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Blogs - The M&A Perspective

Swiss Franc Fluctuation - How it Matters to M&A

27.02.2015 – 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.