Gerhard Jacquemoud Aufsatzjslegal.ch/wp-content/uploads/2013/09/GesKR-Merger-vs.-Exchange-Offer.pdf · Frank Gerhard / Philippe Jacquemoud – Merger vs. Exchange Offer GesKR 2 2012

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3.3 TaxConsiderationsa. Case(1)b. Case(2)

4. ConflictofInterests4.1 DealingwithConflictofInterests4.2 MethodstoMitigateaConflictofInterests

a. AbstentionfromVotingb. ApprovalbytheShareholders’Meetingc. Arm’sLengthPrincipled. NominationofaCommitteeofNon-ConflictedBoard

Members4.3 DisagreementAboutaConflictofInterests

5. Conclusion

I. Introduction

This article is about the statutory merger (Fusion) under Swiss law involving public companies. It primarily aims at describing how Swiss companies (Acquirer) may ac-quire foreign or Swiss companies (Target) by way of a statutory (cross-border) merger.

The statutory merger is the transaction form often chosen by the Acquirer when the Acquirer is planning to offer its own shares as consideration1 and (i) it owns a control-ling or important stake in the Target prior to the transac-tion which will enable it to force a merger through the exercise of its votes at the Target’s shareholders’ meet-ing2 and/or (ii) it might end up with less shares in the

1 In most instances, the consideration in a merger will be shares of the Acquirer, but a cash-out merger with a foreign company could also be envisaged since the high voting majority of 90 % of all shares entitled to vote that is necessary for a cash-out merger with a Swiss Target (art. 18 para. 5 Merger Act) is not applicable to a foreign Tar-get but rather the quorum at the place of incorporation of the Target (see section III.2. below).

2 See for instance the acquisition in March 2010 of Dufry South America Ltd, a company incorporated in Hamilton, Bermuda and listed on the Brazilian Stock Exchange, by Dufry AG, a company incorporated in Basel, Switzerland, listed on the SIX Stock Ex-change. Dufry held 49 % of the shares of Dufry South America before the merger. See also the acquisition in December 2010 of Alcon, Inc, a company incorporated in Hünenberg, Switzerland, listed on the New York Stock Exchange, by Novartis AG, a com-pany incorporated in Basel, Switzerland, listed on the SIX Stock Exchange. Novartis held 77 % of the shares of Alcon before the merger. Interestingly, the acquisition in March 2009 of Genentech, a

TableofcontentsI. IntroductionII. Mergervs.PublicExchangeOffer

1. Introduction2. RemediesoftheTargetShareholders

2.1 TenderOffera. ChallengingtheOfferPriceb. ChallengingtheTransactionc. RiskofBoardLiability

2.2 Mergera. ChallengingtheExchangeRatiob. ChallengingtheTransactionc. RiskofBoardLiability

2.3 Synthesisa. ChallengingtheOfferPrice/theExchangeRatiob. ChallengingtheTransactionc. RiskofBoardLiabilityd. Conclusion

3. FrameworkoftheProcess3.1 Documentation3.2 ApprovalbyCorporateBodies3.3 DealCertainty

a. AcceptanceConditionb. AdditionalPurchaseofTargetSharesintheMarketc. PremiumtoShareholders/Consideration

3.4 TransactionPlanning3.5 Synthesis

III. ParticularIssues1. TriangularMergerwithSharesoftheAcquirerasConsideration

1.1 AdmissibilityoftheTriangularMergerundertheMergerActa. Definitionb. PrincipleoftheContinuationoftheShareholding’s

Rightsc. QuorumsApplicabled. ParticipatingCompanye. Consequences

1.2 MergerConsiderationinTriangularMergers2. QuoruminCaseofCross-borderMerger3. AppraisalRights(Article105MergerAct)

3.1 LegitimationtoFileaLawsuitinCaseofCross-BorderMerger

3.2 ImplementationofArticle105MergerActa. Legalb. Example

FrankGerhard/PhilippeJacquemoud*

Mergervs.ExchangeOffer:Remedies,Procedure,TriangularMerger,Quorum,Appraisal,ConflictofInterests

* Dr. iur. Frank Gerhard, LL.M and lic. iur. Philippe Jacquemoud, LL.M., both attorneys-at-law, Homburger AG.

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the possibility to acquire significant blocks of shares be-fore the transaction), the possibility to pay exclusively in cash, lower transaction costs, less protection provided to employees or creditors, etc. These examples of ben-efits do not purport to be exhaustive. They must be care-fully assessed against each other when adopting the final transaction structure.

First, we will show in Chapter II that there can be a case in favor of the statutory merger over the public exchange offer when the choice exists (i.e., there is no choice if the Acquirer does not reach an agreement on price with the Target6 or if the Acquirer is forced to launch a takeover offer according to the rules in force at the place of listing of the Target7 and/or of the Acquirer8). We will divide

6 We leave open at this stage the question whether the Acquirer, if holding a majority of the shares of the Target, can replace the Board or the committee of independent board members of the Target with members of its allegiance. See section III.4.

7 The mandatory takeover offer can no longer be completed by way of a statutory merger because cash must be offered to the share-holders of the Target (art. 43 para. 2 SESTO-FINMA). For instance, the foreign Target could submit a request for voluntary submission to the takeover rules (which would probably not be granted by the TB, see Urs P. Gnos/Lucas Hänni, Acquisitions on the verge of Swiss takeover rules, GesKR 2011, 210); or the Target could try to force a potential Acquirer to comply with the takeover rules by providing for certain consequences if the Acquirer fails to do so Gnos/Hänni (FN 7), 211). Gnos/Hänni conclude that a Target could not provide in its articles of association that an Acquirer of shares which does not comply with the takeover rules of a specific country shall not be registered in the share register; as this would violate article 685d CO which allows a target to refuse an Acquirer only if either the percentage limit provided in the articles of associa-tion is exceeded or if the Acquirer does not expressly declare that it acquired the shares in its own name and for its own account. We are, however, of the opinion that such a clause would be valid if it is additionally tied to the crossing of a certain percentage threshold – e.g., 3 % – or tied to the violation of the requirement that the Ac-quirer must confirm having acquired the shares in its own name and for its own account, because in both cases the conditions allowing a refusal of the registration of a shareholder in the share register are more limited than under the ordinary regime of article 685d CO.

8 The Swiss Takeover Board does not subject a merger between two publicly listed companies to the Swiss takeover rules because the Target shareholders have no choice but to tender their shares. The takeover rules are only applicable when the investors are called to opt between various alternatives, e.g., tender their shares in an ex-change offer or keep them. See Recommendation 013/02 of the TB in the matter Société Générale de Surveillance SA dated July 20, 1998, c.1; Recommendation 071/01 of the TB in the matter Banque des Règlements Internationaux dated August 31, 2000, c.1; Recom-mendation 165/01 of the TB in the matter Sika AG dated June 2, 2003, c.1; Recommendation 210/01 of the TB in the matter Com-pagnie Industrielle et Commerciale du Gaz S.A. dated Septem-ber 29, 2004, c.1; see also Tschäni/Iffland/Diem (FN 3), note 19; Urs Schenker, Schweizerisches Übernahmerecht, Bern 2009, 215; Jakob Höhn/Christoph G. Lang/Severin Roelli, Öffentliche Übernahmen, Basel 2011, 519. However, if a shareholder holds more than 33¹⁄³ % of the shares in a Swiss company listed on a Swiss stock exchange after the merger, the Swiss rules applicable to man-datory tender offers would most likely be triggered unless an opt-ing-out or opting-up has been validly adopted by the shareholders’ meeting of such company. See Frank Gerhard/ Alexander Nikitine, Fusion – Angebotspflicht – Opting-out, GesKR 2011, 173; Tschäni/ Iffland/Diem (FN 3), note 20 and 43; Höhn/Lang/Roelli (FN 8). Contra: Rolf Watter/Thomas Rohde, Fu sion und Pflichtangebot, in: Tschäni (ed.), Mergers & Acquisi-tions VIII, Volume 63, Zürich 2006, 8 ff.; BSK BEHG-FINMAG-

Target than the threshold necessary to squeeze-out the remaining shareholders if it were to make an exchange offer to each shareholder of the Target separately3. If the Acquirer can agree on a merger agreement with the Target,4 launching an exchange offer5 only makes sense if this transaction form provides more benefits to the Ac-quirer and/or to the Target than a statutory merger. Such «benefits» may include the absence of appraisal rights or of an erga omnes effect of the remedies available to disgruntled shareholders, a limitation of the liability of the board of directors (Board) of the Acquirer, the pos-sibility to squeeze-out minorities, higher deal certainty, known precedents/established practice, less rigidity (e.g.,

company incorporated in Delaware, United States and listed on the New York Stock Exchange, by Roche Holding AG, a company in-corporated in Basel, Switzerland, listed on the SIX Stock Exchange started as a takeover offer since Roche and the committee of inde-pendent board members of Genentech could not agree on the terms of the merger. Roche held 56 % of the shares of Genentech before the transaction. The initial takeover price was USD 89 per share and was reduced to USD 86.50. Subsequently, the parties reached agree-ment and entered into a merger agreement under which Roche ac-quired the outstanding publicly held shares of Genentech for USD 95 in cash.

3 90 % of all the shares entitled to vote is the threshold to force a squeeze-out merger under Swiss law (art. 18 para. 5 Merger Act). However, the Takeover Board (TB) usually does not accept a mini-mal acceptance condition at 90 %, except if the offeror already had a very high shareholding in the Target prior to the takeover offer (see, e.g., takeover Generali (Schweiz) Holding AG, April 2006, where the offeror (the Italian parent company) already held 67,43 % in the Target before the transaction) or if the takeover offer is an exchange offer in order to set up a holding structure (see, e.g., reorganization Swiss Re, March 2011). See table in Rudolf Tschäni/Jacques Iff-land/Hans-Jakob Diem, Öffentliche Kaufangebote, Zürich/Genf 2010, note 477. Furthermore, in a voluntary exchange offer, if the Acquirer buys shares on the stock exchange market against cash, it must offer cash to all offerees (see Takeover Board Circular n° 4 of February 9, 2009, para. 4). This rule makes it very difficult for the Acquirer to reach the squeeze-out threshold under the takeover laws of 98 % (art. 33 para. 1 SESTA) or under the Merger Act of 90 % (art. 18 para. 5 Merger Act). In its consultation paper dated May 4, 2012 the Takeover Board has proposed to change this rule. Amongst other, if within 6 months after the end of the additional acceptance period, the Acquirer purchases shares on the market against cash, he would no longer be forced to offer a cash alternative to all shareholders if the equity securities offered in exchange were liquid.

4 Even if the Acquirer is not able to agree on a merger with the Tar-get, the threat of having the Board removed by an extraordinary shareholders’ meeting due to the votes of the Acquirer may be suf-ficient to insist on a merger structure rather than launching an offer directly addressed to the shareholders of the Target. See the merger between Novartis and Alcon (FN 2) and section III.4 below for the discussion about the powers of the special committee of independ-ent board members.

5 This assumes the launch of an exchange offer, in order to be compa-rable with the merger. However, a merger could also be structured with a cash element, either because the applicable law allows for a cash-out merger, or the Target pays out a cash dividend or repays otherwise cash to its shareholders before the merger. Further, in Switzerland, up to 10 % of the merger consideration could be paid in cash (art. 7 para. 2 Merger Act) or the parties to the merger could arrange for an alternative between shares and cash of the absorbing company (art. 8 para. 1 Merger Act). For instance, the merger be-tween Novartis and Alcon provided for a cash element; the merger between Dufry and Dufry South America provided for an extraor-dinary dividend paid out by Dufry South America to its share-holders before the merger being consummated.

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shares of the Acquirer to be created as consideration in triangular mergers. We will show that the shares of the Swiss or foreign absorbing entity may also be contribut-ed to the Acquirer by way of contribution in kind instead of a payment in cash through an exchange agent. The sec-ond section of Chapter III will concentrate on the issue of the applicable quorum at the respective shareholders’ meetings in case of a cross-border merger. We will show that the quorum prescribed by the law at the place of in-corporation of the Target is solely applicable to the Tar-get irrespective of the transaction structure – i.e., also in case of a triangular merger structure which arguably re-quires a 90 % vote for the absorbed entity under Swiss law. The third section of Chapter III focuses on appraisal rights. We will show in this section that article 105 of the Merger Act is not available to the shareholders of the foreign Target in case of a cross-border merger. We will also discuss how the appraisal action should be imple-mented in practice. Finally, the fourth section of Chapter III presents how conflicts of interest at the level of the Target Board can be overcome. An interesting question in this connection is whether a negative decision of a spe-cial committee could be overridden by the entire Board of the Target. We contend that the merger must be voted on by the full Board and the special committee has no de facto veto power over the Board resolution under article 12 Merger Act. We will also deal with the disagreement among the Board members about the existence of such a conflict and what approach should be taken in such a case by the Board.

II. Mergervs.PublicExchangeOffer

1. Introduction

Mergers and exchange offers remain the predominant deal structures to take over a public company when shares are offered as consideration. In a merger, the Ac-quirer will negotiate a merger agreement with the Target Board. The merger agreement will require shareholder approval of the merging companies in accordance with applicable corporate rules – in Switzerland this will be the approval of 66²⁄³ % of the votes represented at the shareholders’ meeting10. If shareholder approval is ob-tained, any non-approving shareholder has no option but to accept the shares of the absorbing company or to sell the shares. In contrast, in an exchange offer, the Ac-quirer will make an offer addressed to each shareholder of the Target individually. Pursuant to Swiss takeover rules, the shareholders’ meeting will only intervene to resolve on potential defensive measures put forward by the Target Board.11 On the Acquirer’s side, a share-

10 Article 18 para. 1 Merger Act.11 Art. 29 para. 2 SESTA.

the benefits into two main categories: the remedies and the procedural framework. We do not purport to be ex-haustive in the list of benefits examined. While we will show that the exchange offer can deliver superior ben-efits, we claim that proceeding with a merger from the outset can often be more attractive to the Acquirer since a follow-up merger is necessary if the Acquirer does not reach the statutory squeeze-out level of 98 % of the vot-ing rights of the Target at the end of the exchange of-fer. In such a follow-up merger, the same remedies and procedure as in a merger without a preceding offer are available. Hence, the exchange offer could result in the negative accumulation of both the remedies and the pro-cedural cliffs of each transaction structure.

Second, we will deal in Chapter III with specific issues of interest to Acquirers choosing the merger structure.

The following merger acquisition structures are consid-ered:

• The Target merges by way of absorption into the Ac-quirer which survives (forward merger) or the Ac-quirer merges by way of absorption into the Target which survives (reverse merger); in both cases, the shares in the transferring entity are cancelled in con-sideration for the right to receive shares in the surviv-ing entity (Acquirer or Target).

• The Acquirer sets up a wholly-owned subsidiary (NewCo), and the Target merges into NewCo which survives (forward triangular merger) or NewCo merges into the Target which survives (reverse tri-angular merger)9. In both cases, the shares in the transferring entity are cancelled in consideration for the right to receive shares in the Acquirer (not in NewCo).

The first interesting issue is the analysis of the triangular merger. Indeed, we take the view that the 90 % quorum provided by article 18 para. 5 of the Merger Act appli-cable to a Swiss Target is not applicable to triangular mergers when the consideration paid by NewCo is com-posed of shares of Acquirer. In addition, in such triangu-lar mergers, the appraisal action set forth in article 105 of the Merger Act is in our view available not only against the absorbing NewCo, but also against the Acquirer be-cause the Acquirer becomes a participating entity (beteil-igtes Unternehmen) in the sense of the Merger Act. The same applies in our view to the rights available to credi-tors and employees. Furthermore, we discuss various al-ternatives of how to pay-in the contribution for the new

Hofstetter/Schilter-Heuberger, Basel 2011, Art. 32, note 21; Hans Caspar von der Crone, Angebotspflicht, Das Bundesgesetz über die Börsen und den Effektenhandel, SZW Sondernummer 1997, 55; Mirjam Eggen, Das Verhältnis der Angebotspflicht nach Art. 32 BEHG zum Fusions- und Kartellgesetz, Bern 2007, 101.

9 The permissibility of the reverse triangular merger and the quorum in case of a triangular merger is subject to controversy. See section III.1.

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change the reasoning so long as it is intended that the foreign Target be eventually merged into the Acquirer. However, the following thoughts are not applicable if the Acquirer chooses to merge the foreign Target into a foreign NewCo since Swiss law becomes irrelevant for this part of the transaction; only the issuance of the new shares by the Acquirer, their potential listing on a stock exchange in Switzerland and their allotment to the Target shareholders would be governed by Swiss law.

2. RemediesoftheTargetShareholders

Shareholders’ protection can take various forms and de-grees. Conceptually, shareholders have three principal remedies when they feel ill-treated by a tender offer or a merger. Shareholders may want to (i) challenge the of-fer price or the exchange ratio respectively, (ii) challenge the transaction itself by attacking the resolutions taken by the Target’s and/or the Acquirer’s competent corpo-rate bodies and, finally, (iii) hold the Acquirer and/or the Target Board liable for damages.

2.1 TenderOffer

a. ChallengingtheOfferPrice

aa. ApplicableRules

Under the rules of the Swiss Stock Exchange and Securi-ties Trading Act (SESTA) applicable to exchange offers, the Target shareholders may only challenge the price of-fered if it (i) does not comply with the minimum price rule17, or (ii) is not in appropriate relation with the price offered for other classes of securities of the Target18, or (iii) does not comply with the best price rule19. The Ac-quirer shareholders may not challenge the offer price at all.

Even if, as a rule, the SESTA does not set a minimum price, any mandatory tender offer20 and any voluntary tender offer made for a number of equity securities that would result in the Acquirer exceeding the threshold of equity securities of the Target triggering a mandatory offer21 (i.e., 33¹⁄³ % of the voting rights of the Target, whether exercisable or not, except where the Target’s articles of association contain an opting-up (which can increase such threshold up to 49 %) or an opting-out

panies with a main (full or partial) Swiss listing to the SESTA unless the takeover law at the place of incorporation is applicable and such rules offer an equivalent protection to investors.

