What are the M&A options for Chinese FDI in Switzerland?

In our previous columns we featured the advantages of Switzerland as a place for Chinese direct investments in Europe. This column gives an overview of the M&A options available to establish such investments.

As a rule, Chinese investors have all the possible M&A options open to them for their foreign direct investment (FDI) in Switzerland. They may either acquire a controlling stake in a private or listed company by a share deal, asset deal or, rather theoretically, an immigration merger (a Chinese company merging with a surviving Swiss company), or they may establish a branch or subsidiary in a greenfield approach. Finally, they may list a foreign or Swiss subsidiary on the SIX Swiss Exchange.

Bank shareholders acquiring or selling a 10% or more stake in the bank, or increasing or decreasing their shareholding beyond or below 20%, 33% or 50%, and shareholders in (re)insurers reaching, increasing or decreasing their shareholding beyond or below 5% 10%, 20%, 33.3%, 50% or 66.6% of the capital or voting rights of the target must notify the Swiss Financial Markets Authority (FINMA) before closing the transaction. FINMA may prohibit such shareholdings or subject them to conditions.

Acquiring control of listed companies

Acquiring control of a listed company means making a public tender offer in accordance with the federal Act on Stock Exchange and Securities Trading (SESTA) and its implementing regulations, which will be featured in more depth in one of our next columns. If 100% control is sought, SESTA allows a squeeze-out of the remaining minority shareholders if the majority shareholder holds 98% of the target’s outstanding voting rights.

Immigration mergers

To avoid a public tender offer, an immigration merger between a Chinese company and the Swiss target, as the surviving company, could theoretically be considered. From a Swiss law perspective, such a merger would be permissible if Chinese law permitted it and all relevant Swiss and Chinese law prerequisites were met. Under Swiss law, the squeeze-out of minority shareholders by way of a merger requires the approval of 90% of all shareholders.

Joint ventures

The Chinese investor may also invest in a Swiss joint venture. This approach is often used if control is not sought, or at least not in the first stage. Joint venture agreements usually contain share transfer restrictions, provisions about board representation and financing commitments of the joint venture partners. They may also provide for voting arrangements in the shareholders’ meetings.

Establishing a branch

Chinese investors preferring a greenfield approach will establish a branch or subsidiary. Establishing a branch means registering the branch in the commercial register based on a resolution of the Chinese company’s competent corporate body determining the representative(s) domiciled in Switzerland. The relevant filing must in essence include a copy of the Chinese company’s business licence.

Further, the application for registration will have to provide legalised and, as the case may be, superlegalised signatures of all signatories of the branch. The branch name must consist of the Chinese company’s full name, supplemented by “Zweigniederlassung XY”, whereby “Zweigniederlassung” means branch in German, and “XY” stands for the name of the city in which the branch is located. All Chinese documents need to be accompanied by certified translations into German.

Establishing a subsidiary

Establishing a subsidiary requires a notarised deed of establishment including the company’s articles of incorporation and determining all signatories. The nominal share capital must be paid into a bank account held in the name of the company, which is to be established. This account is then blocked until the registration of the company in the commercial register is completed. If the nominal share capital is paid up in kind, rather than in cash, the relevant contribution in kind needs to be described in sufficient detail in the contribution in kind agreement.

The founder(s) must report in writing the nature and state of the contribution in kind, as well as the reasonableness of its valuation. Finally, a licensed auditor must review the founder’s report and confirm its completeness and correctness. With respect to the company name, there are no restrictions except that it must not be identical with a company name already registered in Switzerland, and neither be misleading nor merely descriptive.

As a rule of thumb, smaller subsidiaries are usually established as limited liability companies and bigger ones as corporations. The minimal nominal share capital is 20,000 Swiss francs (US$21,700) for a limited liability company and 100,000 francs for a corporation. In case of a corporation, 20% of its nominal share capital but in any case at least 50,000 francs must be paid upon establishment.

Audit requirements

Auditors are not legally required for Swiss corporations and limited liability companies as long as the company has less than 10 full-time employees and all shareholders opt out of the need for auditors. If, however, a shareholder later requests introducing auditors again, or if the company has more than 10 full-time employees, auditors must be elected. Their audit will be limited, as long as the company has neither listed any shares or bonds nor contributes 20% or more of the consolidated sales or assets of a parent company with listed shares or bonds, and does not exceed two of the following thresholds in two consecutive financial years: balance sheet total of 20 million francs; annual sales of 40 million francs; and 250 full-time employees on a yearly average. The shareholders may, however, at any time opt for a full audit.

IPOs

Finally, Chinese investors may list a foreign or Swiss subsidiary at the SIX Swiss Exchange by means of an initial public offering in accordance with SESTA and its implementing regulations, which, as mentioned above, will be featured in more depth in a future column.