SWITZERLAND Banking & Finance

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1 CHAMBERS SWITZERLAND Banking & Finance Global Practice Guides LAW AND PRACTICE: p.3 Contributed by Lenz & Staehelin Law & Practice Switzerland The Law & Practice sections provide easily accessible information on Contributed by navigating the legal system when conducting business in the jurisdiction. Leading lawyers explain local law and practice at key transactional Lenz & Staehelin stages and for crucial aspects of doing business. DOING BUSINESS IN SWITZERLAND: 2018 p.420 Chambers & Partners employ a large team of full-time researchers (over 140) in their London office who interview thousands of clients each year. The advice in this section is based on the views of clients with indepth international experience.

2 SWITZERLAND LAW AND PRACTICE: p.3 Contributed by Lenz & Staehelin The Law & Practice sections provide easily accessible information on navigating the legal system when conducting business in the jurisdiction. Leading lawyers explain local law and practice at key transactional stages and for crucial aspects of doing business.

3 Law and Practice SWITZERLAND Law and Practice Contributed by Lenz & Staehelin CONTENTS 1. Loan Market Panorama p The impact of recent economic cycles and the regulatory environment p The high-yield market p Alternative credit providers p Evolution of banking and finance techniques p Recent or expected legal, tax, regulatory or other developments p.5 2. Authorisation p Requirements for authorisation to provide financing to a company p.5 3. Structuring and Documentation Considerations p Restrictions on foreign lenders granting loans p Restrictions on foreign lenders granting security p Restrictions and controls on foreign currency exchange p Agent and trust concepts p Loan transfer mechanisms p Debt buy-back p Public acquisition finance p.7 4. Tax p Withholding tax p Other taxes, duties, charges or tax considerations p Usury laws p.8 5. Guarantees and Security p Assets typically available and forms of security p Floating charges or other universal or similar security interests p Downstream, upstream and cross-stream guarantees p Restrictions on target p Other restrictions p Release of typical forms of security p Rules governing the priority of competing security interests p Enforcement p Circumstances in which a secured lender can enforce its collateral p Foreign law and jurisdiction p A judgment given by a foreign court p A foreign lender s ability to enforce its rights p Bankruptcy and Insolvency p Company rescue or reorganisation procedures outside of insolvency p Impact of insolvency processes p The order creditors are paid on insolvency p Risk areas for lenders p Project Finance p Introduction to project finance p Overview of public-private partnership transactions p Government approvals, taxes, fees or other charges p The responsible government body p The main issues when structuring deals p The acquisition and export of natural resources p Environmental, health and safety laws p Islamic Finance p Overview of the development of Islamic finance p Regulatory and tax framework for the provision of Islamic finance p Requirements for Islamic banks and takaful operators to operate p Shari a-compliant products and transactions p.15 3

4 SWITZERLAND Law and Practice Lenz & Staehelin is a leading Swiss law firm with roots going back to The firm offers the full spectrum of business law services with offices in Geneva, Zürich and Lausanne. With over 200 lawyers, including 44 partners it is the largest legal team in Switzerland with attorneys spanning three generations. The team offers the highest professional standards ensuring first class client service. The firm has an extensive global network of prominent correspondent law firms. Lawyers offer advice and support in several languages including English, French, German, Italian, Spanish and Russian. The activities of the Banking and Finance practice group are among Lenz & Staehelin s core strengths. Lawyers advise clients on the full range of banking and finance matters, including asset management, capital markets, commercial banking and structured finance, derivatives, financial services and regulatory and private banking. Authors Shelby R. du Pasquier heads the banking and finance practice at the Geneva office. His practice covers banking and finance, investment funds, corporate and M&A, private clients and investigations. He has published widely in industry publications and is admitted as an expert to the SIX Swiss Exchange for Listing Purposes. He is also a member of the Committee of the Swiss Bar Association (SAV) Self-Regulatory Organization as regards Money Laundering Matters ( ), a Member of the IBA Sub-Committee I1 (Private Funds) ( ) and a Board member of several companies, including the Swiss National Bank and SGS Société Générale de Surveillance SA. Patrick Hünerwadel heads the banking and finance practice at the Zürich office. His practice covers banking and finance, structured finance, aircraft financing, lease finance, asset securitisation, derivatives, regulatory banking and insurance, capital markets, insolvency and restructuring, commercial and contracts. He has published a number of articles in industry publications. He is admitted as an expert to the SIX Swiss Exchange for Listing Purposes, a Lecturer on Corporate Law and Contracts at the University of St. Gallen and Co-Chairman of Banking Law Practice Group of the Zürich Bar. Valérie Menoud is a senior associate specialising in banking and finance, capital markets, collective investment schemes, commercial and contracts, corporate and M&A, investigations. She regularly contributes to industry publications and has been a part-time lecturer in Business Law II, University of Lausanne (HEC) (2017). 