17 Art. 32 para. 4 SESTA in connection with art. 40 ff. SESTO- FINMA.

18 Art. 32 para. 5 SESTA in connection with art. 9 para. 3 and 5, 2nd sentence TOO.

19 Art. 10 TOO.20 Art. 32 SESTA.21 Art. 9 para. 6 TOO.

holder’s meeting might be necessary in order to approve the issuance of the new shares offered as consideration. Finally, the Acquirer may force the remaining Target shareholders to tender their shares only if it has reached the minimum threshold required for a squeeze-out.12 To ease the process, the tender offer, if friendly, can be pre-ceded by a transaction agreement between the Acquirer and the Target.13

As stated above, the benefits of each transaction – ei-ther a merger or an exchange offer – have to be weighed against each other to determine the most appropriate transaction form.14 Our analysis is made from the per-spective of both the Acquirer and the Target.15 It focuses on the one hand on the remedies available to the Target shareholders and on the other hand on the flexibility of the set of rules applicable to each transaction form. Both are analyzed under Swiss law although foreign takeover rules (often similar to Swiss ones) would apply to a Tar-get listed on a foreign stock exchange.16 This does not

12 Usually, the applicable law provides for some squeeze-out mecha-nism. E.g., in Switzerland, if 98 % of the outstanding shares of the target are acquired in an exchange offer, the remaining 2 % can be squeezed-out by way of a court-ordered cancellation of shares (art. 33 SESTA); if 90 % of the outstanding shares of the Target are acquired, the remaining 10 % may be squeezed-out against cash by way of a squeeze-out merger (art. 8 para. 2 in connection with art. 18 para. 5 Merger Act); finally, if 66²⁄³ % of the outstand-ing shares of the Target are acquired, the remaining 33¹⁄³ % may be squeezed-out against shares by way of a statutory merger (art. 8 para. 1 in connection with art. 18. para. 1 Merger Act).

13 The new and more stringent practice of the Swiss Takeover Board (TB) seems to require that in the event the Target’s Board is com-missioning a fairness opinion, such opinion must be received before the Board enters into a transaction agreement in which it contractu-ally commits to recommend the acceptance of the offer. Otherwise, the Board members who are not conflicted might become conflicted because of entering into such a transaction agreement. See Decision 478/01 of the TB in the matter Edipresse, dated May 27, 2011, c. 8.2, approved by Henry Peter/Pascal Bovey, Swiss Takeover Board: new and evolving issues, SZW 2011, 611, and Luc Thévenoz/Manuel Zweifel, Bewertungsgutachten und Fairness Opinions in öffentlichen Kauf- und Tauschangeboten, in: Tschäni (ed.), Mergers & Acquisitions XIV, Zürich 2012, 132 ff.

14 In general, see Ronald J. Gilson/Jeffrey N. Gordon, Control-ling Controlling Shareholder, in: University of Pennsylvania Law Review, Vol. 152, 2003–2004, 787. For a comparison of the merger under the Swiss Merger Act and the public exchange offer under the Swiss Stock Exchange and Securities Trading Act (SESTA), see Rudolf Tschäni, Fusionen versus öffentliche Tauschangebote bei Publikumsgesellschaften, in: Vogt/Stupp/Dubs (eds.), Liber Ami-corum für Rolf Watter zum 50. Geburtstag, Zürich 2008, 429 ff.; Rolf Watter/Katja Roth Pellanda, Going Private, in: Tschäni (ed.), Mergers & Acquisitions XIII, Zürich 2010, 1 ff. (incl. table at the end); and, to a certain extent, Jürg Luginbühl, Öffentli-che Umtauschangebote – Ausgewählte Aspekte aus der Praxis, in: Tschäni (ed.), Mergers & Acquisitions XI, Zürich 2009, 173 ff., in connection with the combination of Hiestand Holding AG and IAWS Group plc in 2008, Recommendation 372/01 and 372/02 of the TB, dated June 6, 2008 and July 15, 2008, respectively.

15 The psychology of one transaction form over another is disregarded in this contribution. The Target will very often argue for a «merger of equals» if the Target shareholders are to receive a large stake in the combined entity.

16 BSK BEHG-Tschäni/Iffland/Diem, Art. 22, note 6. In its Mes-In its Mes-sage dated August 31, 2011 regarding the proposed amendment to the SESTA, the Federal Council proposed to subject foreign com-

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When determining the highest price paid by the bidder for equity securities of the Target during the preceding twelve months, not only the effective price paid per share or option29 must be considered, but also additional equi-ty or option rights or «other ancillary benefits» granted by the offeror to the seller or by the seller to the offe-ror30 which might reduce or increase the minimum price. Such advantages or benefits must be valued by the review body in a transparent, plausible and retraceable man-ner.31 A general assessment is not permitted. This means that the review body must carefully assess and value each supposedly material benefit to either party, even if there is no straightforward valuation model at hand.32

The only situation where a shareholder in an exchange offer can be forced to tender its shares – as in a merger – without being protected by the minimum price rule is the situation where the Acquirer already holds more than 33¹⁄³ % of the Target, launches a tender offer and then squeezes out the minority shareholders at the of-fer price if the 98 % threshold has been exceeded. In-deed, such offer price does not need to comply with the minimum price rule (and, hence, with the rules regarding valuation in case of illiquidity of the shares) since the Ac-quirer will not cross the 33¹⁄³ % threshold in the Target

29 For instance, options are usually valued by either using the Black-Scholes or the binomial model. These two methods are usually accepted by the TB for the valuation of options, see e.g., Deci-sion 410/02 of the TB dated June 16, 2009 in the matter Quadrant AG, c.3.2, confirmed by the Decision of the FINMA in the matter Quadrant, dated July 8, 2009, para. 48 and by the decision of the Federal Administrative Tribunal (FAT) dated November 30, 2010, c.5 in the matter Sarasin Investmentfonds AG vs. Quadrant AG, Aquamit B.V., FINMA and TB.

30 See art. 41 para. 4 SESTO-FINMA and the Decision of the FAT dated November 30, 2010 in the matter Sarasin Investmentfonds AG vs. Quadrant AG, Aquamit B.V., FINMA and TB, commented by Dieter Gericke/Eric Sibbern, Qualifzierte Aktionäre und Preisregeln; Klärungen und neue Probleme, SZW 2011, 321 ff. See also prior cases such as Decision 411/01 of the TB dated June 19, 2009 in the matter Métraux Services SA, c.4.2.2. See also, Schenker (FN 8), 531.

31 See art. 41 para. 5 SESTO-FINMA and the Decision of the FAT dated November 30, 2010 in the matter Sarasin Investmentfonds AG vs. Quadrant AG, Aquamit B.V., FINMA and TB, c.5.1. In the takeover for Quadrant, the review body had to value services rendered to the bidder Aquamit (a joint vehicle owned by Mitsubi-shi and the management of the Target) which are not untypical in joint-ventures, e.g., the granting of a loan to the joint-venture by Mitsubishi, the contribution of know-how and experience by the management, the value of the consolidation of the target in the Mit-subishi group, the refinancing of a syndicated loan of the target by Mitsubishi, the granting of pre-emptive rights and tag-along rights to the management, the lock-up by the management for a period of 5 years, the value of representations and warranties made by the management, the value of the pledge given by the management on its shares in the bidding vehicle, the waiver by the management of severance payments in case of change of control in Quadrant, and the granting of a put option by Mitsubishi to the management. See the mission given by the TB to the review body in its Decision 410/04 dated November 14, 2011 in the matter Sarasin Investment-fonds AG vs. Quadrant AG, Aquamit B.V., FINMA and TB.

32 Idem.

provision (which excludes the mandatory offer at all)22) must comply with strict minimum price rules. Pursuant to article 32 para. 4 SESTA, the offer price per share may not be lower than the stock exchange price23 or 75 % of the highest price paid by the Acquirer for equity secu-rities of the Target during the preceding twelve months before the publication of the offer or the preliminary an-nouncement (so called «prior acquisition»)24, whichever is higher. The stock exchange price is not relevant if the shares of the Target are deemed illiquid.25 In such case, an independent valuation of these shares must be pre-pared.26 Such valuation must not provide a range but a precise figure.27 This also holds true in cases where the Acquirer has no access to the Target management (e.g., in an unfriendly offer) and therefore the independent valu-ation may only refer to publicly available information.28

22 Art. 22 para. 2 and 3 SESTA. See, e.g., Decision 440/01 of the TB dated June 4, 2010 in the matter COS Computer Systems AG. See in general on opting-out, Gerhard/Nikitine (FN 8), 173 ff. and on its adoption by the shareholders’ meeting after the listing of the company: Frank Gerhard, Takeover Board Opts-out from Opt-ing-Out, CapLaw 5/2011, 11 ff.

23 See art. 40 SESTO-FINMA for the definition of the «stock ex-change price». By and large, this is the volume-weighted average price over 60 trading days before the launch of the offer, except in case of illiquid securities for which a valuation is required instead.

24 See art. 41 SESTO-FINMA for the definition of the «price of the prior acquisition». As examples of payments of such a premium, see offer of MMA Vie SA for Harwanne Compagnie de participa-tions industrielles et financières SA dated January 30, 2009, as well as offer of Aquamit B.V. for Quadrant AG dated May 4, 2009. In connection with the consultation procedure opened by the Federal Department of Finance regarding the SESTA, the TB had prepared several amendments to the SESTA (see the memorandum of the TB dated January 21, 2011, as well as the position paper of the TB dated April 27, 2010 regarding the amendment to the SESTA). In particu-lar, the TB has expressed the view that the so-called «control pre-mium» allowed by article 32 para. 4 SESTA is no longer desirable and has proposed two alternatives. First, the TB had proposed that the control premium be simply abolished and replaced by the rule that the offer price be at least equal to the highest price paid by the bidder and the parties acting in concert during the twelve months prior the launch of the takeover offer. Second, the TB had proposed that the control premium is still allowed but only for a control stake which corresponds to at least 33¹⁄³ % of the voting rights of the Target. In its bill presented to the Federal Parliament regarding the amendment of the SESTA (Securities Fraud and Market Abuse) dated August 31, 2011, BBl 2011, 6873, 6890 ff., the Federal Coun-cil proposed the abolishment of the control premium (see para. 1.3.2.3.1). On the arguments pro and contra the control premium, see Luc Thévenoz/Lukas Roos, Die sogenannte Kontrollprämie im Übernahmerecht, SZW 2011, 612 ff. (pro abolishment) and Nina Reiser/Hans Caspar von der Crone, Mindestpreis nach Art. 32 Abs. 4 BEHG, GesKR 2012, 29 ff. as well as Daniel Daeniker, Angebotspflicht und Kontrollprämie – die Schweiz gegen den Rest der Welt?, in: Tschäni (Hrsg.), Mergers & Acquisitions XIII, Zürich 2010, 93 ff. (contra abolishment).

25 Art. 40 para. 3 SESTO-FINMA. For the definition of the liquidity, see TB Circular Nr. 2 dated February 26, 2010.

26 Art. 40 para. 4 SESTO-FINMA. On this valuation, see Thévenoz/Zweifel (FN 13), 97 ff.

27 See Decision 403/06 of the TB dated May 29, 2009 in the matter Harwanne Compagnie de participations industrielles et financières SA, c.1.

28 See Decision 457/01 of the TB dated January 28, 2011 in the matter Feintool International Holding AG, c.5.2.

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to any condition precedent or subsequent related to the success of the takeover offer, such share purchase will be considered to be a purchase prior to the announcement of the takeover offer.42 Consequently, such share pur-chase will be relevant when assessing compliance with the minimum price rule but will not trigger the applica-tion of the best price rule. However, if the Acquirer en-ters into a share purchase agreement with certain Target shareholders prior to the announcement of the takeover offer, but the closing of the share purchase agreement is subject to the completion of the takeover offer or is subject to the same conditions as the takeover offer (so called «coupled transaction»),43 such share purchase will trigger the application of the best price rule. The only joint conditions allowed by the TB are conditions that are absolutely necessary in order to close the share pur-chase agreement.44

The exchange offer is however often only the first step of a full takeover of the Target.45 Indeed, if the Acquirer does not obtain 98 % of the voting rights in the Target,46 a subsequent merger to be accomplished pursuant to the Merger Act is required to eliminate the Target share-holders by offering them shares of the Acquirer or of an affiliate or cash.47 In this case, the dissenting share-holders may avail themselves of the remedies foreseen

42 Decision 403/01 of the TB dated February 26, 2009 in the matter Har wanne Compagnie de participations industrielles et financières SA, c.4.2.2 and Decision 410/02 of the TB dated May 29, 2010 in the matter Quadrant AG, c.2, confirming Recommendation 307/01 of the TB dated January 8, 2007 in the matter Bank Sarasin & Cie, c.3; Recommendation 318/04 of the TB dated June 9, 2007 in the matter Converium Holding AG, c.9.2; Recom mendation 227/01 of the TB dated March 9, 2005 in the matter Büro-Fur rer AG, c.2 and Recom-mendation 329/01 of the TB dated August 22, 2007 in the matter Unilabs S.A., c.2.

43 Decision 410/01 of the TB dated May 29, 2010 in the matter Quad-rant AG, c.3.3, confirming Recommendation 322/01 of the TB dated August 22, 2007 in the matter Unilabs S.A., c.2.5; Recommen-dation 307/01 of the TB dated January 8, 2007 in the matter Bank Sarasin & Cie, c.3; and Recommendation 236/01 of the TB dated April 28, 2005 in the matter Swiss International Air Lines AG, c.6.2.

44 Recommendation 322/01 of the TB dated August 22, 2007 in the mat ter Unilabs S.A., c.2.5; Recommendation 307/01 of the TB dated January 8, 2007 in the matter Bank Sarasin & Cie, c.3. For instance, the purchase may still be subject to a regulatory condition neces-sary for such share purchase or the condition that a share transfer restriction in the articles of association of the Target be abolished.

45 Tschäni (FN 14), 435.46 The squeeze-out threshold can also be reached by a contribution

of some assets by the Acquirer into the Target after the end of the offer; Watter/Roth Pellanda (FN 14), 14; see regarding poten-tial abuse of right: Sebastian Goslar/Klaus von der Linden, Grenzen des Rechtsmissbrauchseinwands gegen Gestaltungen beim aktienrechtlichen Squeeze out, Zugleich eine Besprechung des BGH-Urteils vom 16.3.2009 – II ZR 302/06, BB 2009, 1318, Betriebs-Berater 2009, 1991.

47 See Recommendation 220/02 of the TB dated March 9, 2005 in the matter Maag Holding AG: SPS Immobilien first launched a pub-lic takeover offer for Maag and merged after the lapse of the ad-ditional acceptance period with Maag. See Adriano Margiotta/Isabelle Chabloz, Aus der Praxis der Übernahmekommission, SZW, 191 ff.; Thomas Reutter/Mariel Hoch Classen, Fusions-gesetzliche Ausgleichklage und börsenrechtliche Preisvorschriften – Auflösung eines Normwiderspruchs, in: Vogt/Stupp/Dubs (eds.),

(article 9 para. 6 TOO e contrario)33 and no review of the offer price is made in a squeeze-out procedure according to article 33 SESTA.34

The second limitation to the pricing of a tender offer is the requirement – if the Target has issued several classes of equity securities – that there is an appropriate relation-ship between the respective prices paid for the different classes of equity securities and financial instruments.35 If the different classes of securities are listed, the offer price must be in relation to the respective stock exchange prices;36 if the securities are not listed or are illiquid, the offer price must be in relation to the respective nominal values37. This principle of relative equal treatment is also applicable if the offer extends to non-listed equity secu-rities of the Target, e.g., if it covers employee options of the Target.38

The third limitation to the pricing of a tender offer is the best price rule. If the Acquirer acquires equity securities of the Target in the period from the publication of the offer until six months after the end of the additional ac-ceptance period at a price that exceeds the offer price, it must offer this price to all recipients of the offer (and not only to those who have accepted the public offer).39 This best price rule also applies to the acquisition of financial instruments such as stock options which are subject to the offer.40 A share purchase by the Acquirer will only be subject to the minimum price rule (i.e., the Acquir-er may pay a premium of up to 33¹⁄³ % above the offer price), rather than both the minimum price rule and the best price rule (i.e., the Acquirer may not pay a premium of up to 33¹⁄³ % above the offer price), if such purchase qualifies as a purchase prior to the launch of the takeover offer.41 In particular, if the share purchase agreement is entered into prior to the announcement of the takeover offer, and the closing under the share purchase agree-ment occurs prior to the announcement of the offer, or after the announcement of the offer but is not subject

33 See Decision 427/01 of the TB dated September 29, 2009 in the matter Canon (Schweiz) AG, c.3 or Decision 455/01 of the TB dated September 23, 2010 in the matter Neue Aargauer Bank, c.3. In both cases, the acquirer held even more than 98 % of the tar-get prior to the tender offer. See regarding the timing of the 98 % threshold for the purpose of the squeeze-out: Fabienne Frehner/Dieter Dubs, Kraftloserklärung nach Art. 33 BEHG: massgebli-cher Zeitpunkt für das Überschreiten des Schwellenwerts von 98 % – Besprechung des Urteils Z2 2011 38 des Obergerichts des Kan-tons Zug vom 9. November 2011, GesKR 2012, 137 ff.

34 Watter/Roth Pellanda (FN 14), 1 ff.35 Art. 32 para. 5 SESTA and art. 9 para.3 TOO. 36 See Decision 428/01 of the TB dated October 12, 2009 in the matter

Athris Holding AG.37 See Decision 258/01 of the TB dated November 28, 2005 in the

matter Société Montreux-Palace SA.38 See Decision 378/02 of the TB dated January 20, 209 in the matter

Speedel Holding AG, c.2.3.39 Art. 10 para. 1 TOO.40 Art. 10 para. 2 TOO.41 Art. 32 para. 4 SESTA in connection with art. 41 para. 1 SESTO-

FINMA.

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TB and the FINMA does not apply to proceedings be-fore the FAT. Indeed, the proceedings before the FAT are solely governed by the AAP, which does not provide for the application of the 2 % shareholding requirement.56 Shareholders that become parties to the proceedings are entitled to participate in the proceedings, have access to the TB’s file, and are entitled to challenge orders of the TB before the FINMA and, on appeal, with the FAT.

