The Private Equity Review
Second Edition
Editor Kirk August Radke
Law Business Research The Private Equity Review
Reproduced with permission from Law Business Research Ltd.
This article was first published in The Private Equity Review, 2nd edition (published in April 2013 – editor Kirk August Radke).
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Second Edition
Editor Kirk August Radke
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Printed in Great Britain by Encompass Print Solutions, Derbyshire Tel: 0844 2480 112 acknowledgements
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i Acknowledgements
PINHEIRO NETO ADVOGADOS
PLMJ – LAW FIRM
PwC
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STIKEMAN ELLIOTT LLP
URÍA MENÉNDEZ
WONGPARTNERSHIP LLP
ii contents
Editor’s Preface ���������������������������������������������������������������������������������������������������ix Kirk August Radke
Part I Fundraising �������������������������������������������������� 1–164
Chapter 1 BRAZIL ������������������������������������������������������������������������������������� 3 Enrico Bentivegna, Jorge NF Lopes Jr and Vitor Fernandes de Araujo
Chapter 2 CAYMAN ISLANDS ��������������������������������������������������������������� 14 Nicholas Butcher and Iain McMurdo
Chapter 3 FRANCE ���������������������������������������������������������������������������������� 23 Stéphane Puel and Julien Vandenbussche
Chapter 4 GERMANY ������������������������������������������������������������������������������ 39 Felix von der Planitz and André Gloede
Chapter 5 INDIA �������������������������������������������������������������������������������������� 49 Siddharth Shah and Bijal Ajinkya
Chapter 6 JAPAN �������������������������������������������������������������������������������������� 60 Kei Ito, Taku Ishizu and Akihiro Shimoda
Chapter 7 KOREA ������������������������������������������������������������������������������������ 71 Young Man Huh, Yong Seung Sun, Sung Uk Park and Hee Jun Choi
Chapter 8 LUXEMBOURG ��������������������������������������������������������������������� 79 Marc Meyers
iii Contents
Chapter 9 SINGAPORE ��������������������������������������������������������������������������� 90 Low Kah Keong
Chapter 10 SOUTH AFRICA �������������������������������������������������������������������� 99 Johan Loubser, Jan Viviers and Andrea Minnaar
Chapter 11 TURKEY �������������������������������������������������������������������������������� 113 Ümit Hergüner, Mert Oğuzülgen and Zeynep Tor
Chapter 12 UNITED KINGDOM ���������������������������������������������������������� 124 Mark Mifsud
Chapter 13 UNITED STATES ����������������������������������������������������������������� 137 John Ayer, Susan Eisenberg and Raj Marphatia
Part II investing ���������������������������������������������������� 165–418
Chapter 1 AUSTRALIA �������������������������������������������������������������������������� 167 James Rozsa, Philip Kapp and James Delesclefs
Chapter 2 BELGIUM ����������������������������������������������������������������������������� 179 Stefaan Deckmyn and Wim Vande Velde
Chapter 3 BRAZIL ��������������������������������������������������������������������������������� 193 Álvaro Silas Uliani Martins dos Santos and Felipe Tavares Boechem
Chapter 4 CANADA ������������������������������������������������������������������������������� 205 Brian M Pukier and Sean Vanderpol
Chapter 5 CHILE ����������������������������������������������������������������������������������� 215 Andrés C Mena, Salvador Valdés and Francisco Guzmán
Chapter 6 CHINA ���������������������������������������������������������������������������������� 226 Pierre-Luc Arsenault, Stephanie Tang, Jesse Sheley and David Patrick Eich
iv Contents
Chapter 7 GERMANY ���������������������������������������������������������������������������� 246 Hans-Jörg Ziegenhain and Alexander G Rang
Chapter 8 India ����������������������������������������������������������������������������������� 258 Vijay Sambamurthi
Chapter 9 IRELAND ������������������������������������������������������������������������������ 272 David Widger
Chapter 10 ITALY ������������������������������������������������������������������������������������� 287 Fabio Labruna
Chapter 11 JAPAN ������������������������������������������������������������������������������������ 296 Kei Ito, Taku Ishizu and Tomokazu Hayashi
Chapter 12 Korea ���������������������������������������������������������������������������������� 306 Young Man Huh, Hae Kyung Sung, Kyle Byoungwook Park and Jaehee Lauren Choi
Chapter 13 NORWAY ������������������������������������������������������������������������������ 315 Peter Hammerich and Markus Heistad
Chapter 14 Portugal �������������������������������������������������������������������������� 324 Tomás Pessanha and Manuel Liberal Jerónimo
Chapter 15 SINGAPORE ������������������������������������������������������������������������� 338 Andrew Ang, Christy Lim and Dawn Law
Chapter 16 SPAIN ������������������������������������������������������������������������������������ 351 Christian Hoedl and Carlos Daroca
Chapter 17 SWITZERLAND ������������������������������������������������������������������� 362 David Ledermann, Olivier Stahler and Nicolas Béguin
Chapter 18 TURKEY �������������������������������������������������������������������������������� 375 Ümit Hergüner, Mert Oğuzülgen and Zeynep Tor
v Contents
Chapter 19 UNITED KINGDOM ���������������������������������������������������������� 386 Stephen Drewitt
