A new Merger Act (the Act) is expected to enter into force in
Switzerland on July 1 2004. The Act will materially change and
facilitate certain corporate transactions which, under the current
Swiss corporate law (primarily regulated in the Swiss Code of
Obligations (the Code)), still have to be carried out through a
series of complicated transactions, often involving formal
liquidation procedures and triggering unfavourable tax
consequences.
The Swiss legislation regulates mergers only with regard to
stock corporations, partnerships limited by shares and cooperative
societies. Except for mergers between stock corporations and
partnerships limited by shares, the law does not cover mergers
between different types of legal entities. No provisions exist with
regard to spin-offs and split-ups. Furthermore, apart from the
change of a stock corporation into a limited liability company, the
existing law does not recognize the change of an entity's corporate
form.
To fill this gap and to facilitate corporate reorganizations,
the new Act will regulate the civil law aspects of mergers,
demergers and changes of corporate form in a broad, comprehensive
legal framework. The Act will replace and supersede the respective
provisions of the Code.
The Act regulates the following corporate transactions:
- mergers (the unification of two or more legal
entities);
- demergers (spin-offs and split-ups), which are the opposite
of mergers, that is, the split of one legal entity into several
legal entities, by transferring all or part of its assets and
liabilities to one or more acquiring entities with shares of
the acquiring entities issued to the members (shareholders) of
the transferring entity;
- transformation, that is, the change of the legal form of an
entity, while maintaining the proprietary and membership
rights; and
- transfer of assets, that is, the transfer of assets and
liabilities from a transferring legal entity to an acquiring
legal entity through a new mechanism; this transfer results in
an automatic title transfer of the assets pursuant to a
transfer agreement upon registration in the commercial
register.
Mergers
Types of mergers
As under the existing law, the Act
distinguishes two types of mergers: (i) merger by absorption, where
one legal entity absorbs (takes over) another, with the result that
the absorbed entity is dissolved and struck off the commercial
register; and (ii) merger by combination, where two or more legal
entities are combined into a new legal entity, whereby both or all
entities are dissolved and struck off the commercial register and a
new legal entity is created. With regard to the formation of the
new entity, the corresponding provisions of the Code apply.
For affiliated companies within a group or at least 90%-owned
subsidiaries, the formal procedure is simplified and not all rules
of the Act apply. Furthermore, the Act provides for an easier
procedure with regard to small and medium enterprises (SMEs),
provided all members (shareholders) pass certain resolutions
unanimously.
Permitted mergers
The Act provides for an exhaustive
list of permitted mergers (as illustrated in table 1).
| Table 1: Permitted
mergers |
|
Maintenance of participation rights
The members
(shareholders) of the transferring entity will receive equity or
membership rights of the absorbing entity, corresponding
proportionally to their former participation rights in the
transferring entity. For this purpose, the capital of the absorbing
entity needs to be increased in case of an absorption. With regard
to the capital increase, the corresponding provisions of the Code
apply.
But the new Act also allows that the parties may agree in the
merger agreement that members (shareholders) are partially or fully
compensated in cash (a cash-out merger). If the merger agreement
provides for cash compensation only, the approval of at least 90%
of the members of the transferring entity who are entitled to vote
is required. Minority shareholders holding 10% or less in the
transferring entity may thereby be squeezed out and forced to
accept cash compensation instead of shares (squeeze-out merger).
This is not possible under the existing Swiss legislation (except
for listed companies pursuant to the special provisions of the
Swiss Stock Exchange Act).
Protection of creditors and employees
Where
requested by creditors within three months from the effective date
of the merger, the absorbing entity has to secure the creditors'
respective claims. For three years the members of the transferring
entity remain liable to its creditors for liabilities that were
created before the merger.
Before carrying out the merger, the employees of the entities
involved have to be consulted. Should employees decline to be
transferred, they may request that their claims due before the
merger are secured and, if so, the members of the transferring
entity remain liable for such claims.
Demergers
Unlike mergers, demergers are not regulated by the existing
legislation and the means to achieve a spin-off or split-up have
been rather circuitous. Only Swiss tax rules have covered spin-offs
and split-ups for quite some time.
Spin-offs and split-ups
The new Merger Act
recognizes two types of demergers:
- In a split-up, a legal entity transfers all of its assets
and liabilities to two or more legal entities. The transferring
legal entity is thereby dissolved and struck off the commercial
register. In exchange, its members (shareholders) receive
equity or membership rights in the acquiring legal
entities.
- In a spin-off (also called a carve-out), a legal entity,
without being dissolved, transfers a part of its assets and
liabilities to one or more other legal entities. In exchange,
its members receive equity or membership rights in the
acquiring legal entity or entities.
Symmetric and asymmetric demerger
The Act further
distinguishes between demergers where: (i) the members of the
transferring legal entity are granted equity or membership rights
in all involved legal entities in proportion to their former rights
(symmetric or pro-rata demerger); and (ii) demergers where
the equity or membership rights in certain or all of the legal
entities involved do not correspond to the members' proportional
ownership interests (asymmetric or non-pro-rata demerger).
