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The M&A Perspective - I/2015

27 February 2015

Swiss Franc Fluctuation - How it Matters to M&A
On 15 January 2015, the Swiss National Bank (SNB) announced that it would discontinue the minimum exchange rate of CHF 1.20 per euro. Taken by surprise, the markets reacted ferociously. The Swiss franc soared and the euro briefly fell to 0.85 francs. These days, the exchange rate is around CHF 1.07 per euro, roughly 11% lower than four weeks ago. Business people, politicians and the media were all over the subject: Was this necessary? Why now and why so suddenly? What will it mean for the Swiss (export) economy going forward? This is not the forum to add to these discussions. Instead, we wonder where this changed reality plays a role in the M&A process and what it means for buyers, sellers and targets:

Before signing an acquisition agreement: The shift in the exchange rate can significantly influence the economics of a target company's customer and supplier contracts and, as a consequence, its profitability and value. Therefore, in the early stages of a transaction the parties will predominantly discuss how the movement in the exchange rate could affect the target company's current business model, to what extent the target may adapt to the new circumstances and how all this should influence its current valuation. In the legal due diligence, a special focus needs to be placed on the exact terms of the material customer and supplier contracts. What currency is the contract in? Is there a contractually agreed quantity structure or an exclusivity clause? What is the contract's duration? Can it be terminated unilaterally, and if yes, by whom and by when? All these findings must find their way into the various analyses and eventually the parties' discussion of valuation and purchase price.

After signing an acquisition agreement: In case there is already a signed acquisition agreement, the question arises what legal consequences the shift in the exchange rate can have on the contract. Under Swiss law, as a rule, a contract needs to be maintained irrespective of subsequent changes (pacta sunt servanda). The application of the concept of "clausula rebus sic stantibus" is accepted under Swiss law, however, it is very doubtful whether its requirements (serious disruption of the terms of trade, unpredictability of the change) are fulfilled in the case at hand. A rescission of the contract based on "fundamental error" (Grundlagenirrtum; erreur fondamentale) is not totally inconceivable (although some legal scholars exclude future circumstances from its application), but it is certainly a very hard case to argue. If the contract contained a "No Material Adverse Change" (MAC) condition precedent, the shift in the exchange rate could potentially qualify as a MAC. However, very often so-called "market MACs", i.e. a MAC which affects the market as a whole and not the target company in particular (such as, for example, a change in regulation applicable to the target company's industry, or a shift in the exchange rate), are carved out of the MAC condition and do not entitle a party to refuse closing the deal. Last but not least, the (subsequent) shift in the exchange rate will normally not give rise to a violation of representations and warranties, as under Swiss law, representations and warranties generally relate to past and present circumstances, not future events. To be liable for forward-looking statements (for instance contained in the target company's business plan), a seller would need to give a specific guarantee/indemnity in the acquisition agreement. In Swiss M&A practice, this is, however, quite unusual.

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Swiss Corporate Tax Reform - Switzerland will Remain Attractive
In reaction to continued international pressure Switzerland is changing tax privileges for holding companies, administrative companies, and mixed companies at the cantonal level as well as the taxation of principal companies and the Swiss Finance Branch structures at the federal level. Switzerland intends to replace these privileges as part of its corporate tax reform III. The government sent a first proposal of this reform into consultation. The consultation process just ended on 31 January 2015 and it is therefore too early to report on its results. However, judging from press coverage, the proposal has overall been received positively.

From the M&A perspective, the taxation of Swiss holdings is of particular interest, as normally the cross-border acquisition of a target company is effectuated by way of a special purpose vehicle (SPV) in the form of a Swiss (holding) company. In many cases, the SPV is not merged with the target company right away (often to avoid a partial indirect liquidation or because the tax authorities deny a debt push-down). Although pursuant to the proposed reform a holding company will become subject to ordinary statutory taxation, the participation exemption on qualifying dividend income and capital gains will remain. As a result, a pure holding company's profits will continue to be taxed marginally or not at all. The cantons will likely also provide for a reduced tax on equity. This means that, even after implementation of the corporate tax reform III as proposed, Switzerland will remain a very attractive holding jurisdiction.

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Swiss Corporate Law Reform - No Cause for (Immediate) Excitement or Concern
Last November, the Swiss government launched a consultation process for the so-called "big" corporate law reform. The consultation runs until 15 March 2015. The proposal comprises, among other things, a modernization of the rules regarding share capital, corporate restructurings and accounting, a further developed corporate governance including the enhancement of shareholder rights and their legal enforcement, the implementation of the new regime on remuneration for Swiss listed companies ("Minder initiative") into statute, and, notably recommends a quota of 30% of women in board rooms and management of big listed Swiss companies.

Is this proposal a cause for (immediate) excitement or concern? The answer is "no". It is much too early to say how this revision will eventually play out. We stand at a very early stage of the political decision making process, and some proposals obviously seem to be "testing the water". For example, prominent business interest groups oppose the very idea of a big Swiss corporate law reform at this point in time. In their opinion, there is no need for it, and with the currency issues at hand (see first article above), the Swiss economy has to focus on other things. Other political players also announced their opposition to particular aspects of the proposal. If and when the proposed legislation will find its way into parliament is therefore uncertain, and if it does, it is expected to change significantly along the way. Therefore, it is still too early to get either excited or concerned. We will keep you posted from an M&A perspective, once the first political gun smoke has subsided and a more mature proposal been presented.

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