Chapter 20 UNITED STATES ����������������������������������������������������������������� 403 Norbert B Knapke II
Appendix 1 about the authors ���������������������������������������������������� 419
Appendix 2 Contributing Law Firms’ Contact Details....441
vi Editor’s Preface
This second edition of The Private Equity Reviewcontains the views and observations of leading private equity practitioners in 24 jurisdictions, spanning every region of the world. This worldwide survey reflects private equity’s emerging status as a global industry. Private equity is not limited to the United States and western Europe; rather, it is a significant part of the financial landscape in developed countries and emerging markets alike. Today, there are more than a dozen private equity houses that have offices around the world, with investment mandates matching such global capabilities. In addition to these global players, each region has numerous indigenous private equity sponsors. As these sponsors seek investment opportunities in every region of the world, they are turning to practitioners in each of these regions and asking two key commercial questions: ‘how do I get my private equity deals done here?’, and the corollary question, ‘how do I raise private equity money here?’. This review provides many of the answers to these questions. Another recent global development that this review addresses is the different regulatory schemes facing the private equity industry. Policymakers around the world have recognised the importance of private equity in today’s financial marketplace. Such recognition, however, has not led to a universal approach to regulating the industry; rather, policymakers have adopted many different schemes for the industry. The following chapters help provide a description of these various regulatory regimes. It remains to be seen how 2013 will treat private equity sponsors, and whether the world will see uniform opportunities for deals and fundraising in all regions, or rather a series of disjointed stories, with opportunities in some regions and none in others. I wish to thank all of the contributors for their support of this second volume of The Private Equity Review. I appreciate that they have taken time from their practices to prepare these insightful and informative chapters.
Kirk August Radke Kirkland & Ellis LLP New York March 2013
ix Chapter 17
SWITZERLAND
David Ledermann, Olivier Stahler and Nicolas Béguin1
I OVERVIEW i Deal activity Global private equity buyout volume fell 11 per cent year-on-year in the first three quarters of 2012, as activity declined due to continuing macroeconomic uncertainty. Confidence clearly improved in the second half of the year; the central bank continued to support financial markets with cheap liquidity, while concerns regarding a eurozone break-up eased.2 While some managers have disappeared, the number of pledge fund platforms has increased. However, valuations have continued their downward trend, and private equity firms continue to struggle to find fresh funds while macroeconomic fundamentals remain uncertain.3 The situation is unlikely to change rapidly, as the estimated dry powder for buyout fund managers continues to undergo a downward trend in 2013. The secondary transactions market has increased compared to 2011, offering investors true liquidity and arbitrage opportunities. In the venture capital market, very few managers have been able to raise new monies. This segment saw fewer but larger deals with a shift from risk capital to development capital, and the emergence of new players (super angels, family offices and sovereign funds). M&A deals volumes remained at the same level as 2011, while valuations increased due to the mammoth Glencore– Xstrata merger. Although Switzerland is not part of the European Union, the euro crisis certainly played a significant role in the stagnation of deal activity during 2012: the increased volatility of the market, the appreciation of the Swiss franc against the euro and
1 David Ledermann and Olivier Stahler are partners and Nicolas Béguin is an associate at Lenz & Staehelin. 2 UBS report on private equity, dated 17 December 2012. 3 The Swiss Private Equity & Corporate Finance Association (‘SECA’) Evening Event: Outlook 2013 (29 January 2013).
362 Switzerland the dollar, and the general tightening of access to debt financing, all contributed to the slowing of private equity activity in Switzerland. The increasing difficulties in accessing credit had a substantial impact on the relative importance of the private equity industry in the Swiss mergers and acquisitions (‘M&A’) market. In 2007, the aggregate value of all M&A transactions carried out by private equity players in Switzerland represented almost 20 per cent of the Swiss M&A market. In 2012, the same figure amounted to approximately 5 per cent. In Switzerland, secondary transactions (through share deals or sale of interest in a private equity fund) remain the preferred exit strategy, as individual founders and investors domiciled in Switzerland expect to achieve tax-free capital gains upon exit. Asset deals are usually much less attractive to individual investors, and they are therefore more common when the shareholding is entirely held by institutional investors. With respect to private equity investment, the trend in Switzerland is no different than in the rest of Europe: a it takes longer for a target to close a financing round; b terms and conditions requested by private equity investors are more exacting; c failures to close rounds become more frequent; and d investors request bulletproof due diligence as well as clear milestones.
