What measures should be taken to best prepare for a corporate reorganisation?
While due diligence in internal group reorganisations may only be required to a certain extent (eg, with regard to change-of-control clauses in third-party agreements) the assessment of the legal and tax consequences of the contemplated final structure is essential. To be certain of the potential tax impact, it is often recommended to apply for a tax ruling with the competent tax authorities. In corporate reorganisation transactions that comprise the transfer of assets, the statutory auditors of the legal entities (if any) are often involved. Finally, more complex transactions that require a filing with the competent cantonal register of commerce can be filed for review and pre-approval.Employment issues
What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?
If a seller transfers a company’s business or a part thereof to a purchaser in an asset deal (irrespective of whether in a traditional asset deal or an asset deal under the Merger Act), the existing employment relationship with the seller, and all related rights and obligations automatically pass to the purchaser as of the day of the transfer, unless the employee objects to the transfer, in which case the employment relationship with the purchaser terminates at the end of the notice period provided by law.
The seller and the purchaser are jointly and severally liable for any claims of an employee that fall due before the transfer, or that fall due between the transfer and the date on which the employment relationship could normally be terminated or is terminated following refusal of the transfer.
The seller (as the employer) has to inform the employees’ representatives or, if there are none, the employees directly, in good time before signing, of the reason for the transfer, and the legal and socio-economic consequences of the transfer for the employees. If, as a result of the transfer, measures affecting the employees are planned (such as a change of their usual place of work) the employees’ representatives or, if there are none, the employees themselves have to be consulted in good time before a decision is made on these measures.
If such consultation and information rights are breached, the asset sale does not automatically become null and void. The employees’ representatives or all employees concerned can, however, block the acquisition by injunctive relief. It is disputed whether they can have the acquisition prohibited until the rights have been complied with. They can in any case sue for damages.
If the asset sale occurs through an asset deal under the Merger Act, the employees’ representatives, or all employees concerned, have the additional possibility of blocking the registration of the acquisition in the relevant registry of commerce.
Irrespective of whether the sale of assets has been implemented by way of a traditional asset deal or as an asset deal under the Merger Act, if the transferred relationship is governed by a collective employment contract, the purchaser must comply with it for at least one year, unless it expires or is terminated sooner. If the employee refuses the transfer, the employment relationship ends upon expiry of the statutory notice period; until then, the purchaser and the employee must perform the contract.
The principles of an asset deal, as outlined above, apply mutatis mutandis for a merger, demerger or conversion under the Merger Act.
What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?
Private pension schemes
Private pension schemes are mandatory. Thus, the employer has to conclude an accession agreement with a separate legal entity as the carrier of such private pension scheme. This legal entity, normally a foundation, is either set up by the employer itself or, more commonly, by an insurance company or another third party. The legal entity is the carrier of the private pension scheme, which is mainly financed by the employer and, normally, the employees. If the employer changes (eg, because of a transfer of a business unit), the employees have to be registered with the new employer’s pension scheme.
Pensions on a business transfer
A reorganisation in the form of a share or asset purchase does not as such affect the separate legal entity that is the carrier of the private pension scheme. It may be, however, that the transaction affects the legal entity indirectly. In some instances, for example, the legal entity needs to be fully or partially liquidated and assets resulting from the liquidation passed on to the legal entity or entities newly in charge of the employees concerned. Such full or partial liquidation is heavily regulated and supervised by the state authorities entrusted with the supervision of the mentioned legal entities.Financial assistance
Is financial assistance prohibited or restricted in your jurisdiction?
Upstream or cross-stream financial assistance within a group of companies is a controversial topic in Switzerland. In the light of recent case law, the granting of an upstream or cross-stream: (i) security (eg, granting of a guarantee) by a Swiss subsidiary to secure obligations of its parent company or any of its affiliates, other than 100 per cent direct or indirect subsidiaries; or (ii) loan (also in the form of cash pools) by a Swiss subsidiary to its (direct or indirect) parent company or to any of its affiliates must:
- be allowed by the Swiss subsidiary’s articles of association, which shall include the purpose of group support and financial assistance;
- be in the interest of the Swiss subsidiary (ie, dealing at arm’s length, service against consideration, review of importance of the loan compared to the other assets of the subsidiary, financial capacity of the parent company and the affiliates to repay the loan); and
- not constitute a repayment of the equity capital of the Swiss subsidiary or an unjustifiable repayment of benefits or contributions.