1. Loan Market Panorama 1.1 The impact of recent economic cycles and the regulatory environment Generally speaking, the lending market in Switzerland is well-developed and stable with experienced participants (banks, borrowers and advisers). The Swiss lending market has been stable over the past few years, including during the 2008 financial crisis. Although the market is largely in the hands of Swiss banks, non-swiss banks appear to also be more active on the Swiss market nowadays. Tax incentives, as well as the negative interest rates introduced by the Swiss National Bank in 2015, and subsequently by some banks, had the effect to foster investments and to support loan market activities. Lending remains attractive for banks and the availability of credit facilities remains high. The Swiss Financial Market Supervisory Authority (FINMA) is keen to ensure that lending is sustainable and that the solvency of banks is not put at risk as a result of over-lending. To this end, FINMA monitors that banks have sufficient capital to withstand changes in risk drivers. The continuing pressure on profitability may result, according to FINMA, in banks taking on increased risks in lending or in interest rate risk management, for instance by ceasing to hedge interest rate risks. 1.2 The high-yield market For the past ten years, high-yield debt securities have been an increasingly popular means of external debt financing. 4

5 Law and Practice SWITZERLAND Compared to bank loans, high-yield bonds are listed on a regulated exchange and can therefore be traded in the regulated secondary market. This type of product is therefore particularly attractive for investors. Large leveraged acquisition financing transactions in the Swiss market are typically structured with both loans from institutional investors and the issuance of high-yield notes. It should be noted that since interest paid on bonds by a Swiss debtor are subject to Swiss withholding tax, bonds are typically not issued by Swiss-based entities. 1.3 Alternative credit providers Recently, alternative credit providers such as pension funds and insurance companies have been increasingly participating in the lending market, especially in international leveraged finance transactions. As non-bank lenders are active in the market, the tax Swiss non-bank rules is of particular importance when structuring a transaction (see 4.1 Withholding tax). As regards debt securities transactions in Switzerland, those are generally co-ordinated by Swiss banks (or non-swiss banks) with a broader investor base than in the bank loan market. 1.4 Evolution of banking and finance techniques Crowdfunding is a new development in Switzerland to finance projects (see 1.5 Recent or expected legal, tax, regulatory or other developments). Currently, crowdfunding is not subject to any specific regulatory requirements under Swiss law. Likewise, crowdfunding platforms are for the time being not subject to any licensing requirements. Notwithstanding the above, platform operators are to ensure that they do not conduct any banking activity in such a context, which would require a banking licence. This is typically the case if the operators accept deposits from the public (see 1.5 Recent or expected legal, tax, regulatory or other developments). In addition, their activities are generally subject to anti-money laundering regulations. 1.5 Recent or expected legal, tax, regulatory or other developments On 1 August 2017, the Swiss regulatory framework was amended in order to promote the emergence of innovative business models based on financial technology, such as crowdfunding. Under certain conditions, it is now possible to accept public deposits for up to a threshold of CHF1 million without holding a banking licence, even if the funds in question come from more than 20 depositors (ie, one of the criteria to determine whether a banking activity is conducted by a financial intermediary) (so-called sandbox ). In addition, funds received can remain on a settlement account for up to a maximum of 60 days, without qualifying the funds as a public deposit and consequently triggering the banking licence requirement. The previous seven-day statutory limit has therefore been increased. Finally, it is expected that a new type of licence will soon be introduced for companies accepting public deposits while not using such deposits to fund the traditional lending business. In such a case, the aggregate amount of public deposits will be limited to CHF100 million and may neither be invested nor be interest-bearing. The Swiss Parliament is currently discussing two draft instruments: the Swiss Federal Financial Services Act (FinSA) and the Swiss Federal Act on Financial Institutions (FinIA), with a view of overhauling the regulatory framework applicable to the provision of financial services. It is not expected that the two bills will enter into force prior to The drafts are largely based on EU directives (MiFID, Prospectus Directive, PRIPs project). In a nutshell, the draft FinSA provides for uniform rules with regard to the prospectus duty that shall apply to all securities offered publicly into or in Switzerland. It further provides for a key information document that is to be supplied for all financial instruments, including bonds, offered to retail clients. 