As closing a financing round is more difficult and takes more time, the onus is on the target or controlling shareholder to initiate its fundraising efforts well in advance to allow for the longer time frame of the round and avoid running out of cash mid-round. The investment or divestment cycle has also tended to become longer. While a normal cycle used to be four to five years, the expected maturity of an investment is now closer to seven or eight years. In addition, there is clear market demand for highly experienced management with proved execution capabilities. The same trend is being observed in the fundraising efforts of private equity funds or funds of funds, where closing takes on average close to two years. Although funds sponsored by major private equity houses tend to be rapidly oversubscribed, less established firms struggle to reach the minimum commitment required to close their funds. Investors in private equity funds also tend to be more demanding with increased downward pressure on management fees, more focus on the fund’s governance and requests for an increased level of equity commitment from the fund managers. The trend is clearly towards a consolidation of the private equity market in Switzerland as a result of the difficult economic times, but also because of the tightening in the Swiss regulatory environment. There are currently 64 private equity firms operating from Switzerland, which have raised over $25 billion in private equity capital over the past 10 years, and have over $9.4 billion in available capital.4 The top five private equity firms in Switzerland, ranked on the basis of total funds raised in the past 10 years, are Partners Group, Index Ventures, CapVis Equity Partners, Ares Life Sciences and Equinox.
4 Prequin database, www.preqin.com.
363 Investing ii Operation of the market Exit processes Exit processes in Switzerland usually take the form of an initial public offering (‘IPO’) or a secondary sale (e.g., either a trade sale if the target company is sold to an operational company or a secondary buy-out if the target company is sold to another financial investor). Secondary sales by way of trade sales can be organised as a private sale or as an auction. IPOs remain the preferred route of exit for successful and mature companies but are highly correlated with the market situation (IPO window). Dual-track transactions are rare in Switzerland because of the higher costs of transaction and because issuers that can expect similarly attractive valuation from an IPO or from a trade sale are in reality a rare breed. IPOs tend to produce higher valuations for the issuers and improve the ability of the issuers to finance their future growth (through the IPO itself, but also by accessing the capital markets for future equity or bond issues). The drawbacks of an IPO consist mainly of the costs of the transaction (both in terms of money and management time) and the cost of complying with the regulatory environment of a listed company. A secondary sale is not necessarily the reserve of unsuccessful companies: it is often the best option for companies that are successful but a few years removed from a possible IPO, or companies for which the explicit exit strategy is a sale to a strategic buyer. Secondary sales are typically less costly than an IPO, and the terms and conditions of the sale can remain confidential. The path to closing a secondary sale differs depending on whether the contemplated transaction is a private sale or an auction sale. In a private sale the parties will typically execute a letter of intent (‘LOI’), which includes a set of binding terms and non-binding terms as a road map for the transaction and which will drive the timing of the transaction process. Following the execution of the LOI, the buyer will proceed with its diligence process and will typically prepare a first draft of the contractual documentation that the parties will then negotiate. Auction processes in Switzerland are typically conducted in one or two rounds depending on the demand from potential buyers. A strong demand will allow the seller to impose a two-round process where buyers are first required to provide a non-binding offer on the basis of the information memorandum prepared by the seller. Buyers selected in the first round are allowed to proceed with their due diligence process. The seller then provides these buyers with a first draft of the contractual documentation, and will ask them to provide a binding offer and their comments on the contractual documentation. The seller then decides on the basis of the price and comments made by the interested buyers. When the demand is weak, the seller may not be in a position to impose two rounds and may have to grant exclusivity for a limited time to one or two buyers before due diligence can proceed. Therefore, the nature and length of a secondary sale depend on the business of the target, the bargaining powers of each party, the potential difficulties met in the due diligence process, and the necessity to obtain third-party consent or governmental authorisation. As such, the secondary sale process may take from a few weeks to a few months, depending on the transaction.
Market standard management equity incentive arrangements Under Swiss law, without a contrary provision in the article of associations of the company, it is within the reasonable discretion of the board of directors to determine
364 Switzerland the directors’ compensation. The directors are also empowered to set the compensation of the executives of the company. Directors and managers’ incentives may take the form of an equity participation in the company, either through share options or restricted shares. The shares granted to the management or acquired through option exercise are generally subject to lock-up periods. It is not uncommon that such incentive be completed by performance-based cash bonuses granted to the management. Until recently, the Swiss regulator did not pay close attention to the compensation methods of directors and managers. Following the international trend toward more regulation in the financial services industry, the Swiss Financial Market Authority, FINMA, issued Circular 2010/01 on Remuneration Schemes, which introduced as from 1 January 2010 a new set of minimal standards to major financial institutions in Switzerland supervised by FINMA. By way of example, under these rules, all or part of the compensation granted to managers taking significant risks need to be delivered in the form of deferred compensation with a vesting period of at least three years, and should be subject to contractual clawbacks. The guidelines set out in Circular 2010/01 will inevitably have an influence on the equity incentive arrangements between a portfolio company and its managers, either directly if Circular 2010/01 applies to the portfolio company, or indirectly, as Circular 2010/01 is likely to be seen as good governance practice even if it is not directly applicable to the non-regulated entity. The legal regime applicable to excessive salaries found in Swiss listed companies will be subject to important changes in 2013 (which are more likely to enter into force during the course of 2014) with the enactment of new rules purported, among other things, to increase shareholders’ control over the remuneration of the board of directors and members of the senior management, whether in cash or in kind (including through equity incentive programmes). Although the enactment of the new rules depends on a vote by Switzerland’s citizens on a more restrictive federal initiative, and the definitive text of the new rules remains uncertain, the new rules will necessarily affect management equity incentive arrangements.
