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The M&A Perspective - II/2015

29 July 2015

Implementation of Revised Recommendations of the Financial Action Task Force (FATF) of 2012 - Some Points to Bear in Mind for Private M&A Deals
After a lengthy and complex parliamentary process, a new act aimed at improving Swiss money laundering prevention in line with the above-mentioned FATF recommendations was approved on 12 December 2014. Because the Global Forum on Transparency and Exchange of Information for Tax Purposes will start its Switzerland country evaluation this autumn and, as it appears, transparency of legal entities are an important point on the Forum's checklist, things had to move quickly: Already on 1 July 2015, certain amendments to Swiss corporate law entered into force, affecting in particular Swiss joint stock corporations and their shareholders (some transitional grace periods apply). In a nutshell, they face the following new duties:

  • Holders of bearer shares (Inhaberaktien; actions au porteur) in a privately held Swiss corporation must report their ownership to the corresponding company and the company must register the bearer share holders in a new so-called bearer share register.
  • In case a significant shareholding in a privately held Swiss corporation (>25%) is acquired (bearer or registered shares), the ultimate beneficial owner of the shares must be reported to the corresponding company and the company must keep record of such reporting.
The penalties for non-compliance are harsh: Failure to report means the relevant shareholder is barred from exercising any membership or financial rights with respect to the relevant shares. If a shareholder fulfills the reporting obligation only after the statutory time limits for reporting, the financial rights may only be exercised from the reporting date onwards. Thus, non-compliance may inter alia potentially lead to a loss of dividends.

Going forward, due diligence in private transactions should definitely include verification of compliance with these newly introduced rules. Furthermore, in deals where control does not shift to the acquirer and the target company is not itself involved, reporting the acquiring beneficial owner to the target company must become an additional task on the post-closing checklist.

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M&A Insurance - An Alternative to Traditional Risk Allocation between Seller and Purchaser
After a rather sluggish start in the past, M&A warranty insurance seems to now be rapidly gaining momentum and acceptance in the M&A practice in the US and Europe. The insurers have professionalized their offering by having lawyers with deal experience in charge, by streamlining their quoting and due diligence processes to keep up with the pace of the transaction, and by adapting their pricing to what the market is actually willing to pay in exchange for the "outsourcing" of some transactional risks.

Some deal lawyers already praise M&A insurance as the panacea for any deadlock in warranty negotiations. Others dread it as Pandora's box suggesting that relying on M&A insurance influences the parties' behavior, because being insured creates moral hazard: Parties might not be interested in investing sufficient resources in appropriate due diligence or negotiating hard on representations and warranties and indemnities, but rather they rely on the insurance coverage. There seems to be some truth to both statements: On the one hand, M&A insurance may not be appropriate in every deal for every possible risk as it adds cost and complexity to the deal; also, the market will only be able to render its final assessment as to whether it is really fit for purpose after some actual insurance claims have been raised and handled to the satisfaction of the deal parties (and their lawyers). On the other hand, the M&A insurance route has become an attractive alternative to the traditional risk allocation between seller and purchaser which in a given case is well worth exploring. As such, every M&A practitioner needs to add it to his/her toolbox.

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Shareholder Loans and Dividends - A Possibly Fatal Financial Assistance Cocktail
Financial assistance, broadly understood as the provision of inter-company loan(s) or security to affiliate companies, has always been problematic from a Swiss corporate and tax law perspective. Various mandatory restrictions apply. To comply with the law is particularly demanding if a Swiss company participates in a group-wide cash pool system, because such an arrangement invariably leads to the granting of intra-group loans by its participants. A recent decision by the Swiss Federal Supreme Court adds another level of complexity to this topic:

As a rule, a Swiss company may only pay dividends out of so-called "free equity". The free equity is ascertained on the basis of a balance sheet test and corresponds, in principle, to the amount by which the assets of the company exceed the total sum of the company's liabilities and its share capital (incl. reserves). According to the Federal Supreme Court's recent decision,

  • the free equity available for dividend distribution must be further reduced by the amount of any outstanding shareholder loans (including receivables from intra-group cash pools) that do not pass the arm's length test, and
  • a shareholder loan is not granted at arm's length if no security is provided and the borrower's solvency is not verified.
Legal scholars criticize the decision for various reasons and its ramifications are still unclear. Potentially, a dividend which has been paid in violation of the above rules on free equity is null and void and the target company's board is entitled and obliged to reclaim the dividend amount from the recipient. In the context of a sale of a Swiss company, this issue is not only a due diligence item for the potential buyer, but also, and foremost, for the seller. For the seller may have to safeguard in the sales contract against the risk that after closing the target company successfully reclaims a pre-closing dividend from him/her. One way to deal with this could be to provide in the share purchase agreement for an equivalent post-closing increase in purchase price in case a dividend is reclaimed.

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