2. Authorisation 2.1 Requirements for authorisation to provide financing to a company Lending activities are generally unregulated in Switzerland, provided the lender does not accept deposits from the public or refinances itself via a number of other banks. A Swissbased entity that combines lending activities with deposit taking from the public or refinancing from a number of other banks will generally qualify as a bank, something which would trigger the obligation to obtain a banking licence from FINMA. In addition, the Swiss regime for the cross-border provision of financial services, including lending services, to Swissbased individuals or companies has been rather liberal to date: foreign regulated entities operating on a strict crossborder basis (without having a business presence in Switzerland) do not need to be authorised by FINMA. If, however, these activities involve a physical presence (such as manpower or physical infrastructures) in Switzerland on a permanent basis, the cross-border exemption will generally not be available. In practice, FINMA considers a foreign entity to have a Swiss presence as soon as employees are hired in Switzerland. That said, FINMA may also look at further criteria to determine whether a foreign bank has a Swiss presence, such as the business volume of that bank in Switzerland or the use of teams specifically targeting the Swiss market. This liberal stance will, however, likely change with the introduction of the FinSA and the FinIA (see 1.5 Recent or 5

6 SWITZERLAND Law and Practice expected legal, tax, regulatory or other developments). These two draft bills respond to the third country rules of the EU Financial Services Directive (MiFID 2) and will, inter alia, introduce an obligation, for foreign financial service providers that would be subject to an authorisation in Switzerland to register in Switzerland, as a prerequisite to providing financial services to Swiss-based investors. However, there will be no authorisation or registration obligation for client advisers of prudentially supervised foreign financial service providers. The granting of credits to individuals for purposes other than business or commercial activities (consumer credit) is regulated by the Swiss Consumer Credit Act (SCCA). Lenders contemplating consumer credit activities falling under the SCCA have to register with the canton in which they are established. Exemptions from this registration requirement are, however, available for Swiss banks licensed by FINMA and for lending services that are ancillary to the commercial activity of a lender (ie for the purpose of financing the acquisition of goods or services provided by the lender himself). 3. Structuring and Documentation Considerations 3.1 Restrictions on foreign lenders granting loans With the exception of consumer credit activities, foreign lenders are not restricted from granting loans to Swiss-based investors under Swiss law (see 2.1 Requirements for authorisation to provide financing to a company). Certain restrictions might, however, apply where security is taken over real estate assets (see 3.2 Restrictions on foreign lenders granting security). 3.2 Restrictions on foreign lenders granting security There are no generally applicable Swiss law provisions restricting or prohibiting the granting of security or guarantees to foreign lenders in Switzerland, such as restrictions on the basis of national interest. That being said, depending on the nature of the collateral, the type of security interest and the industry sector, specific restrictions may impact the enforcement of the security interest by a foreign secured creditor. This is the case, for instance, if financing is secured by real property located in Switzerland. The acquisition of real estate in Switzerland by foreign investors or foreign-controlled companies is subject to substantial restrictions under the Swiss Federal Law on the Acquisition of Real Estate by Persons Abroad (the so-called Lex Koller). Residential properties, in particular, can only be acquired by foreign investors or foreign-controlled companies if a licence is issued and such licences are granted on limited grounds. This generally covers both direct investments in residential real estate and acquisitions of shares in a residential real estate company. In addition, the concept of acquisition under the Lex Koller is defined so as to include, as a rule, financings granted by foreign lenders and banks that are secured by residential real estate in Switzerland, such as mortgage financings. The acquisition of commercial properties, by contrast, is subject to fewer restrictions which mainly concern premises that are empty, contain residential parts, or that are acquired in anticipation of expansion plans without concrete plans to build at the time of acquisition. In addition, in certain regulated industries, such as the financial sector (in particular banking), telecommunications, nuclear energy, radio/tv and aviation, shareholders and controlling interests in companies active in the sector may be subject to review and approval by the competent Swiss licensing authority with a view to ensuring proper business conduct and, as the case may be, reciprocity rights for Swiss investments abroad. As a rule, such restrictions generally also extend to the granting of security interests over shares in companies that are active in the sector. 