Country snapshot

Trends and climate
What is the current state of the M&A market in your jurisdiction?

In 2014 the Swiss M&A market saw a record-high transaction volume of Sfr175.8 billion. This was largely driven by several ‘mega’ deals, the largest of which was the Sfr41 billion merger between Lafarge and Holcim. Novartis was involved in three of the top five deals.

However, in the first quarter of 2015 the Swiss M&A market saw a 13% reduction in deal volume compared to the fourth quarter of 2014. In the second quarter of 2015, the performance of the Swiss M&A market continued to decline (EY Mergers & Acquisitions Quarterly Switzerland – Second Quarter 2014; EY Mergers & Acquisitions Quarterly Switzerland – Fourth Quarter 2014; EY Mergers & Acquisitions Quarterly Switzerland – Second Quarter 2015).

Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?

The Swiss economy was shaken up in January 2015 when the Swiss National Bank surprised the market by abandoning the Swiss franc/euro exchange rate floor, causing the Swiss franc to substantially increase in value. The strong Swiss franc proved to have a negative effect on M&A activity and, coupled with worsening economic forecasts, is expected to do so going forward (EY Mergers & Acquisitions Quarterly Switzerland – Second Quarter 2014; EY Mergers & Acquisitions Quarterly Switzerland – Fourth Quarter 2014; EY Mergers & Acquisitions Quarterly Switzerland – Second Quarter 2015).

Are any sectors experiencing significant M&A activity?

The most active sectors are:

  • health and pharmaceuticals;
  • media, technology and telecoms; and
  • industrial goods and services.

Are there any proposals for legal reform in your jurisdiction?

Several important recent and upcoming legal reforms include the following:

  • On July 1 2015 a federal act implementing the revised 2012 Financial Action Task Force recommendations partially entered into force, imposing new registration requirements and transparency rules with respect to shareholdings in corporate entities.
  • The financial markets legislation will be reformed, with three new acts (new Financial Services Act, the Financial Markets Infrastructure Act and the Federal Financial Institutions Act) replacing most of the existing laws.
  • On November 28 2014 the Federal Council issued a preliminary draft of the general Swiss corporate law reform, and its report on the reform is expected to be published by the end of 2015.

Legal framework

Legislation
What legislation governs M&A in your jurisdiction?

M&A transactions in Switzerland are mainly governed by:

  • the Federal Code of Obligations;
  • the Federal Act on Merger, Demerger, Transformation and Transfer of Assets;
  • the Federal Law on Cartels and Other Restraints of Competition, its federal ordinances and general notices and communications of the Competition Commission;
  • the Federal Act on Stock Exchanges and Securities Trading and its federal ordinances;
  • the Federal Act on Intermediated Securities;
  • the Koller Law on the acquisition of real estate in Switzerland by non-residents;
  • the Commercial Register Ordinance; and
  • various tax laws.

Regulation
How is the M&A market regulated?

M&A transactions in Switzerland are mainly governed by:

  • the Federal Code of Obligations;
  • the Federal Act on Merger, Demerger, Transformation and Transfer of Assets;
  • the Federal Law on Cartels and Other Restraints of Competition, its federal ordinances and general notices and communications of the Competition Commission;
  • the Federal Act on Stock Exchanges and Securities Trading and its federal ordinances;
  • the Federal Act on Intermediated Securities;
  • the Koller Law on the acquisition of real estate in Switzerland by non-residents;
  • the Commercial Register Ordinance; and
  • various tax laws.

Are there specific rules for particular sectors?

M&A transactions involving regulated entities (eg, banks, securities dealers, insurers, telephone providers, private radio and television broadcasters and casinos) may be subject to approval by the competent supervisory authorities.

Types of acquisition
What are the different ways to acquire a company in your jurisdiction?

Transactions are commonly carried out by way of share deals, asset deals, joint ventures or statutory mergers under the Merger Act.

