright consent requirement, in view of the possible sanctions,

4 Banking Act, articles 3bis–3quater; Financial Institutions Act, article 43.

5 Banking Act, article 3 paragraph 3; Financial Institutions Act, article 8; Insurance Supervision Act,

article 5.

6 Banking Act, article 3 paragraph 5; Financial Institutions Act, article 11 paragraph 5.

7 Banking Act, article 3 paragraph 6; Financial Institutions Act, article 11 paragraph 6.

Financial Market Regulation

namely the possibility for FINMA to withdraw a licence if the conditions for the licence are no

longer met, the parties will normally suspend the closing of the transaction and exercise their

reporting obligation as soon as the commitment transaction is concluded. This makes it possible

to await FINMA’s determination on the matter. FINMA will check whether the new holders of

qualified holdings have the necessary subjective qualifications.

The acquisition of an insurance company by means of a share purchase or a public takeover

bid does not require explicit authorisation from FINMA. However, the acquirer has to notify FINMA

of the acquisition if the stake in the insurance company exceeds 10, 20, 33 or 50 per cent of the

capital or voting rights of the insurance company. The seller is also subject to a corresponding

notification obligation if, as a result of the transaction, its shareholding falls below one of these

thresholds or the insurance company ceases to be a subsidiary. Further, the law provides that

FINMA may prohibit the participation or attach conditions to it if the nature and extent of the

participation could endanger the insurance company or the interests of the insured persons.

In addition, a share deal will also regularly require a change in the business plan of the insur-

ance company purchased, which in turn must be submitted to FINMA in advance. The obligation

to submit the corresponding application is the responsibility of the insurance company itself.

Finally, it should be noted that an insurance company that wishes to acquire a stake in another

company itself must also submit a notification to FINMA if the stake exceeds 10, 20, 33 or 50 per

cent. Here, too, FINMA may prohibit the participation or impose conditions if the type and scope of

the participation may endanger the insurance company or the interests of the insured persons.

Asset deals

Asset deals permit the transferor and the acquirer to jointly define the scope of the assets and

liabilities transferred: for example, the parties may agree to take over a portfolio of clients from

a particular geographical region or to exclude certain clients with predefined risks or who do not

fit the buyer’s profile.

Regulatory consent requirements

Assets and liabilities tied to regulated activities may only be transferred to an acquirer holding

the requisite licence before the transfer becomes effective. If the acquirer already holds an appli-

cable licence, no new licence application is required.

However, the institution must continuously meet the licensing requirements. Indirectly,

therefore, there are many ways by which such a transaction may trigger consent requirements

on either side of the transaction:

• Among other things, the financial institution’s organisational structure must be appro-

priate for its business activities and thus, depending on the size of the acquisition, the asset

purchase must therefore still be submitted to FINMA for approval. Even smaller takeovers

are subject to approval if the business area of the acquirer is thereby expanded.

• Where a licensed financial institution acquires a business that is not related to the industry

and insofar as this affects the business or administrative organisation described in the

licence, a respective amendment must be discussed with FINMA.

8 Insurance Supervision Act, articles 5 and 21.

Financial Market Regulation

• Furthermore, amendments to the articles of association may only be entered in the commercial

in this way. More broadly, FINMA requires that all amendments to a financial institution’s

articles of association and organisational regulations be submitted to it for approval. Thus,

if the takeover involves changes to the company, FINMA’s approval must also be obtained.

In the case of insurance companies, more direct consent requirements also apply:

• Mergers, demergers and conversions of insurance companies generally require the approval

of FINMA.

Authorisation will be granted only if the insurance companies concerned continue

to meet the material conditions for authorisation after the transaction has been completed.

• Asset deals involving a transfer of an insurance portfolio also require FINMA’s approval,

which is granted only if the interests of all the policyholders and beneficiaries are safe-

guarded.

A special feature of the purchase of an insurance company by means of an asset

purchase is that, when FINMA approves the transaction, the insurance portfolio (ie, the

insurance policies) and the tied assets are transferred to the buyer at the same time, without

the consent of the policyholders to the transfer being required. However, the policyholders

subsequently have the statutory right (which may be waived by FINMA under certain circum-

stances) to terminate the insurance contract within a period of three months from receipt

of a respective notification from the insurance company.

Further, if an insurance portfolio

is transferred to another insurance company, the tied assets are also transferred to the

insurance company taking over the insurance portfolio unless FINMA orders otherwise.

Client consent requirements in general

Fundamentally, transfers of assets and liabilities may occur as a bulk transfer of a portfolio of

assets or liabilities pursuant to the Federal Act on Mergers, Demergers, Conversions and Bulk

Transfers 2003 (as amended; the Merger Act) or as a transfer of individual assets or some or all

of the liabilities of a legal entity under the Swiss Code of Obligations 1911 (as amended).

Of relevance, particularly in the case of banks, is that the scope of application of bulk trans-

fers is limited by the Merger Act (article 69 paragraph 1) to companies and sole proprietor-

ships entered in the commercial register, limited partnerships for collective investment and

open-ended investment companies. Thus, for example, a Swiss branch of a foreign bank cannot

participate in a bulk transfer of assets and liabilities within the meaning of the Merger Act.

In the case of an individual transfer of each asset and each liability, and in the absence of

either a pre-existing contractual relationship between the acquirer and the client or a mech-

anism for the transfer of the client relationship between the financial institutions involved, a

new contractual relationship must be entered into between the acquirer and the client, which

precludes tacit consent to the transfer of the contract. In such a case, the acquirer is required

to draw up all the documentation required for the opening of an account, particularly regarding

know-your-customer requirements (repapering).

9 Insurance Supervision Act, article 3 paragraph 2, article 5 paragraph 1.

10 Insurance Supervision Act, article 62 paragraph 1.

11 Insurance Supervision Act, article 62 paragraphs 3–4.

12 Insurance Supervision Act, article 19 paragraph 2.

Financial Market Regulation

In the case of a bulk transfer, the prevailing view holds that the contracts linked to the trans-

ferred assets and liabilities automatically pass to the acquiring entity with the registration of the

transfer of assets and liabilities in the commercial register. On this date, all the assets and liabil-

ities listed in the inventory are transferred by law to the acquiring party. The fact that a contract

has been entered into intuitu personae, which may be the case for contracts concluded between

a client and a financial institution, does not preclude the effectiveness of a bulk transfer. The

acquiring financial institution then takes the place of the transferring financial institution in all its

contractual relationships. If the acquiring financial institution is able to rely on the account-opening

documentation (including as to know-your-customer requirements) provided by the transferring

financial institution, itself a financial intermediary, repapering (ie, the opening of a new client

relationship) may not be required. In these cases, the change of counterparty takes place by law

and the consent of the client is not required for the transfer of the contract to be effective (but is

generally required with a view to complying with certain constraints in light of banking secrecy, as

set out under 'Client consent requirements in relation to banking secrecy in particular').

Because the contractual relationship in its entirety is transferred to the acquiring financial

institution, the general terms and conditions of the transferring financial institution will continue

to apply, at least until they are amended by the acquiring financial institution, which, however, may

not take place until 30 to 60 days after the transfer, depending on the general terms and condi-

tions. If it cannot adhere to the transferring financial institution's general terms and conditions

(eg, due to incompatible outsourcing policies), the acquiring financial institution may request the

transferring financial institution to amend the general terms and conditions (which will only come

into force at the time of the transfer of the contractual relationship) prior to closing. Alternatively,

the acquiring financial institution may ask the transferred clients to (explicitly or implicitly) agree

to its own general terms and conditions.

In the case of insurance companies, these issues are tied to the requirement to obtain

consent from FINMA (see above).

Client consent requirements in relation to banking secrecy in particular

Barriers for M&A transactions also arise from the criminal law protection of banking secrecy

as well as other privacy and data protection laws. In particular, article 47 of the Banking Act

makes it a criminal offence for a person to disclose a secret that has been disclosed to that

person in their capacity as a member of a governing body, employee, agent or liquidator of a

bank or as a member of a recognised auditor, or that has otherwise come to that person’s notice

while acting in such capacity. All the information relating to the banking relationship between

a client and the bank (including the existence of the banking relationship itself) is protected by

banking secrecy and any intentional breach of this secrecy is punishable by a custodial sentence

or a pecuniary penalty. Accordingly, any transfer of confidential customer information (and,

therefore, the completion of the transaction) generally requires some form of consent from the

transferring clients.

While it is possible at the stage of preparation for the execution of the transaction to

ask clients to consent to the transfer of data, this is usually not the case at the stage of due

diligence, before a transaction has been signed. The reason for this is that the transaction is

generally confidential at this stage and it is not conceivable to inform the clients concerned of

the existence of transactional talks, and in whose favour they would have to waive secrecy. Due

diligence by the potential acquirer(s) is therefore typically carried out based on documents that

Financial Market Regulation

do not contain confidential customer information such as anonymised (redacted) agreements or

template agreements.

However, a potential acquirer may in certain instances need information on the composi-

tion of the institution’s client portfolio or part of the assets it intends to take over, which may

go beyond generic or anonymised information. This pertains, in particular, to the adequacy of

control over the origin of funds (know-your-customer requirements), the nature of the assets

deposited, the compliance of the loans granted with the bank’s credit policy, etc. One among

several approaches for overcoming this problem is the appointment by the transferring bank of

its auditor or a third-party audit company to examine its client portfolio and issue a report (again

in anonymous form) addressed to the potential acquirer(s).

Between the signing of the transaction documents and completion of the transfer, the trans-

mission of client data may become necessary for the eventual on-boarding of clients and to

enable the transferee bank to fulfil any regulatory requirements, such as know-your-customer

requirements. If it is no longer possible to transmit data anonymously at this stage, the consent

or waiver of banking secrecy by the client concerned must be obtained.

In certain cases, the client’s express consent is required. Among other instances, the scope

of hold-mail clients’ deemed consent upon the information being made available to them may

not include a transfer of their relationship and the transmission of their data to a third party.

The client’s express consent should also be obtained prior to a transmission of client identifying

information to a foreign transferee, not least in case the information transmitted to the foreign

acquiring institution is protected to a lesser extent than under Swiss banking secrecy.

In other cases, the tacit or deemed consent of clients to the transfer of their data to the

acquiring bank is generally sufficient. Broadly, silence may be deemed to indicate consent by

virtue of a prior agreement between the parties or their usual business relationship. In addition,

the terms and conditions underlying the client relationship often provide for the possibility of

tacit consent by the client. Nevertheless, tacit or deemed consent requires that clients have had

sufficient time to object to the transmission of information. This period typically matches the

period set out in the bank’s general terms and conditions during which clients may terminate

their banking relationship if they do not agree with a change to the general terms and conditions

that was proposed by the bank.

Enforcement by FINMA

FINMA has various enforcement instruments at its disposal. For example, where a shareholder

holding a qualified equity stake in a bank or financial institution licensed under the Financial

Institutions Act fails to comply with the applicable requirements, FINMA may suspend that share-

holder’s voting rights.

As a last resort, FINMA may revoke the licence of the financial insti-

tutions supervised by it and trigger the liquidation of entities carrying on regulated activities

without a requisite licence or whose licence has been revoked. Contraventions of regulatory

requirements may also trigger criminal liability.

13 Banking Act, article 23ter; Financial Institutions Act, article 65.

Merger Control

Marcel Dietrich and Richard Stäuber

Introduction

Swiss merger control law requires that certain transactions are notified and approved before

they may be implemented. Such merger control proceedings may be lengthy, absorb a lot of

resources of the parties, and they can potentially affect the structure of the transaction – or even

its feasibility – if there are competition issues. It is thus important that the specifics of Swiss

merger control are considered from the outset and throughout transaction planning and imple-

mentation. This chapter sets out the relevant legal framework and key elements of the Swiss

merger control regime, focusing on practical issues arising in M&A transactions and recent

developments of Swiss practice.

Legislative framework and regulators

Legislative framework

Swiss merger control is governed by the Federal Act on Cartels and other Restraints of

Competition (Cartel Act) and the Ordinance on the Control of Concentrations of Undertakings

(Merger Control Ordinance).

In addition, the Swiss Competition Commission (ComCo) and its Secretariat (Secretariat)

have adopted communications and guidelines on the application of the relevant merger control

provisions.

Swiss merger control law is in many respects similar to, and partly designed upon the

model of, EU merger control law. Therefore, when applying Swiss merger control law, ComCo

tends to look also at the guidelines (in particular the Consolidated Jurisdictional Notice) and

decisional practice (in particular regarding market definitions) of the European Commission.

1 Marcel Dietrich and Richard Stäuber are partners with Homburger AG.

Merger Control

Regulators

Swiss merger control law is enforced by ComCo and its Secretariat. ComCo is the decision-taking

body and consists of 11–15 members (currently 12) who are elected by the Swiss Federal Council.

The Secretariat conducts the investigations, prepares the decisions of ComCo and, together

with one member of the presiding body of ComCo, issues the necessary procedural rulings.

The Secretariat consists of four departments: construction; services; infrastructure; and product

markets. Each department handles the merger control filings in its area of competence. A fifth

department, resources, provides administrative and technical services within the Secretariat.

The headcount of the Secretariat amounted to 68 employees (58.1 FTE) as at the end of 2018

(most recent annual report available).

A special regime exists for certain banking mergers. If the Swiss Financial Market

Supervisory Authority (FINMA) considers a concentration of banks necessary for reasons related

to creditor protection, it takes the place of ComCo, which it shall invite to submit an opinion.

No general foreign investment control regime (yet)

There is no general foreign investment control regime in force in Switzerland. Special regimes

apply to certain sectors that were formerly served by state monopolies and where the conduct

of business requires prior authorisation, such as telecommunications, broadcasting and airline

transport services. In addition, the acquisition of a real estate company (ie, a company whose

purpose is to own real estate) may require a permit from the competent cantonal authority under

the Federal Act on the Acquisition of Real Estate by Foreign Persons prior to acquisition.

This legislative framework may change. In March 2020, the Swiss parliament asked the

Federal Council (Switzerland’s executive body) to propose foreign investment control legislation,

aimed in particular at protecting Swiss know-how, employment, public order and safety. The

Federal Council is required to elaborate a proposal for such regime for further review in parlia-

ment within two years.

Scope of merger control

Concentrations

The Swiss merger control regime applies to concentrations, a legally defined term comprising

two kinds of transactions:

• a merger of two or more previously independent undertakings; and

• any transaction, in particular the acquisition of an equity interest or the conclusion of an

agreement, by which one or more undertakings acquire direct or indirect control of one or

more previously independent undertakings or parts thereof.

Control is the ability to exercise decisive influence over the activities of the other undertaking

by the acquisition of rights over shares or by any other means. Control may thus be acquired

directly or indirectly, de jure or de facto. In particular, a buyer may acquire control even when

only acquiring a minority interest in the target, thus potentially triggering a notification obliga-

tion. This may in particular apply if:

• the buyer is granted strategic veto rights, for example, regarding the business plan, budget

or appointment of senior management of the target;

• the buyer is highly likely to achieve a majority at the shareholders’ meeting, given the

expected participation; or

Merger Control

• the target is economically dependent on the buyer, for example, because of very important

long-term supply agreements or credits.

The Swiss merger control regime also applies to joint ventures (acquisition of joint control). In

such cases, an additional requirement for the qualification as a concentration applies in that the

joint venture needs to perform all functions of an autonomous economic entity, a concept known

as 'full functionality'. This requirement is met if the joint venture has a management dedicated to

its day-to-day operations and sufficient resources including finance, staff and assets to conduct

its business activities on a lasting basis.

Applicable notification thresholds

A merger control notification obligation for a certain concentration exists only if the undertakings

concerned exceed the relevant thresholds. Undertakings concerned are the merging entities (in

case of a merger) or the controlled and controlling undertakings (in case of an acquisition of

control), respectively. Hence, the seller is not an undertaking concerned, and its activities are

thus not relevant for assessing the notification obligation. Swiss merger control relies primarily

on a turnover test, supplemented with a notification obligation for dominant undertakings.

Under the turnover test, a concentration is notifiable if in the financial year preceding the

concentration:

• the undertakings concerned together reported worldwide turnover of at least 2 billion Swiss

francs, or Swiss turnover of at least 500 million Swiss francs; and

• each of at least two undertakings concerned reported Swiss turnover of at least 100 million

Swiss francs.

With respect to insurance companies, annual gross insurance premium income is used instead

of turnover, and with respect to banks and other financial intermediaries gross income. The rele-

vant turnover is calculated on a consolidated basis (ie, the entire turnover of all companies under

common control is relevant, excluding intragroup sales). This may significantly enlarge the rele-

vant turnover. By way of example, in case of acquisitions by PE companies, the cumulative turn-

over of all their controlled portfolio companies has to be considered for an assessment of the

controlling undertaking’s turnover. In terms of geographic allocation of turnover, the domicile of

the customer is normally relevant (as the place where competition for the relevant customer has

taken place). A number of corporate groups in practice use Swiss subsidiaries as mere billing

addresses. For such cases, ComCo has clarified in a note that mere invoicing to addresses in

Switzerland for supplies taking place outside of Switzerland does not make such turnover Swiss

turnover, and such turnover is hence not considered for the question as to whether the Swiss

turnover thresholds are exceeded.

In addition, a notification obligation is triggered, irrespective of the turnover, if one of the

undertakings concerned has in a final and non-appealable decision been held to be dominant in a

market in Switzerland, and if the concentration concerns either that market, an adjacent market

or a market upstream or downstream thereof.

Meeting one of the above thresholds is both necessary and sufficient for triggering a notifi-

cation obligation in Switzerland:

• It is necessary in that ComCo does not have the authority to review a planned concentra-

tion, or to impose any remedies, if the thresholds are not met. This applies also in case the

Merger Control

substantive threshold for intervention (see 'Threshold for intervention: dominance plus')

would be met.

• Meeting the thresholds is also sufficient for a notification obligation: There is no additional

nexus of a concentration to Switzerland required to trigger a notification obligation. The fact

that the thresholds are met in a certain case sufficiently indicates local effects, according

to the Federal Supreme Court. As a consequence, the Swiss merger control regime in prin-

ciple also applies to foreign-to-foreign transactions. An exception applies to certain foreign

joint ventures: According to a note published by the Secretariat, the establishment of a joint

venture in Switzerland is not notifiable if the joint venture does not have any activities in

Switzerland and such activities are neither planned nor foreseeable.

Standstill obligation

If a merger control notification obligation exists, the parties must refrain from implementing the

concentration before it is cleared by ComCo. During the period between signing and closing of a

concentration, it is therefore important for the parties involved to continue their operations as if

there was no concentration.

Hence, the buyer must refrain from influencing the target’s day-to-day business. While

certain preparatory work for the concentration’s implementation after closing is allowed,

exchanges of information between the parties must be limited until closing based on two leading

principles:

• Any information must only be exchanged among the parties if there is a 'need to know' for

the receiving party in order to prepare implementation. This need to know might depend

on the stage and duration of the implementation preparations. If the time between signing

and closing is long, more detailed information is often only required at a later stage of the

implementation preparations.

• If information is exchanged that is commercially sensitive, such information must only be

exchanged in a clean team. The clean team can only contain individuals that are not working

in the parties’ day-to-day business. Further, it must be assured that the clean team members

are bound by separate confidentiality undertakings to refrain from disclosing clean team

information to non-clean team members. In addition, clean team information should be held

separately from other information and access must be restricted.

Upon request, ComCo may exceptionally authorise implementation of the concentration prior

to clearance. The parties need to show good cause for such implementation, for example, by

showing that the concentration could otherwise not be implemented or that third parties may

suffer significant harm. With respect to concentrations of banks that are deemed necessary for

reasons of creditor protection, special rules apply. FINMA is competent to review such concen-

trations (see 'Regulators'), and it may permit implementation at any stage of the proceedings.

In the case of public takeover bids, the standstill obligation may conflict with public takeover

rules, in particular as the latter may require the acquisition of shares prior to clearance. Swiss

law does not provide specific rules to address these situations. It is recommended to raise the

topic with ComCo early in the process, and to potentially request early implementation or to

propose arrangements on voting rights.

Merger Control

Merger control proceedings

Notification

To obtain clearance of a concentration subject to merger control review, the concentration needs

to be notified to ComCo. In the case of a merger, the notification obligation is on both merging

parties that have to designate at least one joint representative. In the case of an acquisition of

control, the notification obligation is with the undertaking(s) that acquire the control (ie, the

buyer), but neither the target nor the seller. Compared with merger control notifications in other

jurisdictions, Swiss notifications are rather lengthy and detailed, requiring – depending on the

competition sensitivity of the concentration – significant time and effort for the parties to prepare.

ComCo has published a form for the notification of concentrations that lists the information

that the notifying undertaking(s) have to submit. In particular, these are the following:

• description of the business activities of the undertakings concerned;

• description of the planned concentration, including the goals that are pursued with it; and

• information on the relevant product as well on the geographic markets that are affected.

The following documents need to be provided to ComCo:

• most recent annual accounts and reports of the undertakings concerned;

• any agreement affecting or related to the concentration;

• offer documentation, in case of a public takeover; and

• reports, analyses and business plans made with regard to the concentration, to the extent

they contain relevant information for the competitive assessment of the concentration.

A lot of work in practice goes into the description of affected markets. Markets are affected

if two or more of the undertakings concerned jointly hold a market share of 20 per cent or

more, or if one of the undertakings concerned holds a market share of 30 per cent or more.

There is a large body of decisional practice of ComCo and the European Commission on market

definition, covering many sectors and activities, that will be considered to determine the rele-

vant markets. These definitions of product and geographic markets may not correspond to the

business perspective as to what 'markets' they operate in (they often are very narrow), and the

required data may not be readily available with the parties.

For affected markets detailed information is required, in particular in the following respects:

market shares of the parties and their competitors in the past three years; market entries in

the past five years, expected market entries as well as the estimated costs of market entry;

structure of supply and demand; importance of research and development; R&D activities of

the undertakings concerned; key innovations; the innovation cycles; and patents, know-how and

other intellectual property rights.

Parties to M&A transactions should also bear in mind that the reports and analyses they

draft to assess a potential transaction in advance may ultimately need to be provided to ComCo

– and considered for the competitive assessment of the concentration.

The undertakings concerned and the Secretariat may mutually agree on the details of the

content of the notification prior to the notification of the concentration, and limit the required

data. In doing so, the Secretariat may grant an exemption from the duty to submit particular

information or documents if it is of the opinion that such information is not required for the

assessment of a certain concentration. In practice, this is relevant for foreign-to-foreign mergers

that deploy limited effects in Switzerland. The notification may also refer to the notification to

Merger Control

the European Commission (Form CO) if the concentration has already been notified there, in

particular where markets are broader than national.

There is no deadline for the notification to be submitted. However, the review period for

ComCo only starts upon submission of a complete notification, and, as mentioned ('Standstill

obligation'), a concentration must not be consummated before it is cleared. A concentration may

even be notified before the signing of a transaction. In this case, the parties need to be able to

show a good-faith intention to conclude an agreement (eg, by way of a letter of intent or memo-

randum of understanding).

The notification form may be submitted to the ComCo in any official language of Switzerland

(ie, German, French or Italian). Any exhibits may be submitted in English.

Course of proceedings

It is customary and recommended to enter into pre-notification contacts with the Secretariat,

in particular in complex concentrations. To this end, the parties submit a draft filing to the

Secretariat for review. The Secretariat subsequently will comment upon completeness and indi-

cate what information it requires in addition, if any.

Upon formal submission of the notification, a one-month review period for ComCo to assess

the concentration begins (Phase I). If a certain concentration has in parallel to be notified to the

European Commission, it is recommended to align these filings in time. Specifically, by submit-

ting the Swiss filing a few days after the Form CO (where the Phase I review period is 25 working

days), the parties allow ComCo to await the European Commission’s decision before it issues its

own decision.

The Secretariat needs to revert on completeness of the notification within 10 days. If the

notification is considered incomplete (a finding that will be avoided by the above-mentioned

pre-notification contacts), the review period has not started and it will only begin upon submis-

sion of the missing information.

Within the one-month period, ComCo is required to notify the undertakings concerned

whether it intends to open an in-depth investigation. If no such notice is given, the concentration

may be implemented and clearance is assumed. Rather than remaining silent, however, ComCo

regularly provides a comfort letter to the parties stating that it considers the concentration

as unobjectionable. ComCo cannot prohibit a transaction at the end of Phase I. As an alterna-

tive to clearing a concentration or opening an in-depth investigation, ComCo may exceptionally

authorise a concentration at the end of Phase I subject to conditions or obligations; such condi-

tions or obligations need, however, the parties’ approval.

If there are indications that a concentration creates or strengthens a dominant position,

ComCo may open an in-depth investigation (Phase II). The in-depth investigation needs to be

completed within four months. This period may only be prolonged if ComCo is prevented from

reaching a decision in time for reasons attributable to the undertakings (in particular, if they fail

to provide requested information in time). In controversial cases, ComCo will summon a hearing

towards the end of the Phase II review period where the parties can provide their assessment

of the concentration and third parties are asked for their views directly to the ComCo. At the end

of Phase II, the concentration is either cleared unconditionally, cleared subject to conditions or

obligations, or prohibited.

During the entire review process (Phase I and Phase II), the Secretariat is in charge with

investigating the concentration and the primary point of contact for the parties. The Secretariat

Merger Control

may request further information from the parties at any time, and parties are obliged to provide

the requested information. In Phase II proceedings, the Secretariat may issue extensive requests

with short deadlines (of a few days) that will absorb considerable resources with the parties.

Further actors: third parties, the general public and other competition authorities

When reviewing a concentration, the Secretariat may contact third parties, in particular

customers and competitors, and request their assessment The Secretariat regularly does so in

Phase II proceedings. Where remedies (conditions or obligations) are considered, the Secretariat

may also obtain the assessment of such remedies by market participants. Any such third parties

are not parties to the merger control proceedings. Hence, they have no access to the file.

The submission of a notification is not made public. A Phase I clearance will not be published

immediately, but ComCo regularly publishes its reasoned decisions in a quarterly overview which

will appear a few months after clearance. In case of in-depth investigation (Phase II), ComCo will

both publish its opening of such in-depth investigation and the final decision. Again, the reasoned

decision will be published at a later stage. For the publication of the reasoned decision, the

undertakings concerned have the possibility to indicate business secrets and request redaction

in the published version of the decision. If the undertakings concerned and ComCo do not reach

an agreement on business secrets, ComCo issues an appealable order.

In the case of concentrations notifiable in several jurisdictions, ComCo may contact

other competition authorities. ComCo is entitled to may share information with the European

Commission, based on the agreement between the EU and Switzerland concerning coopera-

tion on the application of their competition law. Such exchange is possible without approval by

the parties, but they need to be notified in advance. There is no legal basis allowing ComCo to

exchange information with other competition authorities. However, ComCo may request a waiver

of confidentiality from the parties to be able to exchange information with such further compe-

tition authorities.

Appeals

The undertakings concerned may appeal a conditional clearance or a prohibition decision to the

Federal Administrative Court. Third parties, such as competitors or customers, are not entitled to

appeal a decision. The Federal Administrative Court has full jurisdiction to review ComCo’s deci-

sion in fact and in law, and it may confirm or revise the decision of the ComCo. An appeal to the

Federal Administrative Court has to be made within 30 days as of formal notification of ComCo’s

decision to the parties. The duration of the proceedings before the Federal Administrative Court

depends largely on the complexity of the appeal and the case, but usually amounts to signifi-

cantly more than one year.

The judgment of the Federal Administrative Court can be appealed to the Federal Supreme

Court. The Federal Supreme Court can normally review the judgment only with respect to its

conformity with the law and is bound by the facts established by the Federal Administrative

Court. It can deviate from these facts only in case they are manifestly incorrect or have been

established in violation of legal provisions. Appeals to the Federal Supreme Court have to

be filed within 30 days as of receipt of the formal notification of the judgment of the Federal

Administrative Court. The proceedings before the Federal Supreme Court usually take more than

one year; however, in principle the judgments of the Federal Supreme Court are issued faster

than the Federal Administrative Court’s.

Merger Control

Overall, appeal proceedings may be very lengthy and provide only unsatisfactory relief

for the parties in the fast-paced area of M&A. By way of example, an appeal against a prohibi-

tion decision of ComCo of May 2017 (Ticketcorner/Starticket) is still pending with the Federal

Administrative Court in March 2020, after the question of standing to appeal has been litigated

up to the Federal Supreme Court.

Sanctions

Non-compliance with the Swiss merger control regime may lead to sanctions for the parties and

potentially the individuals acting on their behalf. An infringement of the standstill obligation – by

omitting a notification or implementing a concentration prior to clearance – may be sanctioned

with a fine. The undertaking(s) obliged to file a notification – the merging undertakings or the

undertaking acquiring control – may be fined with up to 1 million Swiss francs, and in repeated

cases with up to 10 per cent of their overall Swiss turnover. In addition, responsible individuals

may be fined with up to 20,000 Swiss francs. Fines have already been imposed on undertak-

ings for failure to notify, including with regard to foreign-to-foreign transactions. These fines are

made public. Further, if a notifiable concentration has been implemented without notification, the

ComCo may investigate it ex officio and take the necessary steps to restore effective competition,

such as imposing remedies, or even ordering the separation of any combined undertakings.

Last, the civil law effects of a notifiable concentration that has not been notified are suspended,

potentially endangering the buyer’s effective control over the target.

Any undertaking that fails to comply with a condition or obligation attached to an author-

isation, implements a prohibited concentration or fails to implement a measure intended to

restore effective competition may be sanctioned with a fine of up to 1 million Swiss francs, and

in repeated cases with up to 10 per cent of its overall Swiss turnover.

Any undertaking that does not, or does not fully fulfil its obligation to provide information

or produce documents may be fined with up to 100,000 Swiss francs. If the undertakings have

provided inaccurate information, ComCo may revoke an authorisation or decide to investigate a

concentration.

Substantive assessment of concentrations

Threshold for intervention: dominance plus

ComCo may intervene with a concentration if:

• the concentration creates or strengthens a dominant position liable to eliminate effective

competition; and

• the concentration does not strengthen competition in another market such that the harmful

effects of the dominant position can be outweighed.

