The Swiss M&A market is mostly driven by strategic investors but the activism of financial investors has been constantly growing in recent years.

Swiss banks, in particular Credit Suisse, UBS and Zürcher Kantonalbank, are usually involved as arranger in connection with bank financings of Swiss acquisitions financed in the Swiss market. In such deals, a handful of Swiss banks, including the Swiss Cantonal banks, participate in the banking syndicate.

International banks usually take the lead arranging large Swiss acquisitions, through the London market, which typically contain a bank/bond structure and are placed internationally either with institutional high-yield investors and/or other international banks.

The activity of foreign debt funds has remained constant in Switzerland due to the mostly liberal Swiss regulatory cross-border regime (further details regarding the regulatory regime are set forth in 1.2 Corporates and LBOs). Furthermore, it is expected that platforms connecting institutional investors and borrowers will continue to increase their stake in the Swiss lending market due to the increased equity requirements for banks.

In 2021, the involvement of private equity investors increased by 13% compared with 2020 and it contributes a significant part to the current Swiss M&A market. Private equity investors usually use leveraged buyout strategies (LBOs) and acquire a controlling stake in the target by combining equity and debt structures.

After the entering into force of the new Swiss financial regulatory regime on 1 January 2020, debt funds are subject to supervision and certain regulatory requirements. In particular, most distributors of funds have to have an entry in the new register of investment advisers. However, pure cross-border lending without the physical presence of the lender in Switzerland generally remains unregulated (except for so-called "lombard (margin) loans", which qualify as financial services that are subject to the Financial Services Act).

After the uncertainties of the worldwide COVID-19 crisis were mostly overcome after the first lockdown in 2020, the Swiss M&A market proved to be even stronger than before the crisis. In 2021, the M&A transaction value increased by 24.6% compared with 2020, with 233 confirmed transactions, therefore marking a new record high, according to market reports. The booming M&A environment was characterised by both private and public transactions. Moreover, the market outlook is generally positive. However, new uncertainties have recently arisen with the war in Ukraine. In addition, the recent shift from inbound to outbound transactions turned back as the number of Swiss companies acting as buyers only increased moderately while the number of acquisitions of Swiss companies by foreign entities rose by over a third.

The law governing acquisition-finance transactions depends on various factors, including the:

• parties involved;
• structure of the transaction;
• size of the transaction; and
• financing instruments used.

Transactions financed by a single or small number of regional banks are typically based on a short and straightforward loan agreement and would usually be in the relevant language of the borrower (German, French or Italian). For larger syndicated loans, the customary Swiss arrangers are UBS, Credit Suisse and Zürcher Kantonalbank. The documentation is typically in English and based on the Loan Market Association (LMA) standard and from time to time applies a Swiss finish, which in certain respects differs slightly from the London market practice.

Swiss law generally governs the documentation for M&A deals between Swiss parties that are arranged by Swiss banks. However, if a transaction cannot be syndicated in the Swiss banking market due to the size or volume of the transaction or if transactions are financed through the issuance of high-yield notes, that transaction is very often arranged through the London market and is governed by English law.

For private M&A transactions, Swiss law does not provide for any requirements for "certain funds". However, in larger acquisitions it is common practice to include provisions for certain funds.

The standard documentation for the syndicated loan market provided for by the Loan Market Association (LMA) is well-known and generally used in Switzerland for larger Swiss financing transactions. Therefore, Swiss law loan documentation largely follows the structure of the LMA agreements in full (as far as possible) or to a slightly reduced extent; the latter is referred to as the "Swiss LMA-light" standard.

English is the common language for the predominant part of the syndicated loans. However, the documentation may occasionally use the German, French or Italian languages in cases where:

• a syndicate includes some of the smaller and more regional Swiss banks; or
• there is a small and local borrower that is less used to English-language documents.

In Switzerland, it is common practice that lenders' counsel is responsible for drafting the finance documentation and for providing the validity and enforceability opinion. Lenders' counsel may also issue the capacity and due authorisation opinion but, occasionally, banks request borrowers' counsel to be responsible for those opinion statements.

The principal elements of the debt-financing structure are a senior-term loan or high-yield notes to fund the purchase price of the acquisition and a revolving credit facility for the target's working capital financing. The senior debt may be guaranteed and/or secured by security in the assets of the target group.