If listed companies are involved as targets, a transaction can be structured as:

  • a tender offer for cash;
  • exchange offers for securities; or
  • a combination of both.

As a particularity of Swiss law, asset deals can be structured as a transfer of assets and liabilities under the Merger Act. Under this mechanism the assets, liabilities, contracts and employees that are subject to the transaction are globally transferred to the buyer by law (so-called ‘partial universal succession’).

Preparation

Due diligence requirements
What due diligence is necessary for buyers?

This depends on the circumstances of the case. Most frequently, the scope of due diligence covers:

  • operations;
  • legal;
  • tax;
  • financial; and
  • environmental.

Information
What information is available to buyers?

A potential buyer has unlimited access to the target’s entry in the Commercial Registry, which contains information including:

  • all board members and signatories of the target;
  • share capital;
  • objects;
  • statutory seat; and
  • all of the target’s documents filed with the Commercial Registry (eg, articles of association, capital increases and decreases, statutory mergers and transfers of assets and liabilities) according to the Merger Act).

With respect to limited liability companies, the entry also contains the quota holders of the target.

Further, any interested party may request excerpts from the target’s debt collection register and the Land Register regarding real property owned by the target.

Further information is available with regard to listed companies (eg, controlling groups of shareholders, financial statements and reports and potentially price-sensitive information published under the applicable listing rules).

What information can and cannot be disclosed when dealing with a public company?

When receiving confidential information about a listed company, the recipient will be subject to Swiss insider and market abuse rules. The listed target must ensure that adequate confidentiality agreements are in place.

Stakebuilding
How is stakebuilding regulated?

For listed companies, stakebuilding is mainly regulated as follows:

  • Article 20 of the Federal Act on Stock Exchanges and Securities Trading requires that the target and the relevant stock exchanges be notified of any purchases and sales of participation rights that reach, exceed or fall short of 3%, 5%, 10%, 15%, 20%, 25%, 33.3%, 50% or 66.6% of the voting rights (whether exercisable or not).
  • Article 32 of the Federal Act on Stock Exchanges and Securities Trading provides that the purchase of shares equal to or more than 33.3% of the voting rights of the target triggers the obligation to make a public takeover bid for all listed shares of the target (unless the target has specifically opted out of this provision). 

Documentation

Preliminary agreements
What preliminary agreements are commonly drafted?

For sales of private companies, in most cases letters of intent, memoranda of understanding and/or term sheets are used as preliminary documents. These documents set out the transaction process and in most cases include provisions on exclusivity, confidentiality and break-up fees.

Principal documentation
What documents are required?

These depend on the circumstances surrounding the transaction.

In the sale of a private company, the key document is the sale and purchase or transaction agreement. This is:

  • the share purchase agreement in case of a share deal;
  • the asset purchase agreement in case of an asset deal; and
  • the merger agreement in case of a statutory merger.

Which side normally prepares the first drafts?

In auction sales, the seller prepares the first draft, whereas in other types of transaction the buyer prepares the first draft.

What are the substantive clauses that comprise an acquisition agreement?

An acquisition agreement contains the following substantive clauses:

  • object of sale;
  • purchase price, including earn-out provisions;
  • escrow provisions (optional);
  • actions before closing;
  • conduct of business between signing and closing;
  • conditions precedent to closing;
  • closing actions;
  • representations and warranties;
  • remedies;
  • covenants and undertakings;
  • indemnities; and
  • miscellaneous provisions.

What provisions are made for deal protection?

These depend on the party seeking deal protection.

The buyer will usually request material adverse change (MAC) clauses providing termination rights, undertakings and covenants regarding the conduct of business between signing and closing (eg, restricted actions, ordinary course of business) and, in rare cases, break-up fees.

The seller will resist MAC clauses, favour a short period between signing and closing and ask for proof of the availability of sufficient funds to pay the purchase price.

Closing documentation
What documents are normally executed at signing and closing?

At signing, the sale and purchase or transaction agreement and its schedules are executed.