II LEGAL FRAMEWORK i Acquisition of control and minority interests Private equity investors may either invest in the equity of the portfolio company or grant debt financing that may or may not be subsequently convertible into equity. Private equity investors will usually favour equity or convertible loans in order to benefit from any upturn in the increase of the value of the portfolio company. When investing in the equity of the company, private equity investors will usually invest in preferred shares. Swiss law is rather flexible in the definition of the preference rights that can attach to preferred shares, but in practice the most common preference rights are dividend preferences, liquidation preferences, preferred subscription rights, representation rights on the board of directors and anti-dilution rights. It is also possible to provide in the articles of association that certain decisions of the shareholders or the board of directors require a qualified majority of the shareholders or of the directors, or the consent of a certain category of shares or of the representative on the board of directors of a certain category of shares. It is market practice in Switzerland for the shareholders of a private
365 Investing company to be bound by a shareholders’ agreement. A typical shareholders’ agreement will contain provisions regulating: a the corporate governance of the company (both at the level of the shareholders’ meeting and at the level of the board of directors); b the transfer of shares (pre-emption right, tag-along, drag-along); c future financing (right of first subscription, anti-dilution clauses); and d exit strategies (including reallocation of sales’ proceeds along liquidation or dividend preference rights).
A shareholders’ agreement will typically provide that new investors must adhere to the shareholders’ agreement. Such requirement, which aims at protecting the founders and the investors, may deter future investment, in particular if the shareholders’ agreement contains a stringent anti-dilution provision or overly favourable conversion mechanism for convertible loans. The reality is that successive financing rounds usually lead to the amendment and renegotiation of the shareholders’ agreement, in particular in situations of dilutive financing rounds or when the shareholding structure changes significantly as a result of the round. Equity investments may be carried out either by investing directly in the portfolio company or by investing through a private equity fund or, as the case may be, a private equity fund of funds. Direct investments are usually best left to investors who have the expertise and resources to exercise their rights as shareholders of the portfolio company. Investors lacking the expertise and resources necessary to monitor a direct investment usually prefer to carry out indirect investment through private equity funds. Private equity investors investing through the grant of a convertible loan will generally be junior to the other creditors of the company, such as banks and senior lenders, thereby making such investment close to a quasi-equity. Such investment is generally structured as mezzanine loans (i.e., subordinated debt with a fixed-interest and equity kicker). Convertible loans need to be carefully implemented in Switzerland to ensure the enforceability of the conversion mechanism against the portfolio company itself and against its shareholders (who generally have a right of first refusal on the issuance of new shares). ii Private equity fund structuring considerations Private equity funds investing in Switzerland may structure their investment by setting up either a Swiss structure described under the Swiss Federal Act on Collective Investment Scheme (‘CISA’), namely a Swiss limited partnership for collective investments, a Swiss investment company or any other foreign structure – whichever is the most appropriate for fundraising and investment. In practice, the predominant legal form chosen by sponsors is the Anglo-Saxon limited partnership (‘LLP’). Except for the registration requirements that apply to Swiss-based fund managers deriving from the Anti-Money Laundering Act of 10 October 1997, the key structuring considerations stem mainly from CISA and its implementing ordinance that govern, inter alia, the setting up and management of Swiss collective investment schemes, as well as the offering of non-Swiss collective investment schemes in or from Switzerland. CISA provides for a broad definition of foreign (i.e., non-Swiss) collective investment
366 Switzerland schemes so that most foreign private equity funds fall within the ambit of CISA. CISA therefore plays an important role in determining the domicile of the fund manager and the way interests in the private equity funds are to be offered, marketed and promoted in Switzerland. As regards the choice of domicile of the fund manager, CISA allows the structuring of private equity funds by using foreign-incorporated investment vehicles such as offshore LLPs. The choice of a foreign structure presupposes, however, that such a structure is not centrally managed out of Switzerland. For the time being, neither the sponsor nor the entities managing such foreign vehicles are subject to specific authorisation requirements under CISA. However, this will change with the partial revision of CISA, which is expected to enter into force on 1 March 2013. Under the revised CISA, which is notably driven by the desire to comply with the Alternative Investment Fund Managers Directive (‘the AIFM Directive’), Swiss managers of foreign collective investment schemes will be subject to a mandatory licence requirement. Under the revised CISA and the current draft of its revised implementing ordinance, managers of Swiss and foreign funds shall have a minimum stated capital of 200,000 Swiss francs and 500,000 Swiss francs respectively, and meet certain capital adequacy requirements. The capacity of fund managers to meet such requirements and the regulatory costs relating thereto will therefore have to be carefully considered prior to setting up a private equity fund management company in Switzerland. With respect to the manner in which interests in private equity funds may be distributed, sponsors of private equity funds who intend to offer, market or promote their products in Switzerland will have to comply with the requirements laid down by the revised CISA. This means in practice that interests in private equity funds can be distributed in or from Switzerland to qualified investors only (i.e., regulated financial institutions and large institutional investors, as well as high-net-worth individuals). iii Fiduciary duties and liabilities As a general rule, shareholders of privately held companies do not owe any fiduciary duties to the other shareholders or to the companies themselves (unless the companies are Swiss limited liability companies). By way of exception, Swiss courts have ruled that in