SWITZERLAND: An Introduction to Corporate/M&A

Introduction 

Even though Switzerland is a rather small country, it is home to one of the most advanced and competitive economies in the world. The country’s political stability and strong tradition of fiscal discipline, combined with a business-friendly regulatory environment make Switzerland a preferred target for international enterprises and investors. In 2023, Switzerland was ranked the world’s most innovative economy – for the 13th consecutive time – by the Global Innovation Index. Traditionally, Switzerland is best known for its banking and financial services sector as well as its chemical and pharmaceutical industries. Other sectors, including the industrial sector and commodities trading, also form an important part of the Swiss economy. Moreover, Switzerland is home to some newer industries, such as fintech and medtech as well as (cloud-based) software development.

On a political level, Switzerland is divided into 26 cantons and more than 2,000 communes. Typically, civil and criminal matters, including corporate and securities laws are subject to federal laws, with tax, public law or educational matters falling within the competence of each canton. Switzerland has adopted a direct democracy system that enables its citizens to vote directly on the enactment of federal laws or amendments to the constitution.

Key Legal Framework 

The main source of law for private M&A transactions (for share or asset deals) is the Swiss Code of Obligations. Since many of its provisions are non-mandatory, the parties in Swiss private M&A transactions benefit from a great deal of freedom of contract that allows for tailor-made solutions.

Public M&A transactions are subject to the Swiss Financial Market Infrastructure Act (FMIA), together with the respective ordinances. Unlike in private M&A transactions, under the FMIA the parties involved in public M&A transactions have much less room to manoeuvre, with the Swiss Takeover Board supervising the transactions and, in particular, reviewing the offer documentation as well as the actions taken by the parties involved.

Furthermore, mergers and demergers by public or private companies, as well as the – little used in practice – statutory transfers of assets and liabilities, are governed by the Swiss Merger Act.

Swiss M&A Market Trends 

In Switzerland, the M&A market cooled off in 2023. The number of deals involving Swiss businesses (outbound, inbound and domestic transactions) dropped to 484 (-25% compared to 2022). Transactions with financial sponsors’ involvement once again formed a substantial part of the overall activity (29% v 33% in 2022). As in previous years, the most active sectors were technology and industrial markets, as well as pharmaceuticals and life sciences.

Besides the overall slowdown of economic growth in Switzerland, the decline was driven by numerous challenges, including inflation, higher interest rates, the strength of the Swiss franc, instability in banking and financing markets, and ongoing wars. However, there are reasons to be cautiously optimistic that M&A activity will rebound in 2024 – the financial markets have improved and interest rate hikes have stopped. Impressive levels of dry powder are still held by financial sponsors that postponed exiting their portfolio companies in 2023.

In Switzerland locked box mechanisms are common, with this trend continuing in 2023 despite the changeable environment for sellers. Buyers tend to accept longer periods between the locked box accounts and closing. Deferred purchase price elements have not generally increased, but have been regularly used in certain sectors (eg, earn-out clauses in technology deals). Other trends include the focus on ESG, digitalisation and the need for swift and creative solutions in a still-challenging market environment.

Changes in M&A practice are likely to be triggered by the rules applicable to certain listed companies and financial institutions on non-financial reporting, which are going to be applied to annual reports for the year ending 31 December 2023. In addition, Swiss companies are required to exercise due diligence regarding their supply chain if they import or treat conflict minerals, or if they offer goods and services that may have a suspected connection with child labour, and they are required to publish a report on the implementation of these duties. These rules, together with the growing interest in ESG issues, are expected to have an increased impact on M&A activity, as companies subject to these rules will need to disclose to what extent targets they have acquired comply with these rules. It is further expected that financial sponsors, responding to the demands of their limited partners and institutional investors, will increasingly focus on these issues as part of the due diligence process and will seek protection in the event that the practices of the target do not match best practices.

Regulatory Developments 

Switzerland has a very investor-friendly regulatory framework, that is, generally, no investment control measures are in place. Foreign direct investment (FDI) controls only apply to certain industries and sectors, for example, banking and real estate. In addition, several business activities require a government licence, such as aviation, telecoms, radio and television, and nuclear energy.

The corporate law reform that came into force on 1 January 2023, brought a range of modernisation that has had a positive impact on Swiss M&A practice, for example, by providing more flexibility regarding share capital and the use of electronic means. It also strengthened shareholder rights and abolished the ban on interim dividends. In practice, some of the new instruments received a bit more attention from companies and their shareholders – the reform introduced a capital band, which allows the general meeting to include a provision in the articles of incorporation allowing the board of directors to increase or reduce the capital within a band by up to 50% above or below the initial amount of the share capital over a period of up to five years. Various companies have introduced a capital band for five years but only a limited number of companies have made use of the full range permitted by law; instead, a capital band typically ranges from 90% to 110% of the share capital. The reform further introduced the possibility to hold virtual shareholder meetings, and more than two thirds of all listed companies have already introduced a provision in their articles of incorporation allowing them to hold shareholder meetings solely by electronic means (ie, virtually).

On 15 December 2023, the Swiss Federal Council released a revised draft legislation on FDI screening (after the first draft legislation in 2022 did not obtain approval). Under this draft legislation, investment screening is expected to apply only when a foreign state-controlled investor takes over a domestic company that operates in a particularly critical area, such as defence equipment, power grids and production, or health and telecoms infrastructure. The exact timeline for the introduction of this new legislation is currently unclear, as it will be subject to a lengthy process.

On 8 December 2023, the EU Commission published a draft of the AI Act, the first-ever legal framework on AI that aims to provide AI developers, deployers and users with clear requirements and obligations regarding specific uses of AI. Like the GDPR, the AI Act will have extraterritorial reach and will not only be applicable to a Swiss company that makes an AI system available in the EU market, but will also apply if the output generated by the AI system of a Swiss company is used in the EU. Once the Act is formally adopted, it is expected to be fully applicable after two years.