Switzerland is expected to remain the largest single offshore center through to 2020. Swiss trustees will continue to benefit from the diverse strengths of this market. At the same time, there is tightening regulation on key areas of business. Compliance and operation costs are on a general rise, and this could be further compounded by the inclusion of trustees in the Federal Act on Financial Institutions, a new law which should be enacted in the course of 2019, to become effective in 2020.
The consequence of this inclusion is that trustees will be subject to prudential supervision. Before this they were only regulated for anti-money laundering (AML) purposes. Many banks and private wealth analysts expect more consolidation in the financial sector, and next year, as trust companies look for scale in order to combat rising costs, there are a number of factors that buyers need to consider.
A buyer may seek to develop and expand their trust administration business by acquisition. An acquisition may be complementary to the client’s existing business or diversificatory (if the client is expanding into new markets or regions). Below are some of the things a potential buyer may wish to consider before buying a Swiss Trust Company or its business.
In Switzerland, acquisition vehicles are primarily organised as a corporation (Aktiengesellschaft/société anonyme, or ‘AG’), and in rarer cases as a limited liability company (Gesellschaft mit beschränkter Haftung/société à responsabilité limitée).
An AG can issue registered shares or bearer shares and offer such shares to the public and have its shares listed on a stock exchange. An AG must have a share capital of at least CHF100, 000 (US$ 103,405) of which at least 20 per cent of the nominal value of each share (at least CHF50, 000 (US$51,709) in total) has to be paid in (unless bearer shares are issued, in which case 100 per cent of the nominal value of each share must be paid in). There is no legislation of general application in Switzerland requiring notification to, or clearance of, a governmental agency when a foreign owned (or foreign controlled) company makes an acquisition of a trust business in Switzerland.
There are a number of different approaches to valuing a trust business and it is often advisable to use more than one method and compare the results. In general, on a share sale the price for the shares will be calculated on ‘cash free, debt free basis’. This means that the purchase price is set on the basis that either there is no cash or debt in the target company (other than for normal working capital purposes). In addition, the parties may negotiate as to whether to include a completion accounts or a ‘locked-box’ pricing mechanism.
Share purchases are the most common way to acquire privately held companies, and are more common than asset purchases when it comes to trust services companies, although this has been challenged in the past few years with many buyers going for the asset deal route in order to reduce the risk of legacy. In Switzerland, asset purchases can be conducted either; (a) the traditional way, that is, with individual transfers of all assets and liabilities to be transferred, or (b), through an instrument of transfer of assets and liabilities (transfert de patrimoine) under the Swiss Merger Act (LFus).
It must be pointed out that, although the instrument of transfer of assets and liabilities seems to be an easier and more practical option than the individual transfer, it is also affected by certain disadvantages whose practical importance is such that they ultimately make it unpopular. In this respect, particular mention should be made of the controversy as to whether, in the case of a ‘global’ transfer of assets under the LFus, contracts are automatically transferred, or whether this requires the specific agreement of the parties. On the other hand, we should mention the rather strict requirements of the Federal Office of the Commercial Register (FOCR) concerning the details to be given in the inventory of transferred assets (Art. 71 para. 1 let. b LFus) which, knowing that this inventory is published and therefore freely accessible in the Commercial Register, often raises such problems of confidentiality that it results that these requirements are prohibitive, or in any case perceived as such. These two reasons alone (whose effects sometimes combine) explain the current relative unpopularity of this restructuring method. On closer examination, however, these obstacles do not, at least not expressly, find their basis in the text of the LFus, but rather in the interpretation given by the FOCR.
Share purchases: The Advantages and Disadvantages
The main advantages of a share purchase and accordingly disadvantages of an asset purchase are:
The main disadvantages of a share purchase, and accordingly the advantages of an asset purchase, are:
The information obtained through due diligence will help the buyer to decide whether it wants to proceed with the acquisition and, if so, at what price and on what terms (including the level and scope of any warranties and indemnities). It is particularly relevant if the book of structures has hidden liabilities (particularly tax) or employment restrictions.
Assuming that the transaction proceeds by way of a share sale, the principal document will be a share purchase agreement (SPA). In addition there may be other ancillary documents forming part of the transaction. This will almost always include a disclosure letter (qualifying certain warranties made in the SPA) and formal transfer documents (transferring legal title in the shares) but may also include other agreements between the parties/related parties. Post-completion matters will usually include (assuming a share sale) announcing the transaction, making certain filings with the relevant authority (in the jurisdiction in which the share are registered), updating the corporate books of the target company, possibly issuing new employment agreements and dealing with certain administrative matters such as changing insurance, banking and payroll arrangements.
In Switzerland, there is, for the time being, no prior regulatory approval required for the transfer of shares of a trust company. The acquisition and the change of shareholders will have to be notified to the relevant self-regulatory bodies. It must be pointed out that, when the law on financial institutions will be in force, this type of transactions will be subject to the Swiss Financial Market Supervisory Authority’s prior approval.
A share purchase agreement can provide for a governing law other than Swiss law. Generally, provisions of national law would then not apply. However, mandatory Swiss laws relating to, for example; tax, employee protection, competition, and the mechanics of transferring the shares would still apply (where relevant). It is quite frequent that the shares of the holding company (typically located in the Channel Islands) are the subject of the sale. In such a case, UK law is generally chosen as law governing the SPA. It is however highly recommended to carry out a due diligence on the Swiss subsidiaries of such holding company.
Partner. Olivier is a corporate lawyer and advises public and privately owned companies on all aspects of corporate transactions, including mergers & acquisitions, takeovers, joint ventures, financing and general commercial advice.
Charles Russell Speechlys
Cheltenham, Doha, Dubai, Geneva, Guildford, Hong Kong, London, Luxembourg, Manama, Paris and Zurich.