certain circumstances a majority shareholder may be considered as having fiduciary duties towards the other minority shareholders, but such exception is interpreted restrictively. For example, a majority shareholder, pushing for a dilutive round because it knows that the founders and other shareholders will not be able to co-invest and will therefore be financially diluted, could be considered (if the dilutive round has no other objective justification) as being in breach of the majority shareholder fiduciary duties towards the other shareholders. Directors of a portfolio company, including directors representing a specific class of shares, a specific investor or the fund manager, owe a duty of care and duty of loyalty to the portfolio company. Under Swiss law, the position of director of a Swiss corporation limited by shares is personal and no legal entity can act as director. Directors may not delegate their powers to any third party (e.g., by way of power of attorney). The duty of care includes the duty to accept the appointment as director only if such person is sufficiently qualified for the office, as well as the duty to adequately organise
367 Investing corporate matters, to perform the office with diligence, and to diligently select, instruct and supervise the management. The duty of loyalty requires a director not to pursue his or her interests or the interests of the corporate group to the detriment of the portfolio company’s interests. Swiss corporate law does not provide for specific provisions to address conflict-of-interest situations. There is, in particular, no legal requirement to abstain from attending meetings of the board or casting a vote at such meeting in a conflict-of-interest situation. Swiss companies will often adopt internal regulations to set out the appropriate course of action for directors in such a situation (such as disclosure, abstention from the meeting and abstention from voting). Further, the duty of loyalty prohibits a director from competing with the company and requires the director to observe confidentiality with regard to company matters. The duty of loyalty is critical in the context of a management buyout transaction where the directors and the managers are under a duty to handle any conflict of interest in an appropriate manner, notably by informing the shareholders of any offer made by a prospective third-party investor. In the absence of statutory provision and clear precedent defining the duties of the management, managers generally seek an independent appraisal of the portfolio company in order to insulate themselves from any personal liability. Such independent valuation may, however, be dispensed with if all the shareholders approve the transaction in an informed manner. The directors of a Swiss company do not owe fiduciary duties to other constituencies, including creditors, except for the fact that when the company is over- indebted (i.e., the third-party liabilities of the company exceed its assets), then the directors have a duty to file for bankruptcy, unless appropriate measures are taken to remedy the over-indebtedness. Directors who do not file for bankruptcy in a timely manner may be held liable towards the creditors for any increase in the company’s debt between the time where the directors should have filed for bankruptcy and the time where the company was actually adjudicated bankrupt. iv Exit: structuring considerations Due to adverse tax consequences that may be triggered by the distribution of dividends in Switzerland, private equity investors generally provide in their contractual arrangement (e.g., shareholders’ agreement) that no dividends will be distributed prior to the occurrence of an exit event. It is therefore only upon occurrence of an exit event that the investors will realise their investment. IPOs and secondary sales (i.e., trade sales and secondary buy-outs) remain the most common exit strategies in Switzerland. Beside the applicable listing requirements (in particular lock-up periods), an IPO will involve the creation and distribution of new shares of the portfolio company. The shareholders’ agreement typically provides that the right of first refusal of the existing shareholders will be waived in relation to an IPO, and that all existing classes of shares will be converted to ordinary shares immediately prior to the IPO. Because legal constraints make it very difficult to convert preferred shares into ordinary shares at a ratio that is different than one-for-one, shareholders’ agreements typically provide for veto rights in favour of preferred shareholders in the event that the pre-IPO valuation would not guarantee the preferred shareholders the expected return on investment. While a pre-IPO reallocation of shares could technically be feasible if provided for in
368 Switzerland the shareholders’ agreement, it is in practice very rare. If private equity investors opt for a secondary sale, such divestment will essentially be governed by the relevant provisions of the shareholders’ agreements that commonly provide for right of first refusal, drag- along and tag-along rights in favour of the other private equity investors. Apart from the sale restrictions deriving from a contractual arrangement, an exit through a secondary offering is otherwise not subject to any regulatory requirements in Switzerland (save for an antitrust consideration or possible authorisation procedure in a regulated environment). Share buybacks are heavily restricted to the extent that they are implemented through a right against the portfolio company to redeem the shares: first, the acquisition by the portfolio company of its own shares may only be financed with its freely disposable assets, since any payment with the restricted equity of the portfolio company would be void pursuant to the Swiss Code of Obligations; second, the aggregate nominal value of the redeemed shares must not exceed 10 per cent of the nominal value of the share capital; third, when redeeming the shares, the portfolio company’s directors must treat all shareholders equally and ensure that the purchase price of the redeemed shares is set at arm’s length. Consequently, the redemption of shares is not considered in Switzerland as a true exit possibility. It is most often used to facilitate the exit of a retiring founder or to prevent a minority shareholder from selling its participation to an unwanted investor. In practice, the circumstances where the company would consider a share buy-back are set out in the shareholders’ agreement. Liquidation of the portfolio company is only an exit route for failing companies. It will require, inter alia, a shareholder resolution passed by a qualified majority. Although leveraged recapitalisation (whether by way of an extraordinary or interim dividend, or by way of a sale to a holding company) do not per se constitute an exit method, such transactions are sometimes used by private equity firms as a prelude to an exit.
