Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the
conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Balthasar Wicki discussed The Art of Deal Making: Using External Expertise Effectively as part of the M&A chapter.
Which warranties and indemnities are most valuable as part of an M&A contract in your experience? Do you have a process that helps to formulate an effective schedule for either buy or sell-side clients?
In Swiss transactions there is generally a particular emphasis on reps and warranties regarding tax compliance and on hold-harmless clauses regarding later restructuring activities. This is a result of the pecularities of the Swiss tax system, which stipulates personal liability of members of the board for certain types of taxes and dues and may also stipulate follow-up tax effects on the seller depending on later restructuring transactions concerning the target. In Switzerland, an opinion on expected tax effects of a transaction can be submitted to the tax authorities ahead of a transaction, and the tax authorities provide a binding opinion (a so-called ruling) prior to closing. Therefore, a meticulous tax structuring is mandatory in Swiss transactions.
Switzerland being a small jurisdiction, most M&A transactions include significant cross-border aspects. In outbound transactions this might, for example, result in reps and warranties concerning post-closing impairment test of foreign assets and consolidation of accounting records under foreign accounting standards. Representing international buyers, we are regularly mandated with due diligence tasks regarding Swiss assets or subsidiaries that results less in drafting specific clauses than providing a business-based assessment of current and potential future risks and opportunities.
What methods of financing a deal are most common in your jurisdiction, for instance private placements, asset finance, mezzanine debt? What advice can you provide around structuring debt into a transaction?
Switzerland is proud of its liberal financial and banking system. However, the structuring limitations due to tax laws (particularly the regime regarding withholding taxes and regarding re-qualification of tax-free capital gains) influence deal financing considerably.
Two peculiarities of Swiss law influence the structuring of private transactions: other than in neighbouring jurisdictions the identity of shareholders in a privately held Swiss company limited by shares must not be notified to the commercial register, and a transfer of shares does not require a notarial deed. A Swiss company limited by shares (Aktiengesellschaft) is – in the true French sense of the word – a “société anonyme”. Combined with tax privileges for holding companies and (in general terms) a regime of tax free capital gains for Swiss residents (if the shares are held personally), this obviously makes a Swiss holding entity an attractive structuring vehicle for cross-border investments.
When talking about middle market deals, the common transaction structure in Switzerland is private placements.
Is private equity widely available in your jurisdiction? What are the advantages and drawbacks of financing a deal using equity, in your experience?
In Switzerland the PE industry has become far more professional in recent years. There exists a diverse landscape of investors with different strategies and regional preferences. Besides a large base of local PE actors, in recent years large Swiss companies such as Swisscom, Roche and Novartis have started to support young firms directly and we see a constant influx of European and US private equity investors in Switzerland. More than 50% of the total investments were made in the ICT sector.
There is a huge ecosystem of professional associations, state and private support initiatives, technology parks, incubators, business angels associations and institutional investors, which support founders and young firms in different ways, be it with venture or growth capital, buyout funds, or funds of funds.
We are still observing primarily middle market deals in most financing rounds of fast-growing companies (start-ups etc.) and in most succession transactions, private equity investors play a pivotal and fundamental role in Switzerland.
Top Tips – For A Watertight Contract
Drafting a strong contract is equally an art as it is a result of creativity and discipline. In our firm, we value the following principles:
• “Keep it Swiss”: We try to resist the temptation to bloat the traditionally concise Swiss contractual drafting style by gradually shifting to a more and more U.S.-influenced drafting language.
• “Resist copy/paste”: Strong contracts are a result of true work and must reflect the equitable, intrinsic and fundamental interests of the contract parties. Pasting together template clauses carries the risk of inconsistency.
• “Cross the T’s and dot the I’s”: Form is a very strong indicator of content quality. We strongly emphasise the importance of structuring content, spelling, punctuation and on formal language consistency.