Switzerland – Splendid isolation

As an exporting country, Switzerland is not immune to the general crisis and slow down of growth in the rest of Europe. Add to this a tough financing environment, and it is no surprise that the country’s transactional lawyers are reporting a dwindling deal flow.

A key issue for international M&A deals in Switzerland is the strong Swiss franc. In 2011, because prices kept increasing for dollar or euro-based buyers, some inbound acquisitions of Swiss businesses by foreign acquirers failed after following due diligence. However, it’s not just a robust currency that is affecting Switzerland’s M&A transactions. ‘Because the Swiss economy has resisted the global meltdown fairly well in comparative terms,’ says André Gruber, one of the Geneva-based founding partners at Swiss legal practice DGE, ‘Swiss assets are also comparatively expensive.’

Consequently, Switzerland’s M&A advisers are being punished both by a decrease in transaction numbers and by an expensive Swiss franc that renders their services less price-competitive (see box, ‘Taking a cut’).

Nonetheless, M&A activity in Switzerland is proving resilient when compared with other major economies. ‘We’re clearly not living through boom times but, despite the downturn, I have been surprised by the high level of interest by foreign investors in Swiss businesses,’ says Vincent Jeanneret, the Geneva-based managing partner of Schellenberg Wittmer.

A number of high-value international deals involving Swiss companies have taken place, such as Johnson & Johnson’s ongoing $21.3bn acquisition of Swiss medical devices company Synthes, Swiss-based international commodities trader Glencore International’s $10bn IPO (see ‘Riding High’, LB218, page 60) in 2011, and the purchase of mobile phone operator Orange Switzerland by private equity investment group Apax Partners for approximately Ä1.6bn.

With increased regulation piling the pressure on Switzerland’s banks, many anticipate a wave of banking sector consolidation and mergers work for the country’s M&A counsel. Furthermore, the upside of the strong currency is that it encourages some Swiss companies to take advantage of buying opportunities outside of Switzerland (see box, ‘Over the mountain’, page 92), which in turn leads to instructions for Swiss law firms.

 

Against the tide

With high levels of wealth, as well as political and overall economic stability, Switzerland still holds a unique position within Europe. Largely because of a budget surplus and the comparably low costs of the banking system’s bailout, Michael Walther, a partner at GHR Rechtsanwälte, believes that Switzerland has been affected by the financial crisis to a lesser extent than most of the other European countries. It has even significantly reduced its public debt over the past eight to ten years. Financial investors in Switzerland may be quiet right now, but strategic investors are active; and even if pure public Swiss M&A is not in the best of health, private M&A – especially Swiss transactions with international components – has remained fairly buoyant.

’I have been surprised by the high level of interest by foreign investors in Swiss businesses’. Vincent Jeanneret, Schellenberg Wittmer

Zürich-based Philippe Weber, an M&A partner at Niederer Kraft & Frey (NKF), believes that the number and size of deals show that 2011 was, in fact, a very good year. ‘Despite the crisis, there were several high-profile, complex and time-consuming deals. If you’ve been on those transactions then you had an outstanding year,’ he says.

Examples include Johnson & Johnson’s acquisition of Synthes, its largest purchase to date. Leading Johnson & Johnson on Swiss law were Christoph Ramstein and Christoph Lang, Zürich-based partners at Pestalozzi. ‘It’s great to act for the acquirer, as the client gets bigger and you get to keep the client,’ says Zürich-based Michael Kramer, chair of Pestalozzi, and head of the litigation and arbitration group.

 

Homburger advised Synthes on Swiss law, with Zürich-based partner Daniel Daeniker leading the team. Cravath, Swaine & Moore advised Johnson & Johnson on US law; Sullivan & Cromwell provided further counsel on US corporate law; and Shearman & Sterling assisted Synthes with US law. Expected to close in the first half of 2012, the deal is waiting on EU regulatory clearance.

Bär & Karrer has also enjoyed a slice of the major transactions. Zürich partners Rolf Watter and Thomas Rohde, together with Simpson Thacher & Bartlett’s London office, represented Apax Partners on the purchase, by investment funds advised by Apax, of Orange Switzerland from France Telecom. This transaction also requires the approval of the relevant competition and regulatory authorities.

The deal happened at a time when people thought that the acquisition financing markets were closed to new business, yet the buyer was able to secure financing, and the transaction turned out to be the largest LBO in Switzerland in 2011. NKF advised France Telecom and Orange, its team led by Philippe Weber on the M&A and acquisition finance side and Zürich partner András Gurovits on the TMT, regulatory and M&A aspects.

With global law firms like Simpson Thacher appearing on Swiss deals, it’s crucial for the domestic market’s M&A teams to have cross-border expertise, both to pick up those Swiss transactions with an international flavour and to know how to deal with international lawyers. ‘If you don’t have a strong enough Swiss presence you won’t get those deals and it’s important to be on them,’ says Weber.