Depending on the size of the acquisition and the level of the targeted leverage, the senior debt can be supplemented by any of the following:

• second-lien loans;
• mezzanine loans;
• payment-in-kind (PIK) financings (where interest is capitalised and deferred until final maturity); and
• high-yield notes.

Second-lien debt ranks junior to senior debt and is only secured by second-ranking security interests over the same assets that serve as security for the senior debt.

Mezzanine debt is typically unsecured and subordinated in order to rank behind senior and second-lien debt. The subordination of mezzanine loans is usually established by a bilateral agreement between the mezzanine lender and the company. In such an agreement, the mezzanine lender declares, with effect for all senior lenders (and second-ranking lenders), that in the event of the company's bankruptcy or composition with its creditors, the mezzanine lender's claim under the mezzanine loan will rank behind the senior lenders' (and second-ranking lenders') and all other non-subordinated creditors' claims. Since this declaration is effective without the senior lenders' (and second-ranking lenders') consent, it does not need to be set out in an intercreditor agreement.

The mezzanine debt is further often combined with equity kickers. Although not common in leveraged buyout transactions, equity kickers can also be used to compensate the lenders where the leverage and risk goes beyond conventional standards. Under Swiss law, an equity kicker (that is, the means to participate in the upside of the target's value) can take different forms. For example, a company can make interest payments on a PIK-basis, but not in cash. However, typical equity kickers are either conversion rights or option rights. In both cases, Swiss law requires the company to provide for conditional share capital in its articles of incorporation, out of which shares can be issued upon a creditor's exercise of its conversion or option right. The shareholder's right to advance subscription of any such equity-linked debt instruments may only be waived or withdrawn for valid reasons.

Since the timelines in acquisition financings are usually fairly tight, it may not be possible to syndicate the bank loan prior to closing. In such cases, there may be a bridge financing with a maturity of six to 12 months to be refinanced through the syndicated term loan or the issuance of a debt capital market instrument.

While a pure financing through capital market instruments is rarely seen in the Swiss market, large acquisition transactions or transactions involving a big industrial buyer often provide for a capital market element, such as the issuance of a high-yield bond. Such bonds are usually issued on the London or New York market. Furthermore, the capital market instrument may either be issued in addition to the loan structure or be used as a take-out instrument.

Private placements may be made in connection with capital market instruments but are rarely seen in the Swiss market with respect to acquisition financing. Furthermore, financing structures using loan notes are subject to Swiss withholding tax and, therefore, are not usually used in connection with acquisition financings.

If an asset-based financing were used in connection with an acquisition financing, the loan would be secured by certain assets of the borrower and a loan-to-value ratio would be used to determine the amount of money the lenders are willing to lend. However, in particular with acquisition financings, such asset-based financings are rarely requested as they are more common in connection with working-capital financings.

If there are multi-layered debt financing instruments (for example, senior loans, second lien, mezzanine, high-yield bonds) it is common to have an agreement among the creditors for the purpose of:

• determining the relative rights of the various creditor groups;
• establishing the priorities in relation to payments (waterfall) and sharing in the collateral; and
• choosing the mechanisms relating to the enforcement of the collateral.

Recently, large acquisitions have often been financed through secured loans and secured bonds. In these cases, it is common for loans and bonds to be secured on a pari passu basis and for the intercreditor agreement to follow the Loan Market Association (LMA) precedents.

Hedge counterparties are usually not involved in acquisition financing and usually do not benefit from the security granted for Swiss acquisition financing.

In debt financing, and depending on the kind of underlying asset, the most customary forms of security are:

• pledge;
• security assignment (Sicherungszession); and
• security transfer (Sicherungsübereignung).

The Swiss security package usually consists of the following:

• pledge of shares or quotas;
• security assignment of all intercompany loans, insurance receivables and trade receivables;
• pledge of bank accounts;
• pledge of intellectual property rights; and
• security transfer of mortgage certificates (Schuldbriefe).

The perfection requirements under Swiss law depend on the form of the security and the type of asset that is subject to the collateral. Swiss law does not recognise or accept the concept of a floating charge or lien. Moreover, from a mandatory Swiss-law perspective, taking security over movable assets requires the security-provider to give up exclusive control of, and for the secured party to obtain physical possession over, the movable assets. However, certain movable assets (such as aircraft and ships) are subject to special laws allowing for the perfection of a security in those movable assets by registration of the security interest in the relevant registry, rather than taking control/possession of those assets (those registry security interests are explained in more detail in 5.3 Registration Process).

