</p><h3>Recent Swiss Public M&A Transactions

Recent Swiss Public M&A Transactions

The Swiss M&A market has seen significant activity in 2016. Last year’s high deal value was driven by a few large transactions, including the all-cash public tender offer by China National Chemical Corporation (ChemChina) for Syngenta for a staggering USD 43 billion. The transaction constitutes the largest M&A deal a Chinese company has undertaken so far. Compared to the preceding year, 2016 has seen a significant increase in public tender offers. The majority of public offers were conducted by foreign bidders. 2017 has started at a similar pace. Until end of February, three public tender offers have been announced. Particularly noteworthy is the USD 30 billion tender offer by Johnson & Johnson for Actelion, Europe’s biggest biotech company. This all-cash offer is of particular interest as, prior to the completion of the take-over, Actelion will spin off its R&D business to the public shareholders.

Cross-border transactions make up the majority of Swiss M&A transactions. Besides the above mentioned mega deals, recent cross-border transactions included Lonza’s USD 5.5 billion acquisition of US-based Capsugel, the acquisition of a 20% stake in Russia-based Rosneft by a consortium led by Glencore and the Qatar Investment Authority for USD 11 billion as well as the takeover by HNA Group of gategroup (USD 2 billion) and private equity fund EQT Partners’ takeover of travel company Kuoni (USD 1.4 billion).

Deal Structures and Regulatory Framework

What are the main alternative structures to acquire a Swiss public company?

The two main structure alternatives to acquire a public company in Switzerland are the public tender offer and the statutory merger.

However, in a cross-border set-up, the public tender offer is the predominant acquisition form (combined with a subsequent statutory squeeze-out or squeeze-out merger to gain full control over the target). Statutory mergers are rarely seen in a multi-jurisdictional transaction, unless structured as a triangular merger with the two merging entities being incorporated in the same jurisdiction. This article will focus on the Swiss public tender offer regime.

What are the key rules regulating public tender offers?

The rules governing public tender offers for a company listed on a Swiss stock exchange are contained in articles 125 et seqq. of the Swiss Financial Market Infrastructure Act (FMIA) and its implementing ordinances.

The ruling body on public tender offers is the Swiss Takeover Board. The Takeover Board has enacted the Takeover Ordinance (TO) containing detailed provisions on the conduct of a public tender offer and the content of the offer documents. The Takeover Board issues binding orders in connection with all public tender offers. These orders can be challenged by the bidder, the target company and any qualified shareholder (see below for more details) before the Swiss Financial Market Supervisory Authority (FINMA) and in a second instance before the Federal Administrative Court. The Takeover Board’s orders as well as the offer documents for all public tender offers are available under www.takeover.ch.

Can minority shareholders participate in the proceedings before the Takeover Board?

Shareholders holding at least 3% of the voting rights of the target (so-called qualified shareholders) have the right to request party status in the proceedings before the Takeover Board. As a party in those proceedings, a qualified shareholder enjoys basically the same party rights as the bidder and the target, including the right to be heard and the right to inspect the files (subject to confidentiality restrictions, in particular concerning business secrets). A qualified shareholder may object to and challenge orders of the Takeover Board. Despite the introduction of this (minority) shareholder right in 2009, there has not been a significant rise in transaction-related shareholder activism in Switzerland.

Do special rules apply to foreign bidders?

Swiss takeover rules apply equally to Swiss and foreign bidders making a public tender offer. Except for certain very limited areas (e.g. Radio/TV broadcasting or professional transport for passengers or goods), Switzerland does not impose any foreign investment limitations. Further, Switzerland does not apply any foreign exchange controls. It should be noted that in principle a cash tender offer will have to be made in Swiss francs, the official currency of Switzerland.

Stake-Building by a Potential Bidder

Is a bidder required to disclose the purchase of shares?

A bidder may consider building up a minority stake in the target company before approaching the board and launching a tender offer. Any purchase of shares or derivative instruments by the bidder (or persons acting in concert with the bidder) must be disclosed to the target company and the SIX Swiss Exchange (SIX) if any of the thresholds of 3, 5, 10, 15, 25, 33.33, 50 or 66.66% of the voting rights of the target company is reached or exceeded (irrespective of whether such voting rights can be exercised or not). Thus, a bidder can acquire up to 2.99% of a target’s voting rights without having to disclose its participation. The “hidden” buildup of a larger stake prior to launching a takeover is not possible.