At closing, the following documents are normally executed in share and asset deals:

Share deal:

  • resolution by the target’s board of directors approving transfer of the shares in case of registered shares with restricted transferability;
  • updated share registers in case of targets with registered shares;
  • share certificates (endorsed in case of registered shares) in case of targets with share certificates; and
  • assignment declarations in case of targets without share certificates.

Asset deal:

  • resolution by the target’s board of directors approving the transaction; and
  • application for registration of the asset transfer with the Commercial Registry (in case of asset transfer under the Merger Act).

Are there formalities for the execution of documents by foreign companies?

No.

However, the registration of foreign quota holders in limited liability companies with the Commercial Registry requires the filing of a legalised and apostilled document proving the existence of the quota-holder (eg, an excerpt from the Commercial Register or a certificate of good standing).

Where a public deed is required in the context of an M&A transaction (eg, in asset transfers involving real estate), the notary public will also require a legalised and apostilled power of attorney if no representative of the foreign company attends the notarisation.

Are digital signatures binding and enforceable?

Yes. However, at present, digital signatures are rarely used in Switzerland because the law recognises as equivalent to a handwritten signature only an authenticated electronic signature based on an authenticated certificate issued by a provider of certification services, as provided for in the Federal Act on Electronic Signatures. 

Foreign law and ownership

Foreign law
Can agreements provide for a foreign governing law?

Yes, insofar as the parties to an agreement are free to choose the law applicable to the agreement.

However, it is recommended to choose Swiss law as the applicable law for transaction agreements involving Swiss targets, as the legal requirements on the transfer of Swiss shares and assets located in Switzerland are always governed by Swiss law. Thus, even if foreign law is chosen to apply to a transaction agreement involving Swiss shares or assets, the advice of Swiss counsel regarding these requirements is recommended.

Foreign ownership
What provisions and/or restrictions are there for foreign ownership?

According to the Koller Law on the acquisition of real estate in Switzerland by non-residents, foreigners are barred from the acquisition of residential real estate, irrespective of whether they purchase the property in question directly or via a controlling stake in an entity owning the property. There are few exceptions to this rule, which is applied strictly by the authorities.

Valuation and consideration

Valuation
How are companies valued?

The most common method is the discounted cash-flow method, but other methods or combinations of methods may be applied, depending on the circumstances of the transaction.

Consideration
What types of consideration can be offered?

The parties are free to agree on the consideration. However, in most cases this comprises cash, shares or a combination thereof.

However, if the target is a listed company, the bidder must offer cash as consideration when making an exchange offer in the framework of a mandatory bid.

Strategy

General tips
What issues must be considered when preparing a company for sale?

It is important to be realistic about the timeframe of a transaction. Whereas a simple inter-company share deal or merger might take place within a few days, a transaction involving regulated entities or merger control issues might take up to one year.

Further, the seller should be realistic about the value of the target. This means that the seller should know the target and its business. Having thoroughly assessed the target, the seller should put the relevant information about the target in a comprehensive, well-structured data room in order to facilitate the buyer's due diligence. The seller should be transparent about any issues that the buyer will discover during its assessment and which may otherwise lead to delays, lengthy negotiations or erosion of the mutual trust that is paramount to a successful transaction.

What tips would you give when negotiating a deal?

Before negotiating, each party should clearly define which points it considers to be deal breakers and which could eventually be conceded. Once in the negotiation process, a party should try to determine which points are crucial for the other side and which positions the counterparty might be willing to give up. It should then use this knowledge accordingly.

Hostile takeovers
Are hostile takeovers permitted and what are the possible strategies for the target?

Hostile takeovers of listed companies are permitted. As regards the legality of any potential defensive measures, it depends by whom and when such measures are taken. Before the takeover offer has been publicly launched or formally pre-announced, the target’s board of directors can take any defensive measures that it deems appropriate. In contrast, thereafter, only the general shareholders’ meeting may agree defensive measures with a significant impact on the target’s assets and liabilities. Further, if taken by the target’s board, such measures must be in the target's interest and the board must comply with its fiduciary duties and the principle of equal treatment of shareholders.