The decisions of the TB and of the FINMA have an erga omnes effect like article 105 Merger Act. They are binding upon all shareholders of the Target to which the takeover offer is addressed. However, in the Quadrant matter, the FAT made it clear that the FINMA’s and TB’s decisions are revoked only to the extent that the appel-lant is concerned (i.e., effect only inter-partes).57 For all other shareholders, the TB and the FINMA decisions have come into full force and effect (i.e., no erga-omnes effect of FAT decisions). With such a narrow interpre-tation of administrative law, the FAT will not enforce general compliance of the core principles of the takeover regulation – transparency, equal treatment and fairness – with binding effect on all investors.

b. ChallengingtheTransaction

In tender offers, annulment actions against resolutions of the competent corporate bodies are not the rule. Tender offers do not necessarily require the involvement of the shareholders’ meetings, neither of the Target nor of the Acquirer. They only require a tender by the shareholders of the Target of their shares. In addition, with respect to Board resolutions, they are not challengeable, but only the remedy of voidness of article 714 CO (in con-nection with article 706b CO) is available to the share-holders. However, there are certain limited instances where shareholders’ meetings have to be convened also in tender offers, e.g., the Target may have to conduct a shareholders’ meeting to resolve the lifting of a clause re-stricting the transferability of the shares (Vinkulierungs-bestimmung) or to elect new Board members or to de-cide on defensive measures in case of an unfriendly offer. The Acquirer may have to call a shareholders’ meeting in order to resolve upon a capital increase necessary to cre-ate the shares offered as consideration by excluding the pre-emptive rights of the shareholders of the Acquirer. Therefore, shareholders of both the Acquirer and the Target may file an action challenging the resolutions of

56 Decision of the FAT dated November 30, 2010 in the matter Sarasin Investmentfonds AG vs. Quadrant AG, Aquamit B.V., FINMA and TB.

57 Decision of the FAT dated November 30, 2010 in the matter Sara-sin Investmentfonds AG vs. Quadrant AG, Aquamit B.V., FINMA and TB. See criticism expressed against this decision by Lorenzo Olgiati/Nadin Schwibs, Parteistellung und Urteilswirkung im übernahmerechtlichen Beschwerdeverfahren, Besprechung des Ur-teils B-5272/2009 des schweizerischen Bundesverwaltungsgerichts vom 30. November 2010 in Sachen Quadrant, GesKR 2011, 252–261; Gericke/Sibbern (FN 30), 321–331.

in the Merger Act. However, if the appraisal rights are exercised after the merger is completed and they lead to an extra compensation to the remaining shareholders of the Target,48 such extra compensation should not be taken into consideration when considering the applica-tion of the best price rule since the higher compensation received by the shareholders in the merger is not based on a decision by the Acquirer, but on the application of rules which are outside of the Acquirer’s sphere of influ-ence.49 If the merger agreement regarding the back-end squeeze-out merger is entered into more than six months after the end of the additional acceptance period of the takeover offer, the best price rule no longer applies50 and the potential benefits of an appraisal under the Merger Act do not extend to the shareholders having accepted the offer. The drawback of waiting more than six months is that the more time elapses from the time of the offer to the merger, the less relevant the offer price might be for the valuation of the Target under the appraisal rights procedure of the merger.51

ab. ProceduralAspect

A tender offer is a regulated administrative procedure. The TB ensures compliance of the tender offers with the SESTA52 and, indirectly, with corporate law53. The TB (and the Target’s Board) gives a voice to the minor-ity shareholders. Since January 1, 2009, orders of the TB are decisions which are legally binding under the Federal Act on Administrative Proceedings (AAP). They can be challenged before the Swiss Financial Markets Supervi-sory Authority (FINMA) within 5 trading days.54 Every shareholder holding 2 % or more of the voting rights of the Target, whether exercisable or not, can be a party in the proceedings before the TB (so-called «qualified shareholder»).55 The Federal Administrative Tribunal (FAT) has held, however, that the SESTA provision re-quiring a minimum shareholding of 2 % to become and remain a party to the takeover proceedings before the

Liber Amicorum für Rolf Watter zum 50. Geburtstag, Zürich 2008, 381 ff.

48 See Decision of the Federal Supreme Court 4A_96/2011 of Septem-ber 20, 2011, where such extra-payment was denied.

49 Reutter/Hoch Classen (FN 47), 398 ff.; Schenker (FN 8), 278; Georg Gotschev/Christian Staub, Der Ausschluss von Minder-heitsaktionären nach Art. 33 Börsengesetz und durch squeeze out merger gemäss Fusionsgesetz, GesKR 2006, 273.

50 Decision of TB dated March 9, 2005 in the matter Maag Holding AG; Reutter/Hoch Classen (FN 47), 396. See also art. 10 TOO.

51 Interestingly, in the decision of the Federal Supreme Court 4A_96/2011 of September 5, 2011 rendered in an appraisal action, there is no reference to the offer price of the tender offer to justify the squeeze-out price paid under the back-end merger; Reutter/Hoch Classen (FN 47), 383 and 391.

52 Art. 23 SESTA.53 Art. 29 al. 3 SESTA and 37 TOO.54 On the first case under the new rule, see Flavio Romerio/Frank

Gerhard, Harwanne – Erster Testfall für die neue Verfahrensord-nung im Übernahmerecht, GesKR 2009, 355 ff.

55 Art. 33b para. 3 SESTA.

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could not be held liable for the same violation because the requirement of the breach of a protective legal norm (Schutznorm) would not be met.67

In addition, a shareholder may file a derivative lawsuit against the Board members for a breach of their duties.68 In this case, the payment of any damages goes to the company instead of to the shareholders directly.69

It is difficult (but not impossible) for the Target share-holders to claim that the members of the Target Board breached their fiduciary duty of care or loyalty. In an unfriendly offer, the company (i.e., the Target) is not a party to any transaction and therefore a breach of the duty of care or loyalty by the Board is rather unlikely.70 However, the Target Board must issue a report on the basis of article 29 SESTA which must be true and correct. Provided the Board has – when issuing its report – also breached its fiduciary duty of care or loyalty, it may be held liable on the basis of article 754 CO as well.71 Also, since the Board has no duty to increase the share price72, shareholders may not claim that the Board has jeopard-ized an offer at a high price through its negative behavior or through the use of defense measures provided for in the articles of association: If the Board comes to the con-clusion that a change of control is not in the interest of the company and the stakeholders, the shareholders may not claim damages if the Board hinders the offer.

In practice, the Target Board is however well advised to comply with rules of corporate law in order to avoid the nuisance effect of shareholders’ claims. Such claim-ants could invoke that the members of the Board have breached their fiduciary duties during the negotiations in connection with the exchange offer. For instance, the Board may harm the company by entering into certain defense measures which are contrary to its duty of care, because remaining independent is contrary to the interest of the company. Such a defensive measure could include entering into a very favorable incentive scheme with the management or selling assets below their market value or promising a break fee to a certain bidder which covers more than the expenses incurred by such bidder. Also, the Board may share with a friendly bidder business secrets or enter into a very stringent lock-up of assets which would deter third parties from launching a com-peting offer. Shareholders may also claim that the Board has breached its duties set out in SESTA. For instance,

67 The action of the company shall breach the law in order for the conditions of article 722 CO to be fulfilled; Watter/Reichenberg (FN 60), 975.

68 Böckli (FN 59), § 18, notes 225–235.69 Art. 756 para. 1 CO.70 Rashid Bahar, Le rôle du conseil d’administration lors de fusions

et acquisitions – Une approche systémique, Diss. Geneva, Geneva/Zürich/Basel 2004, 320.

71 Böckli (FN 59), § 7, note 176, contra: Höhn/Lang/Roelli (FN 8), 479 and the authors mentioned in footnote 258.

72 See, e.g., Schenker (FN 8), 551–553.

the shareholders’ meeting of their respective company based on article 706 CO for violation of the law or the articles of association.58

c. RiskofBoardLiability

In an exchange offer, the Target shareholders may sue the Target Board for damages according to articles 41 and 754 CO in connection with article 717 CO, articles 29 or 42 SESTA, or article 152 Swiss Criminal Code.59

Under article 754 CO, a shareholder may claim his di-rect damage if he suffers a direct loss independently from a potential loss suffered by the company.60 The Board is liable if it has breached a duty imposed by law61 and there is an adequate causation between the breach and the loss.62 Under article 41 CO, a shareholder may claim his direct damage if the Board has breached a legal norm that was supposed to protect him (Schutznorm).63 In practice, the Federal Supreme Court is reluctant to up-hold direct actions of the shareholders based on article 754 CO.64 Hence, to succeed in court, the shareholder needs to demonstrate that a legal norm aimed at protect-ing him (and potentially the company) was breached by a director.65 The strict practice of the Federal Supreme Court appears legitimate because otherwise cases could arise where a director could be held liable for a breach of a duty66 that the law imposes on him while the company

58 See art. 706 para. 2 CO for examples of voidable resolutions.59 See BSK BEHG-Tschäni/Iffland/Diem, Art. 29, note 14; Peter

Böckli, Aktienrecht, 4th ed., Zürich/Basel/Geneva 2009, § 7, note 176; Matthias Glatthaar, Der Verwaltungsratsbericht bei öffentlichen Übernahmeangeboten, Zürich 2007, 293. Schenker (FN 8), footnote 61 claims that violations of the duties set out in ar-ticle 29 SESTA should fall exclusively under article 41 CO, because the liability under article 754 CO encompasses only duties of the Board embedded in corporate law.

60 Decision of the Federal Supreme Court 131 III 306; Rolf Watter/Paula Reichenberg, La responsabilité des sociétés cotées en bourse liée à leurs communications financières défaillantes, AJP 2005, 975.

61 In our opinion, only the violation of a corporate rule can ful-fill the criteria of art. 754 CO as well; pro: BSK-OR II-Gericke/Waller, Art. 754, note 24; Böckli (FN 59), § 18, note 245; contra: Lorenz Lipp/Roland Müller/Adrian Plüss, Minderheiten-schutz im schweizerischen Aktienrecht, AJP 2011, 595; Watter/ Reichenberg (FN 60), 975 ff.

62 Böckli (FN 59), § 18, note 242.63 If a criminal provision is concerned, the question arises as to wheth-

er the Board is also liable for simple negligence although the crime may only be committed intentionally; contra: Daniel Daeniker/Stefan Waller, Kapitalmarktbezogene Informationspflichten und Haftung, in: Weber (ed.), Verantwortlichkeit im Unterneh-mensrecht, vol. 41, Zurich 2003, 106; pro: Peter Böckli, Ad-Hoc-Publizität und Insiderstrafnorm: Nach-und Feinschliff für das Informationsrecht des Kapitalmarktes, in: Bühler (ed.), Informati-onspflichten des Unternehmens im Gesellschafts- und Börsenrecht, Bern/Stuttgart/Vienna 2003, 107; SJ 1998, 647; and with nuances Watter/Reichenberg (FN 60), 976.

64 Böckli (FN 59), § 18, note 246; Decision of the Federal Supreme Court 131 III 311.

65 Theoretically, the Board might also be held liable in case of prom-issory estoppel (Vertrauenshaftung); Böckli (FN 59), § 18, notes 260–266.

66 Simple negligence would suffice.

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must be a shareholder at the time the merger resolution is taken80 and must not have voted in favor of the merger.81 The claim must be filed against the surviving company.82 The action is not aimed at blocking the transaction (ar-ticle 105 para. 4 Merger Act) but only at the payment of a compensation payment to the harmed shareholder if the merger does not provide for an adequate exchange ratio or for an adequate cash compensation. The court will therefore only review the adequacy of such exchange ratio applying the business judgment rule.83 If the claim-ant is successful, the court will in its discretion condemn the absorbing entity to pay cash or allot additional secu-rities (or a mix of the two84).85

The judgment is effective against all shareholders to the extent they are in the same «legal position» as the claim-ant (article 105 para. 2 Merger Act).86 Hence, while a shareholder who favored the merger may not be a claim-

Dubs, Art. 105, note 40; Marc Amstutz/Ramon Mabillard, Kommentar zum Fusionsgesetz, Basel 2008, Art. 105, note 18; ZK FusG-Meier-Dieterle, Art. 105, note 3. Even though it might be counter-intuitive, the shareholders of the Acquirer may also claim if, for instance, they are unduly diluted because the valuation of the Target reflects an obvious unilateral premium. This would lead to the conclusion that if the Acquirer wants to offer a significant pre-mium to the shareholders of the Target it would be forced to oper-ate through a tender offer instead of a merger. This could be par-ticularly burdensome if the difference in size between the Acquirer and the Target is considerable and a premium is common.

80 Jean-Luc Chenaux, La protection des actionnaires et associés dans les fusions d’entreprises, in: Blanc/Dallèves (eds.), Coopération et fusion d’entreprises, 2005, 142; Paul Bürgi/Lukas Glanzmann, Art. 105 FusG, in: Stämpflis Handkommentar zum Fusionsgesetz, Bern 2003, note 14; Reutter/Hoch Classen (FN 47), 392. Cont-Cont-ra: ZK FusG-Meier-Dieterle, Art. 105, note 15 and Caroline Hirsiger, Der Schutz der Gesellschafter, der Gläubiger, Arbeitneh-mer bei der Fusion von Kapitalgesellschaften nach schweizerischem und Europäischem Fusionsrecht, Diss. Zürich 2006, 350, 332, who acknowledge the quality of party to the acquirer of shares until the court ruling; Gozzi (FN 79), 263 and 264, who acknowledges the quality of party to the acquirer of shares until the registration of the merger in the commercial register; Bahar, Art. 105 LFus, Com-mentaire LFus, Zürich 2005, note 13, who acknowledges the quality of party to the acquirer of shares until the filing of the appraisal action. See Decision of the Federal Supreme Court 135 III 603, c. 2.1.2 and 4A_341/2011, c. 5.1.2 regarding who might claim pursu-ant to article 105 Merger Act. See section III.3.2. below regarding the shareholders who are entitled to receive the indemnification payment.

81 Reutter/Hoch Classen (FN 47), 383 and 391; BSK FusG-Dubs, Art. 105, notes 41–42; Amstutz/Mabillard (FN 79), Art. 105, note 18 and 20. Contra: Gozzi (FN 79), 263; ZK FusG-Meier-Dieterle, Art. 105, note 13.

82 BSK FusG-Dubs, Art. 105, note 43; Amstutz/Mabillard (FN 79), Art. 105, note 22.

83 BSK FusG-Dubs, Art. 105, note 13 ff.; Amstutz/Mabillard (FN 79), Art. 105, note 26.

84 BSK Fusg-Dubs, Art. 105, note 25 ff.; Amstutz/Mabillard (FN 79), Art. 105, note 26. Contra: Böckli (FN 59), § 3, notes 256 and 261a; ZK FusG-Meier-Dieterle, Art. 105, note 26; Bürgi/Glanzmann (FN 80), notes 2 and 11.

85 It is worth noting that the cash or share compensation is subject to withholding tax and income tax for individuals holding the shares in their private wealth, BSK FusG-Saupper/Weidmann, vor Art. 3, note 215.

86 See section III.3.2. below regarding until when shareholders are en-titled to receive the indemnification payment.

the Board may harm the Target shareholders by disclos-ing false information or by omitting to disclose informa-tion in the Board report required by article 29 SESTA or by omitting to issue the Board report pursuant to ar-ticle 42 SESTA.73 Finally, the violation of the principle of equal treatment of the shareholders set forth in article 717 para. 2 CO – for instance, a shareholder of the Target could claim such violation by the Board when the lat-ter selectively shares information with its shareholders, decides upon the application of share transfer and vot-ing rights restrictions provisions, allows due diligence to an investor wishing only to purchase the shares of the major shareholder(s) without making a takeover offer to all shareholders, or repurchases selectively shares from shareholders at prices above the market price – might be alleged.74 Under these circumstances, the shareholder does not suffer an indirect loss through a diminution of the Target’s value (i.e., indirect damage) but a direct loss to the value of its shares which could have potentially been purchased by a third bidder at a higher price if the same information had been shared with the third bid-der.75 As stated above, as a practical matter, shareholders would only succeed with a direct action as opposed to a derivative action against the Board if the provisions set out above are deemed to protect the shareholders (Schutznorm),76 the demonstration of which is very diffi-cult pursuant to court precedents of the Federal Supreme Court.77

An additional hurdle for the shareholders alleging a loss would be the fact that by tendering their shares the loss was self-inflicted, or at least fostered by the acceptance. In our opinion, the causality chain should be deemed breached by the tender of the shares by the shareholder.78

2.2 Merger

a. ChallengingtheExchangeRatio

Pursuant to article 7 para. 1 Merger Act, the shareholders of the transferring company have a claim for shares in the surviving entity equal to their former participation rights, taking into account the assets and liabilities of the merging companies, the allocation of voting rights as well as all other relevant circumstances. Pursuant to article 105 Merger Act an appraisal action in the form of a class action (i.e., with effect erga omnes) is available to the Target and the Acquirer shareholders.79 The claimant

73 This offense may only be committed intentionally. Art. 152 SCC would also be relevant in this context.

74 Schenker (FN 8), 564 ff. 75 Bahar (FN 70), 320.76 Decision of the Federal Supreme Court 131 III 306; BSK OR II-

Gericke/Waller, Art. 754, note 24.77 See Decisions of the Federal Supreme Court 122 III 190; 125 III 88;

127 III 377; 128 III 182; 131 III 306.78 See also Watter/Roth Pellanda (FN 14), 8 and note 27.79 Niccolò Gozzi, Schutz der Aktionäre bei Fusion und Spaltung

gemäss Fusionsgesetz, Zürich/St. Gallen 2009, 255; BSK FusG-

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claim based on the main argument that the offer price under the exchange offer was persuasive but on the argu-ment that the valuation report was conclusive unless the valuation method is neither plausible, nor recognized or applied in similar cases.93 Nevertheless, in this case and even in a more recent one94, the Federal Supreme Court emphasized that the merging entities have a lot of dis-cretion in choosing the valuation methods and assessing the relevant circumstances.95 A court will only hold that the exchange ratio was not adequate if it was arbitrarily established in excess of the discretion of the merging en-tities.96 The purpose of the review of the exchange ratio by the court is not to decide whether it corresponds to an objective, correct and true valuation, but whether it lies within a range that is adequate.97 Within such range the merging entities are free to exert their discretion.

