General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Acquisition agreements and related agreements are typically governed by Swiss law where the target is a Swiss company. Often, the debt finance documents for such transactions are also governed by Swiss law. Certain factors, such as the jurisdiction of the arrangers for a particular financing or if a financing is multi-layered in nature, may call for other laws to apply to certain debt finance documents. Equity and hybrid elements are generally governed by Swiss law as the law of incorporation of the relevant entity.
As for the choice of a foreign law as the governing law of transaction agreements, the relevant Swiss conflict of law rules generally permit this, subject to certain limitations. Foreign judgments and awards of foreign arbitral tribunals can be recognised and enforced in Switzerland, subject to certain requirements, limitations and procedures.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
Swiss law does not, generally speaking, restrict acquisitions by foreign entities in Switzerland. Particular requirements apply in certain regulated industries. For instance, the acquisition of a controlling stake in a Swiss bank by a foreign entity is subject to an additional permit and the satisfaction of the relevant requirements.
Also, while not seen very often in practice, it is possible that a Swiss target company has transfer restrictions in place that preclude or limit foreign entities from becoming shareholders in the company.
Where residential real estate is involved (including as part of the assets of a company), specific restrictions and requirements set out in the Federal Act on the Acquisition of Real Estate by Persons Abroad (known as Lex Koller) become relevant.
Regarding cross-border lending into Switzerland, there are, with the exception of the area of consumer credit, no specific restrictions. Certain restrictions may also be applicable where security is taken over real estate assets. Regarding licensing requirements, see question 6.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
As in other jurisdictions, acquisitions in Switzerland are financed either by equity (or hybrid equity in the form of deeply subordinated shareholder loans) or by debt or, frequently, by a combination of equity and debt.
The structure of a debt package will typically vary as a function of, among other things, the required leverage.
Where low leverage is sufficient, the debt package will often consist of senior debt only. Such senior debt usually takes the form of a term loan. If, in addition to the acquisition loan, there is a need to refinance existing target debt or if there are working capital needs, the senior lenders will often also provide a working capital facility.
Where a higher leverage is sought, the senior debt may be increased by creating first lien and second lien senior debt, and junior debt will often be added. Such junior debt can consist of one or several layers (eg, mezzanine debt and high-yield debt) and it may provide for an in-kind payment component, in addition to or in lieu of cash interest.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
In the context of public takeovers, Swiss law provides for ‘certain funds’ rules and requirements that must be complied with. Essentially, the offer prospectus must provide for financing details and a confirmation from a review body is required, confirming that the bidder has taken the necessary steps to ensure that the necessary funds will be available. The ‘certain funds’ requirements and provisions seen in the context of public takeovers in Switzerland are similar to international standards.
In the context of private mergers and acquisitions transactions, there are no ‘certain funds’ requirements under Swiss law. In practice, there is a wide variety in what parties negotiate in terms of funding certainty. Quite often, especially in the context of domestic transactions and where the seller and the acquirer are non-financial entities, parties work with a relatively low ‘certain funds’ threshold (eg, with a ‘highly confident letter’ or with a term sheet of a bank). In larger transactions, and especially in transactions where private equity sellers are involved, ‘certain funds’ requirements are typically seen in practice and the threshold is typically a high one, on occasion higher than in the context of public takeovers.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
Under Swiss law, there are no specific restrictions, but parties will typically agree upon the permitted use of proceeds in the relevant agreements.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
In line with international standards, a borrower must typically indemnify its lenders for a breach of representations and covenants. In the context of acquisition financings, such representations and covenants tend to be quite comprehensive. In addition, one would typically see:
- tax indemnities;
- funding indemnities;
- currency indemnities and increased costs; and
- break costs regimes.