Pearl Diving – Transactional practice in Switzerland

Balthasar WickiPartner, Wicki Partners AG

This article was taken from the recent IR Global – Meet the Members publication 

There are more than 581,000 enterprises in Switzerland, of which 99 percent are small and medium-sized businesses employing close to 70 percent of all employees.

Leaving the one man micro-companies to one side, there are still more than 250,000 legal entities. Roughly 70 percent of those will change ownership in the next decade, due to economic reasons or generational change relating to the owners.

The transactional practice in Switzerland is, thus, very much a typical middle market activity where value is not an absolute figure, but rather is defined by the transactional structure and the future integration plans of the acquirer.

Often, we deal with targets that are not at the peak of their value. We regularly deal with businesses that have a problematic balance sheet or a reduced ability to continue as a going concern, or, when acting for buy-side clients, targets without a dependable liability history.

Under the liberal Swiss legal framework, a company must undergo an ordinary statutory audit if it exceeds two of the following three criteria:
• CHF20 million balance sheet
• CHF40 million yearly turnover
• 250 full-time employees

As a result, we are often presented with audit reports based on a limited audit only, which are not solid enough to pass a thorough due diligence. However, despite the difficulties hidden in the balance sheet which, typically, show the traces of a family managing the business over several generations, such businesses have a solid operational core. They usually have highly knowledgeable employees, a well-established brand in their respective market and an admirable customer following.

Indeed, apart from the traces of their past in their balance sheet, and their reduced ability as a going concern, they are often the true hidden treasure every investor is looking for. The Swiss legal system offers powerful instruments in such constellations.

Recently, we supported one of the top Swiss winery companies in the acquisition of the largest winery business in the northern part of Switzerland (yes, there is wine in Switzerland!) Family-owned in the second generation, the target company had a systemic importance in its geographic area, where it acquired and processed most of the grapes locally produced along the vineyards of the Rhine valley.

The company had a balance sheet of ever-growing complexity with an uncomfortably high number of (mostly subordinate) loans from friends and family. They had also lost a recent fraud case with rather shocking dimensions. We discouraged our client to sign the share deal which they had already agreed to, and, instead, together with the family foundation which controlled the shares, structured a ‘pre-pack carve-out deal’ based on the recently revised Swiss restructuring law and the Swiss Mergers Act.

Initially, we led the target into a non-published, silent provisional debt-restructuring moratorium, overseen by the local court and a court-appointed administrator (nominated by us). We were able to keep the company afloat by funding the target through preferential loans, thus, even with the current state of the balance sheet, there was a very limited credit risk for our client.

We created the required time for drafting and negotiating the carve-out transaction, based on a surgically drafted asset-transfer agreement, which required approvals by numerous authorities and by the court. Once all approvals were granted, in a coordinated action by the court, the commercial register and our own communication advisors, the debt-restructuring moratorium was published and, in the very same moment, the restructuring transaction closed and was disclosed.

Thus, our client could take over a healthy NewCo containing the operational balance sheet of the target. The historic family financing and all the risks associated with the fraud case remained in the OldCo, which will be liquidated by means of a composition agreement in the coming months.

The above case demonstrates some important aspects of the corporate legal environment in Switzerland. The Swiss legal system is very liberal, permits creative, expedient transactions, and allows direct contact with authorities and courts. This ensures that technically challenging transactions can be orchestrated quickly, with very low transactional risks, even in complex, unclear situations.
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