Shares

Shares are usually pledged rather than assigned or transferred for security purposes. This is to avoid the security agent becoming the formal shareholder. Perfection of a pledge of shares of a Swiss company generally requires a written security agreement and the delivery of the share certificate to the pledgee or security agent (acting on behalf of the other pledgees) (as applicable). The share certificate has to be duly endorsed in blank by the pledgor. If the transfer of the shares is restricted by the articles of incorporation of the company, it is advisable to require the transfer restriction to be deleted from the articles of incorporation (or at least to obtain a board resolution approving the transfer of the pledged shares to a third-party acquirer upon enforcement of the pledge in advance).

Inventory

Inventory can be pledged or transferred by way of security. To perfect such a security interest, the security-provider must give up exclusive control and the secured party must obtain physical possession over the inventory. This strict de-possession requirement under Swiss law makes it difficult and impracticable to perfect a security interest over relevant inventory without substantially disturbing the course of business of an operational security-provider. In most cases, taking possession over inventory is regarded as unduly burdensome, costly and unmanageable. Therefore, taking security over inventory is usually not feasible under Swiss law and inventory is not part of the standard Swiss security package.

Bank Accounts

Security over bank accounts is established by taking security in the receivables against the account bank and is mostly granted in the form of a pledge, but can also be granted by security assignment. However, it is more common for bank accounts to be pledged for the following reasons:

• a security assignment is technically a full legal transfer, while a pledge only provides for a limited right in rem;
• account banks have become increasingly concerned about know-your-customer issues and beneficial owner-identification issues in the last few years. While such issues are evident if the bank accounts are assigned and the security agent obtains legal title in the respective receivables, occasionally account banks are not prepared to accept a pledge of bank accounts and/or will threaten to close the bank accounts and terminate the respective banking relationship. It has become established practice of certain banks to require the pledgor and the security agent to enter into a tripartite agreement with such bank. While the entering into such a tripartite agreement is not required for purposes of creating a pledge or security assignment over a bank account, it always has to be assessed whether the pledgor can risk its banking relationship by denying such entry.

Furthermore, one has to be mindful that if the assignee (such as the security agent) is the same entity as the account bank, the relevant receivables would cease to exist due to the creditor and the debtor under the bank account receivables having the same identity.

Receivables

A security over receivables is normally created by way of a general assignment for security purposes. A security assignment provides for all existing and future receivables to be subject to the security interest and, moreover, the assignee or security agent obtains full title in such receivables, which is more favourable for the secured creditors in the event of the bankruptcy of the security-provider. However, certain limitations will apply to secured creditors in relation to future receivables that come into existence only after the security-provider is declared bankrupt. These receivables will fall into the bankruptcy estate and will not be available to the secured creditors.

The creation of a security assignment requires assignability of the relevant receivables under the law by which they are governed (any such assignability may also be excluded by the governing agreement or applicable general terms and conditions). For perfection of the assignment, a written assignment agreement is required. In particular, with respect to operational debtors, the security assignment usually remains silent (which means the third-party debtors will only be notified of the assignment in the event of default or in order to protect the secured creditors' rights in the security). However, it is customary to notify intra-group debtors and insurance companies. As long as the relevant debtor has not been notified, that debtor can still satisfy its obligations by discharging its debts directly to the assignor.

Intellectual Property Rights

Security is commonly granted over intellectual property rights such as patents, trade marks and designs but typically only if any such intellectual property rights exist and are material to the business of the security-provider and/or the target group. It is not very common to take security over any intellectual property rights that may only be created in the future. The usual form of security over intellectual property rights is a pledge, but it is also possible to take security by way of a security transfer.

The security interest over intellectual property rights is created and perfected by a written agreement. The registration of the security interest in any register is not required to perfect the security. However, registration is recommended in order for the security-holder to be able to enforce its security interest against a third party who could otherwise rely, in good faith, on the information registered in the relevant public register.

Real Property

Security over immovable property may be created by using either of the following.