In the latest case ruled by the Federal Supreme Court,98 the Acquirer paid a premium for a block of shares prior to the merger. The minority shareholder contended in-ter alia that the price paid to the large shareholder re-presented the market price which should prevail over the valuation established by the provider of the fairness opinion and reviewed by the auditor. The payment of the premium was accepted by the court99 and the argument of the minority shareholder rejected. The court held that the «market price» was not conclusive and that the valua-tion of an expert could take precedence. While we believe that the result of the ruling is correct, the blunt argument of the Federal Supreme Court (covering the argument of the Commercial Court of Zurich) according to which a market price is not more relevant than an expert valu-ation100 should be put in perspective. In our opinion, a price negotiated at arm’s length gives always a better valuation result than the calculation of an expert. There is no «real» value without a counterparty. The market

Art. 8 Abs. 2 FusG und Art. 33 BEHG, in: Vertrauen – Vertrag – Verantwortung, Festschrift für Hans Caspar von der Crone, Zürich 2007, 375.

93 Decision of Federal Supreme Court 4A_96/2011 of September 20, 2011, c.5.4. In a merger following immediately an exchange offer, we believe the court could have as a starting point relied on the price of the offer (i.e., price of the offer foremost driven by stock exchange prices) which has to comply with the minimum price rule as described in section II.2.1a. above.

94 Decision of the Federal Supreme Court 4A_341/2011 of March 21, 2012, c.5.1.4.

95 Decision of Federal Supreme Court 4A_96/2011 of September 20, 2011, c. 5.4. The claimant may however force the defending com-pany to release the fairness opinion on which the merger report is based, see Decision of the Federal Supreme Court 4A_440/2007 of February 6, 2008.

96 See section II.3.3c. below and Decision of the Federal Supreme Court 4A_341/2011 of March 21, 2012, c.5.1.4.

97 Decision of the Federal Supreme Court 4A_341/2011 of March 21, 2012, c.5.2.

98 Decision of the Federal Supreme Court 4A_341/2011 of March 21, 2012, c.5.4.2.

99 See section II.3.3c.100 Decision of the Federal Supreme Court 4A_341/2011 of March 21,

2012, c.5.4.1 regarding the argument of the Commercial Court of Zurich and c.5.4.2 regarding the reference to such argument.

ant and file the action, he may benefit from the appraisal payment. This discrepancy is in our opinion reason-able since there is a difference between the filing of an appraisal action and the entitlement to the payment.87 On the one hand, a shareholder filing an appraisal ac-tion while he favored the merger would act against his wish to see the merger occur.88 The favorable vote ex-presses the opinion of the shareholder that he prefers the merger with the low valuation compared to the stand-alone situation. There is therefore no reason to allow the shareholder to act in contradiction to a choice val-idly expressed. Furthermore, the possibility to act venire contra factum proprium would give a very strong incen-tive to favor the merger even if the conditions are not acceptable since the shareholder might nevertheless file the appraisal action later on against his prior vote. Tacti-cally, this could result in the Acquirer offering a lower valuation to price in the risk of being sued. Such a down-ward spiral would not be in line with the purpose of the Merger Act to protect the shareholders. By contrast, the indemnification payment that a shareholder was able to obtain should also benefit all the other shareholders in the same legal position, whether or not they favored the merger, since the indemnification payment is a common interest among the shareholders who are equally affected by the undervaluation of their company or the over-valuation of the Acquirer.89 Furthermore, such a system likely favors the acceptance rate in mergers and hence, in theory, should generally foster the capital allocation ef-ficiency. Indeed, a shareholder who hesitates to approve the merger because he believes the valuation is too low, would still tend to accept it in the hope of receiving an appraisal payment obtained by a claimant who voted against the undertaking.90

In a recent case involving a back-end cash-out merger two months after a successful exchange offer,91 the Federal Supreme Court rejected the claim of a minor-ity shareholder arguing that the valuation of the Target was too low.92 Surprisingly, the court did not dismiss the

87 Bürgi/Glanzmann (FN 80), note 13; ZK FusG-Meier-Dieterle, Art. 105, note 28.

88 Karin Eugster, Die Überprüfung der Anteils- und Mitglied-schaftsrechte nach Art. 105 FusG, Diss. Zürich 2006, 143 and 181.

89 This is a major difference between the appraisal rights under the Merger Act and the administrative action against a decision by the TB under the SESTA. In the latter case, the decision of the FAT (but not the decisions of the lower instances TB and FINMA) has only an effect inter-partes, i.e., in favor of the shareholder who has appealed before the FAT. See Decision of the FAT dated November 30, 2010 in the matter Sarasin Investmentfonds AG vs. Quadrant AG, Aquamit B.V., FINMA and TB.

90 In deciding that the shareholders having tendered their shares in an exchange offer also have standing before the court, the FAT in its decision dated November 30, 2010 created a similar incentive to ac-cept exchange offers rather than blocking them.

91 Decision of the Federal Supreme Court 4A_96/2011 of September 20, 2011.

92 Annemarie Nussbaumer, Abfindungsfusion oder Kraftloserklä-rung nach öffentlichem Übernahmeangebot? – Zum Verhältnis von

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The consequences of a violation of the Merger Act differ depending on whether or not the deficiencies are capable of being remedied. If the deficiency can be remedied, the court in accordance with article 107 para. 1 Merger Act will grant the legal entities a time period for remedying the deficiency rather than block a resolution approving the merger. If, however, the deficiency cannot be re-medied or if the legal entities have not remedied it within the set period, the court will nullify the resolution ap-proving the transaction and impose further measures re-quired to restore the parties to their positions before the resolution was adopted (article 107 para. 2 Merger Act).


According to article 108 para. 1 Merger Act, all persons involved in any way in a merger are liable to the Acquirer and the Target, their shareholders and their creditors for any damage they cause by intentional or negligent vio-lation of their duties. This provision follows the provi-sions of corporate law.107 If the parties liable to damages have not caused harm to any of the shareholders directly, but indirectly, by causing harm to the legal entities, these shareholders may bring an action for damages on behalf of the harmed entity.108 If the creditors have not suffered damage directly, but only indirectly, through a loss suf-fered by one of the companies involved, they have no standing outside bankruptcy proceedings to file an action to recover the loss suffered by the entity. If, however, the liquidator of the bankrupt entity has not filed a liability claim, the creditors are entitled to demand compensation for the losses suffered by the entity on their behalf.109 In that case, the compensation for damage will first be used to satisfy the claims of the entity’s creditors.110

An action for breach of the fiduciary duty of loyalty against the members of the Target Board is more likely to succeed in case of a merger rather than in case of a tender offer because the Board approves the merger agreement and recommends to approve the merger at the sharehold-er’s meeting (article 108 Merger Act).111 Furthermore, in case the members of the Board breach their duties set

pany’s voting rights, the simplified procedure applies provided the minority shareholders are offered to choose between shares in the receiving company and a cash consideration.

107 Art. 752 ff. CO; ZK FusG-Martini, Art. 108, note 7.108 Art. 108 para. 3 Merger Act in connection with art. 757 CO. See

section II.2.1c. regarding the liability of the Board for direct dam-ages; ZK FusG-Martini, Art. 108, note 24.

109 Art. 260 of the Federal Act on Debt Collection Proceedings and Bankruptcy; ZK FusG-Martini, Art. 108, note 25.

110 The limitations set forth in the Federal Supreme Court Decisions BGE 132 III 564, BGE 132 III 342 and BGE 131 III 306 are appli-cable to a direct action of the shareholders and/or creditors during the bankruptcy. A direct action is only permitted provided that the Board breached a legal provision that intended to protect the inter-ests of the shareholders exclusively. As a practical matter, such legal hurdle is very difficult to overcome.

111 BSK FusG-Maurenbrecher, Art. 108, note 22; Handkommen-tar zum Fusionsgesetz-Vogel/Heiz/Behnisch, Art. 108, note 1; ZK FusG-Martini, Art. 108, note 47; Franz Schenker, Art. 108

price should be taken into account as a starting point if any valuation issue is at stake. Such finding would not have prevented the permissibility of a different exchange ratio compared to the price paid for the block of shares since the price paid for the block of shares encompasses the value of the control101 which does not automatically belong to the other shareholders.102 Put it differently, the court should have held (i) that the market price paid to the large shareholder is not conclusive regarding the stake of the other shareholders and (ii) that the price (i.e., exchange ratio) paid to the other shareholders remains within a range of adequate valuation taking into account the price paid to the large shareholder which arguably represents the maximum valuation of the range. Further-more, we believe that the court should have sought guid-ance in the minimum price rule of article 32 SESTA to find that the exchange ratio in the merger was adequate. The TB indeed ruled that the exchange ratio complied with the minimum price rule.103

In its decisions, the Federal Supreme Court rightly sets the bar high inter alia for claimants who acquire shares of the Target in the middle of an exchange offer pro-cess in the hope of obtaining a windfall in subsequent merger proceedings. It is also worth mentioning that in two decisions which concerned the costs of the appraisal procedure,104 the Federal Supreme Court ruled in favor of the defending company in an attempt to reduce the attractiveness of the appraisal claim of article 105 Merger Act, namely in view of the abusive use of this action.105


Pursuant to article 106 Merger Act, the shareholders of each of the legal entities involved in the merger who did not vote in favor of the merger may challenge in court the merger resolution that does not comply with the pro-visions of the Merger Act. In the ordinary merger pro-cedure, this can be the resolution of the Board (article 12 Merger Act) and the resolution by the shareholders’ meeting (article 18 Merger Act), but it could also be only the resolution by the Board in those case where the sim-plified merger procedure applies and only the approval of the Board and no shareholders’ resolution is necessary (article 106 para. 2 Merger Act).106

101 Daeniker (FN 24), 101, 107; Reiser/von der Crone (FN 24), 33.102 Daeniker (FN 24), 109 ff; Reiser/von der Crone (FN 24), 37.103 Recommendation 372/02 of the TB dated July 15, 2008 in the matter

Hiestand Holding AG, c.2.104 Decisions of the Federal Supreme Court 4A_96/2011 of September

20, 2011 and 135 III 603. 105 See also ZK FusG-Meier-Dieterle, Vor Art. 105–108, note 17.106 Art. 23 and 24 Merger Act provide for a simplified merger proce-

dure for mergers within holding companies. In case the absorbing company owns all the voting rights in the transferring company or in case a holding company owns all shares in both of the merg-ing companies, the simplified procedure allows the merger to take place without the necessity to have the merger agreement audited and – above all – without shareholders’ meeting approval. In case the absorbing company owns at least 90 % of the transferring com-

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ing prospectus for new shares to be listed on the stock exchange), the liability of the Board pursuant to arti-cle 752 CO can be triggered if it contains a misleading or incorrect information or if the information does not comply with legal requirements. However, for the infor-mation that is prescribed by the Merger Act, the liability of the Board is exclusively governed by the article 108 Merger Act.118

2.3 Synthesis

a. ChallengingtheOfferPrice/theExchangeRatio

In both the merger and the exchange offer, a successful challenge of the consideration has in principle a – costly – erga omnes effect. Hence, no fundamental difference exists with respect to the effect of such remedy.

However, the rules governing the offer price in the ex-change offer are more precise and settled than the rules applicable to the exchange ratio in a merger – which only has to be adequate. In addition, the compliance of the of-fer price with the minimum and best price rules is first reviewed by a licensed auditor or a security dealer and second by the TB while the adequacy of the exchange ratio in a merger is only assessed once by a qualified auditor. As a result, the merger offers more leeway for claimants to challenge the consideration. The flip side of the less stringent rules in the merger procedure is that a proper valuation of the merging companies will reduce significantly the risk of a court finding that the consid-eration is not adequate.

Based on the above, the pricing rules in the exchange of-fer provide for more certainty as compared to the pricing rules in the merger. However, the broad leeway left to the Board of the merging companies when defining the exchange ratio, even though it may attract more appraisal actions, should ultimately offer a solid protection as well to the merging parties.


We believe that the remedy available in a merger (arti-cle 106 Merger Act) has a more far-reaching effect than the remedy offered under articles 706 and 714 CO to the shareholders in case of an exchange offer. On the one hand, this remedy is always available in a merger – also when no shareholders’ resolution is needed in a sim-plified merger – while the remedy of article 706 is only available in an exchange offer when a shareholders’ reso-lution has been taken. On the other hand, the remedy of article 106 Merger Act also allows to challenge a Board resolution (e.g., if the Target Board has resolved on the

118 Gozzi (FN 79), 299; BSK FusG-Maurenbrecher, Art. 108 FusG, note 10; ZK FusG-Martini, Art. 108, note 9; Schenker (FN 111), note 4.

out in the Merger Act, shareholders may arguably claim compensation for direct damage suffered by them.112 Therefore, the dissenting shareholders have an incentive to file liability claims against the members of the Board in order to be held harmless.

Finally, it is unclear whether an offer prospectus pursu-ant to article 652a CO must be prepared in a merger – and hence whether the prospectus liability of article 752 CO may be triggered. We believe that there is no such obligation since there is no subscription of shares (i.e., no investment decision to purchase shares).113 If the prepa-ration of an offer prospectus was mandatory, it would only make sense if such a prospectus were already issued at the time of the shareholders’ meeting since there is no other point in time in the merger process when the share-holders take a decision: the subsequent share exchange occurs automatically. This is different from a capital increase where the shareholder is still free to subscribe or not for the new shares once the shareholders’ meet-ing has resolved to issue them. Hence, in the latter case, the offer prospectus pursuant to article 652a CO must be ready at the latest at the time of the subscription of the shares as opposed to the earlier date of the shareholders’ meeting.114 To be coherent, in both cases, the prospectus would have to be ready at the time of the shareholders’ meeting which was not the intent of article 652a CO.115 In addition to the traditional argument speaking against the issuance of an offer prospectus, according to which in the merger the new shares are only offered to a lim-ited circle of persons116 (e.g., shareholders of the Target in case of an absorption merger), the aforementioned shows that the rule of article 652a CO does not fit into the merger process. Rather, we believe that the merging companies are only required to make available to their shareholders the information required under the Merger Act (i.e., merger report, merger agreement, report of the auditor and balance sheet).117

Where no prospectus or no similar communication at all is issued, the Board cannot be held liable under article 752 CO. If a prospectus is nevertheless issued (e.g., a list-

FusG, in: Stämpflis Handkommentar zum Fusionsgesetz, Bern 2003, note 2.

112 Such is the view of the majority of authors, e.g. Gozzi (FN 79), 304; Bahar (FN 70), 322; BSK FusG-Maurenbrecher, Art. 108, note 33, 44; ZK FusG-Martini, Art. 108, note 22. Urs Bertschinger, Die Klagen gemäss Fusionsgesetz – Ein Überblick, AJP 2004, 844. The recent case law (BGE 132 III 564, BGE 132 III 342 and BGE 131 III 306) does not change the pertinence of these opinions as the limitation of the direct action is only applicable in case of bank-ruptcy.

113 Hirsiger (FN 80), 353.114 Böckli (FN 59), § 2, note 103; BSK OR II-Zindel/Isler,

Art. 652a, note 1.115 Idem.116 Böckli (FN 59), § 2, note 103; BSK OR II-Zindel/Isler, Art.

652a, note 2. The issuance of an offer prospectus is only mandatory if shares are offered to an unlimited group of persons.

117 Amstutz/Mabillard (FN 79), Art. 16, note 5.

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if the Acquirer would have implemented the transaction star ting with an outright merger (i.e., the remedies fore-seen in the Merger Act become applicable to the dissent-ing shareholders as well122). However, their economic impact will be lower, because only the shareholders be-ing in the same «legal position» as the claimant may ben-efit from the appraisal action due to the erga omnes effect of any judgment rendered after such action. If, e.g., after the exchange offer 20 % of the remaining shareholders vote against the subsequent cash-out merger, this is not equivalent to 20 % of shareholders voting against the outright merger without prior exchange offer (i.e., the exchange offer reduces the number of participants of the class) since the compensatory payment will benefit only the shareholders who were in the same legal position at the time of the merger: the shareholders who have ten-dered their shares in the prior tender offer will no longer benefit from the appraisal action. Nevertheless, a poten-tial applicability of the best price rule123 would have the same corrective impact on the 80 % of the shareholders who tendered their shares as the appraisal action has on the 80 % who voted in favor of the merger. Assuming such applicability being granted and unless the merger is completed after the period terminating six months after the end of the additional period of the exchange offer, there would be no difference between the exchange of-fer and the merger with respect to the economic conse-quences of the appraisal remedies.

As a result, if 98 % of the voting rights cannot be achieved in the exchange offer, there are no benefits in choosing an exchange offer over the merger if the parties focus solely on the remedies of the shareholders.124 Nevertheless, as described below, other benefits might speak in favor of the merger.125

122 Note however that in its decision 4A_547/2011 of February 16, 2012 confirming the decision 135 III 603, the Federal Supreme Court has upheld a cantonal decision pursuant to which the claim-ant shall bear the costs of the procedure if he purchased the shares after the launch of the takeover offer, knowing that a squeeze-out merger would take place.

123 Against the applicability of the best price rule: Reutter/Hoch Classen (FN 47), 440.

124 The Hiestand Holding AG (Aryzta AG) transaction was effect-ed by the way of an absorption merger and the TB held that the Swiss takeover rules governing mandatory offers were complied with. As a result the need for a follow-up merger disappeared; see Recommendation 372/01 of the TB dated June 6, 2008 in the matter Hie stand Holding AG. The fulfillment of the mandatory offer obli-gation through a merger is no longer available because since January 1, 2009 a cash alternative must be offered by the Acquirer to the Target shareholders in a mandatory takeover offer (art. 43 para. 2 SESTO-FINMA); Jana Essebier/Matthias Glatthaar, Öffent-liche Tauschangebote und die Pflicht zum alternativen Barangebot, SZW 2009, 191 ff.

125 See the table comparing the takeover offer with the merger and the formal delisting prepared by Watter/Roth Pellanda (FN 14), 13 ff. and 29 ff.

merger agreement despite being conflicted), while the remedy of article 706 CO is not available to challenge a Board resolution and the remedy of article 714 CO (which foresees the nullity of Board resolutions in the limited cases of article 706b CO) is much narrower than the remedy under article 106 Merger Act.

