Underwriting arrangementsTypes of arrangement
What types of underwriting arrangements are commonly used?
The most common underwriting arrangement is a best efforts (soft) underwriting. In this case, the underwriters merely agree to use their best efforts to sell and market the securities to investors on behalf of the issuer with the offer price typically being determined in a bookbuilding procedure. The underwriters then only purchase the securities that they were able to place successfully with investors. Hence, the underwriters do not assume an underwriting risk.
In the case of a hard underwriting (which is more common for secondary placements than primary issuances), the underwriters firmly commit to purchase a certain number of securities at a certain minimum price. Hence, they assume the full placement risk with regard to these securities. If a higher number of securities can be placed in the market or the price agreed with investors is higher than the minimum price, the upside is typically shared between the underwriters and the issuer or selling shareholder.
In a volume underwriting, the underwriters firmly commit to purchase securities to raise a fixed amount of gross proceeds. However, when the volume underwriting is entered into, the purchase price per share is usually very low (in most cases the nominal value of the shares) resulting in a theoretically very high number of shares to be sold. Over time, the issuer and the underwriters can agree to a higher offer price in one or more step-ups. The final offer terms are then agreed at launch of the transaction (often shortly after an extraordinary general meeting of shareholders) and the volume underwriting becomes a hard underwriting. Volume underwritings are most common in acquisition and rescue scenarios when the issuer needs certainty that a certain amount can be raised.
In rights issues, the banking syndicate can agree to an offer price at a fixed discount to the theoretical ex-rights price; so-called relative underwriting. Similar to a volume underwriting, the theoretical number of shares can be very high. We have not seen this approach often in recent years.Typical provisions
What does the underwriting agreement typically provide with respect to indemnity, force majeure clauses, success fees and overallotment options?
Swiss law underwriting agreements typically provide for a rather comprehensive indemnity in favour of the banking syndicate covering, in particular, losses and claims resulting from (alleged) misstatements in the offering materials as well as breaches of representations or covenants. While the scope of the indemnity is fairly standardised, one of the key negotiation points in initial public offerings (IPOs) with a secondary component is the extent to which the indemnity is granted by the issuer or the selling shareholder.
Underwriting agreements commonly also include termination rights in the case of material adverse changes and significant events affecting the national or international financial, political or economic conditions. In particular, in volume underwritings, the wording of these termination rights is fiercely negotiated.
While the expenses of the banking syndicate are typically reimbursable (at least partially) by the issuer or selling shareholder irrespective of whether the offering is completed, the underwriting fees are typically only payable if the offering is completed successfully. An important exception are volume underwriting fees that are also payable if the offering is ultimately not launched.
A majority of IPOs contain an overallotment option to stabilise the market price of an equity securities offering after the first day of trading. The securities are often made available by way of a securities lending agreement between the underwriters and major shareholders. Stabilisation activities benefit from a safe harbour from the prohibition of market abuse adopted by the Swiss Federal Council if they comply with the requirements of article 126 Ordinance on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading).Other regulations
What additional regulations apply to underwriting arrangements?
If, due to the size of an equity offering, the number of shares underwritten by the banking syndicate exceeds the threshold triggering a mandatory takeover bid (ie, 33.3 per cent of the voting rights) the underwriters may benefit from a specific exemption from the duty to launch a mandatory takeover bid (so-called underwriter exemption). This requires that the banks undertake to sell the securities exceeding the threshold within three months and the sale actually takes place within this period.