3.3 Restrictions and controls on foreign currency exchange There are no restrictions or controls on foreign currency exchanges or on the import and export of capital under Swiss law. Tax, however, might apply in this context. 3.4 Agent and trust concepts Swiss law does not provide for specific rules governing the use of agency or trust structures for lending or security taking purposes. However, such concepts are recognised and commonly used as a practical matter. Administrative, security or collateral agents, for instance, are regularly used for syndicated facilities or agency arrangements governed by Swiss or foreign law. As a rule, it is thus possible under Swiss law that security be granted to, and held by, an agent or trustee and for security documents to be drafted in such a way that it is not necessary to amend them upon a change of the secured parties. However, depending on the nature of the security interest at issue, the role and powers of the agent or trustee may impact the enforceability of the security interest: Where the security interest is a security assignment or a security transfer, the security agent or trustee can enter into the security agreement and hold the security in its own name for the benefit of the secured parties. By contrast, where the security interest is a right of pledge, it is necessary that the agent or trustee act as a direct representative of the secured parties (ie, in the name and on behalf of the secured parties). This is because a Swiss law 6

7 Law and Practice SWITZERLAND pledge is accessory in nature to the claims it secures. This requires, among others, the secured party to be identical to the creditor of the secured claims. Having the security agent or trustee act as a direct representative is the standard approach in Switzerland to address this, as other alternatives or structures (such as a parallel debt) remain untested. As regards trusts in particular, it should be noted that a substantive trust law does not exist in Switzerland. It is therefore not possible to set up a trust under Swiss law. That said, foreign trusts as defined under the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1985 (which Switzerland ratified in 2007), may be recognised in Switzerland. This recognition is governed by the Swiss Private International Law Act (PILA), which allows a settlor to choose the law governing the trust and elect a forum. If a Swiss court is chosen it may not decline jurisdiction as long as either: i) the trust or a trustee has its legal domicile, residence or place of business in the canton where the court is located; or ii) a large part of the trust s assets are located in Switzerland. Finally, a decision of a foreign court on a trust law matter is recognised in Switzerland at the following alternative conditions: It was issued: (a) By a validly designated court; (b) In the jurisdiction in which the defendant has its domicile, residence or place of business; (c) In the jurisdiction where the trust has its registered office; or (d) In the jurisdiction whose law governs the trust; or If the decision is recognised in the jurisdiction in which the trust has its registered office and the defendant was not domiciled in Switzerland. 3.5 Loan transfer mechanisms In practice, loan transfers are generally achieved by way of an assignment of a lender s rights under a credit facility. Swiss law does not provide for general restrictions on such mechanisms. However, parties to a facility agreement often restrict such transfers contractually by subjecting them to a borrower s consent, save in particular circumstances such as a continuing event of default or a transfer to an existing lender or to an affiliate. Under Swiss law, a debtor needs not to be notified of the assignment of rights for it to be valid. However, a non-notified debtor may still validly discharge its obligations into the hands of the assignor. A loan can also be transferred by way of novation pursuant to Swiss law. In such a case, the lender, with the agreement of the borrower, will transfer by novation all its rights and obligations relating to the loan agreement to a new lender. Security interests of an accessory nature, such as a right of pledge, will, as a rule, follow the claims they secure when transferred. Security interests of an independent nature (such as security assignments, security transfers or certain types of personal guarantees) will in principle not automatically follow the claims they secure and must be transferred expressly with the consent of the security provider. As a result, it is generally recommended to expressly assign, respectively novate, the security package to the benefit of the new lender in case of a loan transfer. Finally, assignments and transfers are subject to continued compliance with Swiss non-bank rules (see 4.1 Withholding tax). 3.6 Debt buy-back There is no specific regulation addressing debt buy-back under Swiss law (provided the debt instrument does not provide for an equity option or a conversion feature). In practice, when finance documents address the question of debt buy-backs, such transactions are generally contractually prohibited or restricted. In some cases, the parties may also provide that the participation of a borrower or financial sponsor will be disregarded when it comes to voting matters. 