According to the case law of the Federal Supreme Court, the liability of an elimination of compe-

tition is a condition on its own, in addition to dominance. The Swiss substantive test is therefore

sometimes termed dominance plus. Compared with other jurisdictions, the threshold for inter-

vention is rather high.

When applying this test, ComCo may in particular intervene under the theories of harm

of single-firm dominance and collective dominance. Single-firm dominance entails that the

merged entity can behave on its own appreciably independent from other market participants.

Single-firm dominance liable to eliminate competition is in practice effectively excluded in the

Merger Control

case of market shares below 50 per cent, and even higher market shares regularly become an

issue only if they exceed 70 per cent. Under the concept of collective dominance ComCo reviews

whether the concentration gives rise to a market structure that would allow the merged entity

to enter into collusive practices together with another undertaking. Such collective dominance

regularly requires, among others, a certain symmetry in size and characteristics of the poten-

tially collusive companies as well as market transparency.

Economic efficiencies are traditionally not taken into consideration by ComCo when

reviewing a concentration. However, as mentioned above, the Swiss substantive test provides

that economic efficiency gains in one market can outweigh the effects of the creation or the

strengthening of a dominant position and therefore overall promote competition. This provision

for long had limited practical relevance, but this may be about to change (see 'Increased role for

the efficiency defence').

The focus of the Swiss substantive merger control assessment is on the effects of a concen-

tration on competition. Therefore, ComCo principally does not consider issues other than the

competition effects of the concentration, such as foreign investments, national security, indus-

trial policy, employment effects or other public interests. There is one exception: if FINMA deems

a concentration of banks necessary for reasons related to creditor protection, the interests of

creditors may be given priority (as to the competence of FINMA, see 'Regulators').

If ComCo prohibits a concentration, the undertakings concerned may request the Swiss

Federal Council to nevertheless authorise the concentration for reasons of public interest. The

Federal Council may take into consideration competition-related as well as further aspects in its

assessment. To date, two such requests have been made, but none has been granted.

The dominance plus test as currently applied is subject to legislative review, and the

threshold for intervention by ComCo may be lowered in the future (see 'Potential lowering of the

threshold for intervention').

Remedies and prohibition

If the threshold for intervention is met, ComCo may authorise a concentration subject to condi-

tions or obligations, or prohibit it. According to the principle of proportionality, a prohibition is

excluded to the extent the competitive concerns can be addressed by conditions or obligations.

Conditions have to be implemented prior to closing of the transaction, whereas obligations may

be implemented thereafter. ComCo usually imposes remedies in the form of obligations, and

has used conditions only exceptionally. Other than under, for instance, EU merger control law,

ComCo may impose remedies on its own, even if they have not been proposed by the parties. In

practice, the parties nevertheless are heavily involved in the design of potential remedies.

Neither the Cartel Act nor the Merger Control Ordinance specify the types of conditions

or obligations that may be ordered by the ComCo. In practice, both structural and behavioural

remedies have been implemented. Other than in particular the European Commission, ComCo

does not have a strong preference for structural remedies, such as divestitures. ComCo has in

several cases accepted behavioural remedies, such as an obligation not to integrate certain busi-

nesses. In addition, access remedies may be considered, for example, in the telecommunications

sector where access to a network infrastructure could be ordered.

Given the high threshold for intervention under Swiss law, prohibitions and decisions

subject to conditions or obligations are rather rare. Overall, only four concentrations have been

prohibited by ComCo since the introduction of merger control in 1996, most recently in 2017 with

Merger Control

regard to a proposed merger of the two largest ticketing companies in Switzerland (Ticketcorner/

Starticket). There has not been a clearance subject to conditions or obligations recently.

Ancillary restraints

Ancillary restraints, such as non-compete obligations for the seller, are considered by ComCo as

part of merger control review only if they are directly related to and necessary for the concen-

tration. For such assessment, ComCo considers the practice of the European Commission and

in particular follows the criteria set out in the European Commission’s Notice on Ancillary

Restraints.

Other than under EU competition law, ancillary restraints are, however, not automatically

covered by the clearance of a concentration by ComCo. Rather, a specific request in the notifica-

tion is required. The undertakings concerned have to describe the ancillary restraints in detail

and provide an assessment as to why they consider such restraints as directly related to and

necessary for the concentration.

If an ancillary restraint is not considered directly related to and necessary for the concentra-

tion, it is subject to the general assessment under competition law (prohibition of anticompetitive

agreements).

Recent developments and trends

Potential lowering of the threshold for intervention

As set out under 'Threshold for intervention: dominance plus', the current Swiss test for the

substantive assessment of concentrations – dominance plus – is subject to legislative review. In

February 2020, the Federal Council (Switzerland’s executive body) announced that it will submit

a proposal for an amendment of the Cartel Act in the autumn of 2020, introducing a new substan-

tive merger control test, the significant impediment to effective competition test (SIEC test), as

known from EU competition law.

The potential introduction of the SIEC test would lower the threshold for regulatory inter-

vention. In particular, the new test would allow for an intervention in the case of 'non-collusive

oligopolies', namely a situation where a concentration neither leads to single-firm nor collective

dominance, but nevertheless strengthens a competitor to a degree that effective competition is

materially limited. It is expected that the introduction of the SIEC test would generally make Swiss

merger control proceedings more time-consuming and burdensome for the parties, in particular

given an increased role for economic evidence, and lead to more regulatory intervention.

Increased role for the efficiency defence

For the first time, in 2019 ComCo explicitly relied on considerations of economic efficiency. As

provided for under the Cartel Act, a concentration leading to or strengthening a dominant position

liable to eliminate effective competition can be cleared if the concentration strengthens compe-

tition in another market such that the harmful effects of the dominant position are outweighed.

ComCo considered this case given in a recent concentration in the logistics sector (Gateway

Basel Nord).

Three companies, the Swiss Federal Railways (SBB), Hupac and Contargo, planned a large

terminal with gateway function for combined transport. Because of the layout, lower shunting

costs and volume bundling, major efficiency gains are to be achieved. SBB, Hupac and Contargo

are vertically integrated and have high market shares in the upstream and downstream markets.

Merger Control

The investigation revealed the possibility of eliminating effective competition on the markets for

certain cargo-handling services. With respect to the efficiency gains, ComCo considered that the

large terminal will lead to considerable improvements in combined transport and significant

savings of cost and time, mainly related to rail freight transport and operator services. ComCo

concluded that the improvement of competitive conditions outweighed the disadvantages in the

markets for cargo-handling services and therefore cleared the concentration unconditionally.

Focus on coordinated effects

As mentioned under 'Threshold for intervention: dominance plus', the threshold for intervention

by ComCo based on single-firm dominance is rather high: even with market shares of up to 70 per

cent, an intervention is regularly not possible. An intervention in the case of lower market shares

may be possible based on the theory of harm of collective dominance, where it is assumed that

the merged entity may enter into collusive practices together with another company. Against

this backdrop, the analysis of collective dominance plays a particularly important role in Swiss

merger control practice, compared with other jurisdictions. A full analysis of these effects was

recently conducted in a proposed merger in the telecommunications sector (Sunrise/UPC).

Sunrise, Switzerland’s second-largest mobile network operator and third-largest provider

of broadband internet in Switzerland, planned to acquire UPC, the largest cable network oper-

ator in Switzerland. ComCo's in-depth investigation showed indications for collective market

dominance between the merged entity (Sunrise/UPC) on the one side and the Swiss telecommu-

nications incumbent and largest market player (Swisscom) on the other. Collective dominance

was considered in the market for broadband internet for end-customers in those areas where

only two network infrastructures were available, that is, the coaxial cable of the merged entity

and Swisscom’s copper network (but no fibre to the home infrastructure). ComCo reached the

conclusion that collective dominance was unlikely, in particular owing to a lack of symmetry

between the technologies of the two companies, as well as the reasonable position that Sunrise

would continue its expansion strategy and new technologies, such as 5G. For these reasons

the concentration was cleared unconditionally. Nonetheless, the proposed concentration was

aborted, as approval by Sunrise’s shareholders was considered unlikely.

Private M&A

Christoph Neeracher, Philippe Seiler and Raphael Annasohn

Legal framework and recent changes

Switzerland continues to provide a generally favourable legal framework for private M&A, giving

parties extensive contractual freedom in agreeing on the terms to apply to a transaction. In addi-

tion, in spite of other jurisdictions' tightening on foreign investment control and certain political

aspirations to introduce the same in Switzerland, there are to date still very few restrictions in

this respect. However, the general trend toward an increasingly complex regulatory environment

is leading to higher requirements and costs for participants in the Swiss market.

A notable change in Swiss corporate law implemented in November 2019 concerns the

regime for the disclosure of the beneficial owner of shareholders acquiring, alone or in concert

with third parties, more than 25 per cent in a Swiss company. The amendments removed some

of the uncertainty surrounding the old rules regarding the reporting on beneficial ownership,

which were introduced in 2015 as part of the global effort to combat money laundering and the

financing of terrorism as well as to facilitate international processes for the automatic exchange

of information among tax authorities. Importantly, they clarified that where there is no beneficial

owner (ie, no natural person exercising direct or indirect control over the acquiring shareholder

by analogy with the consolidation rules of Swiss accounting law), which is frequently the case

in private equity structures, the shareholder must make a negative declaration to this effect.

However, at the same time, new criminal offences were introduced to the effect that failure

to comply with the obligations to disclose the beneficial owners is now subject to a fine. The

same applies for intentional breaches of directors’ obligations relating to the keeping of a share

addition to corporate consequences of non-compliance with disclosure duties, which include the

suspension of voting rights and the loss of property rights until due notice is given. Another key

pillar of the new rules is the de facto abolition of bearer shares. After a transitional period and

subject to few exceptions (notably companies with shares listed on a stock exchange), Swiss

1 Christoph Neeracher, Philippe Seiler and Raphael Annasohn are partners with Bär & Karrer AG.

Private M&A

stock corporations will no longer be allowed to issue bearer shares. If bearer shares are still

outstanding by the end of the transitional period of 18 months, they will be converted by law into

registered shares.

Further important legislative changes from a private M&A perspective include the entering

into force of the Financial Services Act, the Financial Institutions Act and their respective imple-

menting ordinances in January 2020, as part of a general overhaul of Switzerland’s financial

regulatory framework. From a tax perspective, in 2019 Swiss voters adopted the Federal Act on

the Tax Reform and AHV Financing (TRAF), aiming, inter alia, at the abolition of the arrangements

of status companies that are internationally no longer accepted. Overall, TRAF will result in

higher taxes for large corporations, while small and medium-sized enterprises will generally pay

lower taxes than previously. The details of both these topics are dealt with in a separate chapters

of this publication.

Development of private M&A activity

The overall Swiss M&A market continued to see strong activity in 2019 amidst economic and

geopolitical uncertainty, although overall deal numbers and transaction values did not quite

match up to the record levels experienced in 2018.

Private M&A transactions accounted for the majority of the overall Swiss M&A market both

in terms of number of deals and deal value in 2019. However, private M&A activity is often driven

by public M&A transactions and vice versa. For example, following a public-to-private trans-

action, which typically involves a public tender offer and subsequent squeeze-out and subse-

quent delisting, there are usually disposals or bolt-on acquisitions to focus, transform or grow

the target company’s business. Conversely, for private equity sponsors in particular, IPOs have

gained significance as an exit strategy, sometimes also as part of a dual-track approach.

Private equity firms continue to be an important pillar of the Swiss M&A market, being

involved in almost half of the 50 largest Swiss deals in 2019. While deal values fell only by 2.2 per

cent compared with 2018, 2019 saw a decrease of deal numbers by 21 per cent compared with

the previous year (126 private equity deals in 2019). Successful fundraising ensured that private

equity sponsors had the necessary dry powder to make acquisitions. Additionally, with private

equity sponsors typically being highly leveraged, they have particularly benefited from low

interest rates and generally favourable borrowing conditions. In order to cope with rising valua-

tions, private equity firms have increasingly been pushing to break new ground and straightfor-

ward deals have therefore become fewer. This represents a general trend in the Swiss private

M&A environment, which continued to become more competitive and sophisticated in 2019.

Further factors for ongoing strong M&A activity 2019 in our view were Switzerland’s stable

political and regulatory environment, with very few investment restrictions, in combination with

a high number of potential investment opportunities – besides large cap targets, this in particular

also includes small and medium-sized enterprises dealing with succession planning. Last but

not least, transformation and portfolio reshaping have continued to account for a substantial

portion of M&A (showcased, eg, by Nestlé’s and Migros’s divestments) and so have consolidation

waves in various sectors (such as healthcare and telecommunications, media and technology

(TMT)). Buy-and-build strategies have also been more frequently pursued by financial sponsors

2 Numbers taken from KPMG’s Clarity on Mergers & Acquisitions, January 2020.

Private M&A

recently, whereby purchasing multiple companies in the same or similar industries has helped

bolster deal numbers.

The traditionally important financial sector saw only limited Swiss M&A activity in 2019. Deal

volumes in the financial industry fell to an all-time low and accounted for only 7 per cent of

transactions.

Cross-border transactions have always been key to Switzerland’s M&A landscape and

continued to be a driving force in 2019 – putting aside the spin-off of Novartis AG’s subsidiary

Alcon Inc, the largest Swiss deals of the past year all had in common a cross-border element.

The significance of cross-border deals can also be seen with respect to private equity invest-

ments. In terms of jurisdictions, western European countries were involved in over half of all

Swiss transactions, both from an inbound and outbound perspective.

While deal pipelines promised a solid start to 2020, issues surrounding the covid-19 pandemic

have put an at least temporary halt to several planned transactions and caused a dislocation of

financial markets. Thus, while the current environment also offers opportunities, general M&A

activity has slowed down and it will be crucial to see how quickly the markets recover and

activity is resumed.

Landmark transactions

Nestlé SA’s sale of Nestlé Skin Health SA to a consortium led by EQT and Abu Dhabi Investment

Authority for US$10.2 billion marked the largest Swiss private M&A transaction in 2019 and the

second largest of the year overall (surpassed only by the spin-off of Novartis AG’s subsidiary

Alcon Inc and listing of the shares on SIX Swiss Exchange and the New York Stock Exchange,

which boasted a transaction value of US$31 billion). Other big-ticket Swiss equity transactions in

2019 include RRJ Capital’s acquisition of Gategroup Holding AG from HNA Group Co Ltd, valued

at US$2.8 billion, and Sika AG’s acquisition of Parex Group SA from CVC Capital Partners Limited,

with a deal value in excess of US$2.5 billion.

Another standout transaction in Swiss private M&A 2019 was the sale of Takeda

Pharmaceutical Company Limited’s Xiidra business to Novartis AG, which is exemplary for the

strong M&A activity in the pharmaceutical industry in Switzerland last year.

In late 2019, a noteworthy (and purely Swiss) transaction was the sale of the Swiss broad-

casting group 3 Plus Group to CH Media, one of the largest media companies in Switzerland. This

deal can be seen as an example of high activity in the TMT sector and the consolidation wave.

Notable private M&A deals signed in the first quarter of 2020 include the sale of department

store operator Magazine zum Globus AG along with eight associated prime real estate properties

by Migros-Genossenschafts-Bund to a joint venture of SIGNA and CENTRAL Group as well as the

investment of a 25 per cent stake in Ringier AG by La Mobilière.

Typical stages of Swiss private M&A transactions

The process of private M&A transactions differs substantially depending, inter alia, on the parties

involved and envisaged form of transaction. However, owing to the recent sellers’ market and

the ongoing trend towards an ever more competitive and sophisticated market, structured

3 Numbers taken from KPMG’s Clarity on Mergers & Acquisitions, January 2020.

Private M&A

transactions and corporate auctions along the lines described below have become market prac-

tice in Switzerland.

In the first stage, the seller and its advisers prepare the sale documentation and marketing

materials. This is followed by a marketing phase in which the seller’s financial adviser, or less

often the target’s executive management, initiates first contact with potential bidders. The latter

are then required to execute a non-disclosure agreement in order to receive further informa-

tion in the form of an information memorandum. Based on this, bidders may decide to make

a non-binding offer, which is followed by the due diligence phase for selected bidders. In this

stage of the process, in addition to data room review, usually management presentations take

place and expert sessions are set up. Seller’s and bidders’ counsel will regularly also have a

first exchange on the sell-side draft transaction documents. After binding offers are submitted

and the seller enters into negotiations with the chosen bidder, parties proceed to signing of the

transaction agreements. In spite of generally limited conditionality in Swiss transaction agree-

ments in the recent sellers’ market, there is usually a certain lapse of time between signing and

closing to account for necessary governmental approvals and pre-closing covenants. During this

phase, the parties typically have to fulfil certain obligations and follow contractually agreed rules

of conduct. The technicalities of closing itself vary depending on the form of transaction and

target business. For the post-closing phase, the parties may agree on certain restrictive cove-

nants (non-competition and non-solicitation) for the seller and covenants (such as continuation

of the business, direct and indirect partial liquidation tax covenants in case of a private individual

seller) of the purchaser.

Typical governance arrangements

The predominant legal form for private M&A transactions in Switzerland is the stock corporation,

irrespective of deal size. Sometimes limited liability companies are used instead, which is usually

because they are treated as transparent for US tax purposes.

A stock corporation is governed by a board of directors that has a supervisory function and

certain inalienable duties with regard to strategic and other important aspects (eg, appointment

of senior management). Directors must be individuals and they are appointed ad personam (ie,

proxies or representation by other persons is not permitted). The board of directors usually

delegates day-to-day management responsibilities to management on the basis of a respective

authorisation in the company’s articles of association. Details of the delegation are set out in

organisational regulations enacted by the board of directors.

Further particularities on governance, including board and management composition and

specific quorum requirements, are commonly also reflected at a contractual level in a share-

holders’ agreement. While the articles of association of a company are filed with the commer-

cial register and therefore publicly available, there are no public disclosure requirements with

regard to shareholders’ agreements and organisational regulations in the private environment.

Shareholders' agreements

General

Swiss law provides for far-reaching flexibility with regard to contractual arrangements in share-

holders’ agreements and Swiss market practice has reached a high level of sophistication in this

respect. However, certain limitations need to be taken into consideration.

Private M&A

As a general rule, shareholders’ agreements are only enforceable against their respective

parties and there is an ongoing debate in Swiss legal doctrine as to the extent to which a target

company itself can be party to a shareholders’ agreement. While certain administrative obliga-

tions of the target company are acceptable in the view of a majority of commentators, it is ques-

tionable whether further obligations can be validly entered into by the target company under a

shareholders' agreement. A further important limitation is that the directors of a company must

act in the best interest of the company pursuant to mandatory Swiss corporate law. This needs

to be taken into consideration in the context of enforcing certain provisions under shareholders’

agreements. It should also be noted that shareholders’ agreements may not have unlimited

terms or set out to remain in force for the entire lifetime of a company. Rather, the maximum term

should be set at about 20 to 30 years (alternatively at, eg, 10 years with automatic extensions).

Non-competition covenants of shareholders in favour of the company are usually enforceable if

the shareholders (jointly) control the company and the covenants are limited geographically and

in scope of activity to the business of the company.

Veto rights

Private M&A investors in the Swiss market follow a wide range of investment strategies, which,

beside classic control deals, also include non-control deals, club deals and joint ventures

between financial investors and corporates. We have also seen various transactions in recent

times where a seller retained a minority stake or rolled into the buyer’s structure with minority

participation. With several shareholders in a company, protection is usually sought via detailed

minority and majority rights in shareholders’ agreements.

There are certain restrictions with regard to implementing the same in a Swiss compa-

ny’s corporate documents. At shareholder level, high quorums can be introduced for specific

decisions in the articles of association to the extent that such arrangements do not lead to a

per se blocking of the decision-making in the company. At board level, veto rights for individual

board members cannot be implemented in a company’s articles of association or other corporate

documents. However, such veto rights are often agreed on a contractual level between parties.

As a consequence, while decisions taken in breach of such contractual arrangements would be

valid from a corporate law perspective, they may lead to consequences under the shareholders’

agreement.

The specific veto rights of minority investors usually depend on the size of the stake held.

Investors with stakes up to 20 per cent usually have only fundamental veto rights aimed to

secure the protection of the investor’s financial interest. Such rights include veto on the dissolu-

tion or (de facto) liquidation of the target company and fundamental changes to its business, pro

rata rights to participate in capital increases and other financing measures as well as maximum

leverage provisions. Minority shareholders with a more significant stake (20 to 49 per cent)

typically are also granted a say on material business decisions and the composition of board

and management. At shareholder level, statutory law also provides for certain blocking rights

of important matters for shareholders holding at least one-third of all votes. These include,

inter alia, certain forms of capital increases, the dissolution of the company and the merger or

demerger of a company under the Swiss Merger Act.

Questions surrounding the concept of control under competition law regulations or

accounting standards (in the context of consolidation) also need to be taken into consideration

Private M&A

with regard to minority rights and can have an impact on contractual arrangements between

parties in specific cases.

In addition, specifically for private equity investors holding a minority stake, exit rights are

usually key and therefore a heavily negotiated point in the context of shareholders’ agreements.

Recent trends

W&I insurance

There has been a noticeable increase in the use of warranty and indemnity (W&I) insurance in

Swiss private M&A deals in Switzerland. In the sellers' market that continued into early 2020,

buyer polices have become a popular solution for bridging the 'liability gap' where a seller is

willing to give a set of representations and warranties but wants to cap its liability at a level that

the buyer is not comfortable with. In such cases, a W&I insurance policy can increase the overall

cover to a level that is acceptable to the buyer.

In this context, stapled W&I insurances have been more widely used by sellers in auction

processes, whereby sellers will initiate a buyer policy process themselves and usually provide

bidders with a non-binding indications report in the data room during the due diligence phase.

This is not only a means to expedite the W&I insurance process, also to prevent the latter from

interfering with the overall transaction timeline, but can also help to prevent insurance providers

from going into exclusivity with certain bidders at an early stage of the process.

If the liability cannot be capped or excluded owing to the lack of negotiation power of the

seller, which, as mentioned, has more rarely been the case in the past year, seller policies are

used (especially by financial sponsors). In this way, the risk of potential outstanding claims can

be shifted to an insurer in order to be able to distribute the exit proceeds to the greatest extent

possible to investors immediately following closing.

In any case, the impacts of obtaining W&I insurance on the overall process of a transaction

should be considered by the parties at an early stage to ensure smooth coordination of the

different workstreams (including in particular due diligence). This should also include aware-

ness of the limitations of insurance coverage, which are typically as follows:

• liabilities from known facts and matters identified in due diligence or information otherwise

disclosed by the seller;

• forward-looking warranties;

• certain tax matters, for example, transfer pricing and secondary tax liabilities;

• pension underfunding;

• civil or criminal fines or penalties where insurance coverage may not be legally provided;

• post-completion price adjustments and non-leakage covenants in locked-box deals;

• certain categories of warranties, for example, environmental matters or product liability; and

• liabilities arising as a result of fraud, corruption or bribery.

Purchase price

Locked-box pricing mechanisms are widely used and accepted in Swiss private M&A trans-

actions, which can be perceived as unusual in particular for US and Asian bidders looking to

invest in Swiss companies. Sellers aiming to limit balance sheet risks and reduce the risk of

post-closing purchase price adjustment disputes have often been successful in pushing towards

using locked-box pricing mechanisms in the recent sellers’ market. As a consequence, locked-box

pricing mechanisms are often combined with an interest payment or cashflow participation for

Private M&A

the period between the locked-box date and actual payment of the purchase price (ie, closing),

allowing sellers to participate in the generated cashflows. Buyers also tend to accept longer

periods between the locked-box accounts date and closing. Conversely, deferred purchase price

elements (such as earn-outs) or vendor loans have been seen less often in recent deals.

Conditions

Owing to the sellers' market we have experienced into early 2020, sellers have usually pushed

towards reducing conditionality to an absolute minimum in order to increase transaction

certainty. Especially in highly competitive auctions, bidders have been reluctant to introduce

conditions precedent so as not to impair the overall attractiveness of their offers.

As a result, in particular MAC clauses have largely disappeared and so have change of

control waivers with buyers usually taking the economic risk in order to secure a deal. But even

the outcome of merger control assessment may be a criterion for certain sellers to move forward

with a specific bidder, and we have therefore increasingly often encountered 'hell or high water'

clauses included in merger clearance closing conditions.

Exit routes

In cases where a private equity or other investor is invested in a target jointly with another party,

terms of the shareholders’ agreement are usually decisive with regard to the conditions under

which the investor is able to exit as well as the specific exit route.

The most frequently seen exit routes in Swiss deals are (still) trade sales to a strategic

investor or secondary buyouts by a private equity firm. Exits by way of an IPO on the SIX Swiss

Exchange have become more common in recent years. A notable example for the latter was the

IPO of KKR backed SoftwareONE Holding AG on SIX Swiss Exchange in October 2019.

We have also increasingly seen dual-track processes pursued by exiting investors. While

there is inherent complexity in running simultaneous IPO and M&A sale processes, sellers hope

to increase deal certainty with the dual track, specifically in times of volatile and unpredictable

markets, and to maximise valuation.

Public M&A

Mariel Hoch and Florentin Weibel

Legal framework and recent changes

Swiss M&A transactions related to public companies are mainly governed by the Swiss Financial

Market Infrastructure Act (including its implementing ordinances) and the Swiss Federal Merger

Act. In addition, certain agreements entered into in connection with a public M&A transaction,

such as block trade agreements, tender undertakings or shareholders’ agreements, are governed

by the Swiss Code of Obligations. Apart from the specific Swiss public takeover rules, a number

of other laws apply in the context of public tender offers, including the Federal Antitrust Act.

The Swiss public takeover rules are enforced by the Swiss Takeover Board (TOB). Decisions

of the TOB may be challenged before the Swiss Financial Market Supervisory Authority (FINMA)

and, finally, the Swiss Federal Administrative Court.

The Swiss takeover rules only apply if either the target is domiciled in Switzerland and its

shares are fully or partly listed on a Swiss stock exchange (eg, SIX Swiss Exchange or BX Swiss)

or the target is domiciled outside of Switzerland but the main listing of all or part of its shares is

on a Swiss stock exchange (the TOB may waive the applicability of the Swiss regime if the take-

over rules of the country of domicile also apply, provided that such rules are not in conflict with

the Swiss regime and provide for equivalent shareholder protection). In principle, the Swiss take-

over rules do not apply to companies whose shares are exclusively listed on a stock exchange

outside of Switzerland or not listed on a stock exchange. However, the TOB has held that the

Swiss takeover rules also apply to a company not listed on a stock exchange if, shortly prior to

the transaction, either the shares were delisted to prevent the applicability of the takeover rules,

or the target was demerged from a listed company.

The Swiss takeover rules apply to both Swiss and non-Swiss bidders irrespective of whether

they are listed. As with private M&A transactions (as described in the chapter on private M&A),

there are to date very few restrictions in respect of foreign investment control with regard to

Swiss-incorporated public companies, in spite of other jurisdictions' across Europe tightening of

1 Mariel Hoch is a partner and Florentin Weibel is an associate with Bär & Karrer AG.

Public M&A

foreign investment control. Political aspirations to introduce wider foreign investment control in

Switzerland are, however, increasing. There is, however, one important exception. Pursuant to

the Federal Act on the Acquisition of Real Estate by Foreigners (Lex Koller), non-Swiss buyers

(ie, non-Swiss natural persons, non-Swiss corporations or Swiss corporations controlled by

such non-Swiss natural persons or corporations) have to obtain a special permit from cantonal

authorities in order to purchase real property or shares in companies or businesses owning real

property, unless the property is used as a permanent business establishment. The acquisition of

shares of a public company whose shares are listed on a Swiss stock exchange is exempted from

such special permit obligation. However, there may be restrictions regarding transactions of

such public company following the settlement of the public tender offer, for example, regarding

additional acquisitions of real estate in Switzerland or in case of a migration of its statutory

seat or an emigration cross-border merger outside of Switzerland. Further requirements and

restrictions exist in certain regulated sectors such as banking and securities trading, insurance,

healthcare and pharmaceuticals, and media and telecommunications.

For instance, the intended acquisition of a qualified direct or indirect participation (ie, 10 per

cent or more of share capital or voting rights or significant influence by other means, eg, on a

contractual basis) in a Swiss bank or securities firm as well as the reaching or crossing of further

shareholding thresholds at 20, 33 and 50 per cent of share capital or voting rights triggers notifi-

cation duties to FINMA, both on the part of the acquiring and disposing shareholders and on the

part of the bank or securities firm itself. Given that qualified shareholders must fulfil regulatory

fit-and-proper requirements, the notification duty de facto has the effect of an approval require-

ment. If, as a result of a planned transaction, a Swiss bank or securities firm stands to become

foreign-controlled (ie, where foreign qualified shareholders directly or indirectly control more

than 50 per cent of the voting rights or exercise control by other means), a formal approval by

FINMA in the form of a supplemental licence is required. Further requirements may apply in

the context of financial groups or conglomerates subject to consolidated supervision by FINMA

or a foreign lead regulator, which may create a need for coordination with or between different

authorities in the approval process.

In connection with the Swiss takeover rules, no new laws or practices of particular note

have been recently introduced. However, a notable change in Swiss corporate law regarding the

disclosure of the beneficial owner of shares by the shareholder as well as the abolition of bearer

shares was implemented in November 2019 (as described in the chapter on private M&A). One of

the few exceptions to the prohibition of bearer shares is companies with shares listed on a Swiss

stock exchange. Following the settlement of a public tender offer and subsequent delisting from

the Swiss stock exchange, such company will therefore need to convert its bearer shares into

registered shares. As part of the general revision of Switzerland’s financial regulatory frame-

work, the Financial Services Act and the Financial Institutions Act (including their implementing

ordinances) entered into force in January 2020. Further, the law on stock companies, which

forms part of the Swiss Code of Obligations, is currently under review and several changes

strengthening minority rights have been proposed. The changes are not yet final and the date of

entry into force is not yet known.