The most common defensive measures are as follows:

  • Shares with increased voting powers – a target may issue shares with a lower nominal value (‘voting shares’) and provide in the articles of association that each share carries one vote irrespective of its nominal value. The nominal value of the common shares must not be more than 10 times the nominal value of the issued voting shares.
  • Restriction of transferability of shares – the articles of association of a target with registered shares may provide that the board of directors can refuse to enter a shareholder in the target’s share register with voting rights if this would exceed a certain threshold (to be defined).
  • Disposal or acquisition of substantial assets – the board of directors may sell or encumber substantial assets of the target. If the sale or acquisition is deemed to be a transaction which significantly affects the assets and liabilities of the target (eg, if such transaction is valued at more than 10% of the target's assets, contributes more than 10% to the target's turnover or concerns an asset designated by the bidder to be a principal asset of the target), approval by the general shareholders’ meeting is required if such measure is taken after pre-announcement of the takeover offer.
  • Voting rights restriction – the articles of association of the target may provide for a voting rights restriction to the effect that no shareholder, acting on its own or in concert with third parties, may exercise more than a certain percentage of votes (to be defined) in the general meeting.
  • Poison pills – subscription rights may be granted to shareholders or third parties under which they are entitled to acquire new shares in the target at a substantial discount (unfriendly bidders are excluded from such offers). Poison pills are rarely used in Switzerland and are subject to certain limitations.
  • Buy-back of own shares (treasury shares) under general law, a company is entitled to buy back a maximum of 10% of its own shares subject to compliance with the principle of equal treatment of shareholders.

Certain special payments to the board of directors and members of the senior management which were used as defensive measures (eg, ‘golden parachutes’) are now generally prohibited under the Ordinance against Excessive Payments, which entered into force on January 1 2014.

Warranties and indemnities

Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?

Warranties typically cover:

  • corporate organisation, capital structure and title;
  • financial statements;
  • fixed assets;
  • permits and authorisations;
  • absence of certain changes and events;
  • material contracts;
  • litigation;
  • tax issues;
  • intellectual property;
  • product liability and stock;
  • environmental issues and health and safety;
  • employment issues;
  • pensions; and
  • insurance.

Indemnities typically cover the following issues and are often used if due diligence has identified a risk that could materialise after closing:

  • tax;
  • environmental issues;
  • product liability; and
  • compliance with certain legal requirements and permits.

Limitations and remedies
Are there limitations on warranties?

The following limitations are frequently negotiated:

  • information that has been disclosed during due diligence;
  • compliance with notification requirements when identifying a breach;
  • time limits for bringing claims under a warranty (usually between 12 and 24 months);
  • qualifying claims, thresholds and caps;
  • failure by the buyer to use commercially reasonable efforts to mitigate damage; and
  • reduction or exclusion if the buyer can recover damage from a third party (eg, an insurer).

What are the remedies for a breach of warranty?

The parties usually seek to derogate from the warranty regime that otherwise applies under general law in that any claims by the buyer other than for damages (eg, rescission of the sale and purchase agreement) are excluded.

The buyer's remedies are usually structured as follows:

  • Upon breach of warranty, the seller has the right to resolve the breach within a certain period.
  • If the breach cannot be resolved, the buyer may claim for damages subject to the limitations agreed in the sale and purchase agreement. 

Tax and fees

Considerations and rates
What are the tax considerations (including any applicable rates)?

In Switzerland, corporate income tax is levied at federal, cantonal and municipal level. The effective ordinary aggregate corporate income tax rate varies between 12% and 24%, depending on the canton and the municipality in which the company is tax resident. In addition, capital tax is levied on a company's equity at cantonal and municipal level. The capital tax rate is low (a maximum of 0.6%).