Based on the above, the exchange offer alternative pro-vides for more certainty with respect to a potential chal-lenge of the transaction.


Holding the board members liable is arguably easier in a merger than in an exchange offer because the involve-ment of the Board is more intensive in a merger rather than in an exchange offer. The Board must in particular approve the merger agreement which must provide for an adequate exchange ratio. The difficult task of assess-ing the adequacy of the consideration is not necessar-ily part of the tasks of the Board in an exchange offer, provided the exchange offer complies with the minimum and best price rules. Furthermore, dealing with conflicts of interests is more difficult in the merger because the full Board must approve the merger agreement.

Based on the above, the exchange offer alternative pro-vides arguably a lower risk of liability of the Board.

d. Conclusion

Notwithstanding the arguably increased deal certainty provided by the exchange offer over the merger with respect to the remedies, the exchange offer will only be superior for the combining entities when the Acquirer reaches the threshold of 98 % of the voting rights in the Target, and thus may avoid the remedies of the Merger Act. If the Acquirer does not reach this threshold, it will need a subsequent merger in order to reach 100 % in the Target.119 A merger according to articles 7 para. 1 and 18 para. 1 lit. a Merger Act will be available if the Acquirer reaches at least 66²⁄³ % of the voting rights of the Target in the exchange offer; a cash-out merger according to ar-ticles 8 para. 2 and 18 para. 5 Merger Act or, arguably, a triangular merger120 will be available if the Acquirer reaches at least 90 % of the shares in the Target entitled to vote.121 The consequences of such a subsequent merg-er on the remedies of the shareholders are the same as

119 Tschäni (FN 14), 435.120 A straight merger with the Swiss Acquirer is not always permis-

sible under foreign law when the Target is a foreign company; see FN 196. In addition, a straight merger would require a vote of the shareholders of the Acquirer subsequent to the offer which is al-most not practicable from a deal certainty perspective.

121 Only the «exercisable votes» are to be counted, i.e., dispo and treas-ury shares must be disregarded, see Amstutz/Mabillard (FN 79), Art. 18, note 29; ZK FusG-Gelzer, Art. 18, note 36; Daniel Daeniker/Micha Fankhauser, Die Spaltung von Gesellschaften in der Praxis, in: Fusionsgesetz – Auswirkungen auf die Praxis, Zürich 2007, 48 ff.

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calculated on the basis of the votes represented at such shareholders’ meeting (see article 18 para. 1 Merger Act). In addition, in order to create the shares to be offered in exchange, the Acquirer will usually need to increase its share capital, which must be approved by the share-holders’ meeting (unless there is authorized capital avail-able) with a 66²⁄³ % quorum as well because the preemp-tive rights of the current shareholders must be excluded (article 704 para. 1 ciph. 6 CO). If the Acquirer reaches the threshold of 66²⁄³ % of the voting rights, it can theo-retically merge the Target into the Acquirer by offering its own shares. However, such straight merger subse-quent to the exchange offer will often not be an option in practice. First, in case of a cross-border transaction such merger is not always permissible under the law of the foreign Target.131 Second, a straight merger would again require the vote of the shareholders of the Acquir-er which is a risk that an Acquirer is not likely willing to take when assessing the feasibility of the transaction. As a result, the Acquirer will consider a squeeze-out merger which requires 90 % of the voting rights.132

A merger always requires the approval by the Target Board (article 12 Merger Act). If the approval of the shareholders’ meeting is required, i.e., in all cases which do not qualify as a simplified merger according to arti-cle 23 Merger Act133, the quorum will be 66²⁄³ % of the voting rights and the absolute majority of the nominal value of the shares of each merging entity represented at the shareholders’ meeting (article 18 para. 1 lit. a Merger Act). As a result of the merger, no minority shareholders would remain at the level of the Target. It is important to note that under Swiss law, the majority shareholder of the Target may validly vote its shares at the share-holders’ meeting134 contrary to other jurisdictions such as England, where the approval by a majority of the mi-nority is required in case of a conflicted transaction135. The same holds true for the decision by the Board to ap-prove the merger where the representatives of the major

131 See FN 196. Before the launch of the transaction, there is room to plan around the non permissibility of the merger under foreign law by choosing alternative structures such as the UK Scheme of Ar-rangement. After an exchange offer, this alternative would be very burdensome to eliminate the remaining shareholders at the level of the Target.

132 A cash-out cross border merger is possible with a quorum lower than 90 % if the law at the place of incorporation of the Target pro-vides for such lower quorum; see section III.2. below.

133 See FN 106.134 This was for instance the case in the merger between Novartis

and Alcon, both companies incorporated in Switzerland, where Novartis could vote with more than 75 % of the votes at the share-holders’ meeting of Alcon on April 7, 2011. The only shareholders’ vote where Swiss corporate law excludes the vote of certain share-holders is the vote on the discharge of the corporate bodies accord-ing to article 695 CO.

135 E.g., in the combination of Glencore with Xstrata announced on February 7, 2012, the court sanctioned Scheme of Arrangement un-der Part 26 of the UK Companies Act requires Xstrata independent shareholder approval of 75 % by value and +50 % by number, and Glencore cannot vote its shares representing 34 % on the Scheme.

3. FrameworkoftheProcess

3.1 Documentation

A statutory merger requires a merger agreement in writ-ten form. Such merger agreement must comply with certain minimum content requirements126, must be approved by the Board and by the shareholders’ meeting of the merging entities in a resolution passed by a quali-fied majority of at least 66²⁄³ % of the votes represented and the absolute majority of the nominal value of the shares represented127, unless the conditions of a simpli-fied merger according to article 23 Merger Act are ful-filled. The equivalent of a merger agreement in a takeo-ver offer is a transaction agreement. This agreement is not regulated by the takeover rules and therefore it is less standardized than a merger agreement128.

In terms of documentation, there are in practice129 no material differences between the exchange offer and the merger except for the offer prospectus pursuant to articles 652a CO and 24 SESTA in the exchange of-fer130 which comes on top of the listing prospectus for the newly issued shares of the Acquirer if the SIX Swiss Exchange does not consider the information in the ex-change offer prospectus as being equivalent to the infor-mation in the listing prospectus pursuant to the exemp-tion of article 33 para. 2 lit. d of the Listing Rules.

3.2 ApprovalbyCorporateBodies

In an exchange offer, the approval by the Target Board is only required in a friendly deal, in which case a trans-action agreement is entered into. Indeed, the Acquirer could also directly address its offer to the shareholders of the Target without bothering whether the Target Board is supporting it or not. Also, in an exchange offer, an approval by the shareholders’ meeting of the Target is not required: The offer is addressed directly to each in-dividual shareholder who may accept or reject it. How-ever, often the Acquirer will make its offer conditional upon an acceptance of 66²⁄³ % of all outstanding shares of the Target because this quorum guarantees full control over the Target (article 704 CO). Implicitly, this quorum might even be higher than, e.g., a 66²⁄³ % approval at a shareholders’ meeting, because the 66²⁄³ % approval is

126 Art. 13 Merger Act.127 Art. 12 para. 2 Merger Act in connection with Art. 18 Merger Act.128 See Markus Vischer/Andrin Schnydrig, Die Transaktionsver-

einbarung bei öffentlichen Übernahmen, AJP 2006, 1192 ff.129 Indeed, in practice barely a takeover offer is made without a fair-

ness opinion. The content required by the TB for such a fairness opinion makes it even more detailed than the verification report commended by article 15 Merger Act. See Flavio Romerio/Frank Gerhard, Fairness Opinion, country report Switzerland, in: Es-sler/Lobe/Röder (eds.), Fairness Opinion, Grundlagen und An-wendungen, Stuttgart 2008, 193 ff.

130 See for a full description of the content of the prospectus in an ex-change offer: Luginbühl (FN 14), 179 ff.

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quirer has a legitimate interest, irrespective of the pre- offer shareholding in the Target, which corresponds to the quorum for the squeeze-out merger.142 The Acquir-er has certainly such an interest (i) as a strategic offeror when it needs 100 % of the Target to achieve the envis-aged synergies or (ii) as a financial offeror (i.e., private equity fund) when it needs 100 % of the Target to real-ize an exit within the next years.143 Such interests should override the concerns of the TB regarding conditions at will. The Acquirer could also envisage undertaking not to waive the acceptance condition with the consequence of increasing the credibility about the necessity of the condition.

If the TB would soften its practice regarding the accept-ance condition, the Swiss market for corporate control could become more active, thus potentially benefiting the shareholders of Target companies and the economy in general by facilitating the shifting of control over inef-ficient companies to a more capable management.

b. AdditionalPurchaseofTargetSharesintheMarket

In an exchange offer, the Acquirer which acquires during the applicability of the best price rule equity securities or financial instruments to which the offer relates against a payment in cash must offer such cash payment also to all other offerees.144 In the exchange offer of Swiss Re AG for Schweizerische Rückversicherungs-Gesellschaft AG with the aim of creating a new holding structure, the TB granted an exemption from the best price rule and held that in an exchange offer for the purpose of setting up a holding structure, a purchase against cash would not disadvantage the other shareholders provided the secu-rities offered in exchange are liquid. Any shareholder who prefers cash can re-sell the securities received on the stock exchange145. However, besides this exception ap-plicable to mere reorganizations only, the restriction im-

142 See also Höhn/Lang/Roelli (FN 8), 278, who support allowing an acceptance condition of 90 % since the Acquirer wants to keep a realistic chance to hold 100 % of the shares at a later stage.

143 In France, pursuant to article 433-4 of the code monétaire et finan-cier and article 237-14 of the règlement général de l’AMF, a bidder may launch a withdrawal offer if it holds 95 % of the voting rights or capital of the target. Pursuant to article 231-9 of the règlement général de l’AMF, the offer may be conditional but the AMF is not used to accept acceptance thresholds higher than ²∕³. In the UK, pursuant to article 979 para. 2 of the Companies Act, the squeeze-out threshold is 90 %. The UK Takeover panel is used to rule in favor of acceptance conditions as high as 90 %. In Germany, pursu-ant to article 327a para. 1 Aktiengesetz, the squeeze-out threshold is 95 %. The BaFin accepts acceptance conditions as high as 95 %, see Hartmut Krause, Kommentar zum Wertpapiererwerbs- und Übernahmegesetz, Köln 2005, § 34 ff.

144 See TB Circular n° 4 of February 9, 2009, para. 4. The reason for this rule is the principle of equal treatment of all offerees (art. 24 para. 2 SESTA).

145 Decision 469/01 of the TB dated February 15, 2011 in the matter Schweizerische Rückversicherungs-Gesellschaft AG, c.5.1, based on the Recommendation 302/01 of the TB dated October 12, 2006 in the matter ISOTIS SA, c.8.2.2.

shareholder are not per se excluded from participating in the decision and the vote provided the conflict of inter-est is solved by another means than the abstention of the conflicted Board members.136 This flexibility of Swiss law enhances the attractiveness of the merger over the exchange offer because in one step requiring a quorum of 66²⁄³ % of the votes represented at the shareholders’ meeting of the Target the Acquirer may obtain 100 % of the shares of the Target.

3.3 DealCertainty

a. AcceptanceCondition

Probably one of the strongest obstacles to exchange of-fers lies in the restrictive practice of the TB regarding ac-ceptance conditions which leaves a risk of hold-out by minority shareholders.137 In case of a straight merger without any preceding exchange offer there is no need for a subsequent merger to eliminate the minority share-holders from the Target. The absence of a back-end transaction is arguably a cost saving factor and reduces the complexity of the transaction.

Pursuant to article 13 para. 1 TOO, the Acquirer may subject the offer to conditions if it has a legitimate inter-est. In principle, the offer may only be made subject to conditions if the Acquirer has no decisive influence over the fulfillment of such conditions.138 Otherwise, the Ac-quirer could withdraw its offer at will. The TB consid-ers that such conditions reduce the binding effect of the offer and shift the risk from the Acquirer to the Target shareholders.139 The same reasoning applies, e.g., when an offer is subject to an excessive number of conditions, which would give the Acquirer more room to withdraw the offer140, or, precisely, to the condition of a high ac-ceptance threshold.

As a rule of thumb, an acceptance condition higher than 66²⁄³ % of all shares of the Target is not permitted un-less the Acquirer holds a high number of Target shares or of irrevocable undertakings prior to the offer.141 In our opinion, the TB should accept an acceptance condition of 90 % of all outstanding shares of the Target if the Ac-

136 See III.4 below and Watter/Roth Pellanda (FN 14), 15.137 Heinz Schärer/David Oser, Redomiciliation Transactions, in:

Tschäni (ed.), Mergers & Acquisitions XIV, Zürich 2012, 81; see statistics regarding acceptance ratio of exchange offers, Finanz und Wirtschaft of September 18, 2010, 27, Vom Mehrwert überzeugt, quoted by Watter/Roth Pellanda (FN 14), 13. See section II.3.2. and FN 120 regarding the non practicability of having a subsequent straight merger to eliminate the remaining shareholders of the Tar-get.

138 Article 13 para. 2 TOO.139 Dieter Gericke/Karin Wiedmer, Kommentar Übernahmever-

ordnung, Zürich 2011, Art. 13, note 9.140 Recommendation 249/01 of the TB in the matter Saia-Burgess

Electronics Holding AG of July 15, 2005, c. 2.1.2.141 See table of precedents in Tschäni/Iffland/Diem (FN 3), note

477; Gericke/Wiedmer (FN 139), Art. 13, note 60.

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es can occur before the announcement or the completion of the transaction.146

In the merger, the principle of equal treatment of the shareholders147 and the way the exchange ratio is defined pursuant to article 7 Merger Act require that the same consideration provided in the merger agreement be of-fered to all shareholders.148 In addition, the Acquirer cannot offer a cash portion exceeding 10 % of the total consideration.149 However, there are no restrictions on a purchase of shares before or after the execution of the merger agreement150 even if the acquisition occurred a logical second before the execution of the merger agree-ment.151 The Federal Supreme Court confirmed in a most recent ruling that the shareholders have no right to receive the same consideration under the merger as shareholders outside the merger process receive from the Acquirer.152

In an exchange offer, the Acquirer can freely decide on the amount of cash and shares that it wants to offer to the shareholders provided that the minimum price rule is complied with.153 Given that the shareholders must be treated equally, the same consideration has to be offered to all of them during the offer. This rule is not applica-ble to a purchase of shares prior to the announcement of the offer. However, according to the minimum price rule, such prior purchase may not occur at a price which is more than 33¹⁄³ % above the exchange offer price if such purchase was made up to 12 months prior to the an-nouncement of the offer.154

As long as no mandatory offer is triggered, the rules regarding the payment of different prices for prior pur-chases are more flexible in a merger because there is no minimum price rule.155 The same is true for purchases after the merger. During the process itself, the exchange offer may be deemed more flexible because there is no

146 See merger between Alcon and Novartis (2010) with prior purchase by Novartis of a large stake from Nestlé at a premium or the com-bination between Hiestand Holding AG and IAWS (2008) where Lion Capital LLP was paid a premium for its shares in Hiestand Holding AG before the combination of the companies into Aryzta AG.

147 ZK FusG-Burckhardt, Art. 7, note 40.148 ZK FusG-Burckhardt, Art. 7, note 39; Rudolf Tschäni, Gross-

aktionäre, Verwaltungsräte und Management – ihre Handlungs-spielräume in Übernahmesituationen, in: Tschäni (ed.), Mergers & Acquisitions XIV, Zürich 2011, 45.

149 See article 7 para. 2 Merger Act; the 10 % limit is calculated on the shares effectively offered and not on the maximum number of shares that the Target shareholders would have received pursuant to the exchange ratio without any cash payment.

150 Tschäni (FN 148), 45.151 Decision of the Federal Supreme Court 4A_341/2011 of March 21,

2012, c.5.4.1 and 5.4.2.152 Decision of the Federal Supreme Court 4A_341/2011 of March 21,

2012, c.5.153 Tschäni (FN 148), 45.154 See art. 41 SESTO-FINMA and FN 24.155 See II.2.1a. for the consequences of the minimum price rule in take-

over offers on the payment of premiums.

posed by the TB makes it more difficult for the Acquirer to reach the 90 % threshold in an exchange offer.

The Merger Act does not provide for a similar restric-tion, i.e., until completion of the merger, the Acquirer may purchase securities of the Target against cash with-out being obliged to offer such cash portion to the other shareholders of the Target.

Aware of the negative impact of the restriction imposed by Circular n°4 of February 9, 2009 on voluntary ex-change offers, the TB has in its consultation paper dated May 4, 2012 proposed to adopt a new article 9a TOO. Compared to the rule in force, the new rule would be (i) more restrictive prior to the offer (i.e., if during the twelve months prior to the publication of the offer the Acquirer has acquired more than 10 % of shares of the Target against cash, a mandatory cash alternative would have to be offered to all shareholders in the subsequent exchange offer), (ii) similar during the period of the offer (i.e., mandatory cash alternative), and (iii) more flexible during the period of 6 months after the completion of the offer (i.e., no mandatory cash alternative if the eq-uity securities offered in exchange were liquid). While we believe that the additional flexibility proposed by the TB is needed (but not sufficient) for the period af-ter completion of the offer, we think the proposal goes too far with respect to the period during and prior to the offer. To offer a cash exit to all the shareholders when the Acquirer crosses the threshold of 10 % rather than 33¹⁄³ % in a prior acquisition would result in an unjusti-fied discrepancy between a mandatory offer and a volun-tary exchange offer putting an additional burden on the Acquirer in voluntary exchange offers. Furthermore, its planning possibilities would be reduced since after cross-ing the 10 % threshold in the Target, the Acquirer would forgo for 12 months the possibility to launch a voluntary exchange offer (without offering a cash alternative). The TB should stick to the initial idea of fostering voluntary exchange offers by dropping the proposal of a manda-tory cash alternative outside the scope of true mandatory offers, at least when the equity securities offered in ex-change are liquid. Also, for the period after the offer, the TB should allow purchases against cash without the ob-ligation to extend such cash consideration to all other re-cipients of the offer for purchases on the stock exchange and purchases made in order to fulfill obligations under employees participation plans.

c. PremiumtoShareholders/Consideration

In order to enhance the chances of a successful transac-tion, Acquirers tend to purchase large blocks of shares ahead of the transaction, if necessary against a premium. In both the merger and the exchange offer, such purchas-

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In its Message regarding the amendment of the SESTA dated August 31, 2011, the Federal Council has pro-posed the abolishment of the premium in public ten-der offers.162 If the bill is approved by the Parliament, the attractiveness of the merger over the exchange offer will even increase because only the merger structure will permit the payment of a premium to large shareholders prior to the merger.