Development of public M&A activity and landmark transactions

The development and performance of the overall Swiss M&A market, including public M&A deals,

continued to see strong activity in 2019 (as described in the chapter on private M&A). Even

Public M&A

though private M&A transactions accounted for the majority of the overall Swiss M&A market

both in terms of number of deals and deal value in 2019, there were a number of large and note-

worthy public M&A deals and TOB procedures.

The largest public M&A deal of the year 2019 was the public exchange offer submitted by

DSV A/S, Denmark, for all publicly registered shares in Panalpina Welttransport (Holding) AG

with a transaction volume of approximately 4.6 billion Swiss francs. The public tender offer was

announced on 1 April 2019 and settled on 19 August 2019. At the end of the public tender offer,

98.44 per cent of all Panalpina shares had been tendered into the offer. Following the subsequent

statutory squeeze-out of the remaining public shareholders, Panalpina was taken private and

delisted from SIX Swiss Exchange.

The purchase of the 25 per cent interest held by Electricité de France in Alpiq Holding SA by

EOS Holding SA and other investors financed by a mandatory convertible bond from Schweizer

Kraftwerksbeteiligungs-AG and the subsequent public tender offer by the latter regarding the

remaining publicly held shares in Alpiq Holding SA marked another important public M&A trans-

action in 2019.

Moreover, in April 2019, the public tender offer by CMA CGM SA, France, regarding CEVA

Logistics AG, Switzerland, which was announced in November 2018, was settled. Upon expiry of

the public tender offer, the bidder and the persons acting in concert with the bidder held 97.89 per

cent of the shares in CEVA. Other public tender offers in 2019 include the public tender offer by

Behr Birger Cellpack BBC AG for the publicly held shares in Groupe Baumgartner Holding SA.

Besides the above-mentioned public tender offers, in 2019 the TOB was involved in a number

of share buyback programmes as well as a number of procedures relating to the applicability of

public takeover rules. Noteworthy, in particular, are the TOB and FINMA decisions regarding the

restructuring measures of Schmolz + Bickenbach AG and the approval of an exemption to the

mandatory bid obligation. In this procedure, which was subject to much attention by the media

and the public, the TOB first denied such an exemption to the mandatory bid obligation, whereas

FINMA overruled the TOB and confirmed such an exemption in the subsequent appeals proce-

dure. In another recent procedure, the TOB confirmed twice and upon objection by a minority

shareholder the general validity of the opting-out clause to the mandatory bid obligation included

in the articles of association of LEM Holding SA.

Typical stages of Swiss public M&A transactions

General

The process of a typical public M&A transaction is governed by the Swiss takeover regime.

Regarding the structuring of such a transaction, the Swiss takeover rules, however, allow for

great flexibility.

The classic method of acquiring a Swiss public company is a public tender offer for the

purpose of acquiring equity capital of the target. In exchange for the target shares, the bidder

may offer shares (listed or non-listed), cash, or a combination thereof. Alternatively, control over

a Swiss public company may also be obtained by:

• purchasing a controlling block of shares from the previous shareholder(s) (subject to an

opting out from the mandatory bid obligation);

• acquiring a business (assets and liabilities) or by a transfer of assets according to the

merger agreement;

Public M&A

• participating in a major share capital increase (again, subject to an exemption or opting out

from the mandatory bid obligation); or

• a merger.

In the classic method of a public tender offer, the view of the target board determines the cate-

gorisation of the offer as friendly or hostile. The Swiss takeover rules apply irrespective of this

categorisation. The support of the target board is, however, required in order to conduct a due

diligence process prior to launching an offer. Further, a bid which is recommended by the board

of directors of the target company is in general more likely to succeed (and is far more common

than a hostile takeover).

Preliminary phase

Once the pre-announcement of the offer or the offer prospectus have been published, the typical

stages and the timing of a public M&A transaction are regulated to a large extent. However, the

phase immediately prior to the pre-announcement or the publication of the offer prospectus

depends largely on the involved stakeholders and is relevant for the bidder to structure the deal

and to get the support of the target’s board of directors as well as possibly major shareholders.

In this preliminary phase, the bidder and the target company usually conclude a confidentiality

(and standstill) agreement. In the case of a friendly offer, the bidder and the target company will

typically conclude a transaction agreement according to which the bidder is obliged to publish a

tender offer subject to certain terms and the target’s board of directors commits to support and

recommend the offer. Further in such preliminary phase, the bidder may seek tender undertak-

ings from major shareholders of the target.

In general, there are no rules about the approach by the bidder of the target company. As

long as the threshold for triggering a mandatory offer (ie, 33

/3 per cent), is not passed, creeping

tender offers, where a stake is steadily built up, do not fall within the ambit of the Swiss takeover

rules. However, such a tactic is difficult to pursue owing to the disclosure obligations of signif-

icant shareholdings (starting at 3 per cent of the target’s issued voting rights), and the bidder

must keep in mind the minimum price rule.

During this preliminary phase, the potential bidder has to be mindful of public statements.

First, the TOB may qualify a public statement regarding a potential public takeover offer as a de

facto pre-announcement of the offer if such statement contains already specific information as

to the bidder’s intent and the offer price. Second, even if such public statement does not fulfil

the requirements of a pre-announcement, it may trigger certain obligations. In particular, the

TOB may set the potential bidder a deadline to either 'put up' by making a formal offer or to 'shut

up' by confirming that it will refrain from launching an offer for a period of six months (put-up

or shut-up rule). This put-up or shut-up rule aims at liberating a target company that has been

taken hostage by the destabilising effects of a lingering potential offer.

Public tender offer procedure

Subsequent to the negotiation and structuring phase and once an offer has been pre-announced,

the bidder must publish the offer prospectus within six weeks. A pre-announcement is optional

(ie, the bidder may directly publish the offer prospectus). If the bidder must obtain clearances

from competition or other regulatory authorities prior to the formal publication of the offer,

the TOB may extend the six-week period between pre-announcement and the publication of the

Public M&A

prospectus. Prior to publication of the offer, the bidder must further appoint a review body to

assess the offer and issue a report as to whether the offer complies with takeover law and

whether financing is in place. In the case of a friendly takeover offer, the offer prospectus will

also contain the report of the board of directors of the target. It is standard practice for the bidder

to seek pre-clearance from the TOB prior to the publication of the offer prospectus, and the TOB

will publish its decision regarding the compliance of the offer typically on the date of publication

of the offer prospectus.

Following publication of the offer prospectus, a cooling-off period generally of 10 trading

days applies, during which a qualified shareholder of the target (holding alone or together with

other shareholders 3 per cent or more of the target’s issued voting rights) may join the take-

over proceedings as a party and appeal the decision of the TOB. The main offer period, which

commences after the cooling-off period, typically lasts between 20 and 40 trading days and may

be shortened or extended in specific situations with the consent of the TOB. On the trading day

following the lapse of the main offer period, the bidder must publish the provisional interim

results of the offer. The definitive interim result must be published no later than four trading

days following the lapse of the main offer period, and must specify whether the offer condi-

tions have been met or waived and whether the offer has been successful. If the offer has been

successful, the offer must be open for additional acceptances for 10 trading days after publi-

cation of the definitive interim result. The final result of the offer must be published again on a

provisional basis on the trading day following the lapse of the additional acceptance period and

in its final form no later than four trading days following the lapse of the additional acceptance

period. The settlement of the public tender offer must take place 10 days after the last day of

the additional acceptance period, but may take place later with the consent of the TOB in case

merger and other regulatory clearances have not yet been obtained.

Squeeze-out and delisting

A bidder holding, alone or together with persons acting in concert, more than 98 per cent of

the voting rights of the target company is entitled to request the cancellation of the remaining

shares against payment of the offer price by way of a statutory squeeze-out. The action must be

filed within three months following the lapse of the additional acceptance period. The bidder may

continue to purchase target shares in order to reach the 98 per cent threshold until the court’s

decision regarding the cancellation of the shares. The duration of the statutory squeeze-out

procedure varies between four and six months. Shareholder rights to challenge the statu-

tory squeeze-out are limited to certain formal requirements and do not allow for any claim to

increased compensation.

If the bidder holds more than 90 per cent of the shares but does not reach the 98 per

cent threshold, minority shareholders may be forced out against compensation by way of a

squeeze-out merger according to the Swiss Merger Act. The target shareholders have no right to

obtain shares of the absorbing company, but may challenge the merger and the fairness of the

compensation in court. Such appraisal claims may lead to a lengthy litigation procedure.

In the event of a successful tender offer followed by a squeeze-out merger or a statutory

squeeze-out, and in the event the intention to delist the target company’s shares has been

disclosed in the offer prospectus, the requirements for a delisting are a mere formality and the

timetable is very compact. In the absence of any rules to the contrary in the target’s articles of

association, the decision to delist the target’s shares lies with the target board of directors.

Public M&A

General principles and rules of the Swiss takeover regime

Mandatory public tender offers, opting-out or opting-up and exemptions

Under certain circumstances, a person may be required to make a mandatory public tender offer

to buy all publicly held shares of a listed company. Such a mandatory offer is triggered by an

acquisition of shares (completion of the sale), resulting in a shareholding exceeding 33

/3 per

cent of the voting rights of a target company, irrespective of whether such voting rights may be

exercised.

Although mandatory offers are generally governed by the same set of rules as voluntary

bids, there are important exemptions where stricter provisions apply. The minimum price rule

applies (see below) and settlement by means of an exchange against securities is only permitted

if a cash alternative is offered (such cash alternative must comply with the minimum price rule,

but can be lower than the value of the shares offered in exchange). Further, mandatory offers,

unlike voluntary offers, may be made subject to only a very limited number of offer conditions.

The Swiss takeover rules allow a Swiss target company to opt out of the mandatory offer

rules by adopting a provision to this effect in its articles of association. Target companies may

also opt up the threshold triggering a mandatory offer requirement in their articles of associa-

tion from 33

/3 up to 49 per cent. The TOB has established a number of strict rules regarding

transparency and majority requirements in connection with the introduction of such a clause in

the company’s articles of association, which, if they are not followed, prevent the opting-out or

opting-up to be valid and effective (see 'Development of public M&A activity and landmark trans-

actions' regarding LEM Holding SA, in which the validity of such a shareholders’ resolution was

the topic in two TOB procedures in 2011 and 2019).

There are a number of exemptions to the obligation to make a mandatory offer when

exceeding the threshold of 33

/3 per cent of the shares of the target company. Certain of these

exemptions, such as (among others) a restructuring involving a capital reduction immediately

followed by a capital increase so as to offset a loss, require only a notification to the TOB. Other

potential exemptions, such as (among others) the transfer of voting rights within a group, the

temporary exceeding of the threshold or the acquisition of shares for the purpose of a restruc-

turing (as in the case of Schmolz + Bickenbach AG in 2019) require a formal approval by the TOB

and are only granted in justifiable cases.

Transparency and equal treatment of shareholders

The bidder must publish the offer in a prospectus with true and complete information in order to

enable the recipients of the offer to reach an informed decision, including (among others) a brief

description of any agreements between the bidder and the target as well as the target’s share-

holders. Further, the bidder must treat all shareholders of the target company equally, which is

further expressed by the price rules applicable to Swiss tender offers.

Price provisions

According to the best-price rule the bidder must pay the same price to all recipients of the offer.

Therefore, should the bidder or a person acting in concert with the bidder pay a price that is higher

than the offer price offered under the offer to any shareholder between the pre-announcement

of the offer and the date that is six months from the expiry of the additional acceptance period,

such higher price must be paid to all recipients of the tender offer. Pursuant to its practice, the

TOB may extend such period of six months if the parties tried to circumvent the best-price rule,

Public M&A

which needs to be analysed carefully by the parties involved, in particular with regard to put or

call options of certain major shareholders of the target company that have not tendered their

shares under the offer.

In mandatory and in change-of-control offers (ie, offers which would allow the bidder to

exceed the 33

/3 per cent threshold if successful), the offer price must be at least equal to the

60 days' volume weighted average price (VWAP; if the stock is liquid) or the highest price paid for

securities of the target company by the bidder(s) in the 12 months preceding the offer, whichever

is higher (minimum price rule). If the target shares are not deemed liquid from a takeover law

perspective, the 60 days VWAP is replaced by a valuation to be provided by the review body.

In partial tender offers or public tender offers for target companies with an opting-out provi-

sion in their articles of association, the minimum price rule does not apply and the bidder is free

to set the offer price (the best-price rule, however, applies).

Rolling shareholders and ancillary benefits

In recent years, with more private equity investors looking at Swiss-listed target companies, a

trend has evolved whereby structuring options involving one or more major shareholders of the

target company either remain in the company (and sign a respective non-tender undertaking) or

roll over into the bidder structure.

Such a structuring option involving a rolling shareholder leads to complex questions in

connection with the price rules under the Swiss takeover law. The TOB may qualify certain bene-

fits granted by the bidder to such rolling shareholder, which may be contained in a shareholders’

agreement or other transaction documents such as put and call options or management or

employee incentive plans (if the major shareholder is simultaneously a manager or an employee

of the target), as ancillary benefits under the minimum, the best-price rule or both. If this is the

case, such benefits would lead to an increase of the price that the bidder must pay to all share-

holders of the target company having tendered their shares into the offer.

In order to mitigate the risks for the bidder in such structuring options, it became standard

practice in Swiss public M&A deals with such a remaining or rolling shareholder that the bidder

appoints an independent valuation expert in order to determine and value potential ancillary

benefits included in such transaction documents (or to be in a position to delete them prior to

the publication of the pre-announcement or the offer prospectus). Further, in such a transaction

structure, the bidder will almost always seek a formal pre-clearance by the Swiss TOB to avoid

any risk of breaching the price rules.

Offer conditions

The public tender offer may be subject to certain conditions. If, and only if, such offer conditions

are not fulfilled (or waived), the bidder may walk away from the offer, which is, in Swiss public

M&A transactions, extremely rare. In the context of voluntary offers, conditions are generally

permissible if:

• their satisfaction is outside the bidder’s control;

• they are stated clearly, objectively and in a transparent way in the offer documents; and

• they do not require any actions from the target company that could be unlawful (in particular

a violation of the board’s fiduciary duties).

The bidder must take all reasonable steps to ensure that the offer conditions are met.

Public M&A

Typical offer conditions are:

• a minimum acceptance threshold;

• a material adverse change clause relating to the target company (within the specific thresh-

olds set out by the TOB case law);

• the registration of the bidder in the share register (in the case of registered shares) and

the cancellation of transfer or voting right restrictions in the target’s articles of association;

• merger and other regulatory approvals;

• replacement of the board of directors; and

• no injunction or court order.

Mandatory offers may be made subject to only a limited number of conditions, such as merger

and other regulatory approvals, the removal of transfer or voting right restrictions and no injunc-

tion or court orders.

Transaction notifications

From publication of the pre-announcement or the offer prospectus until expiry of the additional

acceptance period, all parties in a takeover proceeding, shareholders holding at least 3 per cent

in the target company and persons acting in concert with the bidder must disclose on a daily

basis all transactions in securities relating to the offer to the TOB and SIX Swiss Exchange. The

TOB publishes the transaction notifications on its website.

Persons acting in concert with the bidder

Persons are acting in concert with the bidder when they are coordinating their conduct by

contract or any other manner to purchase or sell securities or exercise voting rights. As a

general rule, persons acting in concert with the bidder must be disclosed in the prospectus

and comply with the bidder’s obligations, such as the obligation to treat shareholders equally

(including adherence to the price provisions), to notify transactions and to comply with transpar-

ency requirements. Further, if the persons are acting in concert in view to obtain joint control

with the bidder over the target (ie, if they exercise a main role in the public tender offer), they are

perceived as co-bidders and, if they hold in the aggregate 33

/3 per cent of the voting rights, a

mandatory offer may be triggered.

Transaction certainty and competing offer

Swiss takeover law limits the ability of a bidder to protect the envisaged takeover transaction

and absolute deal certainty is difficult to achieve. Conversely, Swiss law facilitates competing

offers on a level playing field, which may be submitted until the last day of the main offer period.

Generally, the target board of directors may lawfully agree to refrain from soliciting

competing offers (no-shop undertaking). However, the right to react to unsolicited offers must

be retained to the extent required by the board’s fiduciary duties, including the disclosure of

non-public information to, or negotiate with, the unsolicited bidder. Also, the target board must

be free to withdraw its recommendation of the first offer and recommend a superior offer in

compliance with its fiduciary duties. Obligations in the transaction agreement between the bidder

and the target company that the TOB deems to be too restrictive on the right of the target board

to consider competing offers have been declared void by the TOB. Further, break fees contained

in the transaction agreement are not permissible if they will result in coercing shareholders to

Public M&A

accept the offer. As a rough guide, the TOB has accepted in the past break fees of up to 1 per cent

of the transaction volume.

Shareholders accepting an offer may revoke their commitment in the event of a competing

offer. The same withdrawal right applies to tender undertakings (which, under Swiss law, are

therefore not irrevocable).

In order to discourage potential competitors and to achieve a higher transaction certainty,

the bidder may build up a stake in the target prior to the offer. If the bidder secures a large stake

from a majority shareholder prior to the publication of the offer, but with a completion date after

the publication of the offer (eg, because of required merger clearances), the bidder will need to

pay attention that such a block trade share purchase agreement is not linked to the public tender

offer. If it was, for example, conditional upon the success of the public tender offer, the TOB would

treat it similarly to a tender undertaking that may be revoked in the case of a competing offer.

Outlook

Issues surrounding the covid-19 pandemic have put a (temporary) halt to several planned public

M&A transactions with regard to public companies whose shares are listed on Swiss stock

exchanges. While the current environment and generally low level of stock prices also offers

opportunities with regard to public M&A deals, general M&A activity has slowed down and it will

be crucial to see how quickly the markets recover and activity is resumed.

Apart from the most recent events surrounding covid-19, there has been a continued trend

of private equity investors looking to take over Swiss listed targets. Also, shareholder activists

have started to play a role in Swiss public M&A transactions whereby they may have the role of

a catalyst (eg, Cevian in the DSV offer for Panalpina) or the role of a blocking force if the offer

price is deemed too low.

Distressed M&A in Switzerland

Emanuel Dettwiler and Lukas Bopp

Introduction

Businesses rise and fall and, with them, companies are incorporated, dissolved and liquidated.

When a company ends up in financial difficulties or even becomes insolvent or over-indebted

and finally goes bankrupt it will seek opportunities to navigate out of the troubled waters or find

solutions for the business operated by the failed company.

This is when distressed M&A comes into play. Distressed M&A is all about acquiring, selling

and financing troubled and insolvent companies.

Distressed M&A transactions are different

from traditional M&A transactions mainly in terms of timing (much higher pace) and risk allo-

cation. Both aspects result in the buyer being forced to take more risk than in a traditional M&A

transaction. The upside is that acquiring the assets of a distressed business offers amazing

opportunities for any buyer with enough risk appetite.

Compared with a traditional M&A transaction, a distressed M&A transaction is much more

complex. It comes with twists and turns, which most dealmakers would be unfamiliar with. There

is a significant higher volume of documentation required and, last but not least, there is not just

a buyer and a seller at the table. In most distressed M&A transactions, the buyer will have to

negotiate with secured and unsecured creditors, senior and junior lien holders and lenders and,

if the deal takes place after the target company has been declared bankrupt, the bankruptcy

administration or the judge. In most situations, all these parties have diverging interests, which

need to be reconciled in the limited time available to execute a deal. Further stakeholders are the

board of directors, the management, the employees or the workers’ representatives and in some

cases, for example, if the company is of importance as an employer, the (local) authorities. Often

their situation and interests have to be taken into account as well. Adding to the complexity of a

distressed M&A deal are the numerous advisers involved, which include accountants, appraisers,

attorneys, investment banks and turnaround specialists.

1 Emanuel Dettwiler and Lukas Bopp are partners with Kellerhals Carrard.

2 Nesvold/Anapolsky/Lajoux, The Art of Distressd M&A, New York 2011.

Distressed M&A in Switzerland

In 2018, the number of openings of bankruptcies in Switzerland reached almost 14,000,

up from 13,000 just two years earlier and an all-time high.

According to the Federal Statistical

Office, the total financial losses resulting from ordinary and summary bankruptcy proceedings

passed the 2 billion Swiss francs mark.

All this has been happening in a sound, even thriving

business environment. It is obvious that such figures will go even higher should the economic

environment turn, which, following the latest developments around the spread of covid-19, is

quite likely to happen in the coming months.

Legal framework

Liability risks for board members of companies in crisis

The board of directors of a company has a special responsibility in the context of restructuring

and reorganisation in a crisis close to insolvency. The chosen action alternatives can trigger

personal liability risks for the board of directors and the managers of a company.

The main duties of directors of a Swiss company on the brink of insolvency are laid down in

article 725 paragraph 1 and 2 of the Swiss Code of Obligation (SCO).

Article 725 paragraph 1 SCO establishes that where the last annual balance sheet shows

that half of the share capital and the reserves required by law are no longer covered, the board

of directors is held to convene a shareholders’ meeting without further delay and the directors

should propose restructuring measures.

If there is a substantiated concern that the company is over-indebted, article 725 para-

graph2 SCO orders the board of directors to establish an interim balance sheet and to submit

it to the auditors for verification. If the interim balance sheet reveals that the claims of the

corporate creditors are covered neither by assumed continuation values nor by break-up values,

the board of directors must notify the judge, unless creditors agree to subordinate their claims

up to the amount of the overindebtedness. The period for notification depends on the particular

case and the reasonable expectations for reorganisation. In practice, notification periods of 15 to

30 days are a feasible average.

In general, the balance sheet can be drawn up on going-concern values as long as the

board may assume that the business of the company can continue for a reasonable period of at

least 12 months (going-concern assumption, cf article 958a SCO). If, however, the business must

presumably be ceased within the next 12 months, the balance must be drawn up on the basis

of liquidation values (which generally leads to an implosion of the assets of a company, thus

enhancing the chance of overindebtedness).

Under current Swiss law, imminent illiquidity of a company is not a legal element that

requires the board to apply for the opening of an insolvency proceeding. Nevertheless, since the

financial planning is a core duty of the directors, imminent illiquidity is a fact that may give rise

to the concern that the company is over-indebted in the sense of article 725 paragraph 2 SCO or

question the going-concern assumption under article 958a SCO.

3 Press release of the Federal Statistical Office of 11 April 2019.

4 Press release of the Federal Statistical Office of 11 April 2019.

Distressed M&A in Switzerland

High decision-making pressure on board of directors and management

In a situation of crisis, this legal framework creates a difficult and unfamiliar environment for the

management and the board of directors, in which fast actions are to be undertaken and in which

the decisions once taken can in most cases no longer be changed at a later stage.

In order to decide how to save the company, the board must weigh up the following

alternatives:

• restructure the company on its own;

• restructure the company and admit new shareholders;

• sell key parts of the company; or

• if restructuring is not feasible, liquidate the company or file for insolvency.

In normal times, any M&A transaction is a complex, time- and resource-consuming process

for both, seller and buyer. In the event of a crisis, time pressure and liability risk add to this

complexity. The existence of the company is at stake and vital factors such as the reputation

of the company, the relationship with customers, suppliers, employees and banks must not be

strained. Finding a suitable buyer becomes an almost unsolvable problem for the directors in

such times. However, this problem can be solved by calling in suitable specialists who, with their

network, offer access to possible investors or buyers. They can also help to quickly set up the

necessary transaction structure, prepare a plausible valuation of the company and a minimal

due diligence possibility.

While all parties involved are interested in a fast transaction, it is vital to ensure deal secu-

rity. Depending on the particular constellation, a distressed M&A transaction before or during

insolvency may be the best option.

Distressed M&A prior to Insolvency

Overview

The main differentiator between a regular M&A transaction and one involving a distressed

company is time. When it comes to a distressed M&A transaction, everything has to happen at a

much higher pace.

A healthy M&A transaction would typically start with the negotiation and signing of a letter

of intent or a memorandum of understanding. Then, the buyer would engage in an extensive due

diligence covering a large part of the relevant financials, documents, etc of the target company,

previously carefully arranged by the seller. The due diligence would be followed by negotiating

the purchase agreement, signing of the transaction documents and closing. The whole process

up to the signing of the transaction documents would typically take between several weeks and a

few months. In a bidding process, the process often takes even longer. The due diligence is typi-

cally preceded by the distribution of a teaser to potentially interested parties, who, after signing

a non-disclosure agreement, would receive an information memorandum based upon which they

would submit their indicative offer. After the due diligence, the bidders still interested would

submit a final offer, together with a mark-up of the purchase agreement. In a negotiated sale as

well as in a bidding process, the transaction follows certain characteristic patterns and is pretty

foreseeable, both in timing and the steps to be taken.

On the other hand, distressed M&A transactions hardly ever follow a common script. The

only joint feature of distressed M&A transactions is urgency. Timing does not permit for a letter of

intent to be negotiated or even a smooth bidding process to be followed. The document collection

Distressed M&A in Switzerland

made available for a due diligence will not be comprehensive and well structured like in a tradi-

tional M&A transaction. Instead, buyers will have to bear with an incomplete and opaque set of

data and documents patched together in a hurry. The time available to conduct due diligence

will be countable in days rather than weeks. Despite the general time pressure, the buyer has

a certain interest to delay the process. While there are risks related to such behaviour, it often

allows the buyer to push down the price further.

Sale of shares

It is always easier and faster to execute a transaction as a sale of shares rather than of assets.

A share sale usually allows avoiding regulatory or licensing issues. The documentation required

for the transaction is simpler than the one for an asset sale. With the board of directors and

the management under considerable time pressure, often caused by the banks or investors, it

is obvious that this is the preferred mode of transaction in distressed M&A before bankruptcy.

On the other hand, any buyer who is reluctant to take the risk will have to invest significant

efforts into the due diligence, and all this, in a short period of time, it being understood that the

quality and quantity of the due diligence most likely will remain lower than usual. But only with a

comparatively detailed due diligence of all relevant aspects of the target company will the buyer

be able to drive down the risks to a more comfortable level. This is all the more important as in

a distressed M&A transaction, as distinct from traditional M&A transactions, the representations

and warranties and recourse rights in the transaction documents will be limited, mainly for

two reasons:

• first, the time pressure will make the seller accept a significant price cut to get rid of its

risk; and

• second, the representations and warranties will be of use only to the buyer, if the seller itself

is (and, after the transaction, will remain) financially solid and solvent.

In a distressed transaction regarding an already bankrupt company, the buyer will in most cases

even have to accept the target on an 'as is' basis as the receiver will not be prepared to grant any

representations or warranties at all.

Sale of assets

With the efforts attached to a share sale, it does not come as a surprise that buyers prefer asset

deals. In an asset deal, the buyer may only take the assets it wants and, by doing so, minimise its

risks. This means, inter alia, that, other than in a share sale, the buyer may focus its due diligence

on the assets to be acquired and, by doing so, may streamline its due diligence process.

As in a share deal, by operation of law, the employees of a sold business will be transferred

to the buyer.

Owing to the strict liability scheme for directors under Swiss law, in bankruptcy, the direc-

tors of a company often face liability claims of creditors and/or shareholders for damaging the

company by depriving it of its assets.

Also, pursuant to article 164 of the Swiss Penal Code, the

seller may be criminally liable for selling the assets below value. The buyer may face criminal

charges under this article too, if it knowingly supported the seller in such a sale below value.

5 cf article 754 SCO.

Distressed M&A in Switzerland

Hence, in an asset deal, the board of directors has to make sure to sell the assets at a fair price

and not at a price too favourable to the buyer in order to avoid such liability or criminal charges.

Ideally, this is best done by having the assets valued by an independent appraiser. An additional

way to minimise the liability risk on the buyer’s side is to assess whether, following the transac-

tion, the seller will be able to cover its remaining liabilities.

A possible way to combine the advantages of an asset and a share sale is a hive-down. In a

hive-down, the distressed company establishes a subsidiary to which it transfers the business (in

the form of assets, liabilities and contracts) as a contribution in kind. By transferring the troubled

business into a clean new company, the buyer gets the opportunity to buy the business in the

form of a share sale with the associated advantages while at the same time avoiding having to

acquire all the risks attached to the legacy company.

Challenges and pitfalls

The often diverging interests of the many parties involved in a distressed M&A transaction create

many challenges and the complexity of a distressed M&A transaction makes it prone to pitfalls.

Lack of information

Given the time pressure in a distressed M&A transaction, it is difficult for a buyer to gain a

comprehensive view on all aspects that are important to decide on whether to go ahead or

to back out of the deal. To limit the lack of information it is advisable for the buyer to gather

information before the formal sale process actually starts. Such information should include

knowledge about the distressed business and industry as well as about the legal process to be

followed to acquire the distressed assets.

Uncertainty of the deal

Chasing a distressed company may turn out to be a costly exercise as several parties may be

interested in an acquisition or investment but most times only one will be successful and the

others will be left with nothing else but the cost of the M&A process. This is not just because

only one party or a consortium can be successful but also because the buyer finds the troubled

company to be in much more difficulty than expected or because the company reassesses its

situation and finds ways to restructure itself or the circumstances having led to the distress

improve significantly. In addition, a buyer may overdo it by driving down the price too much, and

thus making it more interesting for the seller to find alternatives to a sale. Such an alternative

may even be to liquidate the company.

Failure to convince creditors of a haircut

Often, the distressed M&A transaction forms part of an overall out of-court restructuring plan for

the troubled company. In such case, it is important to make sure that the creditors of the company

agree to a partial waiver of their loans before the M&A transaction is completed. Following the

acquisition, the buyer will have no leverage any more against the creditors, which may result in

continuing financial difficulty of the acquired company and, possibly, its bankruptcy under the

ownership of the buyer. Given the rigorous liability scheme for directors under Swiss law,

each

6 cf article 754 SCO.

Distressed M&A in Switzerland

board member, failing to make the haircut in favour of the target happen prior to the closing of

the acquisition, will risk personal liability.