Otherwise, in case of any doubt (in particular with regard to whether the relevant case constitutes an arm’s-length transaction), the amount of the security or loan shall be limited to the freely distributable funds of the Swiss subsidiary that needs to be blocked in the amount of the security or loan, and the subsidiary’s shareholders’ meeting shall resolve on and approve the granting of such security or loan.
If an upstream or cross-stream transaction does not meet the financial assistance rules as outlined above, the transaction may be null and void (eg, because it violates the company’s purpose clause or it infringes the protected equity capital of the company), can be challenged by the company or its shareholders, and may lead to directors’ liability.
In case of a financial assistance issue from a corporate law perspective (eg, if an upstream loan exceeds the distributable reserves of the respective Swiss company), no Swiss tax consequences should be triggered. However, if a subsidiary has granted an upstream or cross-stream loan and the grant of the loan was not in the interest of the subsidiary, or did not meet the dealing at an arm’s-length standard in another way (eg, in cases in which the repayment of the loan is unlikely from the beginning), Swiss tax authorities may, depending on the individual case, requalify such loan as a constructive dividend distribution, subject to Swiss withholding tax of 35 per cent (or 53.8 per cent grossed-up if the Swiss withholding tax has not been transferred to and is not borne by the recipient).
Further, to avoid any deemed dividend distribution subject to Swiss withholding tax, the safe-haven interest rates as annually published by the Swiss Federal Tax Administration need to be observed or, alternatively, evidence needs to be provided that the applied interest rate complies with the arm’s-length principle (see question 16).Common problems
What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?
Book value transactions
It is very likely that, in the case of an intra-group upstream or cross-stream sale of assets or shares by a Swiss company at book value (if it is lower than the fair market value), such transaction will be a financial assistance case and the financial assistance rules will have to be complied with (see question 10).
If a Swiss company sells all, substantially all or the material part of its assets without reinvesting the consideration, such transaction often qualifies as a factual modification of the company’s purpose without the consent of the shareholders’ meeting regarding its liquidation and, therefore, as a factual liquidation of the company. Such sale does not lie, as a matter of principle, in the competence of the board of directors of a Swiss company. Further, a sale of all, substantially all or the material part of assets of a company can hardly be justified by the company’s interests. If a sale qualifies as factual liquidation, it will be null and void, and may lead to directors’ liability. To address this issue, the company can be put into voluntary liquidation before the sale transaction takes place. In cases where it is doubtful whether the contemplated sale will qualify as factual liquidation and the initiation of voluntary liquidation proceedings is not feasible, it is recommended to have the shareholders decide on the planned transaction in order to reduce the risk of personal liability of the directors.
Although specific transfer pricing provisions are not known in Switzerland, Swiss tax authorities may add commercially unjustified expenses of legal entities to their taxable profit. To avoid such qualification, intra-group services and assets have to pass the arm’s-length test and serve a business purpose of the entities involved (see question 16).
Accounting and taxAccounting and valuation
How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?
The Swiss statutory accounting principles also apply to corporate re-organisations. However, in order to benefit from a tax-neutral corporate reorganisation, assets and liabilities need to be transferred at book value (see question 13). Such book value transfers often trigger financial assistance issues if, for example, the book value of the transferred assets by a Swiss subsidiary to its parent company is lower than the fair market value of the assets (see question 10).Tax issues
What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?
Corporate reorganisations (eg, mergers, demergers, share-for-share exchanges (quasi-mergers) or the transfer of assets and liabilities) may qualify as tax-neutral restructurings if certain preconditions are met. Such tax-neutral transaction requires, inter alia, that the assets and liabilities are transferred at book value and remain subject to unlimited taxation in Switzerland. Otherwise, corporate income tax, issuance stamp tax, securities transfer tax, withholding tax, value added tax, real estate capital gain or transfer taxes might be triggered. Therefore, corporate reorganisations are usually structured in a way to meet the requirements for a tax-neutral reorganisation. In order to obtain tax certainty about the contemplated new structure, it is often recommended to apply for a tax ruling with the competent tax authorities.