Transaction structures and sale process

Common structures

What sale structures are commonly used for distressed M&A transactions in your jurisdiction? What are the pros and cons of each, and what procedures and legal requirements apply?

Asset sales, share sales and any other types of transactions allowed under Swiss law are, in principle, also feasible to purchase a distressed company. If such a company owns a business or part of a business that is, per se, economically viable, it is often seen in practice that such business is sold in the form of an asset sale to a ‘rescue company’. In such a scenario, the board of directors sells (often with prior consultation or even approval by the shareholders) the business or parts thereof to a newly incorporated company, usually with the involvement or participation of the creditors, and even before the start of any formal insolvency proceedings. If the initiation of an insolvency proceeding is inevitable, at best, a sale of business is already prepared in such a way that it can be executed promptly once the bankruptcy proceeding or debt-restructuring moratorium has started (pre-pack). The advantage of this scenario is that the deal can be structured in a way that the rescue company does not have to assume (too) many liabilities and can get rid of burdensome pledges or other restricting collateral. The main risk of such a sale scenario (outside an insolvency proceeding) is that the transaction may be challenged in a subsequent bankruptcy proceeding on the basis of a voidance action (eg, by the bankruptcy officer or one of the creditors claiming that the transaction was under value), or that the directors may face liability claims.

Packaging and transferring assets

How are assets commonly packaged and transferred in a distressed M&A transaction in your jurisdiction? What procedural, documentary and other requirements apply?

When there is no longer any prospect of a successful restructuring of the company, it is often seen in practice that the company’s business or parts thereof is sold in the form of an asset sale to a rescue company.

In most cases, this is either done out-of-court (ie, before any insolvency proceedings are initiated) or under a debt-restructuring moratorium, preferably in a pre-packed deal.

If the board of directors first initiates a debt-restructuring moratorium and sells the business to a rescue company during such moratorium, it will require the consent of the composition court. This approval can be requested together with the application for the provisional moratorium if the sale must be realised urgently to avoid a loss of value. With the request for a provisional debt-restructuring moratorium, a draft composition agreement must be submitted, which outlines the sale of the business to the rescue company.

Transfer of liabilities

What legal requirements and practical considerations should be borne in mind regarding the acceptance and transfer of any liabilities attached to the distressed company or assets?

As long as not all creditors agree with the transaction (or the purchaser will not settle their claims in full), the board of directors of the target company must ensure that only assets and no debts, such as bank loans or payables of other (trade) creditors, are transferred to the acquiring party in the case of sale of the company’s business or parts thereof. The transfer of such liabilities would not only reduce the purchase price but would also favour the creditors involved in the transaction and potentially lead to the liability of the board of directors due to the preferential treatment of some of the creditors. However, the assumption of privileged (eg, employee claims) and secured debt is unproblematic, provided that these will also be fully satisfied in bankruptcy proceedings, as in such a case the other creditors are not disadvantaged.

Consent and involvement of third parties

What third-party consents are required before completion of a distressed M&A transaction? What are the potential consequences of failure to obtain these consents? In what other ways are third parties commonly involved in the transaction?

If insolvency proceedings have not been initiated, there are no additional approvals required to affect a legal sale and transfer of the business. However, in practice, the main creditor or creditors of the company are often involved in the transaction to reduce a potential subsequent challenge of the transaction in bankruptcy proceedings.

If the company or its business are sold during a debt-restructuring moratorium, the sale transaction requires the consent of the creditors (normally by approving the composition agreement by a quorum of either:

  • a majority of creditors representing two-thirds of the total claims; or 
  • one-quarter of the creditors representing three-quarters of the total claims, and the approval of the composition court.

 

If bankruptcy proceedings have been initiated, the bankruptcy officer (or appointed administrator) sells the business of the company in the course of an auction or, in cases of urgency, in the form of a single-buyer sale in the best interest of the creditors – however, always offering the creditors the option to submit a better offer.

Time frame

How do the time frames and timelines for the various transaction structures differ? Can these be expedited in any way?

Precedents demonstrate that it is possible with the combination of a provisional debt-restructuring moratorium and a (pre-packed) sales application to sell a company’s business (or parts thereof) to a rescue company within a period of approximately one month after filing the request for a provisional debt-restructuring moratorium with the competent composition court if it can be shown that the sale of the business is urgent to safeguard the value of the company. The timing of a sale in a bankruptcy proceeding is often (much) longer (even as pre-pack), depending, however, on the bankruptcy offices involved.

Tax treatment

What tax liabilities and related considerations arise in relation to the various structures for distressed M&A transactions in your jurisdiction?

In principle, the same tax rules apply regardless of whether the shares of the company, its business or other assets will be acquired in the course of a distressed M&A transaction or in a non-distressed situation, whereby some special tax reliefs are available in distressed scenarios (eg, for real estate property transactions). Any capital gain derived from the sale of the company’s business or parts thereof could basically be offset against existing tax loss carryforwards, and hence should not trigger corporate income tax consequences if such a gain can be fully offset against such losses (there is a different assessment for real estate property transactions).

In distressed M&A share deal transactions, the question always arises of how to restructure the outstanding debt to recapitalise the insolvent or over-indebted company prior to or after closing of the transaction. As capital contributions (without consideration) made by the direct shareholder are subject to one-time capital duty at a rate of 1 per cent if no exemption applies (eg, exemption for the recapitalisation for the first 10 million francs or waiver from the one-time capital duty is available if the requirements are met), recapitalisations need to be structured properly so as not to trigger the one-time capital duty. Furthermore, if properly structured, the existing tax loss carryforwards can be preserved.

Auction versus single-buyer sale process

What are the respective pros and cons of auction sales and single-buyer sales? What rules and common practices apply to each?

While, in theory, the best price for the creditors can be achieved at an auction process, the focus of a single-buyer sale is on quick realisation and thus the preservation of the value of the business. The auction process can also ensure that an avoidance action in a subsequent bankruptcy proceeding remains unlikely, as a fair market value can be reliably determined by various bidders. On the other hand, the organisation of an auction is often time-consuming and, depending on the circumstances, the only remaining option is a quick sale of the company or its business to ensure that suppliers and customers remain with the company. While out-of-court auctions will in principle follow the same rules as for non-distressed deals, auction processes in bankruptcy proceedings are governed in detail by the Debt Collection and Bankruptcy Act of 1889, as amended and supporting ordinances.