Finally, we believe that in order to reinstate a level play-ing field between the merger and the exchange offer, the TB should change its practice applicable to exchange of-fers in order to allow (i) an acceptance condition of 90 % of all outstanding shares of the Target163 and (ii) the pur-chase of shares for cash during the best price rule period without triggering the obligation to offer a cash payment to all offerees.164

III. ParticularIssues

1. TriangularMergerwithSharesoftheAcquirerasConsideration

1.1 AdmissibilityoftheTriangularMergerundertheMergerAct

a. Definition

The forward triangular merger can be described as fol-lows: The Acquirer sets up a NewCo, the Target is merged into NewCo, which remains the surviving entity, and the shareholders of the Target receive shares of the Acquirer (and not of NewCo).165 In case of a reverse tri-angular merger, the Target is the surviving entity.166 In both cases, the shareholders of the Target receive shares of the Acquirer. The triangular merger is the standard form of merger in the US-influenced jurisdictions. It is also often the preferred route in a cross-border trans-action, because, e.g., third party consents or regulatory approvals might be more difficult to obtain in an inter-national rather than in a national context, not to speak about tax consequences. We share the view of recent le-gal literature pursuant to which on the one hand the re-verse triangular merger is a permitted merger under the Merger Act167 and such triangular merger (forward or

162 See FN 24.163 See above II.3.3a.164 See above II.3.3b.165 Frank Gerhard/Emanuel Schiwow, Übernahmen mit Hilfe von

Tochtergesellschaften im internationalen Verhältnis – Transaktions-strukturierung mittels Dreiecksfusion anhand einer Fallstudie, GesKR 2009, 196; Schärer/Oser (FN 137), 82.

166 Idem.167 Schärer/Oser (FN 137), 87; Gerhard/Schiwow (FN 165),

198; Amstutz/Mabillard (FN 79), Art. 8, notes 5 and 13; Urs Bertschinger/Peter Spori, Dreiecksfusion – einige zivil- und steuerrechtliche Fragen, in: Kramer/Nobel/Waldburger (eds.), Festschrift für Peter Böckli, Zürich/Basel/Genf 2006, 328 ff.; Cont-

restriction as to the amount of cash that can be offered, provided that it is equally offered to all shareholders (mixed offer). However, such purchases must comply with the best price rule.

3.4 TransactionPlanning

Planning around an exchange offer tends to be more difficult because the takeover offer rules can be unpre-dictable and public authorities (Swiss Takeover Board and equivalent regulators abroad) closely supervise the entire process.156 Furthermore, the freedom of contract of the parties is reduced by mandatory rules.157 For in-stance, issues of acting in concert, the qualification of ir-revocable undertakings158 or the application of the best and minimum price rules159 may be difficult to predict. For disclosure purposes, the SIX Disclosure Office does not consider irrevocable undertakings as triggering the rules of article 20 SESTA.160 However, the coordination exercise done by the Acquirer in the process of collect-ing those undertakings may trigger a group disclosure.161 In the experience of the authors, undertakings to vote in favor of the merger may also lead to a requirement of group disclosure because of the coordination. Neverthe-less, the same office considers that the merging parties do not constitute a group unless there are cross-share-holdings.

Finally, the possibility for a shareholder holding more than 2 % of the shares of the Target to become a proce-dural party in exchange offers tends to increase the plan-ning difficulty because this is an open door for minority shareholders to block the process by challenging aspects of the transaction.

3.5 Synthesis

We have shown that there are no outright benefits for the merger vs. the exchange offer in terms of documentation, quorums and transaction planning. However, the merger seems to offer superior benefits for the parties with re-spect to deal certainty and payment of premium to share-holders.

156 Tschäni (FN 14), 435, 439; Schenker (FN 8), 220 ff.157 Tschäni (FN 14), 439 ff.; Schenker (FN 8), 199 ff.158 Noël Bieri/Katharina Rüdlinger, Börsenrechtliche Meldepflich-

ten bei Unternehmensübernahmen, in: Tschäni (ed.), Mergers & Ac-quisitions XIII, Zürich 2010, 147 ff. and 159; Tschäni (FN 148), 39; Luginbühl (FN 14), 213; Recommendation 372/01 of the TB dated June 6, 2008 in the matter Hiestand Holding AG, c.4.

159 Decision of the FAT dated November 30, 2010 in the matter Sarasin Investmentfonds AG vs. Quadrant AG, Aquamit B.V., FINMA and TB; Decision 403/06 of the TB dated May 29, 2009 in the matter Har wanne Compagnie de participations industrielles et financières, c.1.

160 See Bieri/Rüdlinger (FN 158), 159; Tschäni (FN 148), 39.161 See the broad interpretation of the notion of acting in concert in

Bieri/Rüdlinger (FN 158), 143, 144.

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c. QuorumsApplicable

Pursuant to article 18 para. 1 Merger Act the merger agreement requires shareholders’ approval by a majority of at least 66²⁄³ % of the votes of the shares represented at the shareholders’ meeting, and the absolute majority of the nominal value of the shares represented. The pro-vision does not, however, state which form of merger is subject to this quorum.171 Furthermore, pursuant to ar-ticle 18 para. 5 Merger Act, if the merger agreement pro-vides only for a settlement, the resolution requires the consent of at least 90 % of the shareholders having vot-ing rights in the transferring company.172 When article 18 para. 1 Merger Act is read in connection with article 18 para. 5 Merger Act it appears clearly that the first re-fers to the form of merger provided in article 7 para. 1 Merger Act while the second refers to the form of merger provided in article 8 para. 2 Merger Act173. As a result, a merger falling under article 7 para. 1 Merger Act is sub-ject to the quorum of 66²⁄³ % defined in article 18 para. 1 Merger Act.

d. ParticipatingCompany

The Merger Act does not define what the «transferring entity», the «surviving entity» and the «participating companies»174 are. A reasonable reader of article 4 Merg-er Act may come to the conclusion that «participating companies» (beteiligte Gesellschaften) is used to define (i) the transferring company (übertragende Gesellschaft) and (ii) the surviving company (übernehmende Gesell-schaft). A better understanding of the notion of «partici-pating companies» may help to define the «surviving» and «transferring entities».

The term «participating entity» includes certainly the en-tities that are formally merged into each other. In case of a triangular merger it would certainly mean NewCo and the Target. This is in line with the Merger Act, which does not make any reference to a third entity. In article 8 para. 2 Merger Act, the legislator however did foresee the payment of a settlement. The case that was obviously envisaged under article 8 para. 2 Merger was the payment of cash by the surviving entity as opposed to the pay-ment of securities by a third party. Indeed, article 8 para. 2 Merger Act does not refer to the parent company or to a third party. It is only in the Message that a third party (i.e., also the parent company) was brought into the dis-cussion:

171 Message of the Federal Council on the Merger Act of June 13, 2000, 4403. The Message can be subject to interpretation, although the triangular merger is specifically mentioned in connection with a set-tlement (Abfindung) paid out to the shareholders of the target; see also Bertschinger/Spori (FN 167), 312.

172 BSK FusG-Schleiffer, Art. 18, note 35.173 BSK FusG-Tschäni/Papa, Art. 8, note 8.174 BSK FusG-Morscher, Art. 4, note 7.

reverse) is not subject to articles 8 para. 2 and 18 para. 5 Merger Act.168 We believe indeed that the traditional Swiss concept of the merger is driven by the combina-tion of two elements of unequal importance, the first one being essential, i.e., the principle of universal succession of assets and liabilities, while the second one not, i.e., the principle of continuity of membership, i.e. the exchange of shares of the absorbed company against shares of the absorbing entity.

When we speak about triangular mergers in the follow-ing, we will exclude the case in which the shareholders of the Target are squeezed-out by a cash payment by way of a triangular merger.

b. PrincipleoftheContinuationoftheShareholding’sRights

Pursuant to article 7 para. 1 Merger Act shareholders of the transferring company have a claim for participation rights in the surviving company equal to their former participation rights, taking into account the assets and li-abilities of the participating companies [to the merger], the allocation of voting rights, as well as all other rele-vant circumstances.

Pursuant to article 8 para. 2 Merger Act the participat-ing companies may also provide in the merger agreement that only a settlement will be paid. There is no definition of «settlement» (Abfindung). At this point we can state that the settlement certainly encompasses cash and debt instruments.169

Whether the merger qualifies as a merger pursuant to ar-ticle 7 para. 1 Merger Act or article 8 para. 2 Merger Act has important consequences on the quorum required at the shareholders’ meeting of the Target.170

ra: ZK FusG-burckhardt, Art. 8, note 34; Hans Caspar von der Crone/Andreas gersbach/Franz J. Kessler/Martin Dietrich/Katja Berlinger, Das Fusionsgesetz, Zürich 2004, note 110; Lukas Glanzmann, Umstrukturierungen – Eine systematische Darstellung des schweizerischen Fusionsgesetzes, Bern 2008, § 5, note 57, § 11 note 238; Oltener Arbeitstagung der Handelsregister-ämter Zürich, Solothurn, Basel Stadt, Basel-Landschaft und Aar-gau, REPRAX 4/2004, 16.

168 In addition to the reasons invoked by Schärer/Oser (FN 137), 85, we argue that article 7 para. 1 Merger Act may be construed as en-compassing the triangular merger. See III.1.1d.

169 ZK FusG-Burckhardt, Art. 8, note 27; BSK FusG-Tschäni/Papa, Art. 8, note 8.

170 BSK FusG-Tschäni/Papa, Art. 8, note 12; von der Crone/ Gersbach/Kessler/Dietrich/Berlinger (FN 167), note 377 ff.; ZK FusG-Burckhardt, Art. 8, note 27; Lukas Glanzmann, Art. 8 FusG, in: Stämpflis Handkommentar zum Fusionsgesetz, Bern 2003, note 3; Amstutz/Mabillard (FN 79), Art. 8, note 4; Bertschinger/Spori (FN 167), 325 ff.; Mark Mauerhofer, Squeeze-Out Merger – Die zwangsweise Abfindungsfusion nach Art. 8 Abs. 2 Fusionsgesetz, Diss. Bern 2009, 143 ff.; Roland von Büren/Mark Mauerhofer, Zur Wahrung der Anteils- und Mitgliedschaftsrechte bei Fusionen von abhängigen Konzernun-ternehmen mit Dritten, in: Bucher/Canaris/Honsell/Koller (eds.), Festschrift für Wolfgang Wiegand zum 65. Geburtstag, Bern 2005, 780 ff.

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of the law) is further supported by the fact that there is no economic difference between a triangular merger and a straight merger when both foresee a considera-tion in the form of shares of the parent company hold-ing all the shares of the absorbing company.179 In other words, the main goal of the Merger Act, i.e., to ensure the continuing participation of the Target shareholders into the surviving entity, is fully complied with180 and substance should take precedence over form181. There is no logic to protect minority shareholders of the Target by a higher quorum, and thus to increase the price of the merger, when the triangular merger ensures an equiva-lent continuation of the participation rights of the Target shareholders in the economically combined entity as it would be the case in a straight merger.182 Furthermore, if the formal view were followed, the triangular merger in-volving shares of the parent as consideration would not fit into article 8 para. 2 Merger Act either since the for-mal participating parties to the merger agreement would not be in the legal position on their own to create and/or deliver the necessary parent company shares to the shareholders of the Target. The undertaking of the Ac-quirer, by giving a guarantee183 or by being a party to the merger agreement, is indeed necessary to legally ensure the creation and/or delivery of the shares.184 Such an un-dertaking or the quality of party to the merger agreement binds the Acquirer into the merger process so that it is legitimate to view the Acquirer as a participating entity and not merely as the provider of the merger considera-tion.185 The unfortunate subsumption by the Message of the Federal Council of the triangular shares – for – shares merger under article 8 para. 2 Merger Act further evidences that the remark in the Message quoted above should not be construed as being restrictive with respect to such mergers but on the contrary as aiming to allow them in general under the Merger Act.

The consequence of this view focused on the grammati-cal, systematic and especially teleological interpreta-tion of article 7 para. 1 Merger Act is that in a triangular merger where shares of the parent are offered as consid-eration, the parent company, the Acquirer, becomes a participating company pursuant to article 7 para. 1 the Merger Act.186

179 Against a formal construction of the Message and the provisions of the Merger Act: Schärer/Oser (FN 137), 86; von Büren/ Mauerhofer (FN 170), 780 ff.

180 Lukas Glanzmann, Die Kontinuität der Mitgliedschaft im neuen Fusionsgesetz, AJP 2004, 139 ff.

181 Schärer/Oser (FN 137), 86; von Büren/Mauerhofer (FN 170), 779 ff.; Mauerhofer (FN 170), 27 ff.

182 Schärer/Oser (FN 137), 856; von Büren/Mauerhofer (FN 170), 780 ff; summary in Bertschinger/Spori (FN 167), 326.

183 Bertschinger/Spori (FN 167), 322.184 Peter R. Altenburger/Massimo Calderan/Werner Lederer,

Schweizerisches Umstrukturierungsrecht, Zurich 2004, note 84.185 Bertschinger/Spori (FN 167), 321.186 Contra: von der Crone/Gersbach/Kessler/Dietrich/Berlinger

(FN 167), note 378; BSK FusG-Schleiffer, Art. 18, note 4.

«es ist aber möglich, die Gesellschafterinnen und Ge-sellschafter der übertragenden Gesellschaft mit Anteilen an einer dritten Gesellschaft abzufinden und auf diese Weise eine Art ‹Dreiecksfusion› (‹triangular merger›) zu verwirklichen.»175

[«it is however possible that the shareholders of the Tar-get receive shares of a third party and by this way to ef-fectuate a sort of ‹triangular merger›.»]

The Message is often construed as being limitative (i.e., all triangular mergers fall under article 8 para. 2 Merger Act), but we believe that that the opposite is true: The Message puts a third player into the game (which was not foreseen by the Merger Act) which offers alterna-tive interpretation possibilities with respect to the no-tion of «participating entities» as set forth in the Merger Act. With the recognition in the Message of the implicit existence of a third party, the term «participating com-pany» referred to in article 8 para. 2 Merger Act or article 7 para. 1 Merger Act could hence also cover the parent company of the NewCo – in our terminology the Ac-quirer – which will provide or pay the merger considera-tion.176 If such opinion is followed, the parent company that offers a settlement in cash (or debt) in a triangular merger becomes a «participating entity» pursuant to ar-ticle 8 para. 2 Merger Act. If the «settlement» consists of shares in the parent company when the NewCo is a mere shell company, such parent company becomes a «partici-pating entity» as referred to in article 7 para. 1 Merger Act, although the Message (but not the Merger Act) un-fortunately seems to subject all types of triangular merg-ers to article 8 para. 2 Merger Act.177

If the Acquirer is a participating entity in the sense of ar-ticle 7 para. 1 Merger Act, it would then have to be quali-fied either as a surviving or a transferring entity. The Acquirer is clearly not a transferring entity. It should therefore be qualified as a surviving company along with NewCo. Put differently, the surviving entity should be construed as being not only NewCo, but also the Ac-quirer.178

The argument according to which the Acquirer in a tri-angular merger is also a surviving company (in the sense

175 Idem.176 von der Crone/Gersbach/Kessler/Dietrich/Berlinger (FN 167),

note 109 ff. From the Message on the Merger Act of June 13, 2000, 4403 it can be inferred that the triangular merger falls under art. 8 para. 2 Merger Act. The Message is however silent on the reasons leading the legislator to subject the triangular merger to a higher quorum of the shareholders’ meeting. The Message can also be con-strued as intending to underscore that the triangular merger would continue to be possible without taking a view on the quorum.

177 Also Schärer/Oser (FN 137), 85 argue that a triangular merger should be considered as a merger pursuant to article 7 para. 1 Merg-er Act and not a merger with a settlement pursuant to article 8 para. 2 Merger Act because such structure precisely allows for an eco-nomic continuity of the rights of the Target shareholders.

178 Contra: von der Crone/Gersbach/Kessler/Dietrich/Berlinger(FN 167), note 378; BSK FusG-Schleiffer, Art. 18, note 4.

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Acquirer against the issuance of the new shares of the Acquirer to the shareholders of the Target.192

The fifth consequence would be the obligation of the Acquirer to participate in the preparation of the merger report pursuant to article 14 Merger Act.193

The sixth consequence is tied to the applicability of the Private International Law Act (PILA). If the Acquirer were a participating company pursuant to article 7 para. 1 of the Merger Act, article 163a PILA would be appli-cable even if NewCo and the Target were incorporated in a foreign country.194 The envisaged merger must also be permitted at the place of incorporation of the par-ticipating company.195 Evidence in support of this might sometimes be difficult to provide because the absorption of the Target by a foreign Acquirer is restricted in many countries. In the experience of the authors, this is the case at least in England and the Netherlands. Florence Guillaume adds the examples of Germany and Aus-tria.196 The permissibility of the merger under foreign law is required by the PILA to ensure that the transfer of the assets and liabilities of the transferring entity into the absorbing entity will occur by universal succession:197 «En fin de compte, il faut que le droit étranger admette que le patrimoine de la société qui lui est soumise passe sans liquidation et uno actu dans la société suisse».198 If such transfer is not permitted under the law of the for-eign absorbed Target, then the merger is not possible under Swiss law. The triangular merger with a Swiss Acquirer and two foreign merging entities without any transfer of assets and liabilities between Switzerland and a foreign country was not envisaged by the PILA. In our opinion, article 163a PILA has to be construed in line with its purpose to facilitate cross-border mergers as long as there are no legitimate interests against such transaction.199 If the authorities or the parties take the view that the PILA is applicable, the requirement of the

192 Bertschinger/Spori (FN 167), 323. Art. 9 para. 2 Merger Act.193 Not consequent: Bertschinger/Spori (FN 167), 322.194 Article 163a PILA is applicable if one of the participating entities

is governed by foreign law: Florence Guillaume, Art. 163a, in: Commentaire Romand sur le droit international privé et la conven-tion de Lugano, Basel 2011, Art. 163a, note 4. She does however not analyze the triangular merger. There would be no international component if the Acquirer were not considered a participating en-tity: Gerhard/Schiwow (FN 165), 198; Schärer/Oser (FN 137), 82.