III YEAR IN REVIEW i Recent deal activity There have been four IPOs in Switzerland in 2012. In March 2012, one of Europe’s first sizable IPOs in recent months saw the Swiss trade and services company DKSH make a strong debut on the Swiss stock exchange, with its shares opening higher after they were priced at the top end of their offered range.5 This was followed by the listing of the Zurich real estate company, Swiss Finance & Property Investment AG, in April 2012, with a capitalisation of listed shares of 99.6 million Swiss francs, and the listing in July 2012 of Zug Estates Holding AG, a spin-off from the Metall Zug group with an initial free float market capitalisation of registered shares of 375 million Swiss francs. The last IPO on the Swiss exchange occurred in October 2012, with the listing of 6,666,665 new shares of Zurich-based EFG Financial Products Holdings AG with an opening of 46 Swiss francs per share for a total market capitalisation of 307 million Swiss francs.
5 Marta Falconi, ‘DKSH Makes Strong Debut on Swiss Exchange’, Wall Street Journal, 20 March 2012.
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2012 saw many several large M&A deals in Switzerland. With a combined deal value of approximately $50 billion, and with seven of the top 10 Swiss deals involving a US-based bidder or target company, the US was Switzerland’s most important partner for M&A transactions.6 The most striking deal was the $40.2 billion acquisition of the Xstrata mining group by commodities trading giant Glencore. The combined business will operate mines from Australia to Zambia, and will be the world’s biggest producer of zinc, lead and thermal coal and a top-five supplier of copper and nickel.7 Another notable transaction in 2012 was Watson Pharmaceutical’s $5.5 billion acquisition of Swiss-based Actavis group from Novator Partners LLP, creating the third-largest generics business in the world. In the financial sector, Swiss bank Julius Baer added 50 per cent to its assets under management (‘AUM’) when it purchased the non-US wealth management business of Bank of America Merrill Lynch for $883 million, while Grupo Safra SA acquired a majority interest in Bank Sarasin & Cie AG following a successful public offer. Among secondary sales by private equity investors, the most notable transaction announced in 2013 was the $6.6 billion partial acquisition of Alliance Boots GmbH by Walgreen Company from AB Acquisitions Holdings Limited (which is partly controlled by certain funds advised by the private equity firm Kohlberg Kravis Roberts). The two pharmacy giants will operate more than 11,000 pharmacies in the US, Europe and Asia under the Walgreens and Boots banners. Walgreen will initially have a 45 per cent ownership in Alliance Boots, although the US chain has an option to buy the entire company before 2016.8 ii Financing The market is increasingly becoming an investor market with more stringent terms being imposed on portfolio companies and founders. Investors now tend to insist on their financing commitments being tied to the achievement of certain milestones or disburse their commitments on a needs basis, two requests that were frequently dismissed in the past on the grounds that milestone-based finance was too complex to structure under Swiss law and too easy to manipulate. Extensive representations and warranties that were frequently resisted on the grounds that Swiss companies are prevented or restricted for legal reasons to provide such representations and warranties are now more frequent, or are often reinforced by representations and warranties provided by the founders themselves. Stringent anti-dilution clauses are also more frequent. Private equity investors are also being more demanding with respect to exit provisions by requesting all shareholders to commit to an organised sale process within a certain time frame. This trend tends to encourage companies to seek further financing from their existing investors rather than seeking investment from new investors.
6 KPMG, M&A. 2013 Edition. 7 Kayakiran, Firat/Riseborough, Jesse, ‘Glencore Agrees to Buy Xstrata for $62B in Shares’, Bloomberg, 7 February 2012. 8 Timothy W Martin and Ryan Dezember, ‘Walgreen Spends $6.7 Billion on Boots Stake’, Wall Street Journal, 20 June 2012.