Do Swiss insider rules limit the bidder’s ability to build up a participation?

Swiss law provides for detailed insider rules applicable to any market participant. An intended merger or takeover of a Swiss target usually qualifies as insider information (i.e. non-public, price-sensitive information) and would therefore restrict an insider from trading in the target’s shares. Notwithstanding this, based on a safe harbor in the law, the potential bidder is allowed to purchase target shares prior to the announcement of its tender offer provided that the bidder does not have any other, additional non-public, price-sensitive information on the target (e.g. deriving from the due diligence).

Can a bidder ensure confidentiality of its takeover plans if it starts discussions with the target?

In a friendly scenario the bidder will typically approach the target’s board well in advance of the intended tender offer. Under the listing rules of SIX, the target must in principle make a public disclosure if it enters into substantive discussions or negotiations with the bidder as such information is deemed to be price-sensitive (so-called ad hoc publicity rule). However, if the disclosure of such information jeopardizes the target’s plan (which will usually be the case in a takeover scenario), the target may postpone the disclosure provided that confidentiality of the information is ensured. Thus, the target can usually delay the disclosure of its discussions and negotiations with the bidder until a transaction agreement has been signed and the offer is published by the bidder. However, in case of a leak an immediate public statement will be required.

Can a bidder publicly discuss that he is considering launching a takeover for a particular company?

A potential bidder is not entirely free to publicly discuss (for example in a newspaper interview) its intention to acquire a specific public company. In case of such statements, the Takeover Board may set a deadline by which the bidder must either launch a voluntary offer or publicly confirm that it will not launch a tender offer for at least six months (so-called put up or shut up or PUSU rule). Considering these potential restrictions, public statements by a potential bidder will have to be carefully assessed in advance.

Certain Key Elements of a Public Tender Offer

What are the key steps in a public tender offer?

The timeline (see diagram) illustrates the key steps and documents required for a public tender offer.

What is the purpose of the pre-announcement?

The pre-announcement is a short document containing the key terms of the public tender offer (namely the offer consideration, the offer conditions and the offer restrictions). The pre-announcement has several legal effects:

  • Obligation to make an offer. Once a pre-announcement has been published, the bidder is locked in and can no longer step back from the announced transaction. The offer prospectus must be published within six weeks from the date of the pre-announcement.

  • Impact on offer price. The publication date of the pre-announcement is relevant for the determination of the minimum price the bidder is required to offer to shareholders. In addition, from the pre-announcement until six months after the additional acceptance period the best price rule applies.

  • Defensive measures. With the publication of the pre-announcement by the bidder, the ability of the target’s board to take defensive measures is significantly reduced. Defensive measures in principle will require shareholder approval and need to be pre-notified to the Takeover Board.

  • Notification of trades. Upon publication of the pre-announcement, any trades in target shares (or derivatives) by the bidder, the target and persons acting in concert as well as qualified shareholders must be disclosed to the Takeover Board and published on a daily basis.

While it is not required to publish a pre-announcement (the bidder may directly publish the offer prospectus, see below), it is common that a tender offer is initiated by a pre-announcement which also eliminates the risk of a leak.

What is the main content of the offer prospectus?

The offer prospectus is the key offer document. It contains the offer terms, including offer price, offer conditions, information on the bidder, the target, the financing of the offer, the bidder’s plan in relation to the target as well as information on the securities to be offered in an exchange offer. The offer prospectus must also describe any agreements between the bidder and the target, its governing bodies and shareholders. In a friendly tender offer, the target board’s report on the takeover would typically be included in the offer prospectus. The prospectus must be kept up to date throughout the entire offer.

Prior to its publication, the offer prospectus must be reviewed by the review body and the Takeover Board. The review body must be independent from the bidder and the target, which means that the financial advisors of the bidder and the target may not act as review body. The review body issues a report in which it confirms accuracy and completeness of the offer documents and compliance with Swiss takeover law. A key task of the review body is to assess and confirm that the necessary funds to pay the offer consideration will be available at closing (certainty of funds).