Share deal
If the seller is a Swiss corporation, participation relief applies. If the seller is a Swiss individual, any capital gain is tax free. Special restrictions apply if privately held shares of at least 20% are sold to a buyer that holds the shares as business assets and the buyer distributes non-operating and distributable assets which already existed at the date of purchase (an indirect partial liquidation).

Asset deal
Capital gains due to the sale of assets are subject to corporate income tax. For commercially used assets, rollover relief will be granted if the proceeds are reinvested.

Other taxes
The following taxes levied by the federal tax authorities must be considered in M&A transactions:

  • withholding tax of 35% on (deemed) dividends;
  • stamp duty of 1% on equity issues (including contributions);
  • securities transfer tax on the change of ownership of securities (from 0.0015% to 0.003%); and
  • value added tax (regular rate of 8%).

At the cantonal level, the following taxes may be levied if real estate is directly or indirectly involved:

Real estate gain tax – depending on the location of the real estate, the real estate capital gain may be subject to real estate gain tax. However, in some cantons real estate capital gains are subject to corporate income tax.  
Real estate transfer tax – real estate transfer tax is levied on a cantonal and communal level. The rates vary up to a maximum of 3.3%. Some cantons have abolished real estate transfer tax.

For individuals, selling their business a share deal is often more tax favourable than an asset deal.

Exemptions and mitigation
Are any tax exemptions or reliefs available?

Merger exemption
As a general rule, mergers are tax neutral (no corporate income tax, stamp duty or securities transfer tax applies) if the transaction is based on book values and tax liability remains in Switzerland. Further, mergers have no withholding tax consequences provided that all reserves (including retained earnings) are transferred to the buyer. Tax neutrality is also available to other reorganisations, including quasi-mergers, spin-offs and split-offs.

If a merger involves insolvent companies, specific rules apply.

Participation exemption
Capital gains qualify for the participation exemption if the shares sold represent at least 10% of the subsidiary's capital and were held for more than one year before the sale. 

What are the common methods used to mitigate tax liability?

Holding companies
A company that holds substantial participations or whose income and/or assets relate to participations may qualify as a holding company for cantonal tax purposes. Holding companies are essentially exempt from cantonal and municipal corporate income tax (exceptions in particular in relation to Swiss real estate). The holding regime is expected to be abolished in 2019.

Debt financing
The maximum debt ratio recognised for tax purposes is determined by reference to a company's assets (rather than a liability side-related debt/equity ratio). The Swiss Federal Tax Administration (FTA) has issued guidance on the maximum debt ratio and sets the interest rates applicable to intra-group loans. Any debt in excess of the FTA standards will be treated and taxed as hidden equity and related interest paid as deemed dividends.

Permanent establishments abroad
Permanent establishments abroad are exempt from Swiss tax by virtue of unilateral provisions, meaning that no treaty protection is required. Provided that it has sufficient substance, any profits allocated to the permanent establishment abroad will not be subject to Swiss tax.

Replacement of participation/assets – rollover relief
As an alternative to the participation exemption, proceeds from a sale of shares of at least 10% held for at least one year may be reinvested, resulting in a deferral of tax on the capital gain. The same applies to other assets used for business purposes if the proceeds will be reinvested in other business assets in Switzerland.

Tax rulings
The tax authorities have a long-established practice of granting tax rulings. Although the privileged tax regimes (holding, mixed and domiciliary company) are being phased out, discussions on proposed transactions with the tax authorities are standard practice.

Fees
What fees are likely to be involved?

Notaries' fees
Public deeds are required in certain corporate transactions (eg, the incorporation of a company or where real estate is involved). The fees vary from canton to canton.

Land register charges
The charges for changes to the Land Register vary depending on the type of change and the canton in which the real property is situated. 

Management and directors

Management buy-outs
What are the rules on management buy-outs?

