Buying a Swiss Trust Business- Some Factors to Consider

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.   

1. What are the Main Corporate Entities Commonly Involved in Private Acquisitions?

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.

2. How Can the Target Trust Business be Valued?

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.    

3. What are the Most Common Ways to Acquire a Private Company?

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:

• Simplicity, that is, the entire business is transferred, subject to agreements or permits with change of control provisions. On an asset purchase, if performed the traditional way, all the assets and liabilities to be transferred have to be identified and individually transferred/assumed, and third party consents and approvals are usually required. If an asset purchase is performed through a transfer of assets and liabilities under the LFus, all relevant assets and liabilities are transferred by operation of law. However, as mentioned, such transfer bears the above mentioned disadvantages (disclosure obligations which make the transaction transparent) and uncertainties (it is unclear whether agreements transfer by operation of law, that is, without third party consents).
• Contracts are generally unaffected unless they contain change of control provisions.
• The seller can benefit from tax-exempt capital gains on the sale of privately held participations, unless the sale is considered as an indirect partial liquidation (re-qualification of the tax-exempt capital gain into taxable income). However, such income tax consequences can be avoided if the transaction is properly structured. If the shares are held by a corporate shareholder the participation relief applies, provided the respective requirements are met.
• The buyer can use any tax loss carry forwards of the target company, during the residual tax loss carry forward period.
• There are no tax consequences for the target company.
• Unless there are specific information/consultation requirements under collective bargaining agreements or similar agreements, the common view is that it is not necessary to inform or consult employees or employees' representatives regarding a share purchase (unless the share purchase is shortly followed by a merger).
• An asset purchase with a transfer of employees makes it necessary to inform and/or consult with the transferring employees or employees' representatives.
• An asset purchase with a sale of all, or substantially all assets, constitutes a factual liquidation. This may first require formally putting the selling company into liquidation, hence an approval by a shareholders meeting, possibly in front of a notary, or changing its purpose, which in turn is less confidential than a share deal.
• A share purchase might constitute a way to avoid having to proceed to a change of trustee.

The main disadvantages of a share purchase, and accordingly the advantages of an asset purchase, are:

• The buyer can pick and choose their assets and generally leave liabilities with the seller. This also protects the buyer to a certain extent from any hidden liabilities and from legacy issues related, for instance, to non-tax compliant clients.
• The base cost of capital assets can be stepped up for tax purposes (allowing greater relief from corporation tax on capital gains on later sales).
• The buyer can grant security to lenders over the assets acquired, while on a share purchase, any security taken over the target company's assets may constitute prohibited financial assistance (although financial assistance can be given by a private company provided it is not an unlawful reduction of capital).
• An asset purchase avoids the problem of trying to locate missing minority shareholders.
• The buyer may not be able to offset financing costs against future profits of the target company.
• The amortisation of the acquired shares is limited (only in case of a decrease in value).The buyer takes over the deferred historical tax risks.
• The sale of shares may be subject to securities transfer tax if a Swiss securities dealer is involved in the transaction.

4. How Can Risk be Minimised? The Need for Due Diligence

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.

Transaction Documents

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.

Regulatory Approval

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.

5. Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?

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.

Olivier Cavadini
Partner – Corporate & Commercial. Advises public and privately owned companies on all aspects of corporate transactions, including mergers & acquisitions, takeovers, joint ventures, financing and general commercial advice. He also frequently advises clients about regulatory requirements applicable to trustees and asset managers.

Charles Russell Speechlys
Cheltenham, Doha, Dubai, Geneva, Guildford, Hong Kong, London, Luxembourg, Manama, Paris and Zurich.