Guarantees and collateral for acquisition financings in Switzerland

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

It is the prevailing view in Switzerland that the provision of upstream guarantees (ie, guarantees for obligations of direct or indirect shareholders of the guarantor) and cross-stream guarantees (ie, guarantees for obligations of sister companies of the guarantor) is subject to a number of requirements and restrictions.

Essentially, it is held that these guarantees should be treated as the equivalent of a dividend distribution as far as formal and substantive requirements and limitations are concerned. The key implication of this is that upstream and cross-stream guarantees are, in practice, limited to the amount that the guarantor could distribute to its shareholders as a dividend at such time as payment is demanded under the guarantee. This limitation is sometimes referred to as the ‘free equity limitation’. Also, payments under upstream and cross-stream guarantees may be subject to tax implications, including Swiss withholding tax.

Downstream guarantees (ie, guarantees for obligations of subsidiaries of the guarantor) are not typically subject to restrictions. Exceptions are possible under certain circumstances, for instance, if the subsidiary is not a wholly owned subsidiary of the guarantor or if the subsidiary is in significant financial distress.

As far as foreign entities are concerned, there are no specific limitations under Swiss law on the ability of such entities to provide guarantees for obligations of Swiss entities.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

The requirements and limitations applicable to upstream and cross-stream guarantees, as referred to in question 14, are also applicable to upstream and cross-stream security interests. That said, where a Swiss target provides guarantees and security interests for obligations of the acquirer (which will become the parent company of the Swiss target as a result of the acquisition), this Swiss security package would be upstream in nature and therefore subject to the various requirements and limitations, including the free equity limitation referred to in question 14.

Swiss law does not provide for whitewash or similar procedures. A number of steps are taken in practice, however, to bolster the validity of an upstream security package and to mitigate, as far as possible, the imperfections of such security packages. The starting point is to make sure that the articles of association of the Swiss entity explicitly permit upstream undertakings. It is also important to ensure that the transaction documents and the transactions contemplated are properly approved by the relevant corporate bodies. In addition, transaction documents will typically address the free equity limitation and certain Swiss withholding tax law points and they will also typically provide for certain undertakings and assurances by the security provider to mitigate, as far as possible, the upstream limitations. Moreover, parties are typically advised, for corporate law and tax law reasons, to compensate the Swiss entity for the granting of the upstream security package by means of a guarantee or security fee.

Specific Swiss law issues can be faced where a Swiss target group company with minority shareholders is required to grant a guarantee or security interests for the obligations of the obligors under an acquisition financing. Such issues must be analysed and addressed on a case-by-case basis.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

Floating charges and blanket liens are not available under Swiss law. Such types of security interests are, among other things, not in line with the Swiss law requirements on the required level of specification of the collateral assets and they are also not typically in line with the Swiss law requirement that a security provider no longer be in possession of the collateral assets (in the case of movable assets).

In corporate lending transactions, the two most commonly used forms of security interests are the right of pledge and the security assignment or security transfer. Specifically, in the context of secured acquisition financing transactions, the Swiss security package often consists of a pledge over the shares in the Swiss target, a security assignment of certain receivables, a security assignment of rights and receivables under the acquisition agreements, a pledge over bank accounts and guarantees by certain entities. The scope of the security package may, of course, be narrower or broader, depending on the specifics of the transaction.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

These matters are primarily governed by the Swiss Code of Obligations, the Swiss Civil Code and, in an international context, the Swiss Private International Law Act. Also, specific rules can be applicable for certain specific asset types (for instance, the Swiss Book-Entry Securities Act, where security is taken over book-entry securities).

Under Swiss law, the perfection requirements depend on the form of the security interest and on the type of collateral asset.

In general, a security interest over movable assets requires that the security provider give up possession of the relevant assets. Possession of such assets must pass to the secured parties or to a third party. This requirement does not apply to immovable assets and does not apply to movable assets for which there is a special register (in particular, ships and aircraft).

Notification is not, as a general rule, required under Swiss law to create a security interest but it is required to prevent that the underlying parties (eg, debtors under receivables assigned for security purposes) can validly discharge their obligations by means of payment to the security provider.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

There are no such requirements in Switzerland.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

No works council or similar consents are required to approve the provision of a guarantee or security interest by a Swiss company.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

It is possible under Swiss law that security is granted to, and held by, an agent and security documents can be drafted such that it is not necessary to amend them upon a change of the secured parties. Where the security interest is a security assignment or a security transfer, the security agent can act in its own name for the benefit of the secured parties. Where the security interest is a right of pledge, it is necessary that the security agent act as direct representative of the secured parties (ie, in the name and on behalf of the secured parties). The reason for this is that a Swiss law pledge is accessory in nature, meaning, among other things, that the secured party must be identical to the creditor. This can be achieved by having the security agent act as a direct representative, which is the standard approach in Switzerland for accessory security interests (with exceptions for very specific transactions, where it can be necessary to adopt another approach). An alternative approach would be to create a parallel debt and to secure such parallel debt, as this is done in a number of other jurisdictions. The concept of parallel debt remains untested, however, in Switzerland. It is for this reason that the parallel debt concept is still not frequently used in Swiss security documents (at least not on a standalone basis).

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

Not applicable.

Describe the fraudulent transfer laws in your jurisdiction.

Swiss insolvency laws provide for clawback rules (see question 33). In addition, Swiss insolvency laws provide that a creditor can request the court to open bankruptcy proceedings without prior enforcement proceedings against a debtor that acted fraudulently, or that is attempting to act fraudulently, to the detriment of its creditors.

In addition to the insolvency law rules, the Swiss criminal laws provide that it is a criminal offence if a debtor reduces its assets to the detriment of its creditors if bankruptcy proceedings are commenced against it or if a certificate of unsatisfied claims has been issued.