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For debt and convertible debt financing, the terms are also becoming more demanding, with more frequent requests for security packages on convertible loans (which lapse upon conversion). For mezzanine loans, covenants light tend to disappear. iii Secondary sale The golden age when private equity funds were able to sell without representations and warranties is over, whether in the context of trade sales or secondary buyouts, or sales of interests in private equity funds. Accordingly, in the context of trade sales or secondary buy-outs, sale and purchase agreements usually contain a comprehensive catalogue of representations and warranties, including title, organisation, financial statements, tax, intellectual property, employees and social security, real estate, material contracts and absence of litigation. The scope of the representations and warranties is usually reduced in the case of a management buyout, since the buyers are involved in the management of the target or have extensive access to the management. Sale and purchase agreements also usually contain full indemnities with respect to taxes or other special risks identified during the due diligence. Warranty and indemnity insurances (i.e., insurances protecting the seller or the buyer from liability or from loss related to risks, or value-reducing factors that were unknown at signing or closing but that are covered by a corresponding representation and warranty in the share purchase agreement) are not widespread in Switzerland, even though the average premium has dropped significantly over the past few years.9 In the case of an earn-out, due to the thin capitalisation of the purchasing vehicle, the seller will usually require from the purchaser a bank guarantee or a guarantee from a parent company in order to secure the performance of the obligations by the purchasing vehicle. Buyers seek to secure any possible remedy to a potential breach of representation by collateral. This is customarily achieved through an escrow mechanism, whereby a portion of the purchase price (generally a substantial fraction of the seller’s cap) is put into an escrow account for a multi-year period corresponding to the duration of the representations and warranties provided in the share purchase agreement. The parties may alternatively agree upon other mechanisms, such as holdback (retention of a portion of the purchase price by the buyer) or an independent guarantee issued by a third party (e.g., a bank). Additional issues are raised when the secondary sale takes the form of a sale of interests in a private equity fund. For instance, the buyer’s due diligence process may be limited due to possible confidentiality obligations imposed on the investors in the fund documentation. The selling investors and the prospective buyer shall also negotiate provisions in the sale and purchase agreement covering, inter alia , the buyer’s indemnity relating to a limited partner clawback obligation or the release of the seller regarding post-closing liabilities. Further, the transfer procedure of the fund interests will generally require the consent of the fund manager. Such consent may potentially be withheld in a situation where the transaction could cause the fund a loss of a specific status, benefit or exemption, or require specific authorisations or disclosure authorisations. The refusal
9 Gregory Walker, Thomas Mannsdorfer, ‘Reporting Corporate Finance’; SECA Yearbook 2012, from p. 45.
371 Investing of the fund management could also be driven by the concern to maintain the ability of the investors to comply with the various capital commitments. The process of selling interests in a private equity fund may therefore prove to take longer than expected.
IV REGULATORY DEVELOPMENTS
The AIFM Directive, which was enacted on 21 July 2011 and must be implemented into national law and applied by EU Member States by July 2013, will also have a significant impact in Switzerland. One key feature of the AIFM Directive is to subject all alternative investment fund managers (‘AIFMs’) in the EU to the same standards of transparency and conduct, irrespective of the location of the funds they are managing. AIFMs incorporated in Switzerland will be considered as non-European AIFMs and will be subject to the third- country regime, which provides that non-European AIFMs can only obtain an EU passport in 2015 after a phased introduction of two years. Before the third-country passport is introduced, and for a period of three years after that, national regulatory regimes, in particular national private placement regimes, will remain available for non- European AIFMs. Swiss AIFMs will only be granted an EU passport if they are subject in Switzerland to regulatory supervision equivalent to the EU supervision deriving from the AIFM Directive. On 6 July 2011, the Swiss Federal Council issued a proposal for a partial revision of CISA following the soon-to-be introduced third-country regime provided by the AIFM Directive. After intense debates in the two chambers of the Swiss Parliament, the revised CISA was enacted on 28 September 2012. The revision of CISA should affect private equity houses in two ways, relating to the regulation of Swiss managers and the distribution of foreign funds. First, Swiss investment managers who manage Swiss funds are currently regulated and supervised by FINMA. By contrast, Swiss investment managers who manage non- Swiss collective investment schemes are not subject to any regulatory supervision or authorisation requirement by FINMA. The revised CISA will require all Swiss investment managers of foreign funds to obtain authorisation from FINMA, subject to certain de minimis rules.10 Swiss managers of foreign funds will have to meet the capital adequacy, personal and organisational requirements that apply today to the managers of Swiss funds. Swiss fund managers will be authorised to manage foreign funds if they are incorporated
10 The Swiss Parliament approved the introduction of de minimis rules, according to which the managers of funds whose investors are ‘qualified investors’ (as defined in the revised CISA) are not regulated if they satisfy one of the following conditions: the AUM of the funds, including those resulting from the use of leverage, do not exceed 100 million Swiss francs; or the AUM of the funds do not exceed 500 million Swiss francs and the funds are unleveraged and closed- ended for a five-year period. Managers of funds who are exempt under the de minimis rules may ‘opt-in’ under the revised CISA if a registration is required by the legislation of the jurisdiction in which the fund is established or distributed.