195 Florence Guillaume (FN 194), note 7.196 Florence Guillaume (FN 194), note 7. The entry into force of

the Directive 2005/56/CE of the European Parliament and of the Council of October 26, 2005 has not changed the situation for cross-border mergers with Swiss companies because Swiss compa-nies cannot claim benefits under that Directives. See Christopher Mader, Die grenzüberschreitende Verschmelzung am Beispiel Deutschland – Österreich, in: RWZ 2011/32, 99 ff.

197 Florence Guillaume (FN 194), note 9.198 Message of the Federal Council on the Merger Act of June 13, 2000,

4151.199 Message of the Federal Council on the Merger Act of June 13, 2000,

4149 and 4151.

e. Consequences

Since the notion of participating company appears at various places throughout the Merger Act with the same meaning, it is coherent to consider the Acquirer in a triangular merger as a participating company pursuant to all the provisions of the Merger Act. This could be viewed as the flip side of the coin that will affect the po-sition of the Acquirer, e.g., in case of an appraisal claim or with respect to information obligations towards other constituencies. All the rights and obligations derived from being a participating company should in our view equally apply to the Acquirer as parent in a triangular merger (articles 105, 106, 25 ff., 18 para. 1 Merger Act). This substantive view would finally allow a coherent ap-plication of the Merger Act that lacks today by consider-ing the Acquirer as a participating company with respect to some obligations187 but not others.

Such view would have several consequences:

The first consequence would be that a vote of the Ac-quirer’s shareholders would be required pursuant to article 18 para. 1 Merger Act.188 The requirement of a shareholders’ vote is not burdensome when the Acquirer could not consummate the transaction without creating new shares. In such a case, the shareholders must anyway vote on the creation of the new shares and the quorum of 66²⁄³ % necessary for the exclusion of the preferential right of subscription is the same as the quorum of article 18 para. 1 Merger Act.189

The second consequence would be the applicability of the information and consultation rights of the employees and creditors against the Acquirer according to article 25 ff. Merger Act.190

The third consequence would be the availability of the appraisal claim pursuant to article 105 Merger Act against the Acquirer. It is currently denied by the major-ity of legal scholars that article 105 Merger Act shall be available to the Target shareholders against the Acquirer in a triangular merger.191 This debate would be closed by a coherent application of the notion of participating company.

The fourth consequence would be that the provisions of the Code of Obligations regarding contributions in kind would no longer be applicable to the contribution in kind of the newly issued shares of NewCo into the

187 Bertschinger/Spori (FN 167), 322 and 323.188 von der Crone/Gersbach/Kessler/Dietrich/Berlinger (FN 167),

note 378; BSK FusG-Schleiffer, Art. 18, note 4.189 Art. 704 para. 1 ciph. 6 CO; Handkommentar zum Fusionsgesetz-

Vogel/Heiz/Behnisch, Zurich 2005, Art. 18, note 9.190 von der Crone/Gersbach/Kessler/Dietrich/Berlinger (FN 167),

notes 378, 418 and 432; Bertschinger/Spori (FN 167), 323.191 Eugster (FN 88), 140; von der Crone/Gersbach/Kessler/

Dietrich/Berlinger (FN 167), note 1030.

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possible to provide in the merger agreement and in the decision taken by the shareholders’ meeting of the Target that a fiduciary agent acting in his name but for the ac-count of the Target shareholders will subscribe for the new shares of NewCo and become shareholder of the new shares, and subsequently, according to the share-holders’ resolution of the Target, will contribute them into the Acquirer against issuance of new shares by the Acquirer. Such new shares are subsequently allocated by the agent to the Target shareholders. The wording of the contribution in kind resolution of the shareholders’ meeting of the Acquirer could be:

«Type of contributions: Pursuant to the Merger Agree-ment dated [___] the Company takes over all assets and liabilities from the Target with assets in the amount of CHF [___] and liabilities in the amount of CHF [___] pursuant to the merger balance sheet dated [___]; in ex-change, the Agent shall receive [___] shares of the Com-pany with a nominal value of CHF [___] each.»

If the triangular merger involves exclusively Swiss enti-ties, the use of a fiduciary agent to contribute the shares of NewCo into the Acquirer is permitted irrespective of the classification of such transaction under article 7 para. 1 or 8 para. 2 Merger Act. Indeed, if the substan-tive approach is followed, the delivery of the considera-tion by a fiduciary agent is a mere technical modality to consummate the merger pursuant to article 13 para. 1 lit. d. Merger Act.204 No separate proxy granted by each of the shareholders of the Target is therefore required. If the formal approach prevails, the fiduciary agent be-comes shareholder of NewCo in lieu of the shareholders of the Target which cease to be shareholders of the par-ticipating entities. All Target shareholders are entitled to receive the consideration decided by the resolution of the shareholders’ meeting of NewCo as set forth in the merger agreement. The participating parties are free to set out with a binding effect upon all Target shareholders how the consideration shall be provided by the fiduciary agent acting upon instruction of the participating parties (i.e., how the shares shall be issued on their behalf). The consideration mechanism does also fall under article 13 para. 1 lit. d. and lit. f. Merger Act.

If the triangular merger involves a foreign Target and a Swiss NewCo, the same reasoning is applicable provided that such foreign law permits such transaction.

If the transaction involves a foreign Target, a foreign NewCo and a Swiss Acquirer, the permissibility to use an exchange agent to contribute the shares of NewCo into the Acquirer has to be reviewed from the perspec-tive of the foreign law applicable to the merger between these entities. In our experience, Anglo-Saxon jurisdic-tions do provide that the proxy granted in the decision of

204 BSK FusG-Wolf, Art. 13 FusG, note 9; Bertschinger/Spori (FN 167), 320.

permissibility of the merger under foreign law should be deemed satisfied if the transaction as a whole is permit-ted under the laws of NewCo and the Target. The appli-cability of the PILA should not be a hurdle because such cross-border transaction would also not have been pos-sible without the applicability of the PILA if the law at the place of incorporation of the Target and the NewCo had prohibited it.

1.2 MergerConsiderationinTriangularMergers

In order to create the merger consideration in a triangu-lar merger, the Acquirer must increase its share capital (unless the Acquirer has enough treasury shares avail-able) and the issue price for the new shares must be paid in.200, 201

Rather than having an agent making a cash payment cor-responding to the nominal value of the new shares to be issued by the Acquirer,202 an alternative valid for the forward triangular mergers could be to contribute into the Acquirer new shares issued by NewCo to the Target shareholders in connection with the merger which are immediately passed-on to the Acquirer in exchange for shares in the Acquirer.203 This transaction form also al-lows for the creation of share premium (agio) at the level of the Acquirer, which – since January 1, 2011 – can be distributed to shareholders free of withholding tax. Share premium is created if the shares of NewCo are contrib-uted into the Acquirer at their market value (based on the stock exchange price or on a company valuation) and such market value is higher than the nominal value of the shares newly issued. The market value of NewCo is identical to the market valuation of the Target as the former represents economically the latter.

The shares newly issued in the first step by NewCo be-long legally to the Target shareholders. It is however

200 For a complete description of the methods regarding the issu-ance of new shares in triangular mergers, see Gerhard/Schiwow (FN 165), 191 ff. and Schärer/Oser (FN 137), 93. For a complete description regarding the issuance of the share consideration in an exchange offer, see Luginbühl (FN 14), 172 ff.

201 For a description of capital increase by issuance of bonus shares («Gratisaktien»), i.e., by conversion of free reserves into equity ac-cording to article 652d CO, see Gerhard/Schiwow (FN 165), 191 ff.; Schärer/Oser (FN 137), 93; Bertschinger/Spori (FN 167), 318.

202 This has, e.g., been done in 2008 in the cross-border reverse triangu-lar merger of Hudson News, a Delaware company, into a NewCo, a Delaware company and a fully-owned subsidiary of Dufry AG, a Swiss company with domicile in Basel listed on the SIX Swiss Exchange, see Gerhard/Schiwow (FN 165), 202; Schärer/Oser (FN 137), 92.

203 This has for instance been done in 2010 in the cross-border forward triangular merger of Dufry South America Ltd, a Bermuda com-pany listed on the stock exchange in Sao Paulo (BOVESPA), into Dufry Holdings & Investments AG, a Swiss company with domi-cile Basel and a fully-owned subsidiary of Dufry AG, a Swiss com-pany with domicile in Basel listed on the SIX Swiss Exchange; see Gerhard/Schiwow (FN 165), 207; Schärer/Oser (FN 137), 92; Bertschinger/Spori (FN 167), 320.

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text it is important to emphasize that the majority opin-ion of the scholars supporting the sole applicability of foreign law to the quorum applicable at the shareholders’ meeting of the Target is based on the reasonable expecta-tions of the Target shareholders211. It is indeed reason-able to consider that the Target shareholders, at the time of their decision to invest in the Target, assumed that the Target was and would continue to be governed by its law of incorporation and not Swiss law. Therefore, the quorum of shareholders’ resolutions of the company in which they invested should remain the same even in the case this quorum is lower than the quorum applicable in a foreign country. Otherwise, the Target shareholders would receive a windfall paid by the Acquirer’s share-holders who expected a merger according to the Target by-laws (the lower the quorum, the lower the premium paid by the Acquirer).

3. AppraisalRights(Article105MergerAct)

3.1 LegitimationtoFileaLawsuitinCaseofCross-BorderMerger

Each shareholder of the Swiss Acquirer (in a straight, but also in a triangular merger212) may, within two months after the publication of the merger under the Merger Act, request the court to assess whether the participation rights or other compensation received in the merger is a fair equivalent to the participation rights held before (article 105 para. 1 Merger Act).213

However, article 105 Merger Act is not available to the foreign Target shareholders.214 In such case, the law of the country of incorporation of the Target is applica-ble.215 The same reasoning applies here as when assessing the quorum for the approval of the merger at the share-holders’ meeting.216 As a result the Swiss jurisdiction and the rights of article 105 Merger Act (in particular the er-ga-omnes consequences) are not available to the foreign Target shareholders. The foreign Target’s shareholders have to file lawsuits in the country of incorporation of the Target. Since the liability of the Acquirer is unclear under Swiss law in case of a triangular merger, in our view, the Target Board should ask from the Acquirer a parent guarantee or that it becomes a party to the merger agreement to ensure that the Acquirer is legally obliged to deliver the merger consideration shares.

In the context of article 105 Merger Act the law applica-ble to the merger agreement is not relevant to determine

211 On the «Übertragungstheorie»: Bessenich (FN 207), 852 ff.212 See section III.1.1e.213 See section II.2.2a.214 BSK FusG-Girsberger/Rodriguez, Art. 163a IPRG, note 25;

Opposite opinion: Eugster (FN 88), 187.215 BSK FusG-Girsberger/Rodriguez, Art. 163a IPRG, note 25;

Opposite opinion: Eugster (FN 88), 187.216 See section III.2.

the shareholders’ meeting and in the merger agreement has a binding effect on all the Target shareholders.

2. QuoruminCaseofCross-borderMerger

In this section, no distinction will be made between a triangular, a straight or a cash-out merger. The quorum usually applicable at the shareholders’ meeting when the Target is incorporated in Switzerland, 90 % in case of a cash-out merger or 66²⁄³ % in case of a straight or, as advocated in this contribution205, a triangular share-for-share merger, is not triggered when the Target is incorpo-rated in a foreign country.

The question of the applicable quorum in cross-border mergers must be dealt with pursuant to article 163a PILA.206 Under this provision a merger between a Swiss Acquirer and a foreign Target where the Swiss Acquirer survives is permitted as long as the foreign law permits it and the conditions of the foreign law are fulfilled. Article 163a para. 2 PILA provides that for the remainder («im Übrigen» or «au surplus») Swiss law is applicable.

It is commonly agreed that the conditions for a merger required by Swiss law and the foreign law have to be cu-mulatively207 fulfilled unless no Swiss interests are con-cerned and the foreign provisions do not directly relate to the merger process (e.g., form of the contract, docu-ments necessary etc.)208. According to the majority of the scholars the protection of the creditors of the foreign Target or the internal merger approval process within the foreign Target are excluded from the cumulative appli-cability of Swiss law209 and the foreign law is exclusively applicable to such questions.

Therefore, the quorum needed for the merger approval by the Target has to be determined exclusively under the foreign law in force at the place of incorporation of the Target.210 Neither the 66²⁄³ % nor the 90 % quorum re-quired under Swiss law applies.

To our knowledge, no case has been brought before Swiss courts in respect of the above. In our experience, commercial registers tend to accept this rule. In this con-

205 See section III.1.1c.206 BSK FusG-Girsberger/Rodriguez, Art. 163a IPRG, note 1 ff.207 On the «Vereinigungstheorie»: Balthasar Bessenich, Das neue

Fusionsgesetz: internationale Aspekte, AJP 2004, 853.208 BSK FusG-Girsberger/Rodriguez, Art. 163a IPRG, note 25;

Matthias Courvoisier, Art. 163a IPRG, in: Stämpflis Handkom-mentar zum Fusionsgesetz, Bern 2003, note 2.

209 BSK FusG-Girsberger/Rodriguez, Art. 163a IPRG, note 21; Courvoisier (FN 208), Art. 163a IPRG, note 21 ff.; Anouk d’Hooghe, Aspekte der grenzüberschreitenden Fusion gemäss Art. 163a ff. E-IPRG, Zürich 2003, 25; Christophe Samsons/Sy-bille Flindt, Internationale Zusammenschlüsse, NZG 2006, 290 ff.; Bessenich (FN 207), 853.

210 For the description of the main place of business theory vs. the in-For the description of the main place of business theory vs. the in-corporation theory in the EU: Peter Behrens, Gemeinschaftliche Grenzen der Anwendung inländischen Gesellschaftsrechts auf Aus-landsgesellschaften nach Inspire Art, IPRax 2004, 21.

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As a consequence, only shareholders registered in the share register at the time of the approval of the merger by the shareholders’ meeting, as opposed to shareholders registered in the share register at the time of the settle-ment of the merger or registration with the commercial register, should be entitled to file an appraisal lawsuit and/or to receive the appraisal payment.221

b. Example

The following example222 is aimed at outlining the afore-mentioned issues (i.e, the indemnification payment is not transferred with the share, such payment is received by all shareholders that are registered in the share register at the time of the shareholders’ approval).

March 1:

Company A has a market value of CHF 3’500 (3’500 shares of CHF 1 each) and company B has a market value of CHF 1’000 (1’000 shares of CHF 1 each) before the merger.

March 15:

After the announcement of the merger talks the market value of B increases to CHF 1’500 or CHF 1.50 per share (e.g., the market expects that B receives the full premium of the merger). Thus, the valuation of the combined en-tity amounts to CHF 5’000. The market value of A re-mains CHF 3’500.

April 1:

The Board of A announces that the exchange ratio is set at 1:4. They value A at CHF 4’000 and B at CHF 1’000. In other words they do not share the view of the market regarding the split of the merger premium. As a conse-quence of this ratio, A has to create 875 shares to be de-livered to the shareholders of B.

Scenario 1

In view of the exchange ratio announced, the market should correct the price of the shares if it thinks that no appraisal of B shareholders would succeed. In such a case, the price of the share A would increase to CHF 1’1428 (CHF 4’000/3’500 shares) and the price of the share B would decrease to CHF 1.00.

Scenario 2

If an investor thinks that the exchange ratio is unfair and that an appraisal action would succeed he/she would be ready to purchase the B share for the amount of the valuation of the share given the exchange ratio plus the amount of the expected appraisal. It is fair to say that in our example the maximum amount of the apprais-

221 Contra: Marc Amstutz/Ramon Mabillard, Commentaire Ro-mand, Basel 2008, Intro. LFus, note 511.

222 We thank warmly Mr. Pierre de Saab from the company Dominicé & Co for the input; see also von der Crone/Gersbach/Kessler/Dietrich/Berlinger (FN 167), note 1053 ff.

the law of the merger.217 Furthermore, the Merger Act intended to protect the shareholders and creditors of the Swiss Acquirer and not of the foreign Target.218 The for-eign Target shareholders therefore have to take action at the place of incorporation of the Target and they would receive the appraisal value in the form of a payment or shares by NewCo or the Acquirer depending on the for-eign law.

3.2 ImplementationofArticle105MergerAct

a. Legal

As mentioned in section II.2.2a. above, pursuant to ar-ticle 105 Merger Act, a favorable judgment benefits all shareholders of the participating company provided that they are in the same legal position as the claimant.219

It is however unclear whether persons who acquired their shares after the merger approval by the share-holders’ meeting may also benefit from an indemnifica-tion payment. In other words, it is unclear whether the indemnification payment is attached to the shares or to the shareholder. If the indemnification is attached to the shares, an assignment of the shares triggers the assign-ment of the indemnification claim.220 In this event, the combined entity should create two categories of shares or two trading lines to keep track of the shareholders of the Target prior to the merger (category 1 would be enti-tled to an appraisal payment and category 2 would not). If the indemnification is attached to the shareholder, the shareholder registered in the share register at the time of the merger is entitled to receive it irrespective of a sub-sequent transfer of the shares (i.e., the indemnification payment is not transferred with the share). There would be in such a case an ex-indemnification date (ex-date) for the trading of the shares starting the first trading day af-ter the shareholders’ meeting.

Practical reasons speak in favor of the solution of the non-transferability of the indemnification right. It would indeed be very burdensome to ask each publicly listed company to create two trading lines or two catego-ries of shares although the company does not and cannot know at the time of the completion of the merger wheth-er shareholders will indeed file an appraisal action since such claim can only be filed within two months after the shareholders’ approval. As we will illustrate below, no economic reason speaks against such non-transferability of the indemnification since shareholders may price the anticipated payment in the share price.