Retention of employees and suppliers

The retention of key employees, key suppliers and customers in a distressed M&A transaction is

crucial. The important employees are required to keep the business operations running smoothly

and to prepare all data necessary for the due diligence of the buyer. Key suppliers should be kept

to avoid any disruption of the supply chain and key customers to secure the revenue. As soon as

doubts will arise about the survival chances of a company, key employees will seek to leave the

company, suppliers are likely to start requesting prepayment before delivering and customers

may stall their orders or avoid placing them. This retention aspect is another reason for timing

being of such paramount importance in a distressed M&A transaction.

Confidentiality and standstill agreements

Prior to the transaction, the seller and the buyer typically enter into a confidentiality agree-

ment. As it is crucial for the buyer to be able to inform third parties about the transaction and

discuss about it, in particular with the seller’s creditors or other bidders, the buyer should avoid

accepting any clauses prohibiting it from such discussions. By requesting a standstill agreement,

a seller tries to avoid that the buyer will prevail in the negotiations with the seller because it

acquired claims against the seller allowing it to exert pressure on the seller. Hence, the seller

should refrain from accepting a standstill agreement.

Alternatives

Instead of selling a company or its assets, the seller may consider restructuring the distressed

company. The overall objective of such an exercise is to secure the liquidity of the company and/

or overcome a situation of overindebtedness. There are many ways to restructure a company:

• Subordination: lenders subordinating part or all of their debt will help to straighten out

the balance sheet as, under Swiss law, subordinated debt is disregarded when assessing

whether a company is over-indebted.

• 'Harmonica': a reorganisation of a company is also possible by decreasing the share capital

to zero and, immediately thereafter, re-increasing it again.

This measure reinforces the

equity base of a company and renders it less prone to overindebtedness. It is sometime

chosen to replace existing debt of a lender by equity (debt-to-equity swap) or to streamline

the shareholder base and limit it to shareholders willing to continue with their investment.

• Convertible loan: a convertible loan allows an investor not only to provide debt financing

to a company but also profit from the interest payment. With a convertible loan, the lender

may profit from the conversion option should the company be successful in a turnaround.

Which measures are to be taken depends on the individual situation of the company. Often these

measures are combined with each other and/or precede an M&A transaction.

7 cf article 732a SCO.

Distressed M&A in Switzerland

Distressed M&A in Insolvency

Overview

When a Swiss company becomes insolvent, Swiss law provides (mainly) two types of insolvency

proceedings: On the one hand there is a conventional bankruptcy proceeding in the course of

which assets of a debtor are liquidated and the proceeds are distributed to the creditors. In the

conventional bankruptcy proceeding we must further distinguish between ordinary bankruptcy

proceedings for large companies or complicated conditions and summary proceedings for small

or rather simple bankruptcies. On the other hand, there exists a reorganisation proceeding in the

course of which the business of a debtor can be reorganised, debt can be restructured or the

business or parts of it can be sold more efficiently than in a conventional bankruptcy proceeding.

Opportunities for distressed M&A transactions vary in the different insolvency proceedings

as the prerequisites and the legal conditions for the acquisition of a company are different.

M&A in bankruptcy

Once bankruptcy proceedings are initiated, the company loses the right to dispose of its assets.

The shareholders and the board of directors have no longer any decision power and the credi-

tors become the new 'owners' of the business. Decisions on the future of the company have to

be taken in their interest.

Important decisions such as the continuation of a business in bankruptcy or its sale require,

therefore, according to Swiss bankruptcy law, at some stage consent or involvement of the cred-

itors. This involvement needs time, which is usually not at hand for a distressed M&A transaction.

In an ordinary Swiss bankruptcy proceeding the liquidation of assets may not take place before

the second assembly of creditors has taken place, which is often held months – if not years –

after the opening of the bankruptcy. By this time the business of a company could – usually due

to the lack of liquidity – not be continued, and had to be shut down. Any going-concern value of

a company that might have been still existing at the opening of the bankruptcy is usually lost

and the acquisition of the continued business is either no longer possible or not of interest.

Distressed M&A transactions in which an entire business is sold are accordingly rare in conven-

tional bankruptcy proceedings.

Under certain circumstances, however, it is possible that fixed assets of a company or even

the business as such can be sold without the involvement of the creditors. According to article

243 of the Swiss Bankruptcy Code (SBC) assets that are subject to rapid deterioration can be

sold directly by the bankruptcy office without taking recourse to the creditors by an 'emergency

sale'. According to Swiss doctrine and the Swiss Federal Tribunal

it is also accepted that an

entire company or part of its business can be subject to rapid deterioration and can therefore

be sold in an emergency sale. But it is also clear that such an emergency sale is only possible

under specific conditions. Further, it is unclear and not yet decided by the Swiss Federal Tribunal

whether the creditors’ right to make higher bids according to article 256 paragraph 3 SBC is

applicable in an emergency sale.

There is therefore always the risk that the sale will be chal-

lenged in court and an emergency sale is therefore always associated with risks for the

8 BGE 131 III 280, 284.

9 Article 256 paragraph 3 provides that assets of a significant value can only be sold, if the creditors were

granted the right to made higher bids.

Distressed M&A in Switzerland

bankruptcy administration. As the bankruptcy administration is in Switzerland a state authority

with a 'natural' risk aversion, it is not surprising that in practice only few businesses are sold by

way of an emergency sale in the course of ordinary bankruptcy proceedings.

Provided the requirements for an emergency sale are met or if there was enough liquidity to

continue the business until after the second creditor’s assembly, the acquisition of a distressed

business out of bankruptcy might be a good opportunity for investors. The employees of the

bankrupt business have not to be taken over and a potential buyer can therefore chose whether

it wants to restructure the workforce with the acquisition. Also, the provision on a mass dismissal

of employees

or for a social plan obligation

are not applicable in bankruptcy. Finally, the

agreed sale price cannot be challenged by way of a voidance action. On the other hand, there are

no representations and warranties and the acquisition is entirely at the risk of the buyer.

A sale of a business can also take place in summary bankruptcy proceedings. Because in

summary proceedings there is no creditors’ committee, the competence to sell a business or

a company lies with the bankruptcy office. The sale is more flexible as an ordinary sale, can

already take place 30 days after the creditors’ call, which – once it is clear that there are suffi-

cient assets to finance the bankruptcy proceeding – can be made shortly after the opening of the

bankruptcy proceeding. In summary proceedings it is therefore possible to carry out an ordinary

sale within six to eight weeks from the opening of bankruptcy proceeding. However, in this time

and under such circumstances an ordinary due diligence process is usually not possible and the

support of the bankruptcy office is usually limited.

A speciality of Swiss law is that the creditors have the right to make higher bids and can

accordingly outbid a potential buyer. Further, the consent of chargeholders is required if the

business is sold by way of a private sale and not in an auction. If these parameters are complied

with, the sale may not be challenged by way of voidance action. As in ordinary bankruptcy

proceedings, employees need not automatically be taken over.

M&A in reorganisation proceedings

Overview

Swiss law provides for a reorganisation procedure that, on the one hand, is conceived as a

statutory debt settlement procedure and aims to settle the liabilities of a company without the

company going under as an economic unit. On the other hand, in such proceedings a business

can also be liquidated as gently as possible by transferring the business as a whole or parts of it

to a newly established subsidiary (hive-down) or a third party.

A Swiss reorganisation procedure can roughly be divided into two phases. The first starts

with an automatic stay or moratorium and serves the preparation of the reorganisation or the

liquidation of the company. In this phase the right of a company to dispose of it assets is restricted;

the business may, however, be continued usually under the supervision of an administrator. In

the second phase, the actual restructuring or liquidation and the distribution of the proceeds to

the creditors takes place. The sale of a company is possible in both phases.

10 cf article 335d et seq SCO.

11 cf article 335h et seq SCO.

Distressed M&A in Switzerland

Sale of a business during the moratorium

Although the sale of a business was not contemplated by the law in the phase of a moratorium,

many businesses are sold during this first phase of a reorganisation proceeding. In fact, since a

moratorium can be granted without public disclosure, a transaction can be executed swiftly and

without the need to inform creditors and customers of the difficulties of the company, which in

many cases results in a better price.

During the moratorium, the company remains in charge of its business although usually

under the supervision of an administrator. The company must, therefore, conduct the M&A

process and may also hire advisers.

Yet, since the company may, according to article 298 SBC, only dispose of fixed assets with

the consent of the court, any sale of assets requires court approval. As the creditors are not

involved in the process and in order to protect their interest, the court will usually only give

its consent if the company can demonstrate that it will realise the best possible price for the

creditors and that there is an urgency to carry out the sale and an impairment threatens, if the

sale is postponed. To evidence this, the company can ask the administrator to hand in a report to

the court or a fairness opinion of an M&A adviser. Further, the company can demonstrate that it

conducted an auction process or obtained several offers. If there is sufficient time and if publicity

does not affect the transaction, the creditors might also be granted the right to make higher

offers as pertained in ordinary bankruptcies in article 256 paragraph 2 SBC.

If the court accepts that the sale is in the best interest of the creditors and affirms the sale,

it can afterwards no longer be challenged by way of a voidance action. in addition, the consent

of creditors or shareholders is not required. A buyer is not required to take over the entire

workforce with the acquisition. Yet, in contrast to an acquisition in a bankruptcy proceeding, the

provision on mass dismissal of employees or for a social plan obligation are applicable.

Cases in practice show that it is possible to sell a distressed business within a month from

the opening of the automatic stay, especially when the transaction has already been prepared in

a 'pre-pack' before the request of the automatic stay has been filed. In this case, the request for

opening the moratorium can even be combined with the request to approve the sale.

Sale of a business by adopting a reorganisation

If there is no urgent need to sell the business and provided the company disposes of or gener-

ates sufficient earnings to maintain its liquidity during the moratorium, the company can also be

sold by adopting a reorganisation plan. There are different ways to sell a business in a reorgani-

sation plan. If the sale of the business is ready to be closed, the sale and its terms can form part

of the reorganisation plan itself. It is, however, also possible that the reorganisation plan only

authorises the liquidator to sell the business. In this case, the liquidator has to structure the M&A

process and the sale of the business or parts of it and constitutes an ordinary liquidation action,

which gives the liquidator considerable discretion about the timing and the execution of the

sale. The reorganisation plan can also provide that the business is to be transferred to a newly

established entity (hive-down) whose shares will afterwards be sold by the liquidator. In all these

cases, the reorganisation plan must, however, be approved by the majority of the creditors and

must be sanctioned by the court. The latter requires that the sale is in the best interest of the

creditors, which requires at least that they receive for their unpaid claims not less than what they

would receive in an ordinary bankruptcy proceeding.

Distressed M&A in Switzerland

For a potential buyer the acquisition of the business has the benefit that it can be taken

over without any debts and that the transaction, once it is finally sanctioned by the court, can

no longer be challenged. A buyer can usually also choose which parts and which employees it

wants to take over, as employees are not automatically transferred to the buyer in such a sale.

Conclusion

There are not only successful players in the market. Business failure is commonplace, tragically

but inevitably. However, every failure creates opportunities, which, with the necessary respect,

skills and risk can be seized as a chance to create something new and economically viable.

Properly managed and supported by competent specialists, distressed M&A provides an attrac-

tive opportunity to allow a distressed company or business to become successful and financially

sound again.

Joint Ventures – Selected Aspects

Pascal Richard and Petra Hanselmann

Introduction

A joint venture is an arrangement between two or more parties for pursuing a specific

commercial purpose. From a business perspective, joint ventures are generally formed for the

following reasons:

• leverage resources such as capital, human resources or technology;

• share risk, cost and resources, thereby minimising potential financial exposure; and

• create synergies by combining complementary strengths.

While joint ventures are not confined to a specific industry, in Switzerland they have recently

been seen in particular in the media, technology and financial services sectors.

A joint venture may take a vast variety of forms. This might involve transferring an existing

business to the joint control of the parties or indirectly acquiring an existing business from

another party, in which case organising the joint venture will involve elements of a disposi-

tion or acquisition, or both. Alternatively, an alliance may only involve licence agreements, joint

marketing agreements, affiliate revenue sharing agreements or other types of agreements in

which the parties agree to pursue a set of common goals.

From a legal perspective, a general distinction is usually drawn between contractual joint

ventures and corporate joint ventures (commonly referred to as equity joint ventures). This

chapter will focus on equity joint ventures and assumes the joint venture company (JVC) is a

Swiss joint stock company (AG).

1 Pascal Richard and Petra Hanselmann are partners with Baker McKenzie.

2 International Joint Ventures Handbook, Baker McKenzie (Editor), 2015, p1.

3 A Swiss joint stock company (Ltd/AG – Aktiengesellschaft) is the most common company form used for

joint ventures in Switzerland; alternatively, the JVC might also be in the form of a Swiss limited liability

company (LLC/GmbH).

4 For simplicity, this chapter predominantly assumes a joint venture by two parties.

Joint Ventures – Selected Aspects

Neither the term ‘joint venture’ nor ‘joint venture company’ is specifically regulated in the

Swiss Code of Obligations (CO). Rather, the law applicable to joint ventures has been developed

by legal doctrine and case law. Owing to the lack of any codified legislation specifically governing

joint ventures and the resulting uncertainty, it is of paramount importance for the parties to

carefully address in detail their respective rights and obligations in the legal documentation

governing the joint venture. Such legal documentation commonly consists of the following:

• A transaction agreement (business combination or investment agreement) and a share-

holders’ agreement form the basis for the joint venture between the parties. While the trans-

action agreement provides for the details regarding the acquisition of shares in the JVC

by the parties, the shareholders’ agreement deals with the various aspects following the

formation of the JVC (eg, the governance principles, the financing of the JVC, the distribu-

tion policy, the information rights, the transfer of shares in the JVC, the restrictive covenants

and the duration and termination of the JVC). Owing to the principle of freedom of contract

in Swiss law, the elements of the transaction agreement and the shareholders’ agreement

may also be combined in one contractual document (ie, a joint venture agreement that

would thus govern the whole lifecycle of the joint venture).

• The corporate documents of the JVC, which comprise the articles of association and the

organisational regulations.

• The ancillary agreements providing the contractual framework between the JVC and the

parties (eg, licensing, supply or services agreements).

Selected aspects of the transaction agreement

Corporate set-up and parties to the transaction agreement

The formation of the joint venture is typically addressed in detail in the transaction agreement.

There are various ways by which a joint venture may be established. In practice, however, the

two following ways seem to prevail:

• the parties form a new company and make their respective contributions to the JVC against

issuance of the respective number of shares in the JVC; or

• one (or more) of the parties invest(s) in an already existing corporate structure, in which

case the relevant party makes its respective contribution to the JVC in return for shares that

will be issued in the framework of a capital increase.

In such cases, the JVC will also be a party to the transaction agreement as the JVC will be

obliged to issue and deliver the shares. Various issues may arise from such a contractual rela-

tionship (see 'Liability concepts').

Alternatively, shares in the existing JVC are directly acquired by one party from the other (ie,

the already existing shareholder) without the issuance of new shares and without the involve-

ment of the JVC as a party to the transaction agreement.

Determining the equity participations

One aspect that naturally needs careful consideration in a joint venture set-up is the determina-

tion of the amount of shares in the JVC a party shall receive in return for its contribution.

In an ordinary sale and purchase of shares against cash, it is customary that the parties

agree either on a locked-box mechanism or on a completion accounts adjustment mechanism to

determine the (final) purchase price. In the case of a locked-box mechanism, the purchase price

Joint Ventures – Selected Aspects

is fixed at the signing of the transaction based on a reference balance sheet as at a pre-signing

date. When applying a completion accounts adjustment mechanism, the initial purchase price as

at signing will be subject to adjustments by reference to certain balance sheet positions as at

completion of the transaction (eg, net debt, net working capital or net equity adjustment), which

will eventually result in the final consideration. In a joint venture scenario, the fundamental

difference from an ordinary sale and purchase transaction against cash is that the main consid-

eration received by a party for its contribution to the JVC is not cash but shares in the JVC.

Unlike for shares in a listed company, there is typically no established market price for the

shares in a JVC. Thus the value of the respective contribution made by each party to the JVC

has to be established by applying the respective methodologies in order to calculate the equity

participations of the parties. In this context, it is important to note that the number of shares in

the JVC that a party receives depends not only on the value of its own contribution but also on

the value of the contribution of the other party. Therefore, the earlier in the transaction process

the equity participations of the parties can be determined and fixed, the more efficient and less

complicated the transaction process as such becomes. As a consequence, a completion accounts

adjustment mechanism in the transaction agreement to determine the final amount of shares

to be allocated to a party will, in most cases, not be practicable, as in this case the final equity

participations of the parties would only become final after completion and hence too late in the

process. Thus the most viable method will often consist of applying a locked-box mechanism,

determining the final equity participations at signing and making adjustments only in the case

of extraordinary events. If the parties should nevertheless contemplate a completion accounts

adjustment mechanism, it is recommended that such a mechanism would only provide for a cash

adjustment and thus would not lead to any change in the equity participations of the parties at

completion.

Contribution in kind

The formation of the joint venture typically involves new shares being issued against respective

contributions. If a company at its incorporation or at a capital increase takes over assets from

a shareholder by contribution in kind, Swiss law

provides that the articles of association of the

company must disclose:

• the type of contribution;

• the valuation of such contribution;

• the name of the party that makes the contribution; and

• the amount of shares issued in consideration for the contribution in kind.

Because of the disclosure requirements, the parties must be aware that a substantial amount

of information on the contribution(s) will become publicly accessible. Further, the parties at the

incorporation or the board of directors (board) of the JVC at a capital increase must verify the

type, the condition of the contribution in kind as well as the adequacy of its valuation in a written

report.

The report is subject to verification by an admitted third-party auditor (this may or may

not be the JVC’s statutory auditor), who has to confirm in writing that the report is complete

5 Article 628 paragraph 1 CO (incorporation) and article 650 paragraph 2 cipher 4 CO (capital increase).

6 Article 635 CO and 652e CO.

Joint Ventures – Selected Aspects

and correct.

To qualify for a contribution in kind, assets must be capitalisable in accordance

with the applicable accounting rules. In addition, the respective asset must be transferable and

realisable, and the company must be able to freely dispose of the asset immediately after the

contribution. In practice, this may raise issues in relation to contributions of intangible assets

such as intellectual property, know-how or goodwill owing to the fact that it may be questionable

if a respective asset fulfils the above-mentioned requirements. It is therefore important for the

parties to determine their equity participations and initiate discussions with the auditor at an

early stage in the transaction process. The contribution in kind may also be a mixed contribution

consisting of a cash element in addition, if necessary to even out any discrepancies in the value

of the contributions in kind in order to arrive at the equity participations that the parties desire to

achieve. Further, the contribution in kind is based on a contribution agreement, which, depending

on the nature of the asset, has to be in writing or in the form of a public deed. The contribution

agreement also belongs to the documents that become publicly accessible.

In the case of a violation of the described disclosure requirements, there is a risk that the

contribution in kind could be considered null and void by a court. In addition, the parties or the

board of the JVC, respectively, may face civil or even criminal liability. Observance of the relevant

provisions is therefore important under Swiss law.

Liability concepts

A joint venture often comprises a contribution of the parties against receipt of shares in the JVC

and, as a consequence, the parties have to agree on the value of their respective contribution and

the resulting equity participation in the JVC. Thus, unlike in a sale and purchase of assets against

cash, there is a sell-side and a buy-side element at the same time.

In practice, this means that

usually each party conducts a due diligence of the respective contribution of the other party.

Furthermore, there will be some sort of reciprocity when it comes to protecting the parties’

relevant investments (eg, each party is likely to give representations and warranties, guarantees,

indemnities and covenants). In some situations, this leads to issues that are different from those

in an ordinary sale and purchase transaction.

Where a party contributes assets into an already existing company held by the other party

and receives shares in the relevant JVC in return, the JVC – and not the other party – will

normally be liable to issue and deliver the shares in the JVC to the contributing party. Naturally,

the JVC will also be liable for a breach of representations and warranties and other contractual

breaches. The following issues arise with this concept:

• In the event a party brings a claim against the JVC, any payment to be made by the JVC in

connection with such claim will indirectly also damage the claimant party, because of its

own equity participation in the JVC. As a consequence, in order for the claimant party to be

made whole for any potential claim, the JVC would need to pay more than the amount of

the actual claim.

7 Article 635a CO and 652f paragraph 1 CO.

8 The respective party contributing its asset into the JVC will ‘sell’ its asset to the JVC and ‘buy’ shares

in the JVC.

9 Depending on the proportion of the parties' participation in the JVC.

Joint Ventures – Selected Aspects

• In addition, a claim by a shareholder may also raise issues from a corporate law perspective

because a payment under such a claim may result in a breach of article 680 paragraph 2 CO,

which prohibits the repayment of the contributed share capital to the shareholders. Any

such breach resulting from a payment will render the relevant payment null and void and

may expose the board of the JVC to civil and criminal liability. Further, such a payment may

also be considered a prohibited hidden distribution of profits under article 678 paragraph

2 CO and may also infringe the principle of equal treatment of shareholders under article

717 paragraph 2 CO. As a result, there is a considerable degree of uncertainty as to whether

the JVC may even respond to a claim raised by a party.

• Another drawback of having the JVC as a counterparty to a claim under the transaction

agreement is that the claimant party will normally also be represented by its nominated

members in the JVC’s board or even the management, and any such claim will necessarily

have to be dealt with by these corporate bodies. It is obvious that this situation will inevi-

tably create a conflict of interest, which would need to be resolved accordingly.

For all these reasons, it is advisable that the transaction agreement provides that claims by a

party for a breach of representations and warranties, under a guarantee or for other contractual

breaches, can be brought against the other party instead of the JVC. If this should not be a viable

solution,

more refined liability concepts have to be designed. One possibility to address and

potentially alleviate some of the usual concerns may consist of having warranty and indemnity

insurance in place that would respond in the case of claims for a breach of representations and

warranties.

Selected aspects of the shareholders’ agreement

Governance and organisation

General

The main decision-making bodies of a Swiss joint stock company are the shareholders’ meeting

and the board. Provisions on the composition of the board and the management of the JVC,

the number of board members, quorum and attendance provisions for shareholders’ and board

meetings, as well as potential veto rights of the parties, are key elements of any shareholders’

agreement. If such contractual governance provisions are – to the extent permitted by Swiss

law – in addition incorporated into the articles of association of the JVC, the mere contractual

obligations among the parties become hard-wired in the sense that they are in addition enforce-

able from a corporate law perspective and also bind the JVC and third parties. As the articles of

association become publicly accessible under Swiss law, despite the benefit of additional protec-

tion from a corporate law perspective, the parties often come to the conclusion not to mirror

contractual obligations such as veto rights or a quorum provision in the articles of association,

as they wish to keep the details of the internal governance of the JVC and the balance of power

among the parties confidential.

10 For example, in cases of joint ventures involving private equity funds as they seek to strictly limit their

liability exposure for risks that are not fully controllable.

Joint Ventures – Selected Aspects

Shareholders’ meeting

Under Swiss law, the shareholders’ meeting must mandatorily resolve on certain matters,

such as the approval of the financial statements, the distribution of dividends, the adoption and

amendment of the articles of association or the election of the board. The parties are free to

assign in the shareholders’ agreement and potentially the articles of association of the JVC

additional matters that are not mandatorily in the competence of the board

for decision by the

shareholders’ meeting.

According to article 703 CO, resolutions by the shareholders’ meeting require the absolute

majority of the votes present or represented at the meeting, subject to certain important reso-

lutions, such as the change of the company’s purpose, the liquidation of the JVC, certain forms

of capital increases, certain forms of mergers, or the limitation on the transfer of shares, which

require a mandatory qualified quorum of two-thirds of the votes and the absolute majority of the

nominal value of the shares present or represented (article 704 CO). In the shareholders’ agree-

ment and potentially in the articles of association of the JVC, the parties may agree on higher

quorum requirements for specific resolutions as provided by the CO. Depending on the equity

participations of the parties in the JVC, such specific agreed quorum requirements may result

in a veto right of one or several parties. In practice, specific quorum requirements or veto rights

are often introduced for the amendment of the articles of association, the election and removal

of board members, capital increases and decreases, the liquidation of the JVC, approval of the

financial statements and dividend distributions.

Swiss law does not provide for strong protection rights of minority shareholders. Besides

the qualified quorum for certain resolutions mentioned above, minority shareholders holding

10 per cent of the total share capital have the right to request a shareholders’ meeting or the

adding of an item to the agenda for a specific shareholders’ meeting. The latter right also applies

to shareholders representing shares with a nominal value of 1 million Swiss francs. As a conse-

quence, additional minority protection measures need to be stipulated in the shareholders’

agreement and mirrored in the articles of association (to the extent desirable) and the organisa-

tional regulations of the JVC.

Board of directors

According to article 716a CO, the board has certain non-transferable and inalienable duties, such

as the ultimate management of the company and the issuance of the necessary directives, the

structuring of the accounting system, of the financial controls and of the financial planning or

the appointment of the management. Such matters must mandatorily remain in the decision

competence of the board and may not be delegated, neither to the management nor to the share-

holders’ meeting.

According to article 713 CO, resolutions by the board require the majority of the votes cast.

The parties can agree on higher quorum or presence requirements. Such quorum or presence

requirements may result in a veto right of one or several parties with respect to selected matters

such as the approval of the budget and business plan, acquisitions and disposals of a business,

investments and financings above a certain threshold, approval on the transfer of restricted

shares, appointment and removal of managers and amendments of the organisational regulations.

11 See 'Board of directors'.

Joint Ventures – Selected Aspects

As a default provision, the CO provides that in the case of a tie, the chairman of the board

shall have the casting vote. Therefore, if the casting vote of the chairman shall be excluded, the

parties should explicitly agree accordingly in the shareholders’ agreement and also stipulate this

in the articles of association and the organisational regulations. For non-listed companies, the

chairman of the board is by default appointed by the board from among its members. However,

it is possible to delegate the right to appoint the chairman of the board to the shareholders’

meeting. With regard to the composition of the board, Swiss law does not provide for any nation-

ality requirements on the board. The entire board may consist of foreign nationals. However, at

least one authorised signatory (ie, either a board member or another person authorised to act on

behalf of the JVC) with single signature right or two authorised signatories with joint signature

right need to be domiciled in Switzerland.

The members of the board are not parties to the shareholders’ agreement. As a conse-

quence, the shareholders’ agreement does not directly bind the members of the board. In prac-

tice, the issue is addressed by a provision in the shareholders’ agreement according to which the

parties undertake to procure that the board members appointed by them will observe the provi-

sions of the shareholders’ agreement. This may, however, result in a delicate situation for the

board members. On the one side, according to article 717 CO, board members have to act in the

best interest of the JVC. On the other side, they should act in accordance with the instructions of

the respective party for which they sit on the board of the JVC and by which they are mandated.

As a consequence, from their own liability perspective, in the case of a conflict between the inter-

ests of the JVC and the interests of a party, the board members should act in the interests of the

JVC and against the provisions of the shareholders’ agreement.

Organisational regulations

Under Swiss law, the board may only delegate the management of the JVC if the articles of

association of the JVC explicitly allow the board to do so by way of the adoption of organisa-

tional regulations (whereas, in any event, the board may not delegate its non-transferable and

inalienable duties, as mentioned above). The organisational regulations typically govern, among

other things:

• the rights and duties of the board including the details for the convocation of meetings and

the above-mentioned quorum requirements;

• the delegation of the day-to-day business by the board to the management;

• the rights and duties of the management and specific members of the management, such

as the CEO and CFO; and

• the signature authority of the board members and members of the management.

The provisions of the shareholders’ agreement and the articles of association should, to the

extent applicable, be mirrored in the organisational regulations. Contrary to the articles of asso-

ciation, the organisational regulations do not become publicly accessible. To avoid any discrep-

ancies between the shareholders’ agreement, the articles of association and the organisational

regulations, the shareholders’ agreement should contain a provision stating that the provision of

the shareholders’ agreement shall prevail among the parties.

Joint Ventures – Selected Aspects

Deadlock devices

In 50:50 joint ventures, but also in joint ventures in which a party has been granted veto rights to

block certain material decisions,

there is always the risk that the parties may reach a deadlock

situation on a particular issue. There are many potential solutions on how to address a deadlock.

In practice, frequently used instruments to overcome a deadlock are:

• the granting of the tiebreaking vote to the chairman of the board;

• the granting of the tiebreaking vote to an independent, non-executive board member;

• the referral of a deadlock matter to an independent third party for solution; or

• the referral of the deadlock matter to the upper-level management of the parties in combi-

nation with put-and-call options or liquidation rights if the escalation process should ulti-

mately fail.

In our experience, such internal escalation process to the upper-management level, or even up

to the CEO or the chairman of the board of the parties, has proven to be an effective solution in

practice. As the management of the parties typically wants to avoid an escalation to the top-level

management, compromises acceptable to both parties are often found at an early stage in such

a set-up. Even if the escalation goes to top management, the potential threat of the call-and-put

option process, which could kick in, for example, in the form of 'Russian roulette'

provisions

or blind bids,

often helps the parties to find a common understanding. However, it has to be

mentioned that such provisions are only meaningful in practice if the parties have similar finan-

cial resources available and not both parties are required for the continuance of the JVC. In such

a constellation, the winding-down or liquidation of the JVC might be the only option left. As the

composition and underlying interests in a joint venture can be very diverse, potential deadlock

instruments must be analysed and determined for each joint venture individually. To avoid a

deadlock situation at all, it is first of all important that the parties carefully govern their rights,

obligations and responsibilities in the shareholders’ agreement and ancillary documents.

Transfer restrictions

Shareholder agreements usually contain restrictions on the transfer and encumbrance of the

shares in the JVC, such as lock-up periods, rights of first refusals, pre-emption rights, call option

rights and sometimes also tag-along and drag-along rights. Under Swiss law, such provisions

can, according to majority doctrine, no longer be included in the articles of association of the

JVC. As a consequence, if a party violates the share transfer restrictions, the other parties typi-

cally can only claim contractual damages against the breaching party under the shareholders’

agreement. To reduce the risk that a party breaches the transfer restrictions, it is possible and

market-standard to provide in the articles of association of the JVC that in the case of registered

shares, such shares may only be validly transferred with the consent of the board. The board

may object against a share transfer for important reasons explicitly stipulated in the articles of

12 This will typically be the case for any reserved matters at board or shareholder level.

13 One party makes an offer and the other party has to buy the shares of the other party at the offered

price or sell its shares for the offered price.