The asymmetric demerger may eventually serve to distribute estates,
dissolve joint ventures or for management buy-outs.
Permitted demergers
The Act provides for an
exhaustive list of permitted demergers (illustrated in table
2).
| Table 2:
Permitted demergers |
|
Protection of creditors and employees
With regard to
the protection of creditors and employees, similar provisions as
for mergers apply. But because creditors are potentially more
exposed in a demerger, the Act provides for protective rules at an
early stage of the procedure.
Change of corporate form
The Act generally allows the change of the legal form of an
entity into another, provided that the new legal form is compatible
with the existing legal structure.
Change of corporate form (also called transformation) means that
a legal entity adopts a new legal form, thereby continuing as a
legal entity and maintaining both its economic and legal identity
without needing formal incorporation of a new entity. But the
formalities regarding the formation of the new entity provided for
in the Code need to be observed, except for the special provisions
regarding contributions in kind. All assets and liabilities remain
with the entity without the necessity of a special transfer
act.
The Act provides for an exhaustive list of permitted corporate
changes (shown in table 3).
| Table 3: Permitted changes of
corporate form |
|
If the legal form changes, the equity or membership rights of
its members will be preserved by participation rights in the
changed entity equivalent to their respective rights before the
change of the legal form. As a minimum requirement, each member
must receive at least one share if the entity is changed into a
capital company. In exchange for non-voting shares, at least
equivalent shares or shares with voting rights must be issued.
Transfer of assets
The Act further introduces a new procedure regarding the
transfer of assets. This procedure allows a legal entity to
transfer all or part of its assets and liabilities to another legal
entity by one single act, whereby the acquiring legal entity
assumes the transferred assets and liabilities by operation of law
(universal succession). This transfer may also include the transfer
of agreements with third parties.
This new institute shall facilitate asset deals, which, under
the current law, can be complicated because the specific, statutory
transfer rules for different types of assets have to be
observed.
Unlike a transfer of assets by demerger, the members
(shareholders) of the transferring company do not become members of
the transferee entity. The transfer of assets may be carried out by
resolution of the executive body of the transferring entity and is
based on an agreement between the transferring and the transferee
entity. But the transfer does not require the consent of the
members (shareholders) of the transferring company, unless a
transfer of all operative assets would render the statutory purpose
of the transferring company impossible.
Common formal procedures
The Act provides for similar procedures for the implementation
of the transactions covered by the Act. These procedures are
outlined below, not taking into consideration certain technical
differences.
- The transaction has to be based on a recent audited balance
sheet. Where the last audited balance sheet is more than six
months old or material changes have occurred in the financial
situation of the entities involved, an interim balance sheet
has to be prepared.
- For each transaction, the Act provides for the required
minimum contents of the agreement between the parties (merger
agreement, demerger agreement, transfer agreement). In case of
change of the legal form of an entity, the executive body of
the entity has to prepare a transformation plan.
- The executive bodies of the parties have to prepare, either
each or jointly, a written report explaining and justifying the
legal and economic aspects of the respective transaction.
Again, the Act provides for specific minimum contents to be
addressed in the report.
- The agreement or plan, the balance sheet underlying the
transaction and the report of the executive bodies must then be
reviewed and confirmed by a specially qualified auditor.
- Before the formal resolution and approval of the
transaction by the members (shareholders) of the legal entities
involved, where required, the agreement or plan, the report of
the executive bodies and the auditor's report must be available
for inspection by the members (shareholders) at the registered
offices of the respective legal entities for thirty days.
- Except for the transfer of assets, the members
(shareholders) of the legal entities involved have to approve
the merger, demerger or change of legal form by resolution of
the respective general meeting(s). The Act provides for
specific majority requirements for each type of legal
entity.
- Lastly, the transaction has to be entered into the
commercial register. Registration in the commercial register is
constitutive for the legal transfer of title of assets and
liabilities and the transfer of legal relationships (for
example agreements with third parties). Furthermore, where real
property is transferred, the corresponding recordings on the
land register have to be amended.
SMEs may resolve by unanimous vote of all members (shareholders)
that the executive body does not have to prepare a report and/or
may waive the audit by a specially qualified auditor and/or the
inspection period.
Adaptation of other Swiss statutes
In the course of the enactment of the Merger Act, obsolete
provisions of the Code will be deleted and other Swiss laws will be
adapted accordingly:
Private International Law Act (PILA)
The PILA will
be amended to facilitate cross-border transactions.
Taxes
Swiss tax laws will also be changed to foster
certain corporate transactions without triggering unfavourable tax
consequences. The main changes are:
- within groups, Swiss companies may transfer, at book value,
without tax consequences, divisions and/or single operating
assets;
- after a spin-off or split-up, the shareholders may sell
their shares without a holding period; and
- to the extent no direct taxes are imposed on corporate
transactions, real property taxes may also not be imposed.