• A mortgage assignment (Grundpfandverschreibung) – this can be used to secure any type of debt, whether actual, future or contingent. The creditor of a claim secured by a mortgage assignment can demand an extract from the land register. However, the extract only acts as evidence and does not constitute a negotiable security.
• A pledge or security transfer of mortgage certificate (Schuldbrief) – the mortgage certificate establishes a personal claim against the debtor, secured by a property lien. The mortgage certificate constitutes a negotiable security, which can be pledged or transferred for security purposes. This mortgage certificate may be issued in paper form (Papier-Schuldbrief) or registered form (Register-Schuldbrief). An outright transfer has certain advantages in the event of the security-provider's bankruptcy and in multi-party transactions.

Mortgage assignments and the establishment of mortgage certificates are created and perfected by the parties entering into an agreement regarding the creation of the security, which is made by a notarised deed and entered into the land register. The security transfer or pledge of the mortgage certificate further requires the transfer of the original mortgage certificate in paper form (Papier-Schuldbrief) (including applicable endorsements) to the security agent or, in the case of a registered mortgage certificate (Register-Schuldbrief), the entry of the transferee in the land registry.

The preferred way to create a security over Swiss real estate in connection with acquisition financings and other group financings is through an outright transfer of mortgage certificate(s), especially if those mortgage certificates have already been issued. The secured party's claims can be backed by property belonging to the borrower or a third party (third-party security).

Movable Assets (Trucks, Trains, etc)

While the security over ships and aircrafts can be created by the entry of the security interest in the respective register, the perfection of a security interest over other movable assets (such as machinery, trucks, trains, etc) requires the transfer of possession of such an asset to the pledgee, and is therefore not practicable. The same rules apply as with respect to inventory (see above).

The pledge of bank accounts and receivables is perfected by entering into a security agreement in writing. The same applies to any security assignment of the same assets. The security interest over intellectual property rights is also perfected by a written security agreement. Furthermore, as Swiss account banks usually have a prevailing security interest in any assets of the account-holder held with the respective account bank in their general terms and conditions, perfection of the pledge (but not of a security assignment) further requires that any such account bank, as prior-ranking pledgee (or any other debtor of receivables who holds a prior-ranking security interest in such receivables), be notified of the pledge.

In order to perfect a security interest in inventory and moveable assets, the security-provider must give up exclusive control and the secured party must obtain physical possession over the inventory.

The form requirements of creating a security interest over real estate are explained in more detail in 5.1 Types of Security Commonly Used.

Under Swiss law, security interests that are perfected by registration are the exception and only available with respect to security on ships and aircrafts, as well as mortgage certificates that have been issued in registered form (Register-Schuldbrief). The registration is procured by filing the required documentation with the relevant registry, upon which, and subject to the accuracy of the submitted documentation, the registry will undertake the registration in the relevant register. The registration perfects the security interest. Once the registration is obtained, the security-provider does not have to make any periodic filings in order to maintain the registration over time.

Restrictions under Swiss corporate law apply to the granting of security by a Swiss company (in particular share corporations (AG) or limited liability companies (GmbH)) when such security is granted for the benefit of either:

• a direct or indirect parent company (upstream security); or
• another group company not fully owned by the party providing the security (cross-stream security).

The permissibility of granting such upstream or cross-stream security has primarily to be assessed based on the benefits that the security-provider receives for granting the security, which defines whether such financial assistance is granted on arm's-length terms. However, the "arm's-length terms" requirement can lead to practical difficulties, for the following reasons:

• shareholders often do not wish to provide any consideration for the granting of the security;
• it is difficult to determine what consideration would be adequate.

Due to these difficulties, it is advisable and standard practice to assume the granting of security is not at arm's length and, therefore, constitutes a distribution by the company to its shareholders. Consequently, the following applies:

• the board of directors and a general meeting of the shareholders must approve the granting of the security;
• any such upstream or cross-stream security is covered by the security-provider's purpose as set forth in its articles of incorporation;
• enforcement of the security will be limited to the freely distributable equity capital of the company at the time of the enforcement, the amount of which must be confirmed by the company's auditors. While this limitation applies by law, it is usually further established by including appropriate limitation terms.