217 BSK FusG-Girsberger/Rodriguez, Art. 163c IPRG, note 9; Bessenich (FN 207), 858.

218 Message of the Federal Council on the Merger Act of June 13, 2000, 4499 ff.

219 BSK FusG-Dubs, Art. 105, note 2 and 39; ZK FusG-Meier- dieterle, Art. 105, note 28.

220 Art. 170 CO.

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3.3 TaxConsiderations

Two cases should be distinguished with respect to the qualification of the indemnification payment pursuant to article 105 Merger Act under the withholding and in-come tax: The Acquirer and the Target have effectuated (1) a straight cash-out223 or a share for share merger, or (2) a triangular cash-out or share for share merger.

a. Case(1)

In the first case, the Target shareholders have received the merger consideration (articles 7 and 8 Merger Act) directly from the entity that merges into the Target. In case of shares, no withholding or income tax is levied. In case of cash consideration, the withholding and income tax are due.224 An additional indemnification payment under article 105 Merger Act in cash or shares could be considered as a dividend payment under Swiss law pro-vided that the indemnification payment is assimilated to a settlement (Ausgleichszahlung) under the Circular no. 5 dated June 1, 2004 of the Federal Tax Administra-tion (the Circular)225. Dividend payments are subject to a withholding tax of 35 % and to income tax for indivi-duals holding their shares as part of their private assets. As a result, shareholders of the Target domiciled abroad could not or only partially claim a refund of withholding tax under applicable double taxation treaties and individ-uals domiciled in Switzerland holding their shares as part of their private assets would have to pay income tax on the indemnification payment. Furthermore, the Acquirer and/or the NewCo could not validly gross up the pay-ment of the withholding tax (i.e., Swiss entities may not pay 153,8 % to shareholders)226.

We believe that the treatment of the indemnification pay-ment as a settlement would not be correct. The indem-nification payment pursuant to article 105 Merger Act should not be qualified as a «settlement» (Ausgleichs-zahlung) under the Circular but as a compensatory pay-ment resulting from a breach of a mandatory obligation under the merger agreement (Schadenersatz). The man-datory obligation is to provide a fair consideration to the shareholders of each party pursuant to the Merger Act (articles 7 para.1, 13 para. 1 lit. b. and e contrario arti-cle 105 Merger Act). If the parties breach this obligation, they are liable to the shareholders for the damage they have caused. The nature of the payment for tax purposes

223 This could also occur with a NewCo set up by the Acquirer where-by the Acquirer would not be party to the merger agreement (i.e., cash would come from the NewCo having absorbed the Target).

224 Regarding the payment of the consideration under articles 7 para. 2 and 8 para. 2 Merger Act as opposed to the indemnification under article 105 Merger Act in case of a cash-out merger: BSK FusG-Saupper/Weidmann, vor Art. 3, note 215; articles 4.1.2.4.1 and 4.1.2.3.8 of the Circular no. 5 dated June 1, 2004 of the Federal Tax Administration.

225 Idem.226 See article 14 para. 1 of the Federal Act on the Withholding Tax.

al would be CHF 500. The price of the share B would remain at CHF 1.50 and the share A would remain at CHF 1 so long as holding a B share entitles to receive the appraisal payment.

April 15:

A and B shareholders approve the merger agreement. 20 % of B shareholders vote against the merger agree-ment. Such B shareholders as registered in the share register on April 15 may not file the appraisal action but would receive a potential indemnification payment should one shareholder who is registered in the share register on April 15 and has rejected the merger is suc-cessful with his/her action.

Under the assumption of Scenario 2, the appraisal pay-ment would be calculated based on the following for-mula:

Appraisal amount

1

= Indemnification1 – percentage of B share-holders in the combined entity

AB

The calculation takes into account that B shareholders are entitled to 20 % of the cash flows of the combined entity. The payment of an indemnification reduces the value of the entity. Without any correction, the B share-holders would participate in their own indemnification.

5001

= 6251 – 20

April 16:

The result of the shareholders’ vote is known to the mar-ket.

The share of B is max. CHF 0.875 as of this ex-date (¹⁄5 of the combined value of A and B of CHF 4’375/1’000 shares) and the share of A increases to CHF 1.00.

The shareholders purchasing B stock as of this date are no longer entitled to the appraisal payment of CHF 625.

April 17:

The exchange takes place and 875 A shares are issued pursuant to the merger agreement. The combined value of the entities equals the market value of both entities minus the appraisal. The market value is CHF 4’375 for 4’375 shares. The price per share is CHF 1.–.

B shareholders registered in the share register on April 15 would receive 875 shares x CHF 1.00 = CHF 875. In ad-dition, they would receive the appraisal of CHF 625. The total amount received by B shareholders corresponds to CHF 1’500 (CHF 875 + CHF 625). This is the amount they should have received under the assumption that the market view is shared by the judge. The A shareholders receive «only» CHF 3’500 which also corresponds to the market view outlined in this assumption.

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agreement. This is an inalienable competence of the Board (article 12 Merger Act).229

Pursuant to article 717 CO, the members of the Board must perform their duties with due care (duty of care) and safeguard the interest of the company in good faith (duty of loyalty). They must act in conformity with the interests of the company. The directors must subordinate their own or third parties’ interests to the interests of the company.230 Whenever a Board member’s duties conflict with his or her own interests or interests of third par-ties related to such Board member, special measures must be taken to protect the interest of the company by safe-guarding the integrity of the decision-making process.231

Whenever the Target is controlled by the Acquirer, con-flicts of interests structurally arise between the Target and the Acquirer. The conflict is clear when the same persons are sitting on the Board of the Acquirer and of the Target: such Board members must fulfill their duties as Board members vis-à-vis both companies and must further both companies’ interests. The situation is how-ever less clear when the persons sitting on the Board of the Target are different from those sitting on the Board of the Acquirer, but have been designated and elected by the Acquirer.232 Indeed, Board members who have been designated by a major shareholder are not treated any different from the other Board members with regard to their duty of loyalty (article 717 CO). According to the Federal Supreme Court, the Board member’s duties vis-à-vis the company precede his/her duties vis-à-vis the principal.233 Further, they must act in conformity with the interests of the entire company (including the entire-ty of its shareholders) and subordinate the third parties’ interest to the interests of the company (including the entirety of its shareholders). They might therefore be in a conflict of interest, since they shall safeguard the interest of the Target, but have been elected by the Acquirer. The existence of a conflict of interests in such a situation must be ascertained carefully and there may sometimes be a disagreement among the Board members.

4.2 MethodstoMitigateaConflictofInterests

Statutory law, legal doctrine and jurisprudence provide several methods to address conflicts of interest, whereby they are not equally appropriate in all situations:234

229 BSK FusG-Wolf, Art. 12, note 5; Glanzmann (FN 167), § 11, note 283 ff.

230 Decisions of the Federal Supreme Court 4A_462/2009; 130 III 219; Böckli (FN 59), § 13, note 650.

231 Böckli (FN 59), § 13, note 643.232 The TB assumes in those situations a potential conflict of interest;

see Recommendation 129/1 of the TB in the matter Think Tools AG dated May 17, 2002, c.6.

233 Decision of the Federal Supreme Court 4AC.143/2003, c.6.234 See also Katja Roth Pellanda, Organisation des Verwaltungsra-

tes, Zürich 2007, note 342 ff; Caspar von der Crone, Interessen-konflikte im Aktienrecht, SZW 1994, 8 f.

is therefore not different from a payment for a breach of contract. Furthermore, the Circular refers to settlements paid pursuant to articles 7 para. 2 and 8 para. 2 Merger Act while article 105 Merger Act excludes explicitly arti-cle 7 para. 2 Merger Act. This exclusion of article 7 para. 2 Merger Act in article 105 Merger Act shows that the nature of the payment referred to in the Circular is not the same as the payment indemnification due pursuant to article 105 Merger Act. As a result of the qualification of the indemnification as compensatory payment, the taxes mentioned above should not be levied227.

b. Case(2)

In the second case, the Target shareholders have received the merger consideration from the Acquirer. The pay-ment of such consideration is neither subject to with-holding tax nor to income tax.228 An additional indem-nification payment pursuant to article 105 Merger Act should be treated equally by the tax administration. As stated in Section III.1.1e. above, the Acquirer should be considered a participating company. Therefore, the court would be in a position to rule that the Acquirer is liable for the indemnification payment. The status as party of the Acquirer in the proceedings could also be inferred from the merger agreement that typically obligates the Acquirer to provide the consideration and therefore im-plicitly a potential indemnification payment.

4. ConflictofInterests

4.1 DealingwithConflictofInterests

According to the Merger Act, the ordinary merger pro-cedure requires the approval of both the Board and the shareholders’ meeting (articles 12 and 18 Merger Act). Whereas the Board may delegate the negotiations of the merger agreement to individual Board members, it bears the ultimate responsibility for entering into the merger

227 If NewCo or the Acquirer have directly merged into the Target and the Target shareholders have received a cash payment from the sur-viving entity, such payment would be subject to income and with-holding tax. There ison this point a discrepancy between a triangu-lar merger and a straight merger whereby the Target shareholders receive shares. However, this should not change the qualification of the indemnification payment as a compensatory payment not sub-ject to withholding or income tax. If the Federal Tax Administra-tion were to take another view, NewCo or the Acquirer (whoever is party to the merger agreement) could be viewed as acting abusively if such structure is solely chosen to damage the minority share-holders. The indirect effect of such finding would be to force the Acquirer to implement the structure described in the second case. An alternative would be the distribution of capital reserves which are neither subject to withholding nor income tax. The court should only rule favorably upon such a request if the threat to the interests of the minority shareholders in light of the behavior of the Acquirer and the NewCo would justify an unequal treatment of the share-holders.

228 BSK FusG-Saupper/Weidmann, vor Art. 3, note 215.

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non-conflicted Board members and may be an ad hoc or a standing committee. The Board may also delegate deci-sion-making power to such a committee, unless the mat-ter to be decided on lies within the core competences of article 716a para. 1 CO or is a matter reserved for the en-tire board according to other mandatory provisions, such as articles 12 and 18 Merger Act239. The delegation of the decision-making power must be based on a provision in the articles of incorporation240 and a provision in the organizational rules or a decision by the Board241. This means that in those matters where a resolution by the en-tire Board is mandatory (and hence the matter cannot be delegated to the committee), as, e.g., under article 12 of the Merger Act, such a committee could not be granted a veto right. Of course, whenever the entire Board must approve the merger, the means to mitigate the conflicts of interests must still strictly be applied. Conversely, in all cases where the matter can be delegated to the com-mittee, such a veto right could be implemented, but in future this would have to be provided for in the articles of incorporation of the company242.

4.3 DisagreementAboutaConflictofInterests

Based on his/her duty of loyalty, each Board mem-ber must avoid conflicts of interests with the company and, should a conflict of interests, arise, adequately ad-dress it by informing «immediately and completely»243 the chairman and/or the Board members and, depending on the intensity of the conflict and unless other meas-ures to overcome the conflict of interests are taken by the full Board244, abstain from voting245. A Board member who willfully or negligently violates such duty may be-come personally liable (article 754 CO). In addition, the respective Board decisions may, under certain circum-stances, be void because the decision-making process may violate the basic structure of corporate law (article

(FN 234), note 356; Lazopoulos (FN 237), 121. See also Swiss Code of Best Practice for Corporate Governance, para. 16.

239 In exchange offers, the TB considers the nomination of a committee of at least two non-conflicted board members as a sufficient instru-ment to overcome conflict of interests, besides the abstention of the conflicted member(s) and the commissioning of a fairness opinion (see, e.g., Recommendation 0329/3 of the TB in the matter Unilabs S.A. dated October 6, 2007, c.8.3). Indeed, neither the takeover laws nor the CO do require that the Board report and the recommenda-tion of the Board about a takeover offer be resolved by the entire Board. This is different from article 12 Merger Act which requires a resolution of the entire Board.

240 Art. 716b CO.241 Art. 716b para. 2 CO.242 See article 627 ciph. 20 of the draft amendment to the CO dated

December 21, 2007.243 This is in anticipation of the wording proposed by the draft amend-

ment to the CO dated December 21, 2007 in its article 717a CO.244 See III.4.2.245 Böckli (FN 59), § 13, note 643 and 650; see also the Swiss Code of

Best Practice for Corporate Governance, para. 16.

a. AbstentionfromVoting

A conflicted Board member may abstain from voting on the respective Board decision. Depending on the particu-lar case, the conflicted Board member may, in addition to abstaining from voting, not take part in the decision-making process, not attend the discussion before the decision is made or even not obtain respective Board documentation235. However, this is not an appropriate method if a majority of the Board is deemed to be con-flicted and therefore would be disqualified from taking a decision that falls within the competence of the Board.

b. ApprovalbytheShareholders’Meeting

Arguably, the shareholders’ meeting may approve and thereby authorize a Board decision taken by conflicted Board members.236 However, the approval of a Board de-cision by the shareholders’ meeting cannot overcome a conflict of interests if a shareholders’ decision is already required by law, as this is the case, e.g., in an ordinary merger procedure under article 12 and 18 Merger Act. If the approval by the shareholders’ meeting of the agree-ment should at the same time also serve as an approval of the Board’s acting under a conflict of interests, the two-step procedure would be reduced to a single approval of the shareholders’ meeting and the legislator’s hierarchy would be overruled.

c. Arm’sLengthPrinciple

Another possibility of seeking additional support is to ensure that the arm’s length principle is observed, e.g., by obtaining a fairness opinion. This provides a certain assurance that a transaction is not disadvantageous to the company even though the respective Board decision is not taken by disinterested Board members.237 However, it does not give any indication as to the necessity or the advantages of a particular transaction for the company which should not only be fair but also in the company’s best interest. The fairness opinion may not replace the business decision and hence does not release the Board from its duty to take its own decision, but such dealing at arm’s length may serve as a basis of such decision.

d. NominationofaCommitteeofNon-ConflictedBoardMembers

In view of the drawbacks of the means mentioned above, the practice has developed the committee of non-con-flicted board members as an instrument to overcome conflicts of interest.238 Such a committee comprises only

235 Michael Lazopoulos, Massnahmen zur Bewältigung von Interes-senkonflikten im Verwaltungsrat, AJP 2006, 145.

236 Rather sceptical, Böckli (FN 59), § 13, notes 644, 647 ff.237 Michael Lazopoulos, Interessenkonflikte und Verantwortlich-

keit des fiduziarischen Verwaltungsrates, Zürich 2004, 119.238 Decisions of the Federal Supreme Court 127 III 333; 126 III

363; Watter/Roth Pellanda (FN 14), 22 ff.; Roth Pellanda

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«participating company» under the Merger Act with the consequences attached to this finding.

• Second, in cross-border mergers, we show that the quorum applicable to resolutions of the shareholders’ meeting prescribed by the jurisdiction of the Target should apply in all forms of mergers.

• Third, still in cross-border mergers, we take the view that the shareholders of the foreign Target may not file an appraisal lawsuit according to article 105 Merger Act against the Acquirer incorporated in Switzerland, but have the remedies under the law of the jurisdiction of the Target.

• Fourth, we claim that the entitlement to a potential appraisal payment pursuant to article 105 Merger Act does not transfer along with share transfers. Based on an example we demonstrate that the market can price in such hypothesis.

• Fifth, we take the view that an indemnification pay-ment according to article 105 Merger Act should not be considered as the payment of a «settlement» as un-der article 8 para. 2 Merger Act but as a compensa-tory payment which does not qualify as a dividend payment.

• Sixth, in the context of transactions where the Board of the Target is conflicted, we explain how the Board should proceed. We share the view according to which a committee of non-conflicted Board mem-bers cannot be granted a veto right on the merger. In case of disagreement among Board members about a conflict, reasonable doubt should suffice to remove a Board member from the decision-making process. Finally, we believe that considering the risk of the decision of the Board being void, Board members should pay particular attention in assessing potential conflicts of interest.

714 CO in connection with article 706 para. 3 CO and article 20 CO)246.

Disagreement among board members about the exist-ence of a conflict of interests or about the measures to be taken to overcome such conflict of interests (e.g., ab-staining from voting but participating in the discussions vs. abstaining from voting and being excluded entirely from the decision-making process) occur more often than expected. As a matter of fact, Swiss law defines con-flicts of interests which require the complete removal of the Board member concerned from the decision-making process fairly narrowly.247 We believe however that a Board member whose conflict-free standing is chal-lenged must be deemed to be in a conflict of interests and hence be removed from the decision-making process. This is confirmed by decisions of the Federal Supreme Court, which require the Board to take appropriate measures already if there is a risk of a conflict of interests (as opposed to an actual conflict of interest).248 In view of the theoretical risk of voidness of a Board decision taken by a conflicted Board (and the absence of conse-quences of an abstention by a Board member who is ac-tually not conflicted), any Board should choose the safer route and exclude potentially conflicted directors from voting about their independence and on the business matter itself. In the merger context, this would mean that the shareholders’ meeting would be asked to approve a merger agreement that has not been validly resolved on by the Board. The respective shareholders’ meeting de-cision would therefore become challengeable under ar-ticle 106 Merger Act. Pending resolution of the matter by the competent court, any interested party could block the commercial register and the merger could not be con-summated.

5. Conclusion

In Section III we have striven to present and discuss cer-tain topical issues that public companies are confronted with in planning merger transactions. We can summarize our main claims as follows:

• First we believe that the Federal commercial register should change its practice with respect to the quorum applicable in triangular mergers. When parent shares are offered as consideration in (forward and reverse) triangular mergers, the ordinary quorum of 66²⁄³ % should apply. To consequently follow this substan-tive approach we consider the parent company a

246 Mirjam Rhein, Die Nichtigkeit von VR-Beschlüssen, Zürich 2001, 241.

247 Böckli (FN 59), § 13, note 638 ff. who distinguishes different in-tensities of conflict of interests and who draws different legal conse-quences depending on such intensity.

248 Decision of the Federal Supreme Court 4A_462/2009; BGE 130 III 219.

Documents

Gerhard Jacquemoud Aufsatzjslegal.ch/wp-content/uploads/2013/09/GesKR-Merger-vs.-Exchange-Offer.pdf · Frank Gerhard / Philippe Jacquemoud – Merger vs. Exchange Offer GesKR 2 2012