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 collective 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 security and pension schemes are also outside the scope of this chapter.
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 requirements 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).
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 relationships 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 activities. This licence is granted only if certain conditions are met. For banks and the financial institutions 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 exercise decisive influence on their business activities by other means (each such instance, a qualified 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 requirements on an ongoing basis also means that almost all transactions involving significant changes in shareholders require FINMA approval to be obtained.
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 supplemental 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 commercial 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 notification 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 obligation to report is linked to the participation. It exists regardless of the way in which this participation 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, 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 insurance 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 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 applicable 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 appropriate 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.
- Furthermore, amendments to the articles of association may only be entered in the commercial register if they have been approved by FINMA. Consequently, a permit may also be required 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 safeguarded. 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 circumstances) 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 transfers is limited by the Merger Act (article 69 paragraph 1) to companies and sole proprietorships 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 mechanism 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).
In the case of a bulk transfer, the prevailing view holds that the contracts linked to the transferred 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 liabilities 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 conditions. 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 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 composition 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 transmission 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 shareholder’s voting rights. As a last resort, FINMA may revoke the licence of the financial institutions 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.