1.1 What are the most common types of private equity transactions in Switzerland and what is the current state of the market for these transactions?
All standard transaction strategies to acquire portfolio companies are commonly used in Switzerland. Regular leveraged buyouts probably account for a majority of the transactions.
1.2 What are the most significant factors or developments encouraging or inhibiting private equity transactions in Switzerland?
The abandonment of the CHF/EUR minimum exchange rate by the Swiss National Bank (SNB) in January 2015, resulting in the appreciation of the CHF against the EUR, is generally seen as the most significant recent development for the Swiss economy in general. It may also be the most important factor in private equity transactions. While first statistics suggest a decline in the number of transactions in the first quarter of 2015, the mid- and long-term impact of the SNB decision is much debated and remains to be seen.
2 Structuring Matters
2.1 What are the most common acquisition structures adopted for private equity transactions in Switzerland?
Usually, private equity funds investing in Swiss portfolio companies set up a NewCo/AcquiCo in Switzerland as an acquisition vehicle. Such NewCo is held either directly or via a Luxembourg, Netherland or similar structure. It is also seen that the AcquiCo is incorporated outside Switzerland.
Management usually invests directly in the AcquiCo rather than via a management participation company. Often, one single shareholders' agreement (SHA) between the financial investor(s) and management is concluded, which governs all aspects of the investment (governance, exit procedures, share transfers, good/bad leaver provisions, etc.). In other cases, a main SHA is concluded between the financial sponsors and a separate, smaller SHA with management.
2.2 What are the main drivers for these acquisition structures?
The acquisition structure is mainly tax-driven (tax efficient repatriation of dividends/double taxation treaties). Directly investing in the AcquiCo usually allows Swiss domiciled managers to realise a tax free capital gain on their investment when the AcquiCo is sold in the exit.
2.3 How is the equity commonly structured in private equity transactions in Switzerland (including institutional, management and carried interests)?
A Swiss NewCo often has only one class (or maximum two classes) of shares. Preferential rights, exit waterfall, etc., are implemented on a contractual level in the shareholders' agreement. In case of a NewCo incorporated abroad, often several classes of shares exist.
2.4 What are the main drivers for these equity structures?
From a corporate law perspective, certain limitations regarding the formation of preferential shares exist and the articles of association are publicly available. Consequently, the preferred route is to embody preferential rights, etc., in the shareholders' agreement (which is not publicly available) in which the parties can freely agree on such items.
2.5 In relation to management equity, what are the typical vesting and compulsory acquisition provisions?
Often, management is asked to acquire the full stake of their investment at the outset. In mid-sized deals, management participation usually ranges around 1% to 3%; however, certain funds request much higher management investments. As mentioned in question 2.2, usually each of the managers directly invests in the NewCo to realise a tax-free capital gain at the exit.
Normally, the equity sponsor or the target company grant loans to the managers so they can leverage their investment; the exact structure is usually sought to be confirmed by a tax ruling in order to avoid taxation of the exit gain as taxable income.
The shareholders' agreements with management typically contain standard good and bad leaver provisions, providing for a call option of the financial sponsor in case of a departure (with a price reduction in case of a bad leaver - which may also depend on the duration of employment). Sometimes, the management participation is structured as staggered vesting of the shares. The differences between initial investment with good/bad leaver provisions and staggered vesting are of a rather technical nature; the material result is usually the same.
3 Governance Matters
3.1 What are the typical governance arrangements for private equity portfolio companies?
The predominant type for acquisition and of portfolio companies in Switzerland is the stock corporation (Aktiengesellschaft). Sometimes, limited liability companies (LLCs, GmbH) are used which have the advantage that they are transparent for US tax purposes. The remarks in this question regarding stock corporations apply largely also for LLCs.
The stock corporation is governed by a board of directors which has supervisory function and resolves on strategic and important issues (appointment of senior management, etc.). A director is elected ad personam; proxies (e.g. in the case of absence at meetings) are not possible.
Day-to-day management is normally delegated to management, based on organisational regulations. The latter often contain a competence matrix defining the competences of each management level and which decisions need approval by the board or even shareholders.
Such division of competence is - together with board composition, quorum requirements, etc. - also reflected on a contractual level in the shareholders' agreement.
3.2 Do private equity investors and/or their director nominees typically enjoy significant veto rights over major corporate actions (such as acquisitions and disposals, litigation, indebtedness, changing the nature of the business, business plans and strategy, etc.)?
When a private equity investor holds a minority of the voting rights, its veto rights usually depend on the stake held: while a small investor (up to 20%) normally enjoys only fundamental veto rights aiming at protection of its financial interest (dissolution, pro rata right to capital increases, no fundamental change in business, maximum leverage, etc.), investors holding a more...