14 Both parties simultaneously make an offer to each other to buy the shares of the other party and the

higher offer is successful.

Joint Ventures – Selected Aspects

100

association of the JVC or if it 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 their

real value at the time the transfer request was made. According to article 685b paragraph 2 CO,

provisions governing the composition of the shareholder group that are designed to safeguard

the pursuit of the company’s objects or its economic independence are deemed to constitute

important reasons. As the consent of the board to share transfers is typically subject to a special

majority quorum agreed by the parties in the shareholders’ agreement, such transfer restric-

tions contained in the articles of association of the JVC prevent shares being sold by one party

without the knowledge of the other parties or at least without the knowledge of the board. To

safeguard compliance with the transfer restrictions, the parties can in addition agree to issue

physical share certificates and to deposit such share certificates with an independent escrow

agent. Although frequently seen in practice, it should be noted that depositing the shares with an

escrow agent is not to be deemed an entirely watertight solution as there may still be ways that

enable an non-permitted share transfer in specific cases.

Duration and termination

Under Swiss law, contracts cannot be entered into for an eternal period as the personal and

economic freedom of a contracting party may not be restricted in an excessive way. Eternal

agreements are not fully void but a judge may reduce the term of such eternal agreement to an

acceptable limited term. As joint ventures are not specifically governed under Swiss law, there

is a certain risk that the shareholders’ agreement could be qualified as a simple partnership,

with the consequence that the provisions of article 545 et seq CO and in particular article 546 CO

would be applicable. Article 546 CO provides that if the parties have not agreed on a specific

term, the partnership agreement can be terminated within six months (ie, a notice period that is

inadequate for most joint ventures). As a consequence, it is in any event recommended to specify

the term of a shareholders’ agreement governed by Swiss law.

Generally, a term of up to 20–25 years is, under certain circumstances, still considered

as non-excessive according to doctrine and case law. In practice, a shareholders’ agreement

in a joint venture context often has a term of 10–15 years and provides for an extension of an

additional fixed term of 1–5 years if not terminated by a party after the initial or any extended

period. It is also common that the parties agree on additional termination possibilities, such as,

for example, in the case of:

• a change of control over one of the parties;

• the opening of insolvency or similar proceedings over a party;

• a material violation by a party of its obligations under the shareholders’ agreement, the

transaction agreement or any of the ancillary agreements; or

• deadlock situations that could not be resolved by the parties through other means provided

in the shareholders’ agreement.

These events will typically also trigger a call option right for the party that is not affected by the

aforementioned events.

Joint Ventures – Selected Aspects

101

Ancillary agreements

In addition to the transaction agreement and the shareholders’ agreement, a joint venture set-up

usually requires the execution of a number of further agreements, such as, for example, licensing,

supply or services agreements. Such ancillary agreements are typically entered into by the JVC

and the parties or any of their affiliates. There are regularly certain interdependencies among

the ancillary agreements on the one side and the transaction agreement and the shareholders’

agreement on the other side that need to be carefully addressed and aligned when drafting the

various agreements. The effectiveness of an ancillary agreement may, for example, depend on

the fulfilment of certain conditions by the other party and, once the shareholders’ agreement is

terminated, the parties do typically also wish to end or at least amend the terms and conditions

of the ancillary agreements, so that the term and termination of the various agreements need to

be aligned in order to avoid any unexpected consequences.

102

Acquisition Financing

Philip Spoerlé and Markus Wolf

Introduction

In the past couple of years, there has been high demand for acquisition and leveraged finance in

Switzerland, which was supported by a notable number of mid-market and larger M&A transac-

tions with significant activity of private equity sponsors based in Germany, France, Switzerland,

the United Kingdom and the United States. A further trend is an increased participation of private

debt funds in acquisition financings, which usually take the second lien senior debt or junior

debt tranche.

The main players in the Swiss market offering acquisition finance solutions are UBS, Credit

Suisse and Zürcher Kantonalbank, which regularly act as lead arrangers in M&A financing trans-

action or participate in a club deal structure. In the syndication phase, the arrangers invite smaller

cantonal banks or other local banks to participate in the financing. Small and medium-sized

domestic acquisition financing transactions are also regularly financed by a single bank or a

small syndicate of finance providers, depending on whether the borrower or sponsor has one or

more relationship banks. Larger-scale financings or financings involving a large industrial buyer

are frequently placed with an international banking syndicate involving names like Citibank,

HSBC, Bank of America Merrill Lynch and others. In some instances, such financings are also

arranged out of London. Larger acquisition financing transactions often include a capital market

element such as the issuance of a high-yield bond that can either be used as a take-out instru-

ment or be issued at the same time the loan structure is implemented.

Transaction structure and documentation

Sources of funds

By their very nature, leveraged acquisition financing arrangements combine an equity and a debt

element. The equity element is provided by way of hard equity (share capital, capital contribu-

tions) or quasi-equity (such as deeply subordinated shareholder loans).

1 Philip Spoerlé and Markus Wolf are senior associates with Baker McKenzie.

Acquisition Financing

103

The structure and the quantum of the debt element mainly depend on the targeted (or

accepted) leverage of the target group: in a low or medium leverage scenario, the debt package

regularly consists of senior debt that is structured as a term loan to finance the purchase price

of and other costs and expenses related to the acquisition. Traditionally, the term loan consists

of a non-amortising (bullet) term loan element and an amortising term loan element (TLA/TLB

structure). If the acquisition financing is combined with a (full or partial) refinancing of the finan-

cial indebtedness of the target group, the bidder’s existing debt, or if it is required to satisfy

the working capital needs at the level of the target group, the financing will be enhanced by a

working capital facility that takes the form of a revolving credit facility. Frequently, a portion of

the revolving credit facility can be utilised for letters of credit, bank guarantees or overdrafts

under ancillary facility arrangements. In a high leverage scenario, further layers of second lien

senior or junior debt will be added. Such debt can take the form of mezzanine loan or high-yield

instruments. Junior debt may also include a payment-in-kind element which provides that there

will be no interest payments until the maturity of the debt.

Legal framework

Switzerland has not enacted any specific primary legislation covering acquisition finance or

leveraged finance transactions. Instead, such transactions are structured within the general

legal framework. Applicable legislation for lending transactions includes the Swiss Code of

Obligations, which is governs the granting of loans and the taking of certain security interest

such as security assignments, as well as the Swiss Civil Code, which governs the establishment

of share pledges, mortgages and other securities. Furthermore, professional lenders are subject

to applicable anti-money laundering, know-your-customer and similar regulations. Special rules

apply for public takeover offers with respect to companies listed at a Swiss stock exchange (see

'Public takeover bids' for further information).

Also, with the exception of consumer credits where special rules apply, lending by foreign

banks into Switzerland on a strict cross-border basis does currently not require any licence

under Swiss banking laws and is not subject to the supervision of the Swiss Financial Market

Supervisory Authority (FINMA). However, certain restrictions may become applicable where

security is taken over real estate in Switzerland that is not used for commercial purposes. While

the Swiss inbound cross-border regime for financial services is generally liberal, licence and

other regulatory requirements may apply if employees of a foreign bank are physically present

in Switzerland (eg, because of frequent travel to Switzerland) or if local infrastructure is used.

Documentation

Larger acquisition finance transactions with a value of more than 30 million Swiss francs (or its

equivalent) are usually documented on the basis of the Loan Market Association (LMA) recom-

mended forms of facilities agreements for leveraged acquisition finance transactions. Strong

borrowers or sponsors may managed to have the transaction documented under the LMA

recommended form of investment grade documentation or to push the leveraged documenta-

tion more towards this standard by reducing the number of restrictions and obligations of the

borrower and the target group under the credit agreement. For smaller transactions and bridge

financings, major Swiss banks also frequently use their own standard bilateral facility documen-

tation, which is enhanced to cater for the specific acquisition context.

Acquisition Financing

104

At the point in time the acquirer or sponsor has to submit a binding offer for the acquisition,

usually a commitment letter will be in place. This letter is often based on the LMA standard

mandate letter or another standard established by the relevant arrangers. Depending on the

negotiation power of the acquirer, it may also be possible that the seller accepts a highly confi-

dent letter issued by the arranger. Bids which are made on the basis of a financing that is already

fully documented are rarely seen in the Swiss market.

Acquisition financings that are arranged by Swiss banks or provided by a club of Swiss

banks are typically documented under a Swiss law-governed credit agreement. The vast majority

of financings that exceed an amount of 20 million Swiss francs (or its equivalent) are documented

under an agreement in the English language. The main reason for this is that in such cases the

(future) syndicate may also include lenders from non-German-speaking jurisdictions and that

the lenders want to avoid having an additional restriction for future transfers of their exposure,

which is likely to be the case if the credit documents are in German. However, in cases where

the syndicate includes smaller cantonal banks or other local banks or where the borrower has

a specific preference for an agreement in the German language, the transaction may also be

documented in German.

Security structure and guarantor accession

Types of security

The most commonly used forms of security taken in leveraged acquisition finance transactions

are the following:

• guarantees by material group companies of the acquirer group and, upon accession, the

target and material group companies of the target group;

• pledges over shares in the target company and, depending on the transaction, certain mate-

rial group companies;

• security assignments of certain trade receivables, insurance claims and intragroup claims;

• assignments of claims or rights under the acquisition agreement and related documents; and

• pledges over bank accounts of the acquirer, the target group or both.

In certain cases, security is taken over real estate assets, which is typically created by way of

a pledge or security transfer of mortgage certificates. Fixed charges or floating charges are

not available under Swiss law. Short-term bridge financings may also be unsecured, which is

particularly the case for borrowers with a strong negotiation position and an acquisition that is

seen as a strategic fit by the lenders.

The procedures for the establishment of Swiss law-governed security interests depend on

the form of the security and on the type of asset serving as such. As a general rule, the creation

of a security interest over movable assets requires possession of those assets to pass from the

security provider to the secured parties or a security agent. No security over movable assets can

be created by registration into a public register, with the exception of security over ships and

aircraft, two assets that define ownership based on a register entry. Owing to the requirement

that the security provider has to give up exclusive control over the movable asset used as collat-

eral, security packages will only in very rare cases include any transfer for security purposes or

pledge of inventory as this may not only lead to a disruption of the daily business of the security

provider but also be hardly manageable for the secured parties or the security agent. In respect

of security interests over movable assets (other than ships and aircraft), Swiss law generally

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does not provide for any approval, filing, registration or similar requirements. A special regime

applies to security over real estate: while a pledge or security transfer of mortgage certificates

as such does not require any notarisation or registration, the creation of mortgage certificates

and any increase of the nominal amount of mortgage certificates need to be notarised and regis-

tered in the land register. Finally, it has to be noted that although notification is generally not

required under Swiss law to create and perfect a security interest, notification may be advisable

in order to prevent third parties (such as third-party debtors in the case of an assignment of

receivables or the pledge of bank accounts) from being able to validly discharge their obligations

by making payment to the security provider.

There is no tax payable on the grant of a security interest, guarantee or a suretyship under

Swiss law except for taxes payable in certain cantons for the creation of mortgages. The fees for

notarisation and registration (where required) vary from canton to canton. Typically, the value of

the mortgage to be created serves as the basis for the calculation of applicable taxes, notarisa-

tion and registration costs.

Accession of target subsidiaries

In the acquisition financing context, the credit documentation usually requires an accession

of certain material subsidiaries of the target group to the credit agreement in a capacity as

guarantor. In addition, such subsidiaries are typically required to provide transaction security in

accordance with certain agreed security principles.

With respect to a Swiss subsidiary of a target, there are no specific waiting periods that

must be observed before such subsidiary may grant a guarantee or security. That said, the

corporate purpose clause contained in the respective guarantor’s or security provider’s arti-

cles of association may need to be amended to expressly permit the granting of upstream or

cross-stream guarantees and security, and further adjustments may need to be made (eg,

increasing the nominal amount of mortgage certificates). Therefore, Swiss subsidiaries are typi-

cally given between 10 and 30 business days following closing of the acquisition before they

must grant a guarantee or security. If the target group also includes non-Swiss subsidiaries that

will act as guarantors, security providers or both, the relevant time period for the granting of

security and accession to the credit documentation will usually be longer (normally up to 90 or

even 120 calendar days following the closing). In addition, if the guarantee or security is of an

upstream or cross-stream nature, the restrictions set out under 'Limitations' will apply. As a

general rule, no restrictions will apply if the guarantee or security is of a downstream nature.

Limitations

Swiss corporate law does not have any specific rules on financial assistance and also does

not provide for any thin capitalisation or similar rules. However, there are several provisions

protecting the nominal capital as well as the reserves of Swiss corporations. Based on these

provisions, a Swiss corporation may not make any payment to its parent company unless such

payment is made:

• as a formal dividend;

• in the course of a formal reduction of the relevant company’s share capital; or

• on the basis of an agreement that is made on arm’s-length terms.

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The same applies to any payments to sister companies. No restrictions apply to downstream

payments to a wholly owned subsidiary unless the subsidiary is in financial distress.

It is the prevailing view in Switzerland that the granting of a guarantee or security interest

to a third party (eg, a lender under an acquisition facility agreement) for obligations of a parent

or a sister company (upstream or cross-stream guarantee or security interest) as well as certain

other acts having a similar effect (such as, eg, an indemnity or the waiving of rights for the

benefit of a parent or a sister company), are subject to the same limitations as an actual payment.

This ultimately has the effect that the value of any upstream or cross-stream credit support is

limited to the amount the security provider could freely distribute to its shareholders as a divi-

dend at the time payment is demanded under the guarantee or the security interest is enforced.

Payments under any upstream or cross-stream credit support may further have certain tax

implications. For example, they may trigger Swiss withholding tax at a current rate of 35 per cent

in case they do not meet the arm’s-length test for tax purposes.

Swiss law does not provide for any whitewash or similar measures to avoid the conse-

quences of an upstream or cross-stream guarantee or security. However, in order to mitigate

the imperfections of such security interests from a Swiss law perspective, certain steps are

taken in accordance with standard market practice. First of all, the lenders will usually require

that the corporate purpose clause contained in the articles of association of any Swiss security

provider explicitly permits the granting of upstream or cross-stream security. Additionally, it is

typically ensured that the credit documents and the relevant upstream or cross-stream trans-

actions are properly approved by the competent corporate bodies, which includes an approval

by the shareholders’ meeting of the respective security provider. Finally, the credit documents

usually contain limitation language that addresses the free equity limitation.

Contractual subordination

Under Swiss law, there are two types of contractual subordination. First, there are subordination

undertakings pursuant to article 725 paragraph 2 of the Swiss Code of Obligations pursuant

to which a creditor subordinates its claims for the benefit of all other creditors of a particular

debtor. Second, there are bilateral subordination agreements pursuant to which a creditor

subordinates its claims for the benefit of one prior ranking creditor or a group of prior ranking

creditors. Subordination arrangements in the context of acquisition finance transactions (eg, in

intercreditor agreements between senior lenders and junior lenders, or between primary credi-

tors and intragroup lenders) typically take the form of bilateral subordination agreements.

Subordination undertakings pursuant to article 725 paragraph 2 of the Swiss Code of

Obligations should be fully honoured by a liquidator and a bankruptcy administrator as that

subordination is disclosed in the debtor’s financial accounts. By contrast, bilateral subordina-

tion agreements are not reflected in the debtor’s financial accounts. Hence there is a risk that

the bilateral subordination will not be honoured by a liquidator or bankruptcy administrator. In

order to address this uncertainty, bilateral subordination agreements typically provide that the

subordinated creditor assigns its claims in relation to the subordinated debt to the prior ranking

creditors. Sometimes, it is stipulated that such assignment will take effect only from the opening

of insolvency proceedings over the debtor.

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Enforcement

With respect to the enforcement of Swiss law-governed security interests, it has to be differenti-

ated between private enforcement or realisation proceedings and official enforcement proceed-

ings pursuant to Swiss statutory law.

If possession of the relevant asset serving as collateral is transferred to the secured parties

or the security agent acting on their behalf (which is, eg, the case for a pledge over shares), a

private realisation is only permitted if the security provider has consented to this method of

enforcement in advance. It is market standard for Swiss law-governed security agreements to

contain such a consent. In case of collateral where legal title to the asset is transferred to the

secured parties (which is, eg, the case for an assignment for security purposes of trade receiva-

bles, intragroup loans or claims under the acquisition documents), private realisation is the only

enforcement method that is available.

In the course of a private realisation, the secured parties (through the security agent) may

sell the assets serving as security to a third party or declare to acquire them for their own

account. Any such transaction must be made for market value. Once the transaction has been

effected, the security agent will apply the net proceeds from enforcement towards the discharge

of the secured obligations. Any surplus must be turned over to the security provider. The time-

line for the enforcement by way of private realisation largely depends on how difficult it is to find

a purchaser and to determine the market value of the assets serving as security. For example,

if listed shares with a clearly determinable market value serve as collateral, the enforcement

may be effected in a couple of days or weeks. By contrast, in the case of shares in closely held

companies and, in particular, if the security provider challenges the price applied, the enforce-

ment process may take several months or even years.

If the secured parties choose to enforce by way of official enforcement proceedings, they

will have to apply for the commencement of debt collection proceedings with the competent debt

collection office. Such proceedings entail multiple stages, some of which require court involve-

ment, and may be rather cumbersome. After the secured parties have progressed through all

stages of the debt collection proceedings, the debt collection office will sell the assets serving

as collateral in a public auction or, if the security agreement so permits (which is typically the

case), by way of a private sale. Once the transaction has been effected, the debt collection office

will forward the net enforcement proceeds to the secured parties for application in or towards

the discharge of the secured obligations. The debt collection office will pay any surplus directly

to the security provider. The enforcement by way of official enforcement proceedings typically

takes several months. If the security provider makes use of all the remedies available under the

debt collection proceedings, such proceedings may even take several years.

Based on the above, private enforcement will in most circumstances be more favourable for

the secured parties than official debt collection proceedings as it is less cumbersome and can

be completed rather quickly.

Public takeover bids

Under Swiss law, any public takeover offer requires, among other things, the publication of an

offer prospectus. Swiss takeover law provides that the offer prospectus must contain the mate-

rial information on the financing of the offer as well as confirmation by the independent review

body (which is typically a Big Four audit firm) that the bidder has taken all necessary measures

to ensure that the funds required for the takeover bid will be available at settlement. In order

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to have sufficient comfort to issue the required confirmation, the review body usually closely

follows the negotiation of the credit documentation (in particular the facility agreement).

According to the Swiss Takeover Board Circular No. 3 (Examination of Public Takeover Offers)

dated 26 June 2014 (as amended), the independent review body in particular has to review the

creditworthiness of the lender(s) providing the acquisition financing and those provisions in the

credit documentation that enable the lender(s) to refuse to make available the loan or loans

required for the acquisition. As a general rule, such provisions are only permissible if they

• correspond to a condition in the public takeover offer;

• relate to an essential legal condition with respect to the bidder (such as, eg, status, power,

authority and change of control);

• relate to the validity of a significant aspect of the acquisition financing (such as, eg, the

provision of collateral);

• relate to a material breach of contract on the part of the bidder (such as, eg, pari passu,

negative pledge, merger or non-payment); or

• relate to a significant deterioration of the bidder’s ability to pay.

Taxation

Withholding tax

Under Swiss domestic tax laws, there is no withholding tax to be deducted by a Swiss obligor

on interest payments to be made under a credit agreement if the 'Swiss non-bank rules' are

complied with. These rules provide that:

• the number of finance parties holding a participation or sub-participation in the credit

facility that do not qualify as banks in their country of incorporation must not exceed 10

(10 non-bank rule); and

• the total number of direct or indirect financial creditors of any Swiss obligor that do not

qualify as banks in their country of incorporation must not exceed 20 (20 non-bank rule).

A breach of the Swiss non-bank rules may trigger the application of Swiss withholding tax,

currently calculated at a rate of 35 per cent. However, if there is an applicable double taxation

treaty, the withholding tax may be recoverable by a lender in full or in part.

In addition, interest payments to foreign banks in respect of credits that are secured by

mortgages encumbering real estate in Switzerland are in principle subject to a source tax.

However, the source tax will, depending on the applicable double taxation treaty, if any, either

not be deducted at all, only be deducted at a reduced rate or the amount of the tax will be fully

or partially recoverable.

Tax deductibility and thin capitalisation thresholds

As a general rule, interest on debt owed to unrelated parties (eg, bank debt incurred in connection

with an acquisition) is fully tax-deductible for Swiss corporate income tax purposes. However,

as it is not possible to consolidate the accounts of companies in Switzerland for tax purposes

(except for VAT purposes), the purchaser (if it is a Swiss company) may only deduct interest on

debt incurred to finance the acquisition from its own earnings and not from the earnings of the

acquired company. Furthermore, if the purchaser does not have ordinarily taxable income (eg,

a holding company benefiting from participation relief on dividend payments), the deduction of

financing costs is not effective from a tax point of view.

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By contrast, for tax purposes, the deduction of interest payments on loans from related

parties may be limited by the application of the Swiss thin capitalisation rules. According to regu-

lations issued by the Federal Tax Administration, there is a maximum borrowing ratio prescribed

for each class of assets. For example, cash or bank accounts can be leveraged by up to 100 per

cent of their value, short-term assets by up to 85 per cent of their value, intellectual property

by up to 70 per cent of its value and participations by up to 70 per cent of their value. The

aggregate amount of borrowings calculated by applying those borrowing ratios basically corre-

sponds to the maximum aggregate amount of debt that a Swiss company is allowed to have

with regard to related parties to remain compliant with the limits permitted by the Federal Tax

Administration. When calculating the maximum leverage, the relevant assets may be valued at

their fair market value.

If the debts on the balance sheet exceed the limits allowed by the Federal Tax Administration,

the excess portion of the debt (from related parties) is considered hidden equity and interest paid

on the excessive portion of the debt might be disallowed as a deductible expense.

The arm’s-length principle should be respected in any case where the lender and the

borrower are related parties (affiliated parties) for Swiss tax purposes. In this context it should

be mentioned that the Federal Tax Administration publishes safe haven interest rates on an

annual basis.

110

Labour and Employment

Manuel Werder and Valerie Meyer Bahar

Transfer and dismissal of employees

Overview

In Swiss M&A transactions, there are two key issues with regard to labour and employment law:

• the transfer of the target’s employees to the buyer, if the two companies are to be merged

or otherwise combined; and

• the dismissal of the target’s (or both the target’s and the buyer’s) employees, if the M&A

transaction is to be combined with a restructuring of the workforce of the new company.

Transfer of employees

The applicable regime for the transfer of employees depends on whether the transaction is

structured as a share deal or an asset deal.

Share deals

A mere change in the ownership of the shares in the target does not have an impact on the

employment relationships with the target’s employees. In share deals, the employment agree-

ments between the target company and its employees are not affected by the transaction and

remain in full force and effect.

Under Swiss law, it is generally possible to implement unilateral changes to the terms of the

employment agreement to the detriment of the employees, provided certain requirements are

met and the notice period is respected when making such changes.

Asset deals

General principle: transfer of all employees

In asset deals that qualify as a transfer of a business undertaking, all employees working for the

transferred business and the employment agreements with such employees with all respective

1 Manuel Werder and Valerie Meyer Bahar are partners with Niederer Kraft Frey Ltd.

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111

rights and obligations are transferred to the buyer automatically as a matter of law, unless an

employee rejects such transfer. If only a part of a business is transferred (eg, only the manufac-

turing department, but not the sales department), the same principle applies to all employees

who by way of their function belong to the transferred part.

The same principle applies to transactions that are structured as mergers, demergers or

transfers of assets in the form of a universal succession according to the Swiss Merger Act.

The seller and the buyer are jointly and severally liable for any claims of the employees that

fell due prior to the transfer or that fall due until the date on which the employment relation-

ship could be or is terminated as a result of the refusal of the transfer (see 'Refusal of transfer

and termination'). While the seller and the buyer are free to agree on a different cost-bearing

regime, this arrangement is only effective between them and does not affect their joint and

several liability in relation to the employees.

Procedure: information and consultation obligations

Information obligation

If employees are transferred in an asset deal, merger or demerger, the employees’ representa-

tives or, if there is no employees’ representation in place, the employees of all involved compa-

nies need to be informed about the reason for the transfer and the legal, economic and social

consequences of the transfer for the employees.

In the case of a merger, the employees of both companies (ie, the transferring and the

surviving company), must be informed.

Consultation obligation

Where measures affecting the employees are envisaged as a result of the transfer, the employees’

representatives or, if there is no employees’ representation in place, the employees themselves

must be consulted in good time before the relevant decisions are taken.

Such measures may include dismissal, change of workplace or other work conditions. The

requirement to consult in good time means that there must be sufficient time for a consultation

(ie, for the employees to make proposals how such measures might be avoided or their impact

mitigated), and for those suggestions to be taken into account by management.

As a rule of thumb, a period of two weeks is considered to be sufficient for the consultation,

and there should be some additional days for the management to consider the suggestions, if

any. Thus there should ideally be three to four weeks from the time when the employees are

first informed to the time when the decision about the transaction is taken by the shareholders'

meeting of the parties involved.

Sanction in case of violation of the information and consultation obligation

In the sphere of a mere transfer of employees, there are few sanctions in the case of a violation

of the information and consultation obligations, in particular as it will generally not be possible

for the employees to establish any claim for damages on such grounds.

However, in the case of mergers, demergers and transfers of assets governed by the Swiss

Merger Act, if the information and consultation obligations have not been complied with, the

employees’ representative may request an injunction to prevent the respective transaction from

being registered in the Swiss Registry of Commerce.

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112

Refusal of transfer and termination

The general principle is that all employees and employment relationships are transferred,

including employees who are unable to work (eg, because of illness). Any agreement between

the seller and the buyer by which the circle of transferred employees is limited is invalid as a

matter of law (no cherry-picking).

However, the employee may refuse to transfer to the new employer on the basis of the

information received by way of the information obligation, or any of the involved companies may

terminate the employment relationship:

• Refusal: if an employee refuses the transfer, the employment agreement of such employee

is terminated pursuant to the statutory (not contractual) notice period.

• Termination: the mandatory transfer of all employees in the case of an asset deal does not

affect the target’s or, after the transfer, the new employer’s right to terminate the employ-

ment relationship with its employees in accordance with the terms of the employment

agreement, in particular the contractual (or statutory) notice period (see also 'Dismissal of

employees').

However, in view of the mandatory and automatic transfer of all employment relationships,

employees who have refused the transfer, or employees whose employment relationship has

been terminated by the target, will also transfer to the new entity if the applicable notice period

has not yet expired at the time of the transfer, and the (new) employer is obliged to perform the

employment contract until the date the employment contract effectively ends.

The parties to an M&A transaction often wish to avoid the transfer of employees who either

refused to transfer, or whose employment relationship has been terminated. This can either

be achieved by planning sufficient time from the initial information and consultation and the

issue of notices until the transfer date, or by entering into mutual termination agreements with

the employees, providing for an earlier termination date and compensating the employees

accordingly.

Finally, while the terms of the employment relationship remain unchanged by the transfer,

the buyer may seek to change such terms after the transfer. An exception to this rule applies

with regard to collective bargaining agreements, which continue to remain in force for a year,

unless they end earlier.

Dismissal of employees

Mass dismissals

The dismissal rights of the employer are not affected by an M&A transaction. As is the case

outside of an M&A situation, if a significant number of employees are to be dismissed, the specific

rules governing mass dismissals must be adhered to:

• mass dismissals are defined as notices of dismissal given by the employer to employees

of a business within 30 days of each other for reasons not pertaining personally to the

employees and that affect:

2 Seven days during the probation period, one month during the first year of service, two months in the

second to ninth years of service and three months thereafter, all such notice periods to expire at the

end of a calendar month.

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113

• at least 10 employees in a business normally employing more than 20 and fewer than

100 employees;

• at least 10 per cent of the employees of a business normally employing at least 100 and

fewer than 300 employees; or

• at least 30 employees in a business normally employing at least 300 employees.

The goal of the mass dismissal proceeding is primarily the protection of the labour market

against a sudden rise of unemployment in a certain regional area and segment of the labour

market. It is thus, as a matter of principle, permitted to stagger dismissals over a longer period

in order not to reach the thresholds set out above in individual 30-day periods, which trigger the

mass dismissal proceedings.

Once an employer intends to make mass dismissals, it has an information and consultation

obligation: the employer must furnish the employees’ representative or, where there is none,

the employees themselves with all appropriate information and, in any event, with the reasons

for the mass dismissals, the number of employees to whom notice may be given, the number

of employees normally employed and the period during which the employer plans to issue the

notices of termination.

The employees must then be consulted, namely, at least be given the opportunity to formulate

proposals on how to avoid such dismissals or limit their number and how to mitigate their conse-

quences. Such information must then be considered by the employer before deciding on whether

to move ahead and issuing the notices of termination. In order to comply with the requirements,

the employees should be given about two weeks to consult, and the employer then has to review

their suggestions, if any, before deciding on the mass dismissal. A violation of such consulta-

tion obligation may render the notices of termination issued in the realm of the mass dismissal

abusive, entitling the employee to a penalty payment equal to up to two monthly salaries.

The cantonal employment office has to be notified of any intended mass dismissal. Such

notification must include the information given to the employees as well as the results of their

consultation, and is a prerequisite for the subsequent dismissals to be valid.

The notices given in a mass dismissal are subject to the terms of the employment agree-

ment and Swiss law, in particular with regard to the applicable notice period.

Social plan

A social plan is an agreement by which an employer and employees set out measures to avoid

dismissals or to reduce their numbers and mitigate their effects.

The employer is obliged to enter into negotiations with the goal of establishing a social

plan if it normally employs at least 250 employees and intends to make at least 30 employees

redundant for reasons that have no connection with them personally within a 30-day period.

Dismissals over a longer period that are based on the same operational or corporate decision

are counted together.