Certain aspects of the concept of upstream and cross-stream security and other benefits remain unclear until the Swiss Federal Supreme Court has the opportunity to review and decide a specific case dealing with these matters. However, the Swiss Federal Supreme Court stated certain additional requirements with respect to the determination of the amount of the freely distributable equity capital available for the use of enforcement proceeds of any upstream or cross-stream security (or the payment under any upstream or cross-stream guarantees). While those requirements do not directly have an impact on the granting of upstream or cross-stream guarantees or security, they are relevant for the determination of the amount of the freely distributable equity capital of a Swiss security-provider at the time of the enforcement of such security. In particular, if the Swiss security-provider has upstream or cross-stream shareholder loans outstanding that were not granted on arm's-length terms, that Swiss security-provider is obliged to build a respective reserve and the freely disposable equity amount will be reduced accordingly.

The granting of upstream and cross-stream security can also raise issues of director's liability (criminal or civil). The directors of a Swiss company are subject to a general obligation to act in the interest of that company in relation to all their actions on behalf of the company, including when granting security for the benefit of third parties.

The aforementioned requirements and limitations applicable to upstream and cross-stream security also apply to upstream and cross-stream guarantees (that is, guarantees for obligations of direct or indirect shareholders of the guarantor or sister companies of the guarantor), indemnities and certain other benefits, such as subordination of intra-group claims, and also apply to refinancings.

However, the aforementioned restrictions under corporate benefit rules do not mean that the lenders will not have access to the cash flow of the target. Debt "push-down" structures or "on-lending" structures are generally accepted in Switzerland. It is quite common for lenders to make funds available to the target and/or its subsidiaries. To allow the target to repay its debt, subsidiaries will upstream funds to the target, either by way of dividends or repayment of intra-group loans. However, this upstreaming is again subject to corporate law restrictions.

There are no particular rules concerning the prohibition of financial assistance under Swiss law. However, a company must not purchase more than 10% of its own voting shares.

Generally, as a matter of Swiss law, a Swiss company has to put its own interest ahead of the parent's and the group's interest. The interest of any company is set forth in the purpose in its articles of incorporation and is fundamentally established in its nature to be a capital company and the seeking of profit (Gewinnstrebigkeit). Therefore, a Swiss subsidiary has to conclude any transaction for its own benefit and requires a valid business reason for any transaction contemplated, which is usually given if the transaction is conducted on arm's-length terms (Drittbedingungen).

The principle outlined above applies also with regard to a Swiss company granting upstream or cross-stream security. If an upstream or cross-stream security is granted on arm's-length terms, it is generally valid from a civil- and corporate-law perspective. However, the assessment as to whether an upstream or cross-stream security is granted on arm's-length terms is subject to uncertainty. In order to hedge the case that upstream or cross-stream security is not granted on arm's-length terms, additional requirements should be adhered to, which are outlined further in 5.4 Restrictions on Upstream Security.

The conditions under which a security can be enforced are determined by general principles of law, as well as by the specific provisions of the security agreement. For a secured party to be permitted to enforce the security, the secured party must have a secured claim that is due. The relevant security agreement may set forth further conditions for the enforcement of the security.

In the case of pledged assets, there are two main forms of enforcement.

• Private enforcement is generally only permitted if the parties have agreed to any such private enforcement in advance (except with respect to intermediated securities). Private enforcement can take place by either private sale, public auction or, in relation to assets, the value of which can be determined objectively, by appropriating the assets and offsetting their value against the secured obligations (Selbsteintritt). In all forms of private enforcement, the pledgee must protect the interest of the pledgor and obtain the best price possible, document the enforcement fully and return any surplus remaining after the application of the proceeds to the secured obligations to the pledgor.
• Debt enforcement pursuant to the Swiss Federal Debt Enforcement and Bankruptcy Act usually takes place by the debt enforcement office selling the assets in a public auction. Assets can, however, also be sold without public auction in certain cases.

With respect to assets that have been assigned or transferred for security purposes, enforcement in a strict sense is not necessary, as the ownership in the relevant assets has already been transferred to the secured party. In an enforcement event, the obligation to return the assets to the security-provider ceases and, furthermore, the same principles with respect to private enforcement of pledged assets apply.

As a matter of Swiss law, a guarantee is a promise to the guaranteed party that a third party will perform and a promise to compensate the guaranteed party for any damages caused as a result of the third party's failure to perform its obligations against the guarantee. Therefore, in the context of a financing transaction, the third party undertakes to pay to the lenders a guaranteed amount in the event that the borrower is in default under the credit agreement.

Swiss law distinguishes between two types of guarantees.