372 Switzerland in, and have their administrator or custodian in, jurisdictions that have entered into cooperation and exchange of information agreements with FINMA. Foreign managers may also set up a Swiss branch for the purposes of operating in Switzerland and apply for its registration with FINMA, subject to certain conditions.11 Second, under the current Swiss regime, it is possible to offer non-Swiss funds to ‘qualified investors’ and to a ‘limited circle’ of non-qualified investors even if the funds are not registered for public offering in Switzerland. Private equity houses typically rely on this private placement regime to distribute their foreign funds in Switzerland. Under the revised CISA, the private placement rules will radically change, since any offer or advertisement of funds that is not exclusively directed toward regulated financial intermediaries (e.g., banks, insurance companies, securities dealers, fund management companies, regulated managers of funds and central banks) will be regarded as distribution, regardless of whether such offer or advertisement is made on a public or a private placement basis. Exceptions will apply if the distribution is made: at the initiative of the investor, notably on the basis of an advisory agreement or in the context of an execution-only transaction; within the context of a written discretionary asset management agreement with a regulated financial intermediary; or within the context of a written discretionary asset management agreement with an independent manager (subject to certain conditions). If the offer or advertisement qualifies as a distribution for the purposes of CISA, then a regulated Swiss legal representative as well as a paying agent shall be appointed and authorised by FINMA, even if the targeted investors are non-regulated qualified investors (e.g., large pension funds and private companies). The revised CISA is expected to enter into force on 1 March 2013. It introduces two main transitional provisions: a Managers who will be subject to the revised CISA will have to announce themselves to FINMA within six months of it entering into force. In addition, they will have two years to comply with the new legal requirements and to apply for authorisation from FINMA. During these two years, the managers will be able to continue their activity. b Foreign funds that are exclusively distributed in Switzerland to ‘qualified investors’ will have to appoint a regulated Swiss representative as well as a paying agent within two years of the revised CISA entering into force, unless the Swiss targeted investors are regulated financial institutions exclusively.
11 The authorisation of a Swiss branch of a foreign manager with FINMA is subject to the following cumulative requirements: the foreign manager is subject to ‘adequate’ supervision by its home regulator (this represents a significant softening as compared to the initial draft, which required legislation ‘equivalent’ to the Swiss legislation); the foreign manager has an adequate organisation, sufficient financial resources, as well as competent staff in order to operate a branch in Switzerland; and there is a cooperation and exchange of information agreement in place between FINMA and the foreign manager’s home regulator.
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V OUTLOOK
In spite of a strong Swiss franc, Swiss companies bucked the trend of those in most of the country’s European neighbours. Experts anticipate the M&A level in 2013 will be comparable to 2012. Many private equity funds are close to new fundraising rounds, which will offer new target opportunities for potential bidders. However, the next fundraising rounds may prove to be more difficult than those in 2012, since investors are likely to be more demanding and cautious about investing. In the financial sector, and pressured by stringent regulatory requirements, small and medium-sized private banks are likely to divest their clients’ books with a view to cut down the number of jurisdictions in which they have an active presence as the Markets in Financial Instruments Directive requirements take hold. The divestment of such private banks by foreign owners is expected to accelerate in future years, while the independent asset managers sector will continue to consolidate due to more stringent regulatory requirements.
374 Appendix 1
about the authors
DAVID LEDERMANN Lenz & Staehelin David Ledermann has been a partner at Lenz & Staehelin since 2007. He obtained an LLM from the Duke University School of Law and a law degree (lic iur 1995) from the University of Geneva. Mr Ledermann specialises in complex corporate matters, acquisition and financing of privately held corporations across a broad range of industries. OLIVIER STAHLER Lenz & Staehelin Olivier Stahler has been a partner at Lenz & Staehelin since 2002. He obtained an LLM from the University of Edinburgh and a law degree (lic iur 1990) from the Lausanne University. Mr Stahler specialises in banking and finance law. He acts for a broad range of Swiss and foreign financial institutions. He is involved in the structuring of financial products, and in particular private equity funds. He was the Swiss member of the Tax and Legal Committee of the European Private Equity and Venture Capital Association from 2006 to 2012. Mr Stahler is the sole recipient of the International Law Office Client Choice Awards 2010 in the banking category for Switzerland. He was named as a leading practitioner by the International Who’s Who of Private Fund Lawyers 2012 and 2013. NICOLAS BÉGUIN Lenz & Staehelin Nicolas Béguin is a senior associate in the corporate and M&A practice group in the Geneva office of Lenz & Staehelin.
419 About the Authors
LENZ & STAEHELIN Route de Chêne 30 1211 Geneva 17 Switzerland Tel: +41 58 450 70 00 Fax: +41 58 450 70 01 [email protected] www.lenzstaehelin.com
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