If there is an obligation to negotiate, the employer must, if there is a collective bargaining

agreement in place, negotiate with the employee associations that are party to such agreement.

If there is no collective bargaining agreement, the negotiation will take place with the employees'

representative or, if there is none, directly with the employees.

If no agreement can be found between the parties, an arbitral tribunal is appointed, which

will issue the social plan in the form of a binding arbitral award.

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114

HR due diligence

The following is a selection of HR legal topics that typically arise in Swiss M&A transactions and

consequently form part of HR due diligence and contractual clauses in transaction agreements:

Management retention

In general

In a broad number of transactions, in particular in private equity and venture capital transac-

tions, management retention is of utmost importance. The buyer often achieves this goal by

payment of retention boni or the allocation of shares in the target or the buyer.

The granting of a participation typically results in a variety of corporate law issues relating

to the allocated shares, such as transfer restrictions, call options, tag-along and drag-along

rights, etc, which are typically addressed in a shareholders' agreement.

Non-compete obligations

The legal due diligence typically includes the verification whether the target company’s key

employees are bound by contractual non-competition and non-solicitation clauses, and whether

the enforceability of such clauses has been strengthened by a contractual penalty.

Non-compete clauses may be found in employment agreements or shareholder agreements.

Non-compete obligations under Swiss law

During the term of the employment, the obligation not to compete with the employer is inherent

in the employee’s duty of loyalty, which as a matter of law forms part of any employment

arrangement.

Employees working full-time for an employer are therefore in general restricted from

accepting any employment function with any other employer and are in particular obliged to

refrain from running a competing business for their own account or from working for or partic-

ipating in such a business. Part-time employees may work for other employers if such activity

does not create any damage to the employer, in particular if such employer is not a competitor to

the existing employer or if the activity is not harmful in any way to the existing employer.

After the term of the employment, the employee has, as a matter of principle, no obligation

not to compete with the employer. An obligation to refrain from engaging in any activity that

competes with the employer for a certain period of time also after the end of the employment

relationship must be explicitly agreed between the employer and the employee in writing, and is

subject to a variety of legal restrictions.

Limitations of non-compete clauses

Swiss law sets strict prerequisites in order for contractual non-compete obligations entered into

in the realm of an employment relationship to be valid, based on the principle that employees

must be permitted to change their employer and to continue earning their living without a

non-compete obligation excessively compromising their future economic activity. The enforce-

ment of a non-compete obligation is thus often difficult. The following applies:

• first, the prohibition of competition is binding only where the employee has, in the course

of the employment relationship, gained knowledge of the employer’s clientele or manufac-

turing and trade secrets and where the use of such knowledge might cause the employer

substantial harm; and

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115

• second, the prohibition must be appropriately restricted with regard to time, place and

scope. Typical post-contractual non-compete obligations are entered into for a period of

12 months (by law, the maximum length is three years), for the region or country where

the employee was active, and limited to the activities or field of business of the employer in

which the employee was involved.

Clauses providing for an excessive prohibition of competition may be restricted by a court at its

discretion, taking into account all relevant circumstances.

While no compensation must be paid in order for the non-compete obligation to be valid,

payment of such consideration will increase the likelihood that also a far-reaching non-compete

obligation would be upheld by a court, as such compensation eases the financial impact the

obligation not to compete has on the employee.

Consequences of breach

An employee who infringes the non-compete undertaking is liable to compensate the employer

for any damage suffered as a result of such competing activity. The burden of proof that such

damage indeed occurred is borne by the employer. In practice, it is often difficult – if not outright

impossible – to establish the monetary damage suffered by the employer as well as a line of

causation (adequate causation) between the competing activity and such damage.

Therefore, employment agreements often foresee that an infringement of the non-compete

undertaking is sanctioned by the obligation of the employee to pay a contractual penalty. In

order to allow for the maximum protection of the employer, such contractual penalty clause

should provide:

• that actual damages are owed in addition to the contractual penalty;

• for the non-competition undertaking to remain in place even if the employee has paid the

contractual penalty; and

• that the employer may, in addition to the agreed contractual penalty and any further

damages, ask for specific performance and insist that the behaviour that constituted a

breach of the employment contract be discontinued.

Extinguishment of non-compete clauses

If the employer terminates the employment agreement, a non-compete agreement in the contract

of employment is extinguished. An exception applies – and the non-compete obligation remains

in force – if the termination was based on a valid reason attributable to the employee. If the

employee terminates the employment agreement, the non-compete obligation remains in force,

unless his or her dismissal is for a valid reason that is attributable to the employer.

If the non-compete obligation is extinguished owing to termination by the employer, it is

possible to agree on a new non-compete obligation (eg, in a termination agreement). However,

at this time, the employee will normally only assume such an obligation if he or she is compen-

sated for it.

Finally, non-compete undertakings are extinguished once the employer demonstrably no

longer has a substantial interest in their continuation.

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116

Transaction boni

In the course of an M&A transaction, transaction boni are often promised to the management of

the target company or another group of involved employees as compensation for their extraordi-

nary efforts in the context of the preparation and implementation of the transaction.

Such transaction boni are typically promised and paid by the target company. Depending on

the transaction structure and the timing of the payment, this may result in the buyer econom-

ically bearing the payments. Furthermore, although the target company may be the formal

employer, the extraordinary services are typically rendered for the ultimate benefit of the seller,

who may be different from the employer. This raises complex intercompany dealing, accounting,

tax and pensions issues.

M&A agreements therefore typically contain representations that the target company has

not promised transaction boni to its employees or to third parties.

Contractual provisions

Notice periods

Contractual notice periods of more than three months or fixed-term contracts without the possi-

bility of early termination may negatively affect the possibility of dismissing employees of the

target company, and should thus be identified.

Severance payments and golden parachutes

Provisions on severance payments (such as golden parachutes) included in the employment

contracts may render the dismissal of employees expensive and therefore negatively affect

the target company’s legal right to terminate employment agreements in accordance with the

applicable notice periods. M&A agreements often contain representations that the employment

agreements of the target company do not contain such provisions.

In listed companies, such severance payments or golden parachutes for management are

prohibited as a matter of Swiss law, notwithstanding any contractual agreement to the contrary.

Bonus provisions

Bonus provisions typically form part of the HR due diligence in order to determine whether the

target company’s HR budget is aligned with its contractual legal obligations.

Swiss law differentiates between discretionary bonus payments that are paid at will by

the employer, and bonus payments that form part of the compensation to which the employee

is contractually entitled. Whether a bonus belongs in one or the other category depends on

the contractual agreement between the parties, the communication and the handling of such

payments in the past, and the amount of the bonus relative to the fixed salary.

Bonus provisions are often the source of disputes, in particular in dismissal situations, and

therefore require proper analysis.

Intellectual property clauses

In the context of the acquisition of a target company whose business model heavily depends

on intellectual property rights, it is important to verify whether the target company owns all

intellectual property rights that it needs for the operation of its business and whether the

target company may owe any compensation to any of its employees for inventions and designs

Labour and Employment

117

potentially produced outside the performance of their contractual obligations. The pertinent

rules under Swiss law are the following:

• As a matter of law, inventions and designs produced by the employee alone or in collabora-

tion with others in the course of his or her work for the employer and in performance of his

or her contractual obligations belong to the employer, whether or not they are protected.

• By contrast, inventions and designs produced by the employee in the course of his or her

work for the employer but not in performance of his or her contractual obligations belong

to the employee. However, in the employment agreement the employer may reserve the

right to acquire such inventions and designs against compensation. According to applicable

law, the compensation must be appropriate with regard to all relevant circumstances and in

particular the economic value of the invention or design, the degree to which the employer

contributed, any reliance on other staff and on the employer’s facilities, the expenses

incurred by the employee and his or her position in the company.

• An employee who produces an invention or design outside the performance of his or her

contractual obligations must notify the employer thereof in writing, and the employer must

inform the employee within six months if it wishes to acquire the invention or design or

release it to the employee.

Terms of employment

Time recording, overtime and excess hours

Swiss public law governs the working time of employees as well as the admissibility and compen-

sation of overtime work, work at night, at weekends and on public holidays. These rules apply to

all employees, with the exception of top management.

In order to ensure compliance with such laws, employers in Switzerland are obliged

to account for the working hours of the employees. This requires the introduction of a time

recording system and working time regulations, setting out the general obligations and princi-

ples concerning working time and the recording of working time and absences. The existence of

the recording system and working time regulations typically forms part of the legal due diligence.

As a matter of principle, the performance of overtime and excess hours must be paid out with

a 25 per cent wage supplement. However, the employer and the employee may agree in writing

that the performance of overtime and up to 60 excess hours per year may be compensated by

the monthly salary. Furthermore, the parties may agree that overtime work and excess hours be

compensated by time off in lieu, or be paid out without a wage supplement. The compensation of

overtime work and excess hours may have a significant impact on the payroll costs of the target.

Furthermore, accrued overtime and excess hours typically form part of the legal due dili-

gence because of the respective accrued payment obligations of the target company.

Policies and regulations; collective bargaining agreements

In the context of due diligence, the existence of policies and regulations required by law and

best practice rules is typically verified, for example, for the reimbursement of expenses (these

regulations are also important from a tax perspective), data protection, use of electronic commu-

nication, confidentiality undertakings and prevention of insider trading, non-discrimination and

prevention of sexual harassment, etc. The absence of such regulations may expose the target

company to liability or sanctions.

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118

Furthermore, a part of legal due diligence should review whether the target company’s

employees fall within the scope of a collective bargaining agreement, which may contain terms

that apply in addition to the terms of the employment agreement, usually to the advantage of

the employees.

Collective bargaining agreements, as well as social plans (eg, owing to past restructurings),

may also contain commitments by the employer with regard to the employees or restrictions on

the employer’s contractual right to terminate employment relationships, and thus may have an

impact on the profitability of the target company.

Health and safety laws

Swiss law requires the employer to safeguard the employee’s personality rights, personal safety

and health and integrity, and ensure that proper moral standards are maintained. The employer

must take all measures that by experience are necessary, feasible using the latest technology

and appropriate to the particular circumstances of the workplace, provided such measures may

reasonably be expected in the light of each specific employment relationship and the nature

of the work.

Depending on the industry in which the target company is active, the law, collective

bargaining agreements or industry standards may require the employer to implement specific

health and safety protections.

Freelancers and consultants

Under Swiss social security law, whether an individual or a company controlled by an individual

legally qualifies as an external service provider or employee depends on the circumstances of

the individual case and not the designation of the contractual relationship.

In particular, if an individual is subject to the directions of the principal and integrated in the

organisation of the principal, he or she may qualify as an employee notwithstanding the fact that

the underlying agreement is structured as consultancy, mandate or other agreement implying

the independent provision of services.

Such requalification of freelancers or consultants exposes the target company to potential

pension payment obligations as well as the general obligations of an employer (eg, with regard

to holidays, continued salary payments in case of illness or accidents and dismissal) and thus

may lead to significant payment obligations.

119

Tax Considerations in M&A Transactions

Susanne Schreiber and Cyrill Diefenbacher

Tax framework and recent changes

General tax framework

Corporate income and capital tax

Legal entities are subject to corporate income tax if they are resident (ie, if they are incorporated

or effectively managed in Switzerland). Swiss corporate income tax is levied on the worldwide

net income of a legal entity, except for foreign real estate and foreign permanent establishments.

Depending on the canton and commune of incorporation, the effective corporate federal, cantonal

and communal income tax rate on net profits before tax varies between approximately 12 and

21 per cent.

Swiss tax rules foresee the possibility of carrying forward tax losses and using them against

future tax profits during a seven-year period.

Furthermore, Swiss tax-resident legal entities are subject to a capital tax levied annually on

the taxable equity, which also varies between cantons and communities.

Withholding tax

A Swiss withholding tax is levied on dividends, including deemed dividends, and certain types

of interest deriving from a Swiss source, as well as certain insurance payments paid by Swiss

insurance companies. In principle, a flat tax rate of 35 per cent is automatically deducted by the

payer (debtor system) and is, if the income is properly reported by the Swiss resident beneficiary,

reimbursed through a cash refund or credited against the personal income tax liability. Dividends

paid out of qualifying capital contribution reserves are not subject to Swiss withholding tax and

are income tax-exempt for Swiss individuals holding the shares as private assets. Non-Swiss

resident income beneficiaries principally suffer the withholding tax as a final burden, unless they

are eligible for a partial or full refund based on an applicable Swiss double tax treaty. The Swiss

1 Susanne Schreiber is a partner and Cyrill Diefenbacher is a senior associate with Bär & Karrer AG.

Tax Considerations in M&A Transactions

120

withholding tax regime may, however, soon be partly remodelled (see 'Contemplated Swiss with-

holding tax and securities transfer tax reform').

Stamp duties

Issuance stamp duty

The issuance of new share capital as well as any contributions into the reserves of a Swiss

company made by its direct shareholders are subject to issuance stamp duty, which amounts

to 1 per cent of the net contribution received by the company. Benefits received from indirect

shareholders are not subject to this duty.

The Stamp Duty Act exempts certain transactions from the issuance stamp duty (eg, the

first 1 million Swiss francs received as contributions in connection with the issuance of shares

or shareholder contributions of up to 10 million Swiss francs received in the context of a recapi-

talisation, to the extent that the contribution eliminates losses in the balance sheet).

Securities transfer tax

Transfers of taxable securities (eg, shares or bonds) against consideration and with the involve-

ment of at least one Swiss securities dealer as party or intermediary may be subject to secu-

rities transfer tax of 0.15 per cent (Swiss securities) or 0.3 per cent (foreign securities) on the

purchase price. The tax is due by the Swiss securities dealer, which pays half of the tax for

itself and another half for the counterparty or client that is neither a Swiss securities dealer nor

an 'exempt investor' (exempt investors include inter alia Swiss and foreign investment funds,

foreign regulated pension funds and life insurers, and listed foreign companies and their foreign

consolidated subsidiaries).

It is to be noted that the term 'Swiss securities dealer' comprises not only professional secu-

rities traders, banks, brokers, asset managers and the like, but also all Swiss-resident corpo-

rate entities whose assets consist, as per the last annual balance sheet, of taxable securities in

excess of 10 million Swiss francs. Thus a Swiss holding company often qualifies as a Swiss secu-

rities dealer and as such becomes generally subject to the tax on taxable transfers and needs

to take care of the relevant compliance (regular filings of returns, keeping a turnover register).

Exceptions apply inter alia in the case of tax-neutral reorganisations, intercompany trans-

fers of at least 10 per cent shareholdings or if the transfer forms part of a replacement invest-

ment of a qualifying participation of at least 10 per cent of the share capital of another company.

Income tax

All periodic or one-time income is generally taxable for a Swiss-resident individual (worldwide

income, except for foreign real estate, permanent establishments or explicit tax-exempt income).

Swiss income tax laws include a very beneficial provision that capital gains from the sale of

private assets (other than Swiss real estate) are tax-free (subject to certain limitations to avoid

abuse (eg, indirect partial liquidation or transposition, qualification of the individual as commer-

cial securities dealer, etc)).

The Federal Act on Tax Reform and AHV Financing

The Federal Act on Tax Reform and AHV (social security) Financing (TRAF) entered into force on

1 January 2020 and has a significant impact on the Swiss tax landscape.

Tax Considerations in M&A Transactions

121

TRAF repealed the privileged tax regimes, namely holding, mixed and domicile company

taxation at the cantonal level, and finance branch and principal companies’ taxation at the

federal level. As compensation, the new legislation included a provision to avoid over-taxation on

untaxed hidden reserves for companies transiting out of a privileged tax regime at cantonal or

communal tax level (special rate resolution). It further introduced a mandatory OECD-compliant

patent-box regime and an optional super-deduction for R&D expenditures. Both instruments

were implemented at cantonal level only. A number of the cantons make use of the maximum

allowed deduction of 90 per cent for the qualifying income from patents and similar rights (eg,

Zurich and Zug). Others implemented more restricted deductions in the range of 10 to 50 per cent

(eg, Geneva with a maximum allowed deduction of 10 per cent and Neuchatel with a maximum

deduction of 20 per cent). At the same time, most of the cantons significantly lowered their corpo-

rate income tax rates and some cantons make use of the possibility under TRAF to reduce the

taxable basis on qualifying participations, patents and similar rights and intercompany loans for

cantonal capital tax purposes. TRAF also included a notional interest deduction, which, however,

is only available in the canton of Zurich.

Further, for Swiss-resident individuals, TRAF leads to a higher taxation on dividends from

qualifying participations. The taxable dividend inclusion increased from 60 to 70 per cent at the

federal level and to at least 50 per cent at the cantonal level. In the area of international taxa-

tion, TRAF entitles Swiss permanent establishments of foreign companies to receive foreign tax

credits under certain conditions.

As an important change, TRAF introduced a restriction on the capital contribution principle

(see 'Withholding tax'), namely a 50:50 rule stating that distributions out of capital contribution

reserves of companies listed in Switzerland will only benefit from the tax-free regime (ie, no

withholding or income tax for Swiss-resident individuals on capital contribution reserves paid

out) if the company makes a distribution out of taxable reserves of at least the same amount.

A comparable rule applies in case of a share buy-back on the second trading line, where at

minimum the same amount of capital contribution reserves and other reserves must be used.

Contemplated Swiss withholding tax and securities transfer tax reform

On 3 April 2020, the Swiss Federal Council submitted a reform proposal to the consultations

procedure. The reform proposal foresees a replacement of the current debtor-based regime

applicable to interest payments with a paying agent-based regime for Swiss withholding tax. This

paying agent-based regime:

• subjects all (Swiss and non-Swiss) interest payments made by paying agents in Switzerland

to individuals resident in Switzerland to Swiss withholding tax; and

• exempts from Swiss withholding tax interest payments to all other persons, including to

Swiss-domiciled legal entities and foreign investors.

If the reform proposal is approved, a Swiss paying agent would have to levy and pay Swiss

withholding tax on interest payments and the like of domestic and foreign notes, provided that

the beneficiary is an individual resident in Switzerland. The contemplated Swiss withholding tax

reform is a welcome step to strengthen the Swiss capital market, as Swiss legal entities as well

as non-Swiss investors would not suffer potential Swiss withholding tax on interest payments

from Swiss debtors (eg, a Swiss bond).

Tax Considerations in M&A Transactions

122

In addition, the reform proposal also includes an exemption of Swiss bonds from securities

transfer tax.

The consultation procedure is open until July 2020. The parliamentary debates are not

expected before 2021 and entry into force, if adopted, is not expected before 2022. The exact

measures of the proposed reform may be changed as a result of the consultations procedure

and/or the parliamentary debates.

Recent changes relevant for financial institutions

The prolongation of the withholding exemption on interest paid on 'coco-bonds' or write-off

bonds, respectively, until 31 December 2021 keeps these instruments attractive to foreign inves-

tors. The planned withholding tax reform (mentioned above) will further contribute to the attrac-

tiveness of the Swiss capital market and also make other Swiss bonds attractive to corporate

investors and will lead to attractive new business opportunities for Swiss financial institutions.

From an international perspective, Swiss financial institutions – but also other Swiss-resident

corporates – are increasingly affected by international transparency initiatives, such as, for

example, the automatic exchange of information (first exchange of collected information by

Switzerland in September 2018), the US Foreign Account Tax Compliance Act or the sponta-

neous exchange of tax rulings (first rulings exchanged by Switzerland in May 2018). The ruling

exchange does, however, not concern Swiss tax rulings relating to a unilateral reorganisation or

transaction.

Also, certain types of structured products (eg, securities lending) are under increased scru-

tiny by the Swiss Federal Tax Authority with regard to the refund of Swiss withholding tax, as

the beneficial ownership is often challenged. A number of court cases are currently pending in

Switzerland in this regard.

General tax considerations for Swiss M&A transactions

Taxable acquisitions and dispositions: asset deal versus share deal

In the case of taxable acquisitions or dispositions, Swiss-resident buyers and sellers often have

contrary interests. A (Swiss) buyer often prefers an asset deal, whereas a (Swiss) seller typically

prefers a share deal, owing to the facts outlined below:

Asset deal

Buyers generally prefer an asset deal to limit their risks from the acquired business, to achieve a

step-up in tax basis and to have the possibility to offset financing expenses with operating income.

Compared with a sale of shares, capital gains resulting from sales of assets are generally

subject to full corporate income taxes (no participation relief applicable) at the level of the selling

company. The subsequent distribution of such proceeds to the shareholders constitutes a gener-

ally taxable dividend (with privileged taxation of qualifying dividends for Swiss individuals and

participation relief for Swiss corporate shareholders). Against this background, sellers generally

prefer a share deal, where the capital gains are either generally tax-exempt for Swiss individuals

or can benefit from participation relief (see below).

An asset deal is often considered when only part of an entity (eg, one business division) is

to be sold. The asset deal gives the buyer the possibility to acquire only the required assets and

to acquire them with the right acquiring entity (eg, to centralise IP directly in one entity). Also

in such cases, it may be possible for the seller to realise a share deal by way of a tax-neutral

Tax Considerations in M&A Transactions

123

demerger (see comments below) of the business (or part of it) to be sold to a new Swiss company

and subsequent sale of the shares in this Swiss company.

If single assets are acquired, the purchase price needs to be allocated to the different assets.

Based on accounting provisions, the acquired assets will be stepped up to their fair market value,

which is relevant for capital gains tax purposes for the buyer in the case of a future sale. This

also allows the buyer to depreciate or amortise such assets from their new basis for accounting

and tax purposes. Any tax-loss carry-forwards of the selling entity are not transferred to the

buyer, but remain with the selling entity (and may be set off against the capital gains realised

upon the asset deal).

Should the purchase price exceed the fair market value of the assets acquired in the

purchase of a business, the exceeding part of the purchase price may be allocated to good-

will. Goodwill generally is to be depreciated in the Swiss financial accounts of a Swiss-resident

buyer, with tax regulations allowing either a 40 per cent annual depreciation on a declining

balance basis over five years or 20 per cent annual on a straight-line basis (general depreciation

options for intangibles). The amortisation period may also be shorter or longer, depending on the

expected lifetime of the respective intangible.

Generally, no historic tax liabilities are assumed by a buyer (with certain exceptions of a

joint and several liability with the seller, eg, for VAT (if seller does not carry on a business and

deregisters for VAT purposes) or social security contributions).

Among the downsides of asset deals is the transfer of contracts with suppliers, service

providers, etc with the consent of the counterparty who may use this to renegotiate existing

agreements Furthermore, an asset-by-asset deal may require more (legal) work and set-up of

individual acquisition entities in the case of cross-border transactions. Last, the risk of a fully

taxable capital gain for the seller tends to increase the purchase price for the buyer. The tax

benefit for the buyer arising from the higher amortisation and set-off of financing costs in the

acquisition entity with income from the acquired business may outweigh this. If real estate is

sold, Swiss real estate gains tax respectively property transfer tax may be applicable. These

taxes vary from canton to canton and, in cantons applying the monistic system, real estate capital

gains tax instead of corporate income tax applies, which may be significantly higher. Should

taxable securities be sold as part of the assets, securities transfer tax needs to be considered as

well, if a Swiss securities dealer is involved.

From a VAT perspective, the transfer of assets generally is subject to 7.7 or 2.5 per cent

VAT, but often the mandatory or voluntary notification procedure applies when a business unit is

transferred between Swiss VAT persons.

Share deal

In practice, sellers generally prefer a share deal owing to the applicability of the participation

relief (federal and cantonal or communal level). Corporate sellers may benefit from participation

relief on the capital gain, provided that shares of at least 10 per cent in another corporation,

which have been held by the seller for at least one year, are sold. Swiss-resident individuals

selling shares as private assets generally benefit from a tax-free capital gain on the sale of

shares (with different limitations).

At the buyer level, the purchase price is fully attributable to the acquired shares, which

cannot be depreciated in a Swiss acquisition company unless their fair market value declines.

Goodwill cannot be separately capitalised in the balance sheet.

Tax Considerations in M&A Transactions

124

A reduction in value (impairment) is tax-deductible (eg, reduces net profit) for the Swiss

corporate buyer. Consequently, a subsequent increase in value is subject to corporate income

taxation. A revaluation of a qualifying participation that has been depreciated (ie, a participa-

tion of at least 10 per cent), has to be made if the impairment is no longer justified (claw-back

provision).

Historic tax risks remain with the Swiss target entity and will crystallise at this company’s

level. Likewise, any deferred tax liability on the difference between market and tax book values of

assets remains with the acquired Swiss target and is usually reflected in the purchase price. Tax

loss carry-forwards of the acquired company generally remain available for future use (subject

to certain limitations due to deemed tax abuse, eg, the sale of a factually liquidated company).

However, the tax-loss carry-forward is generally not confirmed in the context of tax assessments

by the tax authorities, which may make a respective valuation difficult.

Real estate gains tax (generally to be paid by the seller) or property transfer tax, respec-

tively, may be triggered if a (majority) shareholding in a real estate company is sold, as this

qualifies in most cantons or communes as economic change of ownership of the underlying

Swiss real estate.

If a registered securities dealer is involved in a share deal (as a party or intermediary),

securities transfer tax may be triggered.

In the case of a share deal, no VAT applies, since the transfer of shares is exempt from VAT.

An often-incurred withholding tax issue a buyer should consider is the 'old reserves theory'

as established by the Swiss Federal Tax Authority. It applies to retained earnings subject to a

potential non-refundable withholding tax on dividends, for example, owing to a non-Swiss seller

or selling entity that does not benefit from a full withholding tax refund under an applicable

double tax treaty. If due to a change of ownership the non-refundable withholding tax would

be reduced to a lower rate than pre-deal, Swiss tax authorities may qualify the distributable

reserves as earmarked at the higher (pre-deal) withholding tax rate with the consequence that

future dividend distributions of the 'tainted' reserves are subject to non-refundable withholding

tax up to this higher rate. The amount subject to the higher withholding tax rate is usually the

lower of retained earnings of the Swiss target company (distributable reserves for corporate law

purposes, subject to withholding tax) and non-operating assets (not needed for the conduct of the

business, at group level) at the time of change of ownership. There are also further anti-abuse

theories with respect to past withholding tax in the case, for example, of a partial or full liquida-

tion of the Swiss target after an acquisition, which should be considered by a buyer.

Swiss-resident individual sellers that benefit from a tax-free capital gain on the sale of

privately held shares in a Swiss or foreign entity may face retroactive taxation in the case of an

indirect partial liquidation. If the target has distributable reserves (for corporate law purposes,

subject to withholding tax) and non-business-related assets in the group that are distributed by

the buyer within five years after the sale, this amount is taxable as dividend for the seller. Thus

the seller generally includes a share purchase agreement (SPA) indemnity clause, under which

the buyer needs to indemnify for a potential indirect partial liquidation triggered (see comments

below). The respective five-year blocking period may need to be respected by a buyer.

The downsides of a share purchase generally are the lack of a tax-efficient amortisation of

the purchase price as well as the reduced availability of debt pushdown options on the level of

the operating company (see 'Acquisition financing').

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125

Tax-free acquisitions and dispositions

In contrast to taxable acquisitions and dispositions, there are various types of tax-free acquisi-

tions and dispositions of domestic entities, which are tax-neutral on the basis that the relevant

conditions are fulfilled, for instance:

• merger;

• demerger;

• conversion; and

• transfer of assets.

Swiss tax treatment of such reorganisations follows a 'substance over form' approach, that is,

generally considers the end result (independent of how it was structured from a legal perspective).

As a general condition for tax neutrality, a continued tax liability in Switzerland and a transfer

at the (tax) book values is required. Apart from this, Swiss tax legislation and the applicable

circular published by the Swiss Federal Tax Authority state the specific conditions to be fulfilled

for each type of reorganisation.

Tax-neutral reorganisation as pre-transaction step

As mentioned, sellers typically prefer a share deal. In order to shape the target to its ideal form,

pre-deal carve-in or carve-out transactions are quite common.

Pre-deal carve-outs are usually structured as a tax-neutral demerger, for example, with a

spin-off of the business unit to be sold or to be kept to a new Swiss company. Such demerger

mainly requires that a business unit (or part of it) remains with the transferring company and

a business unit (or part of it) is transferred to the new Swiss company. However, there is no

holding period (ie, shares in the entity with the spun-off business can be sold immediately after

the demerger). The requirements to qualify for a business unit or partial business unit are as

follows – it is required that:

• the company performs services in the market or towards affiliated entities;

• the company has its own personnel; and

• the personnel expenses are appropriate, that is, in proportion to the revenues.

In the case of a demerger of a holding company or a mixed holding company, the Swiss Federal

Tax Authority’s practice requires for the qualification of a (partial) business unit that:

• the investments in subsidiaries concern predominantly active companies; and

• include at least two qualifying participations (of at least 20 per cent or warranting the exer-

cise of a controlling influence by other means) in such companies.

With the Federal Court Decision of 11 March 2019 (2C_34/2018), the court deviated from this

practice and considered it sufficient for a split-up of a holding company if the remaining and the

transferred part consist of only one operationally active subsidiary, each, as this was – based on

the transparency theory applied – equal to the spin-off of the underlying operational business

itself. This court decision brings new possibilities for pre-deal structuring for mixed holding

companies, that is, it should be sufficient for tax neutrality if one participation of over 50 per cent

in an operationally active Swiss company is transferred, constituting a business unit.

Attention should be paid to the fact that tax-neutral intragroup transfers of (partial) business

units or operating assets at (tax) book value lead to a five-year blocking period over the assets

Tax Considerations in M&A Transactions

126

transferred and the shares in the transferring and receiving entities. If breached, the transferred

hidden reserves are retroactively taxed. In the case of a contemplated asset or share deal, this is

an important aspect that should be reviewed prior to the transaction by the seller or might also

be something that should be reviewed by an interested buyer as it may restrict possibilities for

post-transaction integration.

More restrictive withholding tax practice of the Swiss Federal Tax Authority

The Swiss Federal Tax Authority’s interpretation of anti-abuse limitations has become more

restrictive in recent years; this can inter alia be noticed in the following two areas.

