In June 2012, the Swiss Parliament adopted a revision of the Stock Exchange Act likely to enter into force on 1 January 2013. Through new criminal and regulatory provisions, market-abusive practices shall be efficiently sanctioned and the respective rules aligned with international standards. The bill also entails changes to the provisions governing public takeovers as well as the disclosure of shareholdings.
1.1 Purpose of the Revision
Under current Swiss law the provisions against abusive practices in the financial market are not fully sufficient. Such provisions are criticized for deficits as compared to the rules of the EU member states and considered outdated. According to the Swiss Government (Federal Council) such inconsistencies could lead to reputational harm and competitive disadvantages; the revision of the law shall correct the identified defects and thereby reinforce the integrity and competitiveness of Switzerland’s financial center.
1.2 Content of the Revision
The revision "Stock Market Offenses and Market Abuse" includes criminal as well as supervisory law elements. In terms of criminal law, the offenses of insider trading and price manipulation will be revised and transferred from the Criminal Code to the Stock Exchange Act (SESTA). In particular, the category of potential offenders (Täterkreis) capable of committing insider trading will be expanded to include any individual persons, beyond persons with specific characteristics (such as members of boards of directors or management). In addition, the competences to prosecute and judge these offenses will pass from the Cantonal authorities to the Office of the Federal Attorney General (Bundesstaatsanwaltschaft) and the Federal Criminal Court. Further, a statutory maximum fine will be implemented to sanction a breach of the duty to disclose shareholdings; the same sanction shall apply to a breach of an obligation to make a takeover offer, a newly introduced offense.
In terms of financial market supervisory law, insider trading and price manipulation will be newly prohibited for all market participants. This will grant the Swiss Financial Market Supervisory Authority (FINMA) the competences and supervisory instruments to take regulatory action against further illegitimate market practices in addition to the market-abusive practices prohibited by criminal law.
Moreover, the revision includes additional changes in the areas of public takeover and disclosure of shareholdings. Under specific circumstances, the scope of these provisions will be extended to equity securities of companies with registered offices outside Switzerland. In terms of disclosure law, FINMA’s supervisory instruments will be significantly extended. The most significant and yet controversial change to the public takeover law is the abolition of the option to pay a control premium. Finally, several procedural provisions will be amended.
This newsletter exclusively presents essential changes to Swiss public takeover and disclosure laws. Other criminal and regulatory law aspects of the revision of the SESTA shall not be examined.
- CHANGES TO THE PUBLIC TAKEOVER LAW
2.1 Extension of the Scope to Listed Foreign Companies
The rules governing public takeovers are currently applicable only to Swiss (target) companies whose equity securities are listed in Switzerland. A company is a "Swiss" company if its registered office is in Switzerland (Art. 22 Abs. 1 SESTA). To date, Swiss public takeover law has not been applicable to foreign companies listed in Switzerland (even when the public takeover law of the home country of such foreign company is also not applicable).
In order to avoid such negative conflicts of competence and to protect the public shareholders, the scope of the Swiss takeover law will be newly extended to non-Swiss companies to the extent they are "mainly listed" (hauptkotiert), fully or partially, in Switzerland (Art. 22 para.1 E-SESTA). The new term "main listing" is not defined in the SESTA but might, for the time being, be regarded as synonymous to the term "primary listing" (Primärkotierung). The Federal Council will further define the term "main listing" in its ordinance to the SESTA, "should this prove necessary". In contrast, should the law of another country claim to be applicable) in addition to the Swiss provisions (positive conflict of competence), Swiss takeover law may be waived under certain circumstances.
2.2 Fine for a Breach of Duty to Make Takeover Offer
According to the applicable law, a breach of the duty to make a takeover offer – distinct from the breach of the disclosure obligations – so far does not imply any criminal sanctions. This appears inappropriate, since the breach of the duty to make a takeover offer may have serious consequences for the minority shareholders that, despite the change of control, are denied an exit possibility.
The revision of the law is supposed to cure this defect. In the future, a fine of up to CHF 10 million shall be imposed on those who do not comply with the duty to make a takeover offer (Art. 41a E-SESTA).