• The independent promise of guarantee is an abstract undertaking to pay a specified amount upon request of the guaranteed party. It is independent and enforceable even if the obligations of the borrower have been cancelled, are unenforceable or even null and void. There are no specific requirements as to the form of the contract. Once validly concluded, the existence of a guarantee is, in principle, independent from the existence of the obligation secured by the guarantee.
• The surety is an agreement between two parties whereby one party undertakes to perform the obligations of the borrower in the event of default of the borrower. In contrast to the independent promise of guarantee, the surety is of an ancillary nature, ie, it may only be called if the obligations of the borrower are valid, due and enforceable. If a surety is granted by a natural person, it is subject to certain form requirements that require, inter alia, notarisation of the agreement.

While the parties are generally free to choose the form of guarantee (subject to certain restrictions in the case of involvement of natural persons), sureties are rarely seen in acquisition financings. The reasons for that are mainly of an ancillary nature, as the financing banks are looking for independent and separate obligations and swift and informal execution.

Restrictions on Upstream Guarantees

The same principles apply to upstream and cross-stream guarantees as are set forth in relation to upstream and cross-stream security (see 5.6 Other Restrictions).

Financial Assistance

With respect to financial assistance, the same principles apply to upstream and cross-stream guarantees as set forth in relation to upstream and cross-stream security (see 5.6 Other Restrictions).

While the granting of a guarantee is a service offered in the market that would only be granted against remuneration, in intra-group set-ups such a guarantee fee is usually not paid. In accordance with the principles applicable for upstream and cross-stream security (see 6.2 Restrictions) such a fee would, however, limit the risk of the guarantee not being granted on arm's-length terms. Consequently, if such an upstream or cross-stream guarantee is limited to the freely distributable equity capital of the guarantor, no guarantee fee is necessary.

The concept of lenders' liability is not specifically recognised in Switzerland. Therefore, the liability of lenders can only arise when lenders exercise rights and obligations under the financing agreements in violation of their terms or general rules and applicable Swiss laws. For example, lender liability issues can arise if the lender:

• incorrectly terminates a facility agreement;
• does not act in good faith when exercising its rights under a facility agreement.

As a general rule, lenders must exercise their rights with due care and balance their own interests with those of their borrowers.

Swiss law does not explicitly address the concept of equitable subordination. Although it has been considered and applied in court decisions, there is no established case law in relation to the concept.

Swiss legal doctrine does support equitable subordination in relation to shareholder loans in an insolvency scenario. According to this doctrine, equitable subordination will apply if a shareholder loan is granted in a situation where the borrower is already over-indebted or in financial distress or, generally, at a time and with terms that are not at arm's length (third-party test (Drittmannstest)). In these circumstances, there is a risk that the shareholder loan is either deemed to be subordinated behind all creditors or recharacterised and treated as the equity of the borrower company, resulting in the lender only being entitled to a repayment once all other creditors of the borrowing company are satisfied in full.

Under Swiss insolvency laws, a debt enforcement office may, under certain conditions, avoid transactions, such as the granting of, or the payment under, any guarantee or security or, if a payment has already been made under the relevant guarantee or security, require that the recipients return the amount received to the bankrupt estate. In particular, a transaction may be avoided in the following cases if such acts result in damages to the creditors.

• The debtor has made a transaction within the last year prior to the opening of formal insolvency proceedings or the confirmation of a composition agreement with assignment or transfer of assets being considered as a gift or a disposal of assets without any consideration. Similarly, transactions pursuant to which the debtor received a consideration that was disproportionate to its own performance, may be avoided.
• The following acts are voidable if performed by the debtor within the last year prior to the opening of formal insolvency proceedings or the confirmation of a composition agreement with assignment of assets, provided that the debtor was already over-indebted at that time:        
1. granting of security for existing claims, provided that the debtor was not previously obliged to grant such security;        
2. payment of a monetary obligation in any other way than by payment in cash or other customary means of payment; and
3. the payment of a debt not yet due.
• However, any avoidance action is dismissed if the beneficiary of the transaction can prove that it was not aware of the debtor's over-indebtedness and, being diligent, could not know that the debtor had been over-indebted at that time.

Furthermore, any acts performed by the debtor within the last five years prior to the opening of formal insolvency proceedings, or the confirmation of a composition agreement with the intention to discriminate between creditors or to favour some creditors over others, are voidable if any such intention was known to the debtor’s counterparty.