In the context of a tax-neutral quasi-merger (ie, share-for-share transfer with the contri-

bution of a participation that is controlled by the transferor after the contribution against the

issuance of new shares), new qualifying capital contribution reserves may be created (which

are not subject to withholding tax upon distribution and not subject to income tax at the level of

Swiss resident individuals holding the shares as private assets; certain limitations now apply for

listed companies – see above in relation to TRAF). The Swiss Federal Tax Authority has, against

this background, established a practice where such capital contribution reserves created will

retroactively be denied if the contributed participation is absorbed or liquidated within a five-year

period upon its contribution (ie, treatment like a direct merger). To the extent that such capital

contribution reserves have been distributed in the past, this could lead to income and adverse

withholding tax consequences. The practice also applies in case of contributions of shares of

minimum 10 per cent (with or without capital increase) between corporate entities.

The second area is the above-mentioned old reserves cases where a latent non-refundable

withholding tax burden is acquired. Cases of (partial) liquidation on behalf of the seller, where

the acquired Swiss target is either merged or assets or participations are transferred out by

the Swiss target, are subject to more scrutiny. This practice is relevant for the integration plans

of a buyer since the withholding tax basis is much higher than under the old reserves practice:

the hidden reserves of the Swiss target in the partial liquidation are also subject to the previous

non-refundable withholding tax rate.

Acquisition financing

Swiss acquisitions are often being structured with a non-Swiss acquisition or financing company.

Often, a Luxembourg-resident company is used, which is leveraged with required bank financing

for the acquisition (often guaranteed by a subsidiary with upstream guarantees or collateral; a

Swiss subsidiary can provide such securities or guarantees up to the amount of its distribut-

able equity).

One reason for this is often the better conditions for acquisition financing: Switzerland still

levies a 1 per cent issuance stamp duty on equity contributions by direct shareholders (abolition

of this tax has been discussed, but plans are on hold) and bank lending to a Swiss company

needs to comply with the Swiss 10/20 Non-Bank-Rules, in order to avoid adverse withholding

tax consequences on the interest paid. Also, there is no tax consolidation in Switzerland and

possibilities for a debt push-down in case of a share deal are thus generally limited. With the

planned withholding tax reform mentioned above, we expect that acquisition financing to a Swiss

company will become more attractive. A set-off of interest expenses on the acquisition financing

may be possible if the deal can be structured with a purchase by a Swiss-resident operational

company, which may use the expenses to be set off against its operational, taxable income.

Tax Considerations in M&A Transactions

127

Should this not be possible, there may still be structuring options to achieve a debt push-down,

for example, the distribution of debt-financed dividends (leveraged dividends), whereby the

target company resolves a dividend that is not directly settled in cash, but left outstanding as an

interest-bearing downstream loan by the shareholder or settled by the assumption of external

acquisition debt and the allocation of interest expenses to the target company. In addition, debt

financed intergroup acquisitions, such as the acquisition of shares or assets from group compa-

nies by the Swiss target against an interest-bearing loan, may be possible.

For intragroup loans, the Swiss thin capitalisation rules must be considered since

related-party debt exceeding the maximum permitted debt for tax purposes is qualified as

hidden equity, and interest on such hidden equity is not tax-deductible but considered as deemed

dividend subject to withholding tax. The Federal Tax Authority annually publishes safe haven

maximum and minimum interest rates for intercompany loans. The safe haven rates are quite

low, but in each case, the possibility to use a higher or lower interest rate remains open, if the

respective arm’s-length character can be evidenced.

Landmark transactions

DSV’s merger with Panalpina

On 1 April 2019, DSV A/S and Panalpina Welttransport (Holding) AG announced that they had

reached an agreement on the terms and conditions of a combination by way of a public exchange

offer to all Panalpina shareholders. The transaction had an enterprise value of approximately

4.6 billion Swiss francs. From a Swiss tax perspective, it was structured as a tax-neutral

quasi-merger (share-for-share exchange).

Spin-off of the Alcon eye care devices business

On 9 April 2019, Novartis completed the carve-out and spin-off of Alcon, a global leader in eye

care and the largest eye care device company in the world, with complementary businesses in

surgical and vision care. The Alcon shares were successfully listed on the SIX Swiss Exchange

Ltd and the New York Stock Exchange, with Alcon’s market capitalisation reaching 28 billion

Swiss francs at close of trading on the SIX Swiss Exchange. They are also included in the Swiss

Market Index, which comprises the 20 largest Swiss listed stocks. The spin-off was structured

as a tax-neutral demerger for Swiss tax purposes (ie, with two tax-neutral demergers): first the

tax-neutral demerger of the Swiss Alcon business, followed by a holding demerger of Novartis

by transferring the participations in the Alcon subsidiaries to a new Swiss holding (Alcon Inc) and

distributing the shares in Alcon Inc to its shareholders.

Clearstream's majority stake in Fondcenter

In January 2020, Clearstream (a Deutsche Börse Group company) acquired a majority stake

in Fondcenter AG, UBS’s fund distribution platform. The combination of Fondcenter with

Clearstream’s Fund Desk will create a leading provider of fund services. The companies had

reached a joint agreement by which Clearstream acquired 51 per cent of Zurich-based fund

distribution platform Fondcenter from UBS for 389 million Swiss francs. UBS retained a minority

of 49 per cent. Completion is expected for second half of 2020. The transaction involved inter alia

carve-outs with intragroup transfers and a tax-neutral demerger as a preparatory step at the

level of UBS.

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128

General tax considerations for cross-border M&A transactions

An inbound, immigration transaction can be structured in different ways, as follows.

Immigration merger

An immigration merger (inbound) basically has to respect the domestic merger law provi-

sions; thus, for an inbound merger, the same provisions apply as for a Swiss domestic merger.

Consequently, an inbound merger can be carried out tax-free, if the conditions for a Swiss

domestic merger are met. The main question is, whether the foreign legislation permits an

immigration merger and under which conditions. Furthermore, if the foreign company to be

merged with a Swiss company has hidden reserves and the merger is made at book values,

generally no step-up of the income tax values for Swiss tax purposes is available. However, as

from 1 January 2020, there is a legal basis for hidden reserves (including goodwill) of a foreign

company merged into a Swiss company (excluding any hidden reserves on qualifying participa-

tions) to be stepped up on a tax-neutral basis to market values for Swiss corporate income and

capital tax purposes, irrespective of the book values for accounting purposes. The transferred

goodwill can be depreciated for tax purposes within 10 years. Thus we expect this option to

become more popular. The same rules apply in the case of a change of domicile or shift of the

place of effective management or the transfer of relevant asset functions to Switzerland.

Quasi-merger

A very popular alternative to an immigration merger or a transfer of seat of a foreign company to

Switzerland is a cross-border quasi-merger. As mentioned above, a quasi-merger is a share-for-

share exchange between an acquiring and a target company, whereby the shareholders of the

target company receive at least 50 per cent of the value of their compensation in the form of

new shares of the acquiring company, and the target company legally survives as a subsidiary of

the acquiring company, whereby the acquiring company must control at least 50 per cent of the

voting rights in the target company after the transaction.

Such qualifying quasi-mergers with Swiss and foreign target companies are principally

tax-neutral for the companies involved. Foreign-resident shareholders of the foreign target

company are not taxed in Switzerland. Swiss-resident private individual shareholders of the

foreign target company generally realise a tax-neutral capital gain (or loss) on the entire

quasi-merger consideration. The immigration quasi-merger can typically be done tax-neutrally

at fair market value and the share premium at the level of the Swiss acquiring company gener-

ally qualifies as capital contribution reserves, which can be distributed without withholding tax.

The limitations introduced for Swiss-listed entities (see TRAF) do not apply for distributions out

of foreign capital contribution reserves that are or were created, for instance, by quasi-mergers

with contributions of non-Swiss participations. Certain limitations may need to be considered

(see 'More restrictive withholding tax practice').

Landmark transactions

Most cross-border transactions (into Switzerland) have happened over the past 10 years and

where structured as quasi-mergers. From a tax perspective such quasi-mergers resulted

in significant capital contribution reserves, for example, in the case of the combination of

LafargeHolcim, under a common Swiss holding company. In about the past five years many

relocations or inbound transfers covered offshore entities. A recent and public case was the

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129

relocation of CEVA Group from the Marshall Islands to Switzerland. This was structured as a

tax-neutral downstream merger into a Swiss subsidiary. Another transaction (not implemented)

was the intended combination of Huntsman and Clariant, with a tax-neutral share-for-share

transfer of Huntsman into Clariant; these plans were aborted at the end of 2017.

Key tax issues in M&A transactions – tax practice points for M&A dealmakers

In the case of an asset or share deal, the Swiss tax-related objectives of a Swiss seller and buyer

are often, as outlined above, diametrically different. To find the most tax-efficient deal structure

is often subject to longer negotiations. However, Swiss individuals as sellers will usually insist

on share deals and it is market practice that a buyer has to accept an indirect partial liquidation

indemnity obligation under the SPA.

Depending on the structure of the deal, the focus of the tax due diligence will be different: in

the case of a share deal, a buyer generally inherits all historic tax risks of the target, but in the

case of an asset deal, certain taxes foresee joint and several liability of the buyer with the seller,

and acquired real estate can be encumbered with a pledge for past taxes (without the necessity

of registering such pledge in the real estate register).

From a buyer’s perspective, there are certain potential pitfalls that should be considered

with regard to acquisition financing; for example:

• the issuance stamp duty on direct equity financing into a Swiss company, which can be

mitigated in the case of grandparent contributions or by making use of exemptions for reor-

ganisations (eg, certain share contributions);

• limited interest deductibility for intragroup financing owing to thin capitalisation limitations

and low safe-haven interest rates;

• Swiss 10/20 Non-Bank-Rules to avoid Swiss interest withholding tax of a Swiss borrower,

which means that the Swiss borrower may not have more than 10 non-banks as lenders

under one facility with the same terms; Swiss interest withholding tax can also be trig-

gered in the case of a foreign borrower with downstream guarantees by a Swiss parent

entity and a detrimental use of the funds in Switzerland or, in certain cases, also upstream

or cross-stream guarantees or securities by Swiss entities. Thus the acquisition financing

agreements require specific language to cover this topic and are often subject to Swiss tax

ruling confirmations;

• no tax consolidation for income tax purposes and thus limited options for a debt push-down;

this should be reflected when modelling the purchase price or tax benefits of the

financing; and

• repatriation of funds from the Swiss target to serve the external debt without triggering indi-

rect partial liquidation limitations (in the case of Swiss individual sellers, eg, by arm‘s-length

upstream loans) or dividend withholding tax leakage; non-refundable withholding tax on

dividends may apply either due to the situation of the seller (eg, old reserves practice) or

if the acquisition company is not entitled to a full withholding tax refund under an appli-

cable double-tax treaty. The withholding tax reduction under a double tax treaty espe-

cially requires, apart from beneficial ownership and fulfilment of the general conditions

(shareholding quota, minimum holding period), that the acquisition company has sufficient

substance from the perspective of the Swiss Federal Tax Authority. The withholding tax

exemption under a double tax treaty has to be applied for in order to benefit from a reduction

Tax Considerations in M&A Transactions

130

at source and the Swiss Federal Tax Authority usually requests detailed information about

the rationale and set-up of the acquisition company.

With a share deal Swiss withholding tax aspects in general should not be neglected. The Swiss

concepts of 'old reserves', respectively '(partial) liquidation by proxy', are a speciality of Swiss tax

practice of which a buyer is often unaware. In order to assess potential exposure in this regard,

which may give the possibility to negotiate a lower purchase price, a buyer also needs to look at

the past shareholder history (ie, not only the situation as per signing of the transaction).

Other relevant aspects for a buyer in tax due diligence are in particular:

• existing blocking periods, for instance, from past reorganisations that need to be considered

in the context of potential post-closing integration work;

• deferred tax liabilities on hidden reserves that are permitted from a Swiss tax perspective,

for example, inventory allowance, lump-sum allowance for bad debt; and

• deferred tax liabilities arising from past depreciation of shares in subsidiaries. Such depre-

ciation may need to be reversed after the transaction in case higher values can be justified

(eg, based on the purchase price).

A very positive aspect of Switzerland as a tax jurisdiction is the easy access to tax authorities and

the broad possibilities to obtain advance tax ruling confirmations within a reasonable time frame.

This is particularly important in transactions to obtain certainty, for example, whether the require-

ments of a tax-neutral reorganisation are met, whether certain upstream loans or distributions

do not trigger the indirect partial liquidation taxation or whether certain upstream guarantees by

Swiss entities do not trigger interest withholding tax for loans to foreign borrowers. Transactional

tax rulings with a unilateral context are generally not subject to the international ruling exchange.

Tax rulings that were obtained by the Swiss target may also reduce tax risks for the buyer. For

any tax rulings, it is important to note that they are only binding to the extent the relevant facts are

fully disclosed and the described transaction is actually implemented as described.

Swiss securities transfer tax aspects in share deals should not be forgotten. Financial

institutions in Switzerland are used to this tax, but it should be noted that each legal entity in

Switzerland may qualify as a Swiss securities dealer and as such become subject to securities

transfer tax, if it acts as a party to a deal or is involved as an intermediary. The tax applies both to

the transfer of Swiss or foreign shares (or other securities and bonds). The Swiss Federal Court

recently tightened the requirements that a securities dealer can rely on the fact that the other

party also qualifies as securities dealer – if the evidence is not provided within a short time frame,

the securities dealer has to pay both parts of the securities transfer tax.

The latest tax reform (TRAF), as described above, and the reduction of income and capital

tax rates by cantons, further increased the attractiveness of Switzerland as a tax jurisdiction.

The lower tax rates will have an impact on valuation models in M&A transactions, for instance,

for post-tax cashflow, but also the value of tax losses and the valuation of transitional meas-

ures (eg, separate cantonal tax rate until 2024 for certain income). The impact of potential future

developments at the international level (eg, the OECD approach on challenges arising from the

digitalisation of the economy, which will have an impact on the global tax framework) also needs

to be monitored in the context of M&A transactions, since assumptions for the valuation of the

estimated tax burden may be affected.

131

Dispute Resolution

Gérald Virieux and Mladen Stojiljković

Litigation versus arbitration

Arbitration

In the majority of M&A transactions in Switzerland, the parties choose arbitration over litigation.

There are many reasons for this.

To begin with, arbitration allows the parties to appoint arbitrators with the qualifications (eg,

in corporate law, accounting, etc) and experience (in negotiating M&A transactions, resolving

complex commercial disputes, etc) the parties consider necessary. Given that few high-stakes

M&A disputes end up in state courts, judges rarely have comparable levels of experience.

Arbitration is flexible. It allows the parties to tailor the procedure to their particular needs. As

long as the parties agree, there are few limits to what they can do in structuring the proceedings.

They can choose the language of the proceedings, the number of submissions, the duration of

time limits, the availability and extent of document production, the degree of confidentiality, etc.

In arbitration, parties generally have more control over the proceedings, particularly

regarding the taking of evidence. They can submit written witness statements and expert reports,

and they can cross-examine the other party’s witnesses and experts. In contrast, in litigation, the

court controls the taking of evidence. Witnesses and experts are heard only if the court allows

it. Also, only court-appointed experts may give expert testimony, and the parties have no right to

cross-examination. Normally, the judge examines the witnesses, and the parties may ask a few

additional questions if the judge permits it. In addition, in most Swiss courts there is no verbatim

transcript of the hearing. Instead, witness depositions are only summarised by the court in the

minutes of the hearing. The summary made by the court rarely conveys the exact meaning,

nuances and subtleties of what the witnesses say. Witness testimony in state-court proceedings

can thus be extremely frustrating.

1 Gérald Virieux is a partner and Mladen Stojiljković is a counsel with VISCHER.

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Arbitration is less formalistic. In state courts, it can be difficult to obtain full compensation

in commercial cases involving complex damages calculations.

Even though, as a matter of law,

the substantiation requirements and evidential burdens are not materially different in litigation

and arbitration, courts tend to apply these rules more strictly and in a manner that, at times, may

insufficiently take into account the complexity of the case.

Arbitration and its users are also more up to date with regard to modern technologies and

how they are used in the M&A process. Most courts still use paper submissions, though elec-

tronic submissions are gradually becoming more common.

In addition, in arbitration, the procedural calendar is more predictable. At an early stage in

the proceedings, arbitral tribunals consult the parties and devise a procedural timetable that

includes all major steps in the arbitration. This includes not only the dates for the parties’ submis-

sions, but also the hearing date, and frequently an indication of when the parties can expect the

final award. Such predictability is rare in Swiss state-court proceedings, where party-agreed

procedural calendars are unheard of. Instead, courts set deadlines in reaction to the parties’

submissions. Swiss courts have considerable discretion as to how to organise the proceedings

and they rarely consult the parties before they exercise their discretion. This can lead to substan-

tial delays in the proceedings, depending on the court’s own agenda and workload.

Speed and finality are also important aspects. While the duration of a typical M&A arbitra-

tion rarely exceeds two to three years, it is not uncommon for similar disputes in Swiss courts to

take longer in the trial court alone, not even considering the duration of an appeal. In arbitration,

however, the arbitral award is final and enforceable from the date of its notification to the parties

(unless suspensive effect is granted on appeal). Arbitral awards are not subject to appeal with

full review of facts or law. Instead, there are only limited grounds on which arbitral awards can

be challenged, largely for procedural errors.

Finally, enforcement aspects are important and must be considered as well. In an ideal

world, the losing party would comply and promptly pay what is stipulated in the award. Alas,

in reality this is rarely the case. Often, the prevailing party must take steps to enforce the

award. For cross-border transactions involving parties in different jurisdictions, arbitration has

a clear advantage over state-court proceedings in this respect. Indeed, at the time of writing,

162 countries were party to the United Nations Convention on the Recognition and Enforcement

of Foreign Arbitral Awards signed in New York on 10 June 1958 (the New York Convention). All

major jurisdictions are party to the New York Convention, including all European countries and

the United States. The New York Convention facilitates arbitration in two respects: First, it guar-

antees that the arbitration agreement entered into by the parties will be recognised and enforced

by the courts of member states. This prevents recalcitrant parties from defeating the dispute

mechanism agreed by the parties by initiating court proceedings in their home jurisdiction or in

another favourable jurisdiction. Second, it guarantees that the arbitral award will be recognised

and enforced in the member states. By contrast, as we shall see below, treaties facilitating the

recognition and enforcement of state-court judgments are rare.

2 See also Harold Frey/Dominique Müller, Arbitrating M&A Disputes, in: Manuel Arroyo (ed), Arbitration

in Switzerland: The Practitioner’s Guide, 1115, 1135 (2018) (discussing the substantiation requirements

in M&A litigation and arbitration).

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Arbitration is sometimes perceived as an expensive means of resolving disputes. That is not

necessarily the case. In some instances, arbitration can be cheaper than state-court proceedings,

if only because challenges against the arbitral award are more limited. One effective way of

keeping the costs under control is to opt for institutional arbitration, that is, arbitration adminis-

tered by an institution, such as the International Chamber of Commerce or the Swiss Chambers’

Arbitration Institution (see 'A few words of advice for M&A dealmakers'). The arbitration rules of

such institutions determine in a precise way the costs of administering the case, and cap the arbi-

trators’ fees, thereby providing predictability. Other options include appointing a sole arbitrator

rather than a three-member tribunal, agreeing to an expedited procedure, or, where appropriate,

agreeing on limited document production.

Litigation

Even though arbitration is the preferred means to resolve M&A disputes, occasionally some

cases still end up in the court system. The reasons for this can be manifold.

Certain disputes are practically only decided in the courts, such as challenges of share-

holders’ resolutions to approve or disapprove a merger, or appraisal law suits (actions in which

shareholders submit their shares for valuation to the court rather than accepting the deal price).

In other cases, litigation is chosen because the party with more bargaining power has

imposed it on the other. The practical difficulties for claimants, who bear the burden of proof, to

obtain damages awards in complex high-stakes disputes may work to the advantage of respond-

ents. The seller may thus attempt to impose state-court litigation on the buyer in the hope that it

will make the buyer’s life more complicated in the event of a dispute.

Not all state-court cases are created equal. Much will depend on the court and how experi-

enced it is in resolving M&A disputes. Parties generally prefer, when they have a choice, courts

with experience in commercial disputes in economic centres over smaller courts in rural areas,

which may not be equally experienced and have fewer resources.

Most commercial cases are decided in one of Switzerland’s main commercial hubs: Zurich

and Basel for the German-speaking part of the country, and Geneva for the French-speaking

part. Commercial courts in other cantons (Aargau, St Gallen and Berne) also regularly decide

commercial disputes. The Zurich Commercial Court has the highest caseload in the country and

enjoys a reputation as being business-minded and pragmatic. It is composed of judges (lawyers)

and commercial judges with in-depth experience in specific business segments such as banking,

insurance, auditing, construction, etc. The Zurich Commercial Court has a high success rate

in facilitating settlements. The majority of cases before the Zurich Commercial Court end in a

settlement, voluntary withdrawal or claim recognition by the defendant. When cases are not

settled early, the Zurich Commercial Court tends to decide based on the documents before it,

rarely ordering witness testimony or expert evidence.

In contrast, Geneva does not have a commercial court, and commercial disputes are decided

by the ordinary court of first instance. Complex cases, however, are assigned to experienced

judges. Contrary to the Zurich Commercial Court, witness testimony is common in Geneva.

However, as mentioned previously, witness depositions are only summarised in the minutes

3 See also Rolf Wattter, Lessons learnt aus 20 Jahren M&A-Litigation, EIZ Europa Institut Zürich, Volume

186, 7, 8 (2018) (mentioning public takeovers and proxy fights as being decided in courts).

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134

of the hearing, and much of what witnesses say is lost in the process. In addition, contrary to

arbitration, counsel for the parties are essentially prohibited from talking to potential witnesses

prior to the witness hearing. Witness hearings are therefore much more unpredictable compared

with arbitration because the trustworthiness and actual knowledge of the witness cannot be

assessed in advance of the hearing. This typically leads legal counsel in state-court proceedings

to avoid relying on witness evidence, or at the very least limit witness evidence to what is strictly

necessary, such as when no other means of proving certain facts are available.

As mentioned above, treaties facilitating the recognition and enforcement of state-court

judgments are rare. The Hague Judgments Convention was concluded in 2019 but has not yet

entered into force. One notable exception is the European Union as well as other European

countries such as Switzerland, Norway and Iceland. Between those countries, judgments are

easily and swiftly enforced pursuant to a largely uniform set of rules. Outside of those countries,

however, the recognition and enforcement of a Swiss court judgment will be entirely governed by

local law, with unpredictable results. The risk is high that the losing party will seek to challenge

the Swiss judgment and relitigate the case before the local enforcement court. If, foreseeably, the

judgment may need to be enforced in a country outside the European Union, Norway or Iceland,

where no international instrument applies, then state-court proceedings are not recommended.

Contrary to widespread belief, state-court proceedings are not necessarily cheaper than

arbitration. Much will depend on the amount in dispute and the issues at stake, as well as the

number of levels of appeal. For smaller disputes, state-court proceedings may end up being

cheaper, even when taking appellate proceedings into consideration. For larger disputes,

however, the court costs – which are set in proportion to the amount in dispute – can climb

rapidly. One additional thing to bear in mind with state-court litigation is that the amount of

attorney’s fees granted to the prevailing party does not necessarily cover that party’s actual

legal representation costs.

Others forms

In M&A disputes, parties frequently combine arbitration or litigation with other means of dispute

resolution or prevention.

This includes expert determination. The idea is to outsource disputes relating to certain

technical issues, such as questions of accounting, to an accounting or industry expert, without

going through the process of an entire arbitration. Expert determination is often used in connec-

tion with purchase price adjustment mechanisms. But, as always, the devil can be in the detail.

Sometimes the exact delineation of tasks between expert and arbitrator is not clear. This requires

attention and care in formulating expert determination and arbitration clauses. Parties tend to

prefer locked-box transactions precisely to avoid disputes related to purchase price adjustments.

Another mechanism frequently seen in practice is multi-tiered dispute resolution clauses.

Such clauses can come in different forms. The idea is to provide several steps to help settle

or narrow the dispute before the parties resort to arbitration. That is why the first step or

tier involves either negotiation, conciliation or mediation. It can also provide that both sides

should first escalate the matter internally, say to the CFO or CEO, and only after a negotiation or

cooling-off period can the next step be taken. The Swiss Federal Court recently held that omitting

certain mandatory steps in a multi-tiered dispute resolution clause does not necessarily deprive

the arbitral tribunal of its jurisdiction; rather the tribunal should as a rule stay the proceedings

and allow the parties to complete the step that was omitted (DTF 142 [2016] III 296).

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135

Settlement facilitation by arbitrators is another option. By way of example, article 15(8) of

the Swiss Rules of International Arbitration provides the following:

With the agreement of each of the parties, the arbitral tribunal may take steps to facilitate the

settlement of the dispute before it. Any such agreement by a party shall constitute a waiver of its

right to challenge an arbitrator’s impartiality based on the arbitrator’s participation and knowledge

acquired in taking the agreed steps.

Settlement facilitation has a long tradition in Switzerland. Against this background, it should not

be surprising that a considerable number of M&A dispute settle.

But this is true not only for M&A

disputes. High settlement rates are common across all types of disputes. According to the latest

available statistics of the Swiss Chambers’ Arbitration Institution, from 2004 to 2018, 544 cases

ended with final awards, whereas 458 ended with either a settlement, withdrawal or termination.

Proposed new legislation

Two legislative projects are under way with regard to international arbitration and litigation in

Swiss courts.

The Swiss Parliament is in the process of revising Chapter 12 of the Swiss Private

International Law Act. The proposed amendments seek to selectively adjust and amend statutory

rules on international arbitration and to further strengthen Switzerland’s position as the premier

venue for arbitration. Geneva and Zurich are today among the world’s leading venues for inter-

national commercial arbitration. The bill, which was published in October 2018, is currently being

debated in the federal parliament. The most controversial issue is the proposal to allow parties

to use English before the Swiss Federal Court when challenging awards.

New legislation has also been proposed with regard to state-court litigation. In February 2020,

the Swiss Federal Council issued a bill to amend the Swiss Civil Procedure Code. One of the

primary goals of the bill is to facilitate the enforcement of rights by lowering cost barriers

(particularly the amount the courts can ask as an advance for costs, which today is higher than

in most other jurisdictions in Europe). The bill also includes proposals to allow parties to choose

a commercial court for international disputes, and to allow cantons to provide for English as the

language of the proceedings. Parties should also be able to use English in appeals before the

Swiss Federal Court if they used English in the cantonal court. It remains to be seen whether

the bill will become law. If it does, it will significantly increase the attractiveness of the Swiss

Commercial Courts for international disputes, including for M&A disputes.

4 See, eg, Rolf Wattter, Lessons learnt aus 20 Jahren M&A-Litigation, EIZ Europa Institut Zürich, Volume

186, 7, 8 (2018)

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Overview of common M&A disputes in Switzerland

M&A disputes can arise in all phases of the deal: pre-signing, between signing and closing, and

post-closing.

Pre-signing disputes

Pre-signing disputes are not very common. Under Swiss law, the parties are in principle free to

end negotiations at any time so long as they have not acted in bad faith. This is a high threshold

that is difficult to prove. Even if bad faith can be proven, compensation is typically limited to reli-

ance damages (the economic position quo ante).

Confidentiality covenants may sometimes give rise to disputes. In merger negotiations,

sharing business secrets with a potential buyer may be a risky business, particularly when that

buyer is a competitor. It is impossible to un-disclose a secret once it is out. Therefore, such

disputes typically focus on the right amount of compensation.

Disputes for failing to close

Disputes between signing and closing often relate to conditions precedent (eg, merger control

approval) or covenants (obligations to ensure or avoid certain actions until closing) set forth in

the transaction document. Disputes over such issues can occur, for example, during a financial

crisis or if one of the companies becomes financially distressed and fails to close. But such

disputes are not common. This is because, in this phase of the deal, the parties’ interests are

still aligned and both want to close the transaction. Where closing fails, however, this can have

significant consequences. In a recent major arbitration the transaction failed to close and the

seller had to sell the target at a significant discount, after which it sued the buyer for failing to

fulfil the covenants. The case eventually settled.

Post-closing disputes

The majority of M&A litigations in Switzerland involve post-closing issues. In such disputes, the

purchasing party realises or suspects that it did not receive what it was entitled to expect.

Price adjustment disputes are quite common. In many cases, the parties agree to submit

such disputes to experts. But experience shows that arbitration is sometimes unavoidable,

particularly where issues of fact and law are disputed. Parties rarely want an accounting firm to

decide legal questions of how certain accounting standards ought to be interpreted or whether

the collectability of certain receivables was correctly estimated. Given that the line between the

tasks of the expert and the arbitrator can be blurry under Swiss law, disputes sometimes include

the issue of whether a prior expert determination is binding on a court or arbitral tribunal.

Earn-out disputes may be the most common post-closing dispute of all. While earn-out

clauses may seem like a good idea in the negotiation phase, they tend to increase the risk of

post-closing disputes. After closing, the seller no longer has access to the company and is unable

to influence its business operations. This scenario may distort the parties’ incentives post-closing.

Thus earn-out disputes often revolve around the issue of whether the buyer’s underperformance

could be for reasons for which the buyer should be responsible (eg, bad business judgement or

even manipulation). Swiss law will deem a condition precedent fulfilled where a party has in bad

faith prevented it from occurring. Share purchase agreements often include a right of the seller

to access the buyer’s books and records in order to verify earn-out calculations.

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137

Post-M&A disputes also often revolve around alleged misrepresentations or breached

warranties. Many such disputes involve issues of contract interpretation. In Swiss law, extrinsic

evidence is admissible to prove the likely intent of the parties even where the text of the contract

as such seems unambiguous. This is because, in Swiss law, what is decisive is not necessarily

the objective meaning of the contract but the parties’ true and common understanding at the

time they entered into the contract (article 18 Code of Obligations). Sometimes, the issue can

arise as to what the seller and the buyer knew at the time of contracting. This, in turn, can make

it necessary to look deep into the negotiation history, including the due diligence disclosures,

adding to the complexity of such disputes.