3.7 Public acquisition finance Swiss law provides for certain funds rules and requirements that must be complied with in the context of public takeovers. These are generally in line with international standards. In a nutshell, financial details of the transaction will have to be included in the offering prospectus and an auditor will have to confirm that the bidder has the necessary funds available (or has taken measures to ensure their availability). With regards to private M&A transactions, Swiss law does not provide for certain funds requirements. This issue is therefore generally subject to negotiation by the parties and contractual clauses on funding certainty are varied in practice. In domestic acquisitions (where the parties are nonfinancial entities), the threshold of certain funds is generally low and accompanied by a highly confident letter or with a term sheet of a bank. In certain instances where the transaction is small, a seller may even accept that the acquisition be subject to financing. By contrast, in larger transactions where the financing is generally secured by an underwriting firm, certain funds requirements are typical and the threshold is a high one, on occasion higher than it would be for a public takeover. 7

8 SWITZERLAND Law and Practice 4. Tax 4.1 Withholding tax Generally, under Swiss domestic tax law, interests paid by a Swiss borrower under a loan are not subject to withholding tax. By contrast, interests on bonds are subject to Swiss withholding tax (currently at a rate of 35%). In order to avoid a requalification of a bilateral or syndicated loan facility into a bond issuance (ie, a financing from the public) and the levy of Swiss withholding tax on payments by a Swiss obligor under the financing, the so-called Swiss non-bank rules will have to be complied with. Accordingly, a facility raises withholding tax issues and risks being requalified as a bond issuance if: More than ten non-bank lenders participate (or sub-participate) in the facility agreement (the ten non-bank rule); A Swiss obligor has, on an aggregate level (ie, all lenders not only on a transaction-specific level), more than 20 nonbank creditors (the 20 non-bank rule); and A Swiss obligor has, on an aggregate level (ie, not only on a transaction-specific level), more than 100 non-bank creditors under financings qualifying as deposits within the meaning of the guidelines issued by the tax administration (the 100 non-bank rule). Under these rules, a bank is generally defined as a financial institution licensed as a bank in Switzerland or abroad, carrying out typical banking activities with infrastructure and personnel of its own. A breach of the Swiss non-bank rules will result in the application of Swiss withholding tax, which will have to be withheld by the Swiss obligor. As the case may be, this tax might be (partly or fully) recovered by a lender depending on the double taxation treaty applicable. Finally, one should note that Swiss tax law generally prohibits a Swiss obligor from indemnifying a lender for Swiss withholding tax, so that standard gross-up clauses will not typically be valid and enforceable in Switzerland. 4.2 Other taxes, duties, charges or tax considerations Aside from the Swiss non-bank rules discussed above in relation to payments by Swiss obligors under a facility (see 4.1 Withholding tax), tax issues may arise depending on the security package. First, Swiss withholding tax generally applies to interest payments to a non-swiss creditor under a loan secured by Swiss real estate. The rate of the withholding tax varies between 13% and 35% depending on where the real estate is located. Such a tax may nevertheless be fully recoverable by a lender depending on the double tax treaty that could be relied upon. Second, under certain circumstances when a Swiss parent company acts as a security provider under a facility and if the proceeds of the loan directly or indirectly flow back to Switzerland, the financing may be requalified as a bond issuance by the Swiss parent, something which could trigger the levy of Swiss withholding tax in the event the Swiss nonbank rules are not complied with (see 4.1 Withholding tax). Finally, the granting of a security by a Swiss direct or indirect subsidiary to a parent (so-called upstream security) or to another affiliate (so-called cross-stream security) may trigger Swiss withholding tax on dividends, if the security is not granted at arm s length and limited to freely distributable reserves (see 5.3 Downstream, upstream and crossstream guarantees). 4.3 Usury laws Except in the area of consumer credit, there is no specific limit on the maximum amount of interest that may be charged on a loan. However, high interest rates might be considered excessive and be subject to general Swiss law principles on usury. In this context, the maximal allowable rate of interest depends on several factors and on the circumstances of the case. There is no clear test or threshold but practitioners and scholars usually agree on a limit in the range of 15-18% per year, in line with the maximal interest rates applicable to consumer credits. Swiss law also prohibits compound interests so that default interests due cannot themselves bear default interests. 