2.3 Abolition of Control Premium
In part through a legislative backdoor, the Federal Council has belatedly incorporated into the revision of the SESTA a concern of the Swiss Takeover Board (TOB): The abolition of the control premium. According to applicable law, the price offered in a public takeover must at least match the stock exchange price and shall not be lower than 25% of the highest price paid by the bidder for equity securities of the target company in the preceding twelve months (Art. 32 para. 4 SESTA). Consequently, a bidder may pay to certain main shareholders selling their shares pre-bid an amount higher than the share price offered to the remaining shareholders in its public takeover offer (so-called control premium).
In its legislative comments the Federal Council holds that a control premium would run contrary to the fundamental takeover law principle of equal treatment of the investors as well as to EU law which may result in a competitive disadvantage for the Swiss financial center. In particular for these reasons, the control premium shall be abolished. This controversial opinion was debated in the public legislative consultation procedure as well as in the Swiss Parliament. The opponents of the abolition of the control premium argued mainly that the possibility to take over a controlling majority represented an economic value which would justify compensation by a control premium. In their view the abolition of the control premium constitutes an unjustified infringement of the principle of freedom of contract. Additionally, the abolition would increase the overall price for takeovers and, therefore, ultimately prevent them. However, both chambers of Parliament, the Council of States and the National Council (the latter with narrow result) finally approved the abolition of the control premium without changes, as proposed by the Federal Council.
The revised article 32 para. 4 E-SESTA now provides that the price of an offer has to be at least as high as the higher of the following: a) the stock exchange price or b) the highest price paid by the bidder for equity securities of the target company in the preceding twelve months. This rule will make it impossible for a bidder to pay to a main shareholder selling its shares beforehand a price exceeding the price offered to the minority shareholders in the subsequent public takeover offer.
2.4 Threshold for Qualified Shareholders to Participate in Takeover Proceedings Increased to 3% of the Voting Rights
Since 2009 there has been a divergence between the thresholds for a shareholder to claim the right to participate as a party in takeover proceedings (2% of the voting rights) and the lowest threshold to trigger the duty of disclosure for a shareholder (3%). This constitutes a legislative inconsistency. Today, prior to the publication of a takeover offer – which a bidder cannot rescind – a bidder is not able to reliably identify the qualified shareholders that could enter into the proceedings as formal parties or to assess the risk of such interventions. The SESTA-revision will increase the threshold required to claim the right to participate as a party to the proceedings before the TOB to 3% of the voting rights (Art. 33b E-SESTA). (With regard to the qualified shareholders’ position as a party to the public takeover proceedings see also Schellenberg Wittmer Newsletter / February 2010, available at www.swlegal.ch.)
2.5 Suspension of Voting Rights as Precautionary Instrument of the TOB
As a consequence of a breach of the duty to make a takeover offer, to date the law provides that a civil court may impose a (long-lasting) suspension of voting rights of a non-complying shareholder (Art. 32 para. 7 SESTA). However, this rule has not proven itself in practice (for reasons see Section 3.4).
The revised law provides that the competence to suspend voting rights shall be transferred from the civil courts to the TOB (Art. 32 para. 7 E-SESTA). As a result, the suspension of voting rights (including the new prohibition of additional purchases of shares) will become purely precautionary instrument, effective until the allagation of an infringement is clarified.
2.6 Additional Procedural Rules for Takeover Proceedings
In order to accelerate the proceedings before the Federal Administrative Court (FAC), the new article 33d para. 3 E-SESTA provides that the rules concerning the standstill of time limits generally applicable before the FAC shall not apply in takeover proceedings. Further, the new rules clarify that only persons who already participated in the proceedings before the TOB are entitled to act as a party in the proceedings before the FINMA (Art. 48 I lit. a Federal Administrative Procedure Act; VwVG). Finally, a shareholder acting as a party in the proceedings before the TOB may now be charged a procedural fee (Art. 23, Para. 5 E-SESTA).