In a considerable number of Swiss M&A disputes, the buyer’s inspection and notification

duties may become an issue.

Did the buyer inspect the purchased object soon enough, did it

notify the seller soon enough, was the notification sufficiently detailed? Such questions regularly

come up. These issues, however, can largely be avoided with careful contract drafting.

A few words of advice for M&A dealmakers

M&A transactions come in different shapes and sizes. However, whether you advise clients on

M&A transactions, or whether you are the seller’s or buyer’s CEO or in-house counsel, there are

a number of essential points you should keep in mind that could prevent a costly dispute or, at

the very least, make things a lot easier in the unfortunate event there is one.

The infamous 'midnight clause'

Recommendation 1

Discuss choice of law and dispute resolution from the onset. It is never pleasant to address

dispute resolution mechanisms when negotiations have barely begun. Unfortunately, precisely

because no one wants to contemplate the possibility of a dispute when negotiations begin, dispute

resolution mechanisms are all too often discussed at the last minute (hence the term 'midnight

clause') and given little attention, if any. This can be a grave mistake. Setting the framework for

dealing with possible future disputes from the onset is just as important as discussing price and

warranties, and since it is a necessity, the parties might as well do it at the very beginning of

the negotiation process. There is nothing worse than discovering, after months of hard work on

the terms and conditions of the transaction, that, because of differing company policies or past

experience, the parties are unable to agree on arbitration versus state-court litigation, Geneva

courts versus Zurich courts, or Swiss law versus English law.

Bottom line: get these (seemingly uninteresting, but crucially important) aspects out of the

way from day one.

Choose a reputable arbitration institution

Recommendation 2

Parties should choose a reputable arbitration institution. The best known is certainly the

International Chamber of Commerce in Paris (ICC). The ICC scrutinises each award before it

5 Rolf Wattter, Lessons learnt aus 20 Jahren M&A-Litigation, EIZ Europa Institut Zürich, Volume 186, 7,

17 (2018).

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138

is issued, which ensures quality. Arbitration under the auspices of the ICC and the ICC Rules of

Arbitration is often the preferred choice for cross-border transactions.

In Switzerland, the chambers of commerce of Basel, Bern, Geneva, Lausanne, Lucerne,

Lugano, Neuchâtel and Zurich have established the Swiss Chambers’ Arbitration Institution

(SCAI), which administers arbitration proceedings. Its arbitration rules, the Swiss Rules of

International Arbitration, are available in 18 languages, with English being the official one.

Use the model arbitration clause

Recommendation 3

Reputable arbitration institutions such as the ICC or SCAI provide model arbitration clauses, and

you should use them. These clauses have been carefully devised and are the result of decades

of experience. In other words, model arbitration clauses are tried and tested. There is rarely any

benefit in departing from the model clause. Unfortunately, time and again, the parties amend

the language of the model clause or add elements that are ambiguous or, worse, can defeat the

entire arbitration clause.

Multi-tiered dispute resolution clauses (ie, clauses providing that the parties must seek to

resolve their dispute amicably before initiating arbitration proceedings) can sometimes cause

mischief if certain possibly mandatory steps have not been complied with. Here, too, we recom-

mend using standard clauses such as those relating to the ICC Mediation Rules.

Another recurring example is mixing the arbitration clause with choice-of-court language

taken from another contract or document. It is not rare for dispute resolution lawyers to come

across arbitration clauses containing extra language saying that the parties agree on the exclu-

sive jurisdiction of a certain state court, without specifying the relationship between the two.

This can potentially result in both the arbitration and the choice-of-court clause being ineffective.

Bottom line: copy and paste the model arbitration clause and stick to it. Be wary of the other

party’s seeking to modify it; it may have a hidden agenda.

Keep organised records

Recommendation 4

Keep an organised and comprehensive record of all phases of the transaction, from the first

day of the negotiations to the signing of the contract. Except for disputes turning exclusively on

a purely legal issue (these are rare), facts will almost always play an essential part in an M&A

dispute. Having access to the relevant information and documentation can thus make the differ-

ence between losing or winning the case. It is no secret nowadays that people tend to change

jobs often: in no time, those who were involved on a given transaction will have moved on to

other positions and may be out of reach. It is therefore very important to keep a well-organised

and comprehensive record of the transaction.

Under Swiss law, draft contracts exchanged between the parties during the course of the

negotiations can be useful to show the parties’ intention on a given aspect, or how a specific

clause is to be interpreted and applied. Cover emails may shed light on the parties’ under-

standing of a specific word they used, the scope of a representation or the extent of a particular

warranty, to name but a few. The record should therefore include all documents created in

connection with the negotiation phase, such as letters of intent, factsheets, offers, confidentiality

agreements, document request lists, draft contracts, final contract and closing memorandum.

Ideally, the record should also include all communications between the parties (ie, mostly emails

Dispute Resolution

139

nowadays). Of course, the sheer volume of communications in certain complex transactions may

make it impractical to keep copies of every single email. Modern e-discovery tools and service

providers may help.

Larger transactions will often involve sophisticated buyers and sellers using no less sophis-

ticated tailor-made tools for record-keeping purposes. However, for smaller transactions, there

is a simple way to keep an effective and practical record of the transaction without needing

dedicated software: all it takes is creating an Excel spreadsheet and making an entry for each

relevant circumstance (meeting, email, draft contract, etc), with the corresponding date, and

then link the entry to a document in an associated database. If a dispute arises years after the

deal was made, the only thing that needs to be done is hand over the Excel document with

the associated database to outside counsel, and outside counsel will have a well-organised,

chronological overview of the relevant facts, with direct links to supporting documents. The time

spent in creating and maintaining the database during the negotiation process will be nothing

in comparison with the savings on legal costs. This will also greatly reduce the risk of missing

valuable arguments.

Conclusion

Arbitration is the preferred means of dispute resolution for high-profile, high-stakes M&A disputes,

or disputes involving a cross-border aspect. As a premier venue for arbitration, Switzerland’s

arbitration law offers the parties flexibility, predictability and finality. In some cases, however,

state courts can be an alternative, especially for smaller or purely local transactions. Parties

are well advised to consider the advantages and potential drawbacks of each dispute resolution

mechanism and keep organised records. Consulting outside counsel early in the process may

prevent issues at a later stage.

141

Raphael Annasohn

Bär & Karrer AG

Raphael Annasohn is a partner. He broad experience in international and domestic M&A trans-

actions in various industries, focusing on private M&A and private equity, corporate reorganisa-

tions and restructurings, as well as corporate law and general contractual matters, in particular

shareholders’ agreements. Furthermore, he specialises in the fields of venture capital and

startups and assists clients in their ongoing commercial activities.

Manuel Baschung

Homburger AG

Manuel Baschung is an associate in Homburger’s Banking and Finance team. His practice focuses

on financial markets and banking law as well as financial services regulation.

Peter Bigler

FMP Fuhrer Marbach & Partners

Peter Bigler graduated from the University in Berne with a Bachelor of Law (2009) and a Master

of Law (2011) degree. After being admitted to the Swiss Bar in 2013, Mr Bigler was a research

assistant at the University of Berne, Institute for Economic Law where he is currently finishing

his PhD in patents law. In 2016, he joined FMP Fuhrer Marbach & Partners, his main practice area

being intellectual property law, IT law, new technologies, unfair competition and the intersections

thereof. Mr Bigler has advised many Swiss and international companies on a broad spectrum of

legal issues, contract negotiations, litigation and IP strategy and enforcement. In April 2020, Mr

Bigler joined the legal service of the Swiss Federal Institute of Intellectual Property.

Appendix 1

About the Authors

142

Lukas Bopp

Kellerhals Carrard Basel KlG

Lukas Bopp has been partner at Kellerhals Carrard since 2014. His practice focuses on all

aspects of national and international insolvency and restructuring matters, including the

conduct of insolvency-related litigation, attachment of assets, recognition and enforcement

of foreign judgments and insolvency proceedings. Lukas Bopp represents foreign creditors in

Swiss-related insolvency proceedings and supports foreign trustees in the recovery of assets

located in Switzerland. He is Co-Head of Kellerhals Carrard insolvency practice group. He regu-

larly publishes on issues relating to bankruptcy, conflict of laws and litigation. As a long-time

member of INSOL Europe, Lukas Bopp has an excellent international network.

Emanuel Dettwiler

Kellerhals Carrard Basel KlG

An experienced M&A and corporate lawyer, Emanuel Dettwiler advises clients on a wide range

of international and domestic, public and private, transactions. His particular focus lies on

distressed M&A transactions and restructurings, where he regularly supports clients in chal-

lenging situations. His clients are active in various industries, mainly in life sciences, technology

and IT. He also advises on demanding corporate law topics and assists clients in both equity

and debt financing matters as well as selected contract law issues. He regularly publishes and

lectures in his areas of expertise. An active member in a number of international associations and

alliances, Emanuel enjoys a strong international network. As a former management consultant,

Emanuel has an in-depth understanding of the commercial aspects of problems presented to

him and honours the real needs of demanding corporate clients.

Cyrill Diefenbacher

Bär & Karrer AG

Cyrill Diefenbacher is a senior associate at Bär & Karrer AG. He has broad experience in national

and international corporate tax matters.

He advises clients on tax-related questions in the area of M&A transactions, restructurings

and financing, and also has broad experience in advising clients in the area of tax compliance.

He frequently works on M&A transactions (buy-side or sell-side advice over all stages of the

transaction, advice on management incentive schemes), restructurings and reorganisations and

provides advice on various national or international corporate tax matters. His area of expertise

includes Swiss VAT.

Cyrill Diefenbacher regularly speaks in the area of M&A tax or corporate tax law and

publishes specialist articles in the field of taxes. He is a lecturer at the EXPERTsuisse Swiss

Certified Tax Expert education programme.

Marcel Dietrich

Homburger AG

Marcel Dietrich is the head of Homburger’s Competition | Regulatory team. His practice focuses on

Swiss and EU competition and antitrust law as well as on commercial public and administrative

About the Authors

143

law and regulated markets. He has extensive and longstanding experience in all areas of compe-

tition law ranging from merger control to administrative and civil antitrust litigation.

He also advises on compliance matters and internal investigations. With regard to regulated

markets, he specialises in energy, healthcare and pharma, media and telecommunication, infra-

structure and transport, as well as in public procurement.

He is a member of various national and international competition law associations. He is the

chairman of the Zurich Bar Association’s committee on competition law. He regularly publishes

and lectures on various subjects of competition law, commercial public and administrative law.

Dieter Gericke

Homburger AG

Dieter Gericke heads Homburger’s Corporate | M&A team as well as the Homburger China group.

Dieter Gericke’s practice focuses on M&A (including public takeovers and defence), equity capital

markets (including IPOs), private equity and corporate governance. He advises on matters of

corporate law as well as securities regulations.

Dieter Gericke has advised on various landmark transactions, such as the takeover of

Syngenta by ChemChina, the sale by Nestlé to and merger of Alcon with Novartis and the unso-

licited takeover of Converium by SCOR.

Petra Hanselmann

Baker McKenzie

Petra Hanselmann is a partner in Baker McKenzie’s Zurich office. Petra graduated from the

University of Zurich Law School in 2002 and after her bar admission in Switzerland in 2005,

she obtained an LLM in corporate law from New York University in 2007. Petra joined Baker

McKenzie in 2005 and again in 2011. From 2007 to 2011 she worked with other major law firms in

Zurich and New York. Petra’s professional practice is focused on advising domestic and interna-

tional clients in the areas of mergers and acquisitions, private equity and corporate reorganisa-

tions. She has broad experience in particular in cross-border M&A, international joint ventures,

carve-out transactions and post-merger integrations with a focus on the industrial, technology

and finance sectors.

Marc Hanslin

Homburger AG

Marc Hanslin is an associate in Homburger’s Corporate | M&A team and member of the

Homburger China group. His practice focuses on corporate and commercial law and M&A, as

well as on capital markets law. Marc Hanslin regularly publishes in his areas of practice.

Mariel Hoch

Bär & Karrer AG

Mariel Hoch’s practice focuses on domestic and cross-border public tender offers and mergers,

private M&A transactions, general corporate and securities matters, including proxy fights,

About the Authors

144

hostile defence matters and corporate governance. She also represents clients in M&A-related

litigation.

She has advised a broad range of public and private companies and individuals in Switzerland

and abroad in a variety of industries, including healthcare, pharmaceuticals, technology, financial

services, retail, leisure, transport and industrial products.

She also serves on listed and non-listed companies’ boards and has expertise in board

committee work.

Stefan Kramer

Homburger AG

Stefan Kramer is a partner in Homburger’s Banking and Finance and Capital Markets teams. He

regularly advises on asset-based financings (covered bonds and securitisations), banking regu-

lation (including regulatory capital transactions) and derivative markets regulations. Other areas

of work include insolvency law and financial markets infrastructure.

Stefan Kramer advises on all regulatory aspects, including banking and stock exchange regu-

lations and derivatives market regulations. He is head of Homburger’s Restructuring | Insolvency

Working Group and regularly works on insolvency-related matters, including recovery and reso-

lution planning and cross-border recognition of insolvency measures.

He regularly publishes on banking and financial market matters and is an editor of the

Commentary on the Swiss Banking Act as well as the Commentary on the Swiss Financial Market

Infrastructure Act.

Benedikt Maurenbrecher

Homburger AG

Benedikt Maurenbrecher is a partner at Homburger and heads its Banking and Finance team and

co-heads its Capital Markets team. His practice focuses on banking, finance and capital markets.

He is experienced in a broad range of transactions, notably in the areas of equity capital markets,

secured and unsecured lending, covered bonds, securitisation, regulatory capital and deriva-

tives. He is an Authorised Issuers’ Representative at the SIX Swiss Exchange.

Benedikt Maurenbrecher also advises on domestic and cross-border aspects of banking,

securities and investment fund regulation, and he regularly represents market participants in

related regulatory proceedings and civil litigation. He is a lecturer in law at the University of

Zurich. He is the Co-chair of the Banking Committee and a member of the Securities Committee

of the International Bar Association.

Valerie Meyer Bahar

Niederer Kraft Frey Ltd

Valerie Meyer Bahar is a partner at Niederer Kraft Frey. She advises and represents clients in

commercial and corporate litigation, with a focus on shareholder and employment litigation; in

international and national arbitration; and in all aspects of corporate employment law.

Valerie advises on all aspects of employment law, for example, on the drafting and imple-

mentation of employment agreements; staff and time regulations; compensation matters;

About the Authors

145

dismissals; and the transfer of employees in M&A transactions and restructurings, including

mass dismissals. She regularly handles employment litigation relating, inter alia, to wrongful

termination and bonus claims.

Christoph Neeracher

Bär & Karrer AG

Christoph Neeracher is a partner and head of private M&A/private equity. He specialises in inter-

national and domestic M&A transactions (focusing on private M&A and private equity transac-

tions, including secondary buyouts, public-to-private transactions and distressed equity), trans-

action finance, venture capital, startups, corporate restructurings, relocations, corporate law,

general contract matters (eg, joint ventures, partnerships and shareholders’ agreements) and

all directly related areas such as employment matters for key employees (eg, employee partici-

pation and incentive agreements).

He is experienced in a broad range of national and international transactions on both the

sell and buy sides (including corporate auction processes) and the assistance of clients in their

ongoing corporate and commercial activities. Additionally, Christoph Neeracher represents

clients in litigation proceedings relating to his specialisation.

Pascal Richard

Baker McKenzie

Pascal Richard is a partner in Baker McKenzie’s Zurich office. Pascal graduated from the

University of Berne in 2003 and was admitted to the Zurich bar in 2006. He holds an LLM from the

College of Law of England and Wales and is qualified as a solicitor of the Senior Courts of England

and Wales. Before joining the firm in 2016, Pascal worked as legal counsel in the legal depart-

ment of a Swiss defence and technology group of companies and as an associate and partner

respectively in business law firms in London and Zurich. Pascal advises listed and non-listed

clients on domestic and international M&A, joint venture and carve-out transactions in particular

in the financial services industry, as well as general corporate and commercial matters.

Susanne Schreiber

Bär & Karrer AG

Susanne Schreiber is a partner at Bär & Karrer AG and co-heads the tax department.

Susanne Schreiber has extensive experience in international corporate tax matters, in

particular in domestic and cross-border M&A transactions and reorganisations. She advises on

the tax aspects of financing and acquisition structuring, as well as capital market transactions

and management incentive schemes.

She frequently works on vendor or buy-side transactions for private equity clients, multina-

tionals or individuals, covering due diligence and pre-deal structuring, as well as carve-outs and

post-merger integration from a tax perspective.

Furthermore, Susanne Schreiber regularly supports Swiss multinationals in their tax plan-

ning work, including tax advice on restructurings, financing and tax litigation work.

About the Authors

146

Susanne Schreiber is a German attorney-at-law and tax adviser as well as a Swiss-certified

tax expert. Before joining Bär & Karrer she worked for an international law firm in Germany and

for one of the big four companies in Zurich where she last headed the Swiss M&A tax department.

Philippe Seiler

Bär & Karrer AG

Philippe Seiler is a partner. He has broad experience in international and domestic M&A transac-

tions in various industries. Philippe Seiler does not only cover large transactions and takeovers

but also focuses on small and medium-sized M&A transactions and private equity transactions,

as well as venture capital and startup transactions. Furthermore, he specialises in regulatory

matters in the fields of life sciences and healthcare.

Philip Spoerlé

Baker McKenzie

Philip Spoerlé is a senior associate in Baker McKenzie’s Zurich office and a member of the

Banking & Finance and Capital Markets Practice Groups. He graduated from the University of

St Gallen (MA in Law & Economics, 2011) and obtained a PhD (Dr iur) from the University of St

Gallen in 2015 for his doctoral thesis on the bearer share and the corporate law provisions imple-

mented by the FATF Implementation Act. Prior to joining Baker McKenzie, Philip Spoerlé worked

for a global investment bank in the area of FICC (fixed income, currencies and commodities)

securities trading from 2012 to 2013. Philip Spoerlé’s practice focuses on leveraged and struc-

tured finance, debt and equity capital markets, derivatives, financial instruments and corporate

restructurings. He further is a member of the CG&R and Healthcare industry focus groups. He is

admitted to practise in Switzerland and recognised as an authorised issuer’s representative at

the SIX Swiss Exchange.

Sophie Stählin

Quadra Attorneys at Law Ltd

Sophie Stählin is a senior associate at Quadra Attorneys at Law Ltd, Zurich, advising and

representing domestic and international clients on corporate and commercial law as well as

white-collar crime matters. Before returning to private practice in 2020, Ms Stählin worked as a

senior legal counsel in the Group Corporate Legal team at UBS until 2019 advising on M&A trans-

actions as well as on securities, regulatory, corporate law and corporate governance matters

affecting the UBS Group. Before joining UBS, Ms Stählin was an associate at the Swiss law firm

LALIVE focusing on corporate and commercial law as well as white-collar crime matters. Ms

Stählin is a Swiss-qualified attorney and holds degrees from the University of Basel (MLaw) and

the University of Pennsylvania Law School (LLM).

About the Authors

147

Richard Stäuber

Homburger AG

Richard Stäuber is a partner in Homburger’s competition and regulatory practice, focusing on

Swiss and EU competition and antitrust law.

Richard Stäuber has broad experience in representing businesses in all areas of competition

law before authorities and courts, including cartel and abuse of dominance proceedings, national

and international merger control procedures, dawn raids and leniency proceedings. Richard

Stäuber further regularly advises clients on distribution arrangements, cooperation projects

and licence agreements. His areas of expertise also include regulated markets, in particular the

healthcare and telecommunications sectors, as well as administrative law.

With a background in both law and economics and an active member in Swiss and inter-

national professional associations, Richard Stäuber publishes and lectures in his areas of

specialisation.

Mladen Stojiljković

VISCHER

Mladen Stojiljković is a counsel in the Dispute Resolution Team of VISCHER in Zurich. He focuses

his practice on complex litigation and international arbitration. He also serves as arbitrator.

Mladen’s experience in litigation and arbitration spans a wide range of industries and issues

– including M&A-related disputes, engineering and construction, patent licensing and finan-

cial services. He has also handled matters involving foreign governments and foreign officials.

He holds degrees from the University of Zurich (lic iur, PhD) and Columbia Law School (LLM).

Mladen was named a Future Leader in International Arbitration by Who’s Who Legal (2018, 2019,

and 2020).

Ueli Studer

UBS Group AG

Ueli Studer is a managing director at UBS and head of the Group Functions Legal team, a global

team of around 60 lawyers across all regions, providing globally coordinated legal advice on

regulatory, corporate, contractual, transactional and technology matters of group relevance.

Mr Studer joined UBS in 2006 and has since held three distinct management positions within

UBS’s legal department. For eight years, he led the Legal Corporate Finance & Structured

Transactions team dealing with bespoke, large and complex transactions. Mr Studer then served

as Head Legal Products & Distribution, combining several teams under one cross-divisional

roof providing legal support to the firm’s value chain before assuming his current role. Before

joining UBS, Mr Studer worked for the Swiss law firm Bär & Karrer AG for several years advising

domestic and global companies on M&A, capital markets and financing transactions. Mr Studer

is a Swiss-qualified attorney and holds degrees from the University of Berne (lic iur) and the

University of London (LLM).

About the Authors

148

Kelsang Tsün

UBS Group AG

Kelsang Tsün is an executive director at UBS heading the Group Corporate Legal team within

the Group Functions Legal team. Group Corporate Legal advises on large internal corporate

transactions and reorganisations, M&A transactions as well as on corporate law, treasury and

contracting matters affecting the group. Prior to that, Mr Tsün was leading the Group Treasury

Legal team and also served as legal counsel in the Legal Corporate and Institutional Clients

team advising on complex domestic and international financing transactions. Before joining UBS

in 2010, Mr Tsün worked at a business law firm in Zurich for a number of years advising Swiss

and international clients on corporate and commercial law matters, with a focus on M&A as well

as financing and restructuring transactions. Mr Tsün is a Swiss-qualified attorney and holds a

degree from the University of St Gallen (lic iur HSG).

David Vasella

Walder Wyss Ltd

David Vasella is a partner in the Information Technology, Intellectual Property and Competition

Team. He advises and represents companies on all questions of information and technology law.

He specialises in data protection, intellectual property and contract law, especially in connection

with the monetisation of data and the digitisation of business processes, and supports in data

protection law compliance. He regularly gives talks and publishes in his fields of expertise.

After studying law at the University of Fribourg (licentiate degree 2002), he became a

member of the bar association in Zurich in 2004 and received his doctorate at the University

of Zurich in 2011 in the field of capital market and unfair trading practice law (summa cum

laude; awarded the Prof Walther Hug Prize and Issekutz Prize). David Vasella is co-editor of

digma (Journal for Data Law and Information Security), swissblawg (the biggest legal blog in

Switzerland) and datenrecht.ch (a platform on data law). He is a certified information privacy

professional (CIPP/E). Before joining the firm, David Vasella worked at a large business law firm

in Zurich for a number of years.

David Vasella speaks German and English. He is registered in the Zurich Bar Registry.

Gerald Virieux

VISCHER

Gerald Virieux is the head of the Dispute Resolution Team of VISCHER’s Geneva office. He repre-

sents Swiss and foreign clients before state courts and arbitral tribunals in connection with

commercial disputes. Gerald’s practice focuses notably on disputes involving cross-border

aspects, and on the recognition and enforcement of foreign court decisions and arbitral awards.

Gerald holds a Master in Business Law from the University of Geneva and an LLM in International

Arbitration from the University of Miami Law School.

About the Authors

149

Philippe Weber

Niederer Kraft Frey Ltd

Philippe Weber is the managing partner of Niederer Kraft Frey. He often represents Swiss and

international clients in some of the largest and most complex corporate/M&A, capital markets

and banking transactions in Switzerland and regularly counsels public companies on how to

successfully navigate critical governance and compliance matters.

Philippe also regularly advises companies, boards and other parties on takeover law,

governance and compliance and represents clients in such matters before regulators, including

the SIX Swiss Exchange, the Swiss Takeover Board, the Swiss Financial Markets Supervisory

Authority FINMA and other Swiss and foreign regulators.

Florentin Weibel

Bär & Karrer AG

Florentin Weibel’s practice focuses on domestic and cross-border public and private M&A trans-

actions, M&A-related litigation and general corporate, commercial and regulatory matters.

Manuel Werder

Niederer Kraft Frey Ltd

Manuel Werder is a partner at Niederer Kraft Frey. His practice focuses on corporate law and

M&A, including private equity and venture capital transactions, often with an Asian aspect. He

has expertise in large, complex, cross-border acquisitions, mergers, divestitures and corporate

restructurings. His M&A expertise crosses all industries, including financial, industrials and

services.

Manuel advises Swiss and international financial institutions and corporations active in

different industries in M&A, corporate, commercial, contract, securities and stock exchange law.

His expertise also includes investment and shareholders’ agreements, joint ventures, commer-

cial contracts and employment law.

Peter Widmer

FMP Fuhrer Marbach & Partners

Peter Widmer has been a partner of FMP Fuhrer Marbach since 1988. His practice is focused on

all relevant aspects of IP, including litigation in all Swiss courts. He serves his clients in German

and English. One main field of expertise is the strategic protection of signs (trademarks, company

names, trade and domain names) in a multinational context with the full range from evaluation

and clearance of new signs, to their protection and enforcement, including aspects of unfair

competition, antitrust law and copyright law. Mr Widmer has successfully negotiated a number

of complex trademark coexistence and delimitation agreements with worldwide application. The

second focus is patent litigation, with a special knack for complex and intricate cases in all tech-

nical areas. Furthermore, Mr Widmer’s practice involves all aspects of contracts, again with a

clear focus on IP-related matters, including licences, coexistence and delimitation agreements,

and agreements on assignment of IP rights in complex transactions. Mr Widmer is the author of

publications in IP. He is a speaker or moderator at numerous national and international symposia

About the Authors

150

on IP-related matters and is past chair of the Trademark Standing Committee of the International

Association for the Protection of Intellectual Property (AIPPI).

Markus Wolf

Baker McKenzie

Markus Wolf is a senior associate in Baker McKenzie’s Banking & Finance and Restructuring &

Insolvency teams in Zurich, and a lecturer on private law at the University of St Gallen (HSG).

He graduated from the University of St Gallen (MA in Law & Economics, 2010, and Dr iur, 2012)

and the University of Sydney (LLM, 2016). He previously worked in the firm’s Sydney office and

was seconded to the legal team of one of Switzerland’s leading banks. Markus Wolf advises

lenders, borrowers and sponsors on leveraged acquisition, corporate, project, export and prop-

erty financing transactions. He regularly acts for Swiss and foreign creditors and debtors in

domestic and cross-border financial restructurings and formal insolvency procedures.

151

Baker McKenzie

Holbeinstrasse 30

8008 Zurich

Switzerland

Tel: +41 44 384 14 14

Fax: +41 44 384 12 12

markus.wolf@bakermckenzie.com

pascal.richard@bakermckenzie.com

petra.hanselmann@bakermckenzie.com

philip.spoerle@bakermckenzie.com

www.bakermckenzie.com

Bär & Karrer AG

Brandschenkestrasse 90

8002 Zurich

Switzerland

Tel: +41 58 261 50 00

Fax: +41 58 261 50 01

christoph.neeracher@baerkarrer.ch

cyrill.diefenbacher@baerkarrer.ch

florentin.weibel@baerkarrer.ch

mariel.hoch@baerkarrer.ch

philippe.seiler@baerkarrer.ch

raphael.annasohn@baerkarrer.ch

susanne.schreiber@baerkarrer.ch

www.baerkarrer.ch

FMP Fuhrer Marbach & Partners

Konsumstrasse 16A

3007 Bern

Switzerland

Tel: +41 31 382 44 33

Fax: +41 31 382 46 42

widmer@fmp-law.ch

www.fmp-law.ch

Homburger AG

Prime Tower

Hardstrasse 201

8005 Zurich

Switzerland

Tel: +41 43 222 10 00

Fax: +41 43 222 15 00

benedikt.maurenbrecher@homburger.ch

dieter.gericke@homburger.ch

manuel.baschung@homburger.ch

marc.hanslin@homburger.ch

marcel.dietrich@homburger.ch

richard.staeuber@homburger.ch

stefan.kramer@homburger.ch

https://homburger.ch

Appendix 2

Contact Details

152

Kellerhals Carrard Basel KlG

Hirschgaesslein 11

PO Box 257

4010 Basel

Switzerland

Tel: +41 58 200 30 00

Fax: +41 58 200 30 11

emanuel.dettwiler@kellerhals-carrard.ch

lukas.bopp@kellerhals-carrard.ch

www.kellerhals-carrard.ch

Niederer Kraft Frey Ltd

Bahnhofstrasse 53

8001 Zurich

Switzerland

Tel: +41 58 800 8000

Fax: +41 58 800 8080

manuel.werder@nkf.ch

philippe.weber@nkf.ch

valerie.meyer@nkf.ch

www.nkf.ch

Quadra Attorneys at Law Ltd

Marktgasse 12

PO Box

8021 Zurich

Switzerland

Tel: +41 58 201 20 20

[email protected]

www.quadra.law

UBS Group AG

Bahnhofstrasse 45

8001 Zürich

Switzerland

Tel: +41 44 234 11 11

kelsang.tsuen@ubs.com

[email protected]

www.ubs.com

VISCHER

Rue du Cloître 2

PO Box 3143

1211 Geneva 3

Switzerland

Tel: +41 58 211 35 00

gvirieux@vischer.com

Schützengasse 1

PO Box

8021 Zurich

Switzerland

Tel: +41 58 211 34 00

mstojiljkovic@vischer.com

Aeschenvorstadt 4

PO Box

4010 Basel

Switzerland

Tel: +41 58 211 33 00

www.vischer.com

Walder Wyss Ltd

Seefeldstrasse 123

PO Box

8034 Zurich

Switzerland

Tel: +41 58 658 58 58

Fax: +41 58 658 59 59

david.[email protected]

www.walderwyss.com

SWISS M&A PRACTICE GUIDE