Directors' and senior officers' involvement in management buy-outs may pose issues under Swiss law if the management buy-out is being carried out without the company's consent. This is because the purpose of the management buy-out may conflict with the directors' fiduciary duties towards the company or with the senior officers' duties under the respective employment agreement (eg, confidentiality and fiduciary duties). In addition, conflicts of interest may arise if the transaction agreement is to be entered into between the acquiring vehicle and the target with the director or manager acting on behalf of both entities. In such case, the respective transaction agreement may be void unless approved by the shareholders. 

Directors’ duties
What duties do directors have in relation to M&A?

The directors must carry out their duties with due care to preserve the interests of the company in good faith and comply with the principle of equal treatment of shareholders. Further, in a public takeover offer, the directors must also treat shareholders and bidders equally.

Employees

Consultation and transfer
How are employees involved in the process?

If the employer transfers a business or a business unit to a third party by way of an asset deal or in a statutory merger, then before the transfer takes place it has a duty to inform the employee representative body or the employees directly of the reason for the transfer and its legal, economic and social consequences for the employees. If any measures are expected to affect the employees, the employer must also conduct an employee consultation process before the relevant decision is taken.

What rules govern the transfer of employees to a buyer?

If a business or a business unit is sold through an asset deal, the employment relationships are automatically transferred to the buyer. The employee has the right to refuse such transfer. In such case, the employment relationship ends on expiry of the statutory notice period. This is also valid in the case of a statutory merger. The former employer and the buyer are jointly and severally liable for any claims of an employee relating to the period before the transfer.

Pensions
What are the rules in relation to company pension rights in the event of an acquisition?

An acquisition may involve the transfer of employees' individual entitlements under their Swiss pension plan. This may entail the partial liquidation of an existing pension plan if most of the employees insured under the pension plan are affected by the transfer.

Other relevant considerations

Competition
What legislation governs competition issues relating to M&A?

The relevant legislation is the Federal Law on Cartels and Other Restraints of Competition and its various federal ordinances, and general notices and communications of the Competition Commission.

Anti-bribery
Are any anti-bribery provisions in force?

The relevant legislation is the Criminal Act and the Unfair Competition Act.

Under Swiss law, it is a crime for anyone to offer, promise or grant a bribe to an official, or for a Swiss or foreign official to solicit or accept a bribe. Further, if an advantage is granted or accepted in regard to an official’s future behaviour so that both parties may benefit, this also constitutes a crime under Swiss law.

The Unfair Competition Act prohibits bribery in the private sector; however, contrary to the bribery of public officials, this offence is prosecuted only on specific request of the victim. 

Receivership/bankruptcy
What happens if the company being bought is in receivership or bankrupt?

If a company is over-indebted, the judge will open bankruptcy proceedings on request of the board of directors or (if the members of the board fail to do so) the company's auditors. There are also other circumstances under which a judge will open bankruptcy proceedings over a company.

Once bankruptcy proceedings have been opened, the bankrupt company is no longer entitled to dispose of its assets, as they will be sold and the proceeds distributed among the creditors in accordance with a schedule of claims established by the liquidator. The executive body is no longer entitled to represent the company. At the end of bankruptcy proceedings, the company will be formally liquidated and removed from the Commercial Register.

Under certain circumstances, an insolvent company (or a creditor which is entitled to request the opening of the bankruptcy proceedings) may request a composition moratorium instead of the opening of bankruptcy proceedings. In this case, the judge will appoint an administrator to try to find a solution in order to restructure the debt of the company (eg, debt-toequity swap, capital increase). During the composition moratorium, the company is still entitled to pursue its business, but certain decisions must be either controlled or approved by the administrator. The creditors' assembly (provided that the respective quorum is reached) may also agree with the company on a composition agreement in which the creditors agree either:

  • to keep the company operating by agreeing on long payment deadlines or by renouncing part of their claims; or
  • to liquidate the assets of the company through a liquidator and receive a percentage of the proceeds.

The composition agreement must be confirmed by the judge. In the case of a composition agreement under which the company will be liquidated at the end, the former directors or representatives of the company are no longer entitled to represent the company.