Can a public tender offer be made subject to conditions?

Voluntary offers may be subject to a number of conditions, including:

  • Minimum acceptance threshold. An offer may be subject to a minimum acceptance threshold. Pursuant to the Takeover Board’s practice, an acceptance threshold of 66.66% of the voting rights is permissible even if the bidder does not own any shares at the launch of the offer. The permissible acceptance threshold may be higher if the bidder already owns shares when launching the offer or has obtained tender commitments (so-called “irrevocables”) from individual shareholders.

  • Regulatory approvals. The offer may be subject to the condition that the required regulatory approvals, including merger clearance, have been obtained.

  • Removal of transfer or voting right restrictions. The lifting of share transfer or voting right restrictions in the articles of incorporation is a permissible condition. The same holds true for the board’s approval of the registration of the bidder in the share register of the target.

  • Exchange of the board of directors. The offer may include a condition pursuant to which the members of the board of directors of the target resign from office and are replaced by the bidder’s representatives effective as of closing.

  • No MAC. MAC conditions are in principle permissible provided that the relevant thresholds qualifying as a MAC are clearly defined in the offer prospectus. These thresholds are typically linked to a change in sales, EBIT, or the equity of the target.

  • Restructurings. It is also permissible to make an offer subject to the completion of a restructuring of the target, e.g. the spin-off of a division of the target to the shareholders prior to the completion of the takeover.

  • Issuance and listing of consideration shares. In an exchange offer, the offer may be subject to the condition that the general meeting of shareholders of the bidder approves the capital increase required for the issuance of the consideration shares and the listing of such shares on a stock exchange.

In a mandatory offer, conditions are only permitted for important reasons (e.g., merger clearance and other regulatory approvals, no judgment). A minimum tender threshold would not be permissible in a mandatory offer.

What triggers a mandatory tender offer? Are there any exemptions?

A bidder is required to make a mandatory tender offer if it acquires equity securities in the target (be it directly, indirectly or acting in concert with other parties) and thereby exceeds 33.33% of the voting rights in the target company.

A company may choose to increase the threshold triggering the launch of a mandatory offer to up to 49% of the voting rights (so-called opting-up). Such increase must be contained in the articles of incorporation of the target. A company may also waive the requirement to make a mandatory offer in its entirety by including a so-called opting-out in its articles.

In case of an opting-out, the acquisition of a controlling stake in the target will not trigger a mandatory offer duty. An opting-out may also be introduced for a particular transaction only (so-called selective opting-out), provided that the public shareholders are transparently informed of the planned transaction and the majority of the not involved shareholders approve the opting-out (majority of the minority principle).

What are the legal consequences of a competing offer?

A competing offer may be launched until the last day of the main offer period of the first offer. If a competing offer is made, the timetable of the first offer and the competing offer will be aligned in order to create a level-playing field and allow shareholders to compare and decide between the two offers. Any shareholder who has already tendered his shares into the first offer is entitled to revoke his acceptance and can tender into the competing offer. The target company must treat competing bidders equally. This means that any information provided to one bidder must also be disclosed to the other. There have been only few competing tender offers in Switzerland during the last ten years.

How can the bidder obtain full control over the target?

If the bidder, after completion of its public tender offer, holds more than 98% of the voting rights of the target, the bidder can apply for a court decision cancelling the remaining equity securities of the target in exchange for the same consideration as offered in the tender offer (statutory squeeze-out procedure). The request must be made within three months after the expiration of the offer’s additional acceptance period. Apart from the statutory squeeze-out procedure, the Swiss Merger Act allows the bidder to complete a squeeze-out merger if it holds 90% or more of the voting rights of the target.

Subject to appraisal rights, minority shareholders can be forced to accept cash or any other kind of assets in exchange for their shares of the target company. The squeeze-out threshold of 90% or even 98% may seem high. However, experience shows that the thresholds have been reached in virtually all friendly, successful transactions in the past. There are only very few exceptional cases where the bidder had to declare its offer successful without having reached the necessary squeeze-out level.