5. Guarantees and Security 5.1 Assets typically available and forms of security The type of security right over collateral, as well as the applicable formalities and perfection requirements will generally depend upon the asset used as collateral. Typically, in corporate lending transactions, a security package will consist of a combination of a pledge over shares, a security assignment of certain receivables, a security assignment of rights and receivables, a pledge over bank accounts and guarantees issued by certain group entities. As a matter of Swiss law, the creation of a security right will always require parties to enter into a security agreement clearly identifying the collateral (see also 5.2 Floating charges or other universal or similar security interests) and determining the secured claims in a sufficient manner. As the case may be, formal requirements might apply for the agreement to be valid, such as for mortgage agreements, which must take the form of a notarised deed. Perfection requirements, however, will vary according to the type of security and collateral: 8

9 Law and Practice SWITZERLAND A right of pledge is typically granted on shares, debt securities or units of collective investment schemes. The creation of the right of pledge requires parties to enter into a security agreement. Perfection requirements vary depending on the type of financial instrument. Certificated financial instruments must be physically transferred to the secured creditors or an escrow agent. If the certificates are registered, they must in addition be duly endorsed, typically in a bank. A specific regime applies to intermediated securities which can be pledged either by a transfer of the intermediated securities to the account of the secured party or by virtue of an irrevocable written agreement between an account holder and the depositary institution (control agreement) providing that the institution complies with any instructions from the secured party. With regards to movable property, the most common form of security interests is the right of pledge. The perfection of a pledge requires, in addition to a valid security agreement, that the security provider transfers possession of the pledged asset to the secured party or to a third party in escrow. This however does not apply to aircrafts, ships and railroads for which a public register exists and in which the pledge will have to be entered into. Similarly, a pledge over registered intellectual property rights, such as patents, designs or trade marks will also require a registration in the relevant intellectual property register. A registration fee is usually applicable in this context. Claims and receivables, such as debts or rights under contracts may also be pledged and, as a result, so can bank accounts. That said, the Swiss bank at which the account is held will usually have a first-ranking security interest over its client s account by virtue of its general terms and conditions. In such a case, in order to perfect a second-ranking security interest, it is required that the bank is given notice. Rights and receivables are also typically subject to assignments or transfers for security purposes. These arrangements allow for the transfer of the full ownership of collateral assets. The use of the title is, however, contractually limited to the liquidation of the assets in case of a default and the retention of the proceeds up to the amount of the secured claim. The advantage of this form of security interest resides in the fact that, in case of bankruptcy of a security provider, the collateral will not fall in the bankrupt estate of the security provider (see 7.2 Impact of insolvency processes). The assignment for security purposes requires a written agreement between an assignor and an assignee. When real estate is used as collateral, the security will take the form of a mortgage certificate or a mortgage. No other types of charge on real property is permitted under Swiss law. Mortgage certificates are usually preferred in practice as they constitute negotiable instruments, which can later be pledged or transferred for security purposes. A mortgage certificate can take the form of a register mortgage certificate (paperless) or a mortgage certificate on paper. Both types of mortgages are created and perfected by an agreement of the parties on the creation of the security right (by a notarised public deed) and an entry in the land register. Notary and registration fees vary depending on the cantons where the real estate is located and will often be calculated as a percentage of the secured amount. Generally speaking, the notification of a debtor is not required to create and perfect a secured interest. However, it is nonetheless advisable as a debtor who is not informed of the security will generally be able to validly discharge its obligations in the hands of a security provider. 5.2 Floating charges or other universal or similar security interests Floating charges or other universal or similar security interests over all present and future assets of a company or blanket liens are not available under Swiss law. Such universal security interests are not in line with the Swiss law requirement that collateral be specifically identified. In addition, the requirement that a security provider must transfer possession of collateral assets would render any floating charge over inventory, machinery or equipment excessively burdensome and impracticable. 