Another highlight for Pestalozzi occurred in May 2011 when Glencore International – a longstanding Pestalozzi client – launched its huge joint London and Hong Kong flotation, marking London’s largest-ever listing. Peter Pestalozzi, the firm’s counsel, and former Glencore board member, represented Glencore on Swiss law, specifically the operational side of the deal and the pre-IPO restructuring. ‘With a transaction of this magnitude, any legal practice would have loved to have been on board,’ says Pestalozzi’s Kramer.

Homburger’s Daeniker and partner Frank Gerhard led as Swiss legal counsel to the syndicate of banks acting as underwriters. Offshore law firm Mourant Ozannes was sole adviser to Glencore on the Jersey legal aspects of the flotation – the holding company was Jersey-incorporated – and Linklaters acted as Glencore’s main UK and Hong Kong counsel.

Another Swiss company was involved in the closing of one particularly controversial deal last year. After buying a 25% stake in eye care company Alcon in 2009 (see ‘On the Rise’, LB212, page 97), Basel-based Swiss drugmaker Novartis exercised its option to buy an additional 52% from Nestlé for $28.1bn and declared an interest in the remaining 23%, owned by minority shareholders, who claimed the offer was too low. Eventually, in December 2010, Alcon’s board of directors approved a merger with Novartis, which agreed to pay $12.9bn for the remaining Alcon shares. The deal finally closed in April 2011.

Bär & Karrer’s Watter represented Novartis, Homburger’s Daeniker advised Nestlé, and Pestalozzi’s corporate/M&A head, Jakob Hoehn, acted for the independent board of directors. ‘The advice we gave, alongside Sullivan & Cromwell, ensured that they received independent advice and that they achieved a fair deal this time around,’ explains Kramer.

Because it was not certain that the merger would go ahead, Pestalozzi’s M&A team worked closely with the firm’s litigation group during the negotiations, with a view to preparing a litigation strategy – co-ordinated by Kramer – and a $50m litigation trust fund was set up in case the shareholders did not get a favourable deal. ‘They were prepared to go to war,’ says Kramer. Fortunately, the deal was secured on favourable terms; but the approach was innovative and Kramer doubts the deal would have happened without these other tools and a willingness to litigate.

Other cross-border deals involving the acquisition of Swiss companies include Japan’s largest pharmaceutical company Takeda buying Swiss drug company Nycomed for Ä9.6bn, considered one of the most significant deals to occur in the life sciences sector in 2011. International law offices picked up the transaction’s plum roles, with CMS Cameron McKenna’s London-based partner Sandra Rafferty leading longstanding client Takeda and Freshfields Bruckhaus Deringer acting for Nycomed. However, because the target was Swiss-based, Patrick Sommer, a Zürich-based partner at CMS von Erlach Henrici, and his team were also involved, their role entailing the co-ordination and advice regarding the transaction’s Swiss aspects.

 

Vischer is another firm to have advised Japanese companies in significant deals. Zürich-based Benedict Christ led the team advising Toshiba on its $2.3bn, July 2011 acquisition of energy technology company Landis+Gyr, alongside international counsel Morrison Foerster. Landis+Gyr was jointly represented by Skadden, Arps, Slate, Meagher & Flom; Bär & Karrer partners Thomas Reutter and Christoph Neeracher; and NKF’s Weber.

Asia has also been a source of work for Lalive. Alexander Troller, a Geneva-based partner, has seen increasing numbers of Chinese buyers looking to make acquisitions in Switzerland, particularly in the energy and luxury goods sectors. And notwithstanding a decline in volume, the mid-market has also enjoyed significant mandates. Swiss law firm Python & Peter was active in several acquisitions, including a $50m-plus energy industry deal and a $30m-plus transaction in the automation technology sector.

Purely domestic M&A shouldn’t be written off either. Led by partner Markus Vischer, Walder Wyss advised one of Switzerland’s largest media companies, Tamedia, on the sale of the assets of two of the country’s largest private media enterprises, TeleZüri and TeleBärn, to Swiss-based media and publishing services company AZ Medien. Because not many TV companies have been sold in Switzerland, the transaction raised novel regulatory issues regarding the transfer of TV licences and the distribution of TV signals. Schärer partner Jörg Walther represented AZ Medien.

 

Regulatory pressures

Further merger work in 2012 is likely to come from Switzerland’s banking sector. Alongside the ongoing discussion over banking secrecy in Switzerland, a ‘too big to fail’ (TBTF) debate has ignited over Switzerland’s largest banks. The Financial Stability Board, whose secretariat is in Basel, has published recommendations on ‘systemically important financial institutions’, namely those banks which are TBTF. Add this to the global crisis and the importance of Switzerland’s financial services industry, and the Swiss Financial Market Supervisory Authority (FINMA) has become more authoritative.