If loans are secured over real estate, the following fees may be payable, depending on the transaction:

• notaries’ fees;
• registration fees (land register); and
• cantonal and communal stamp duties.

The rates depend on the:

• security’s face value; and
• location of the real estate.

The rates for fees vary widely from canton to canton.

The granting of upstream or cross-stream security on terms other than arm’s-length may trigger a 35% dividend-withholding tax, which must be deducted from the gross payment made. Dividend-withholding tax is fully recoverable if the recipient is a Swiss-resident entity. Non-resident companies with a permanent establishment in Switzerland can claim a full refund, if the relevant asset is attributable to the Swiss permanent establishment. Non-resident companies can claim a full or partial refund of the dividend-withholding tax, based on an applicable double tax treaty between their country of residence and Switzerland. If no double tax treaty applies, the dividend-withholding tax may become a final burden for the recipient (subject to any measures required in the country of residence of the recipient).

In addition, the Swiss Confederation and the cantons or communes levy an interest-withholding tax on interest that is secured by a mortgage on Swiss real estate. The combined rate of the tax varies between 13% and 33%, depending on which canton the real estate is located in. This interest-withholding tax is reduced to zero under many double tax treaties, including the ones with the USA, the UK, Luxembourg, Germany and France.

In Swiss tax law, if certain levels of debt are exceeded, the tax authorities can deny the deduction of interest on the portion of loans granted to group companies that exceed these levels. The level of acceptable debt in relation to the equity capital of a Swiss company generally depends on the market value of the company's assets (for example, for finance companies, the debt-to-equity ratio must not exceed 6:1). If the applicable threshold is exceeded:

• the interest payments for the portion of debt exceeding the threshold are no longer tax-deductible; and
• capital tax becomes due on the exceeding portion of the loan.

In addition, the interest rate on debt financings must be determined on an arm's-length basis (that is, it must not exceed the maximum interest rates published by the Swiss Federal Tax Administration annually), failing which Swiss dividend withholding tax (currently levied at the rate of 35%) will be levied on the interest payments if the loan has been granted by a parent or sister company. Both maximum debt-to-equity ratios and maximum interest rates do not apply to third-party debt. Therefore, due to these limitations on investor financing, in practice, third-party acquisition financing prevails over investor financing.

Under Swiss corporate law, if a company's liabilities exceed its assets, the company must take measures to restore its balance sheet. In particular, if the claims of the company's creditors are no longer covered (based on either the company's going-concern value or the liquidation value of its assets), the company's board of directors must notify the competent bankruptcy judge, unless some of the company's creditors agree to subordinate their claims to those of the company's other creditors.

There are no specific shareholder liability issues in relation to thin capitalisation or restrictions on debt financing under Swiss law. The obligations of a shareholder are limited to the payment of the subscription amount. There has been much debate about the potential conversion or recharacterisation of a loan granted by a parent to a subsidiary into equity in the case where a subsidiary is too thinly capitalised. However, the Swiss courts and the prevailing doctrine have so far declined to support such a conversion or recharacterisation merely because the company is thinly capitalised.

Swiss law does generally not prohibit or restrict the acquisition of a Swiss business by a foreign investor to safeguard public order or national security. However, after the Swiss parliament has passed a motion to introduce certain legislation on foreign investments in Switzerland, the Swiss Federal Council proposed new draft legislation in August 2021. The specifics of the new legislation are yet to be determined after the public consultation has taken place, which is scheduled for the first half of 2022. In addition, there are specific restrictions for the acquisition of nuclear power plants and Swiss residential real estate companies. There are also restrictions for Swiss banks, securities dealers, fund management companies, asset managers and insurance companies. All of these activities are licensed and supervised by the Swiss Financial Market Authority (FINMA).

The acquisition of a Swiss bank by a financial investor presents particular challenges. A general condition is that any individual or legal entity that directly or indirectly holds at least 10% of its capital or voting rights must ensure that its influence will not have a negative impact on the prudent and reliable business activities of the bank. Meeting this condition is less of an issue if the acquirer is itself a financial organisation subject to adequate supervision.