5.3 Downstream, upstream and cross-stream guarantees Under Swiss law, upstream guarantees (ie, guarantees securing obligations of a direct or indirect parent company) or cross-stream guarantees (ie, guarantees securing obligations of an affiliate, such as a sister company) are subject to certain limitations and formal requirements. In a nutshell, upstream and cross-stream guarantees are treated like dividend distributions as far as formal requirements and substantive limitations are concerned. In particular, upstream or crossstream guarantees should be limited to the amount of freely distributable equity, which corresponds to the amount that could be distributed as a dividend at the time payment is demanded under the guarantee. Otherwise, amounts paid in excess of this amount could be deemed to represent unlawful returns of capital. From a formal perspective, the granting of an upstream or cross-stream guarantee should be approved by both a board of directors and the general meeting of shareholders of the Swiss guarantor. In addition, payments under upstream or cross-stream guarantees may be subject to tax including Swiss withholding tax. By contrast, downstream guarantees (for obligations of subsidiaries of the guarantor) are generally not subject to restrictions except in particular circumstances, for example if the secured subsidiary is in substantial financial hardship or if it is not a wholly owned subsidiary of the grantor. 9

10 SWITZERLAND Law and Practice 5.4 Restrictions on target When a Swiss target grants guarantees or other security interests for obligations of an acquirer, such security interest would be upstream in nature and therefore subject to the limitations discussed in 5.3 Downstream, upstream and cross-stream guarantees. Several processes can be put in place in order to strengthen the validity of upstream guarantees and to mitigate, as far as possible, their risks. First, the articles of association of the Swiss target should expressly permit upstream financial assistance. Second, the guarantees should be approved not only by the board of directors but also by the shareholders of the Swiss target company. Third, the transactional documents should include language to limit such upstream undertakings to the amount of freely distributable equity and provide for a compensation of the Swiss target by a security or guarantee fee, as well as include certain undertakings of the Swiss target to mitigate upstream limitations. Finally, certain Swiss tax withholding issues should also be addressed in the financing documents. 5.5 Other restrictions The main restrictions in connection with the provision of security interests in the context of financings are those relating to upstream and cross-stream undertakings (see 5.3 Downstream, upstream and cross-stream guarantees). Other restrictions might also apply depending on the context, such as a limit on the interest rate deriving from usury laws (see 4.3 Usury laws), bankruptcy legislation (avoidance actions, see 7.4 Risk areas for lenders) and general restrictions in connection with the principle of good faith and public policy. 5.6 Release of typical forms of security A security is generally released through a release agreement and a release action. The release action in particular depends upon the type of security interest that was created. Essentially, the release action will consist of reversing the actions which were necessary for the perfection of the security interest. When the assets have to be transferred to the secured party (for instance for a pledge over movable assets or share certificates or for a transfer for security purposes), the release action will be their return to the security provider. When claims or receivables are assigned, the release action will be their re-assignment in writing to the assignor. Finally, when perfection occurs by the registration of the security interest in a special public register, the release will consist in striking it from the relevant register. All parties that have been notified of the security interest should also be notified of the release. 5.7 Rules governing the priority of competing security interests With respect to real estate, the priority of competing security interests results from the time of entry of the mortgage or mortgage note into the land register. The same applies to the public register for aircrafts, ships and railroads. The land registers contain all pre-existing securities interests with rank and amount. Security interests on real estate may be established in a second or any lower rank provided that the amount taking precedence is specified in the entry. Unless an agreement providing for advancement in rank is recorded in the land register, when security interests of different ranks are created on real property, any release of higher-ranking security interest will not entitle the beneficiaries of lowerranking security interest to advance in rank. With respect to movable property or certificated shares, the perfection of a security interest requires a transfer of the asset to a secured creditor. As a result, third parties are not able to take subsequent security interest over these assets without the consent of the secured party, with the exception of good faith acquisitions (a third party acting in good faith will acquire a valid security interest over the assets, irrespective of the fact that the pledger had no authority over the assets). With respect to rights and receivables the order of priority is chronological, with the first security interest granted in time being senior to any subsequent security interest. Parties can however agree on a different ranking among themselves. As no public register is available, to be assured that a property is free from security interest, legal due diligence should be conducted. Also, it is recommended to obtain a representation or warranty that the property is free from security interest. As a general rule, priority ranking can be contractually varied and Swiss law recognises agreements setting priorities. Any party having a first-ranking security interest can decide to waive its priority right. Such contractual subordination provisions will generally survive in insolvency proceedings of a Swiss security provider. 