Offer Consideration

Is there a minimum offer price that the bidder must offer?

In case of a mandatory tender offer or a voluntary tender offer that extends to more than 33.33% of the voting rights of the target, the bidder needs to comply with the minimum price rule. Under the minimum price rule the minimum price to be paid must be equal to the higher of (i) the market price (defined as the 60 trading days volume weighted average price (60-day VWAP)) and (ii) the highest price paid by the bidder (or any person acting in concert with the bidder) for target shares during the twelve months preceding the offer. The minimum price rule is not applicable in case the target company has validly introduced an opting-out. In addition to the minimum price rule and in any event, if the target company has different share categories, the offer price for the different categories must be in an adequate relation to each other.

Under the best price rule the bidder must increase the offer price if, from the pre-announcement until six months after the expiration of the additional acceptance period, the bidder or any person acting in concert with the bidder (incl. the target if it has entered into a transaction agreement with the bidder) acquires any target shares (or derivatives) at a price higher than the offer price. In practice the best price rule is important because the acquisition of a single target share above the offer price is in principle sufficient to oblige the bidder to raise the offer price payable to all shareholders. The best price rule may also give rise to complex questions if stock option plans are amended or stock options redeemed in connection with the planned takeover.

Can a bidder offer a consideration other than cash?

In principle, the bidder is free to offer cash, shares or a combination thereof as offer consideration. In case of an exchange offer, the offered shares do not even have to be listed. Target shareholders must in principle be treated equally which means that they should receive the same consideration. If in an exchange offer (or in a mixed offer) the bidder acquires shares for cash during the offer (from the pre-announcement until settlement), a cash alternative must be offered to all shareholders.

In a mandatory tender offer, the bidder is always required to offer a cash alternative. The same holds true if during the twelve months prior to the publication of the offer the bidder has acquired 10% or more of the target’s share capital against cash.

Deal Protection

Can the target company agree to a “no shop” obligation? What about other frustrating measures?

In a friendly deal, it is customary for the bidder and the target to enter into a transaction agreement. In the transaction agreement the target typically agrees to recommend the offer. The target can agree to a “no shop” obligation (i.e. a duty to refrain from soliciting third party offers in competition to the recommended bid). Notwithstanding this, the board of the target should retain the right to respond to unsolicited proposals to the extent required by its fiduciary duties (so-called “fiduciary out”).

The target board cannot agree with the bidder to frustrate potential or actual competing offers without shareholder approval. Undertakings of the target to issue shares or sell crown jewels to the first bidder in case of a competing offer would therefore not be binding, and are hardly ever seen in practice.

Are break fees permitted?

The bidder and the target can agree on a break fee payable by the target in case the offer fails, typically as a result of a competing offer. The parties are however not completely free to set the amount of the break fee. Generally speaking, a break fee must be proportionate and not higher than the costs expected to be incurred by the bidder in connection with the public tender offer. Otherwise, the parties risk that the Takeover Board objects and requests a reduction of the break fee. No limitations apply to reverse break fees payable by the bidder to the target should the offer fail for reason attributable to the bidder (e.g. missing regulatory or governmental approvals).

Can shareholders enter into an irrevocable undertaking to tender their shares?

Prior to publishing its offer, the bidder may seek so-called “irrevocables” from individual shareholders pursuant to which such shareholders undertake to tender their shares into the bidder’s offer. The description “irrevocable” may be misleading. In accordance with the practice of the Takeover Board, a shareholder who has entered into an “irrevocable undertaking” has still the right to revoke his undertaking in case of a competing tender offer. The purpose of this revocation right is to foster competition and to create a level-playing field between competing bidders. The revocation right cannot be waived. Thus, if a bidder wants to build up a firm and fixed stake in the target prior to launching the offer, it will have to firmly purchase the shareholder’s participation.

</p><h3>Authors

Authors

Tino Gaberthüel

Partner

Hans-Jakob Diem

Partner, Head of Corporate and M&A, Co-Head of Capital Markets

ZURICH OFFICE

Lenz & Staehelin

Brandschenkestrasse 24

8027 Zurich

Switzerland

Tel: +41 58 450 80 00

www.lenzstaehelin.com

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