’It’s great to act for the acquirer, as the client gets bigger and you get to keep the client.’ Michael Kramer, Pestalozzi

FINMA has decided to implement Basel III – the global regulatory standard on bank capital adequacy, stress testing and market liquidity risk – quickly. Together with the Swiss legislator, it has decided that banks should increase their capital levels to make them more viable during difficult times. The new rules are likely to enter into force in January 2013.

Despite the TBTF debate and the well-documented problems at Switzerland’s two largest banks, UBS and Credit Suisse, with regard to tax fraud and rogue traders, it is more likely that small banks will lose their licence because of the cost of extra capital and regulation, and fail. UBS and Credit Suisse, by contrast, have already improved their capital position and given high priority to compliance.

Although it has not yet happened on a big scale, consolidation among smaller industry players is expected. With the capital requirement rules and the erosion of margins making the world of private wealth management much tougher, the paradigm has shifted and there are likely to be repercussions for Switzerland’s banks. ‘It’s extremely difficult for the smaller, private banks to comply with all the extra regulation such as that imposed by FINMA,’ says CMS von Erlach’s Sommer. With the pressure heaped on both Swiss banks and their clients in recent years, many expect to see some smaller banks bought up, merging or disposing of their client portfolios.

Nicolas Piérard, Geneva-based partner at Borel & Barbey, tells LB that his firm has become more involved in the sale of various banks and asset managers. Because of the reduction in the banking industry’s margins, Piérard expects this field of mergers work to significantly increase in 2012.

Borel & Barbey has already been involved in the sale of various banks and asset managers. In February 2011, partner Michel Barbey represented Johnson Financial Group, as seller, in the disposal of Banque Franck, Galland & Cie to Banque Piguet & Cie. Zürich-based Werner Schubiger, a partner at Kellerhals Attorneys at Law, advised Banque Piguet & Cie.

 

Bär & Karrer has also advised on consolidation-related transactions. Led by Watter, the firm advised both banks in the merger of Bank CA St Gallen and swissregiobank in late 2011, the merged entity changing its name to acrevis Bank.

The cost of increased regulation has also led to divestitures by major European banks of their Swiss wealth management subsidiaries – such as the 2011 sale of ABN AMRO (Switzerland) to Swiss private bank Union Bancaire Privée (UBP). Freshfields Bruckhaus Deringer’s Amsterdam team advised ABN AMRO and Swiss firm Lenz & Staehelin acted as local counsel. Representing UBP was Baker & McKenzie in Geneva. And in October 2011, Barbey again led the representation of Johnson Financial Group in its sale of Franck Galland U.S. Advisors – organised under Swiss law and registered as an investment adviser with the US Securities and Exchange Commission (SEC) – to Roycan Trust, a subsidiary of Royal Bank of Canada Group. FBT Attorneys-at-Law’s managing partner, Christophe Wilhelm, advised Roycan Trust.

Not all Swiss bank sector M&A is linked to the fear of regulation. In November 2011, Safra Group and Rabobank Group entered into a share purchase agreement under which Safra would acquire a majority shareholding in Bank Sarasin for Ä843m from Dutch Rabobank, the transaction subject to approval by the Swiss and foreign authorities. Although an example of consolidation, some argue that Bank Sarasin was not sold because of the cost of regulation or capital requirement worries, but because its parent bank, Rabobank, made a strategic decision to dispose of it. Led by Daeniker, Homburger represented Sarasin on Swiss law. CMS von Erlach partner Hans Wille led the advice to Rabobank.

’Focusing on quality remains a must for internationally oriented law firms such as ours.’ Catrina Luchsinger Gähwiler, Froriep Renggli

Even Switzerland’s oldest private bank, St Gallen-based Wegelin Bank has reacted, not because of regulation but in response to a dispute with US authorities over three of its staff being charged with conspiring to hide over $1.2bn in client assets from US tax officials. At the end of January 2012, Wegelin sold its non-US business to Raiffeisen Switzerland’s Notenstein Privatbank, considering this to be the only way to protect staff and client assets.

Peter Nobel and Christoph Peter, partners at Zürich firm Nobel & Hug, advised Wegelin, and Raiffeisen was represented by Froriep Renggli’s Zürich M&A head Beat Barthold. ‘This transaction was a challenge to the team with respect both to the narrow timeline set for closing and the political and regulatory situation under which the transaction was concluded,’ says Barthold.