For private equity funds, the FINMA has been reluctant to approve the acquisition of a qualified participation (ie, 10% of the capital or voting rights) in a bank. If, due to a shareholder acquiring a qualified participation, FINMA takes the view that the conditions for the respective company's licences are no longer met, it can require the acquirer to sell its participation. If the acquirer does not do this, the FINMA may:

• suspend the voting rights in relation to that qualified participation; or
• where appropriate and only as a measure of last resort, withdraw the existing licence and require the entity to liquidate.

If a party acquires shares, directly or indirectly, which increase its holding to 33.33% of the voting rights in a company listed in Switzerland, it must make a mandatory offer for all the target's listed shares. However, in its articles of incorporation, a company may:

• increase the threshold from 33.33% to 49% (opting up);
• subject to certain conditions, waive the application of the mandatory offer rule (opting out).

The mandatory offer must be made within two months of the date on which the relevant threshold is exceeded.

An acquisition of shares in a Swiss target representing less than 33.33% of the voting rights (or 49% in the case of an opting-up) do not present particular problems. However, if the ownership percentage in the voting rights held by a party crosses 3%, 5%, 10%, 15%, 20%, 25%, 33.33%, 50% or 66.66%, it must notify the relevant company and the relevant exchange within a short period of time.

Public takeovers are subject to certain funds' rules, which are generally in line with international rules. Consequently, funding must be in place before the offer is announced. The offer prospectus must contain, inter alia:

• details of the sources of financing;
• confirmation from the review body (a licensed security dealer or auditor approved to review security dealers) that the financing is available.

Commitment letters from banks in support of the bid are usually sufficient for the review body to issue its funding confirmation, provided the conditions set out in the commitment letters either correspond to the conditions of the tender offer or are under the sole control of the acquirer.

Following a successful tender offer, the bidder has the following two alternatives in order to obtain 100% control in the target.

• 98% squeeze-out procedure – the bidder can request a squeeze-out of the remaining shareholders if the bidder has obtained more than 98% of the voting rights in the target. The squeeze-out procedure must be initiated within three months from the end of the additional acceptance period by filing a squeeze-out action against the target. The consideration to be paid to the minority shareholders in the squeeze-out is the same as in the offer and there are no appraisal rights (the court does not review the adequacy of the consideration and offer price). The 98% squeeze-out procedure is typically completed within about six to eight months following the offer.
• 90% squeeze-out merger – as an alternative to a 98% squeeze-out, the Swiss Merger Act allows a bidder holding more than 90% of all of the target's voting rights to effect a squeeze-out merger between the target and a (newly incorporated) Swiss wholly owned subsidiary of the bidder. The minority shareholders do not receive the absorbing company's shares. Instead, the minority shareholders receive cash or any other form of consideration (such as shares in the bidder company). The compensation must be equal to the value of the shares that are squeezed out. Due to appraisal rights, there is an increased risk of litigation and a delay to the merger if the minority shareholders block the registration of the merger in the commercial register. If the squeeze-out merger is executed six months after the end of the acceptance period when the best-price rule no longer applies, the bidder can offer the minority shareholders consideration exceeding the offer price. However, a squeeze-out merger can only be effected if 90% or more of the shareholders in the target company resolve to allow this, meaning in practice that the bidder has no certainty that it will be able to obtain 100% of the voting rights in the target company through a tender offer.

The typical security package of an acquisition loan includes taking security over the target company's shares, which is provided by a share pledge. If the target is incorporated in Switzerland and the shares are issued in the form of registered shares, the transfer of the title in the target shares under the share-purchase agreement is effected by endorsing the share certificate(s) of the target company in the name of the purchaser. In addition, in order to perfect the share pledge in registered shares, the share certificate(s) have to be duly endorsed in blank by the new shareholder and pledgor of the shares.

As the share pledge is usually a condition to funding the purchase price, the perfection of the share pledge should, in theory, take place prior to effecting the transfer of title in the target shares. This is, however, not feasible from a practical perspective as the pledge may only be granted by the purchaser upon obtaining title in the shares. This "chicken and egg" problem is usually solved by preparing the necessary endorsements for the transfer of title and perfection of the pledge and disclose the so-prepared share certificate(s) for the financing parties' review on the closing meeting. If the endorsements on the share certificate(s) are to the financing party's satisfaction, it may confirm that the conditions to funding are fulfilled at the same time as funding of the purchase price is released and the transfer of title in the target shares is effected. However, if no physical closing takes place, the perfection of the target share pledge is often made a post-closing condition.