- CHANGES TO THE DISCLOS URE LAW
3.1 Extension of the Scope to Listed Foreign Companies
According to applicable law, there is a duty to disclose shareholdings only in listed Swiss companies, i.e. in a company having its registered office in Switzerland and whose equity securities are listed on a Swiss stock exchange. Consistent with the new takeover law provisions (see Section 2.1 above), the scope of the disclosure law will be extended to companies with registered offices abroad but "mainly listed" on a Swiss stock exchange (Art. 20 Para. 1 E-SESTA).
3.2 Maximum Fine of CHF 10 Million for Breach of Disclosure Obligations
The applicable law does not exactly set the maximum fine to be paid in case of a breach of the disclosure obligations ("The fine is up to twice the purchase or sales price"; Art. 41 para. 2 SESTA), which is problematic from a rule of law perspective. Moreover, in extreme cases the fine could amount to several billions – disproportional to the degree of wrongdoing according to the Federal Council. In order to meet the principle of legality and balance the degree of wrongdoing in the offense, the new maximum fine for a willful breach of the duty to disclose shareholdings shall be limited to CHF 10 million (Art. 41 Para. 1 E-SESTA).
3.3 Extended Supervisory Instruments of FINMA
The provisions regarding the disclosure obligations are applicable to all market participants. However, according to the current law FINMA may take regulatory measures only if it supervises the entity having breached the relevant rules (in particular banks, securities dealers and insurances).
Therefore, in order to enforce the disclosure obligations visà- vis other market participants, FINMA shall receive the following regulatory means: information obligation, issuance of declaratory rulings, publication of supervisory decisions as well as confiscation of profits (Art. 34 E-SESTA). As FINMA is granted new enforcement tools, the disclosure law previously taken lightly now definitely receives sharper teeth.
3.4 Suspension of Voting Rights as Precautionary Instrument of FINMA
Until now, the TOB, the target company or the affected shareholders had to take legal action before the competent civil court for the suspension of voting rights, based on a breach of the disclosure obligations (Art. 20 para. 4bis SESTA). For various reasons, this provision is considered a legislative failure. The unclear regulation, in particular the effect of the suspension of voting rights, has been criticized. Further, the competence of the civil courts is said to be unsatisfactory given that once the suspension is declared it usually takes effect too late due to the length of the civil proceedings. It is also problematic that a suspension could be circumvented by the purchase of additional shares.
Upon the revision, the competence to suspend voting rights in case of breach of disclosure obligations will be transferred from the civil courts to FINMA (Art. 34b E-SESTA). Also, the suspension of voting rights will become a purely precautionary instrument that must be cancelled as soon as FINMA has ascertained that the disclosure obligations have not been violated or that the person concerned has discharged its duty (Art. 34 E-SESTA). In order to prevent a party from circumventing the suspension by purchasing additional equity securities, article 34b E-SESTA will now grant to FINMA the precautionary measure to prohibit such additional purchases (Zukaufsverbot).
The revision of the Stock Exchange Act features some important changes to public takeover and disclosure law.
First it must be noted that FINMA in particular but also the TOB will soon have effective instruments to ensure the enforcement of partially limp disclosure and takeover provisions vis-à-vis all market participants. Should this coincide with a reinforcement of the workforce within the supervisory authorities, such changes may result in visible consequences in practice. The determination of a maximum fine for a breach of disclosure obligations (as well as the duty to make a takeover offer) is most welcome as it creates legal certainty. From a potential bidder’s point of view, the harmonization of the thresholds for qualified shareholders in public takeover proceedings (with the 3% threshold triggering the duty to disclose shareholdings) is also positive, since all qualified shareholders become identifiable prior to a public takeover. Whether the abolition of the possibility to pay a control premium will efficiently impact the market for corporate control remains to be seen.
It must finally be noted that the Swiss Parliament rapidly changed provisions that had only recently been introduced but proved to be inappropriate. This is the case for example with regard to suspensions of voting rights or the inconsistent 2% threshold for qualified shareholders. However, such developments also mirror the risk of a faster and perhaps less attentive lawmaking process in the field of capital markets.