Consolidation within the banking sector may also affect relations that law firms have enjoyed with their traditional clients, especially if some banks cease to exist. Additionally, as the costs of capital and regulation force small banks to reconsider their business case, the increased complexity and fast pace of new legislation in the banking sector may require lawyers to become even more specialised. Firms with large teams of banking law experts and a steady workflow may benefit from the consolidation, while smaller practices, which previously advised the smaller banks, could suffer from this development.

 

New ground

Increased regulation because of the Basel III framework and the expectation that banks raise their capital levels is also generating capital markets work. In November 2011, NKF acted as Swiss counsel to EFG International, a Zürich-headquartered private banking group, in an exchange offer to convert regulatory capital, subject to a ten-year phase-out, into Basel III-compliant regulatory capital. In the exchange offer, EFG invited holders of the Ä400m EFG fiduciary certificates listed on the Luxembourg Stock Exchange to exchange them into new Tier 2 notes issued by its subsidiary EFG International (Guernsey).

The new Tier 2 notes will include a so-called ‘point of non-viability’ (PONV) write-down feature. This feature is a contractual provision where investors waive their rights under the Tier 2 notes upon the PONV, ie if FINMA decides that a write-down of the Tier 2 Notes is necessary to maintain the viability of the bank; or if there is a decision to make an injection of public sector capital without which the bank would become non-viable. This was the first deal of this kind in Europe from a non-TBTF bank. Weber led for EFG as sole Swiss counsel and co-ordinated EFG’s foreign advisers. ‘What the transaction shows is that Switzerland is once again at the forefront of ground-breaking developments and can set precedents for much larger jurisdictions,’ says Weber.

 

Walder Wyss has also advised on significant capital markets deals. In December 2011, its corporate and commercial head, Urs Gnos, led the advice to the Cantonal Bank of Glarus in strengthening its lower tier 2 regulatory capital by raising around Ä33m through the issue of ten-year subordinated, convertible loans to eight other Cantonal banks.

The increased focus on regulation is also likely affect Swiss-based fund managers. With the UK planning to introduce legislation to prohibit asset managers from accepting commission when promoting financial products, Switzerland will probably follow suit. ‘This will make the industry more transparent but asset managers operating in Switzerland, who currently earn approximately half of their income through commission, will have to adapt to the new environment and devise other ways to be remunerated,’ says Geneva-based Dominique Christin, a partner at BCCC. For example, they may start charging fees.

Currently, Swiss-based fund managers are considered qualified professionals when investments for their clients are based on a management mandate. Consequently, they can buy foreign funds not registered for distribution in Switzerland. This will no longer be the case under the proposed modification of the Collective Investment Schemes Act (CISA), not even in cases where the manager has launched their own fund abroad for the purpose of managing client assets more efficiently. ‘Such restrictive regulation is unnecessary and does not result in additional protection,’ says Christin. ‘Fund managers will continue to come to Switzerland, but it is difficult to advise in the current environment, as it is now uncertain how the law will be modified and how Switzerland will respond to the Alternative Investment Fund Managers (AIFM) Directive.’ Approved by the EU parliament in November 2010, the AIFM was created to produce a comprehensive and effective regulatory and supervisory framework for alternative investment fund managers within the EU (see ‘Worlds Colliding, LB211).

’The Swiss economy has resisted the global meltdown fairly well in compariative terms.’ André Gruber, DGE

On the bright side, the increased focus on regulation is likely to translate into additional work streams for Switzerland’s lawyers, either in setting up new funds or in providing advice to fund managers on their reduced margins and adapting to the new environment.

 

Eternal optimism

Switzerland’s deal flow does not look like it’s about to dry up, but some transactions lawyers expect the flow of M&A work to be sluggish in 2012. ‘It means we have to be even more cost-efficient, but we are prepared for this,’ says Vischer’s Christ. ‘Because Swiss law firms are smaller than Anglo-Saxon counterparts we can be more versatile and switch our M&A lawyers to day-to-day corporate matters.’

If M&A mandates do dry up, Switzerland’s full-service law firms are likely to be compensated by other practice areas. Schellenberg Wittmer’s Jeanneret expects the firm to further develop its biotech, pharma and life sciences law expertise, while litigation and arbitration work is booming for most Swiss dispute resolution teams (see ‘Fighting fit’, page 98).

Several firms have beefed up their tax departments to deal with the extra tax compliance and investigations work. Bär & Karrer recruited three tax specialists in late 2010. Poledna Boss Kurer (PBK) welcomed counsel Hans-Peter Hochreutener from the Federal Tax Administration in January 2011, where he was the legal head for ten years; and Python & Peter welcomed professor Robert Danon as counsel from the University of Neuchâtel in January 2012.

It is clear that the Swiss legal market isn’t short on optimism. Says NKF’s Weber: ‘People are already predicting that 2012 will be a gloomy year for M&A but they said that at the start of 2011 too!’ LB