6. Enforcement 6.1 Circumstances in which a secured lender can enforce its collateral Security interests can be enforced if a secured party has a secured claim and this claim is past due. The financing documentation will generally determine which default event may lead to an enforcement of the security interest. Under Swiss law, there are two main avenues for enforcing a security interest. First, the enforcement of a right of pledge can follow the rules set out under the Debt Enforcement and Bankruptcy 10

11 Law and Practice SWITZERLAND Act (DEBA) (if the parties have not agreed to private enforcement or the secured party chooses not to enforce the collateral privately). Under the DEBA, the usual form of enforcement is a public auction sale. Assets will, however, be sold without a public auction if: They would lose value during the time required to prepare the auction; The costs for the safekeeping of the assets are unreasonably high; The assets have a market price (ie, they are traded on a stock exchange); or All parties agree to the private sale. Second, where the collateral consists in pledged claims, movables or security papers (including mortgage notes) the parties are free, to a certain extent, to agree on a private foreclosure mechanism. Private enforcement is generally preferred in practice as it can be processed more expediently and with a simpler process than enforcement under the DEBA. By contrast, if a security right consists in a security assignment or transfer, enforcement can only be effected by way of private enforcement, as title to the collateral has passed to a secured creditor precisely with such purpose. Private enforcement can be achieved through a public auction, public offering or a private sale. If a private sale has been agreed upon in security documents it is advisable to expressly arrange in this context for the right of a secured creditor to purchase the collateral himself. The value of the collateral will be determined based on fair market value and any surplus remaining after application of the proceeds to the secured amount would be paid out to a security provider. Private enforcement is only available as long as no official enforcement proceeding under the DEBA has been initiated. 6.2 Foreign law and jurisdiction A choice of a foreign law as the governing law of a contract is generally permitted under Swiss law, save for specific contracts such as contracts with consumers. A choice of law to govern pledge agreements, whilst binding for the parties, will not bind third parties who, as a rule, may rely on the law of the residence of the pledgee. Swiss courts will, however, generally refuse to apply provisions of foreign law if this leads to a result incompatible with Swiss public policy. In addition, a Swiss court may apply provisions of another law than the one chosen by the parties if legitimate and important reasons call for it and if the facts of a case have a close connection with such other law. Similarly, choices of forum are generally binding and enforceable, subject to Swiss conflict-of-laws rules. Stateowned private enterprises are also free to subject themselves to foreign jurisdiction with respect to their private activities. 6.3 A judgment given by a foreign court As a rule, Swiss courts will generally recognise a final and conclusive judgment of a competent foreign court. Recognition of a foreign decision may, however, be denied if such a decision is manifestly incompatible with Swiss public policy; if a party establishes that it did not receive proper notice; if the decision was rendered in violation of fundamental principles of procedural law; or if the principle ne bis in idem has been violated. When proceedings in relation to the same subject matter and between the same parties have been started earlier in another competent court Swiss courts will, as a rule, neither enforce a judgment nor take up the case until a decision capable of being recognised in Switzerland is rendered by the foreign court. As for the arbitral awards, Switzerland is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and will therefore recognise and enforce foreign arbitration awards pursuant to and to the extent of such convention. 6.4 A foreign lender s ability to enforce its rights The purchase of real estate by foreign or foreign-controlled investors might be subject to approval by the Swiss authorities under the Lex Koller. Any acquisition of residential real estate assets in Switzerland by foreign or foreign-controlled investors, in particular, is subject to restrictions and permit requirements (see 3.2 Restrictions on foreign lenders granting security). These restrictions and requirements also apply to the taking of security interest over real estate property and might impact both the creation and the enforcement of the security interest. Naturally, lenders ability to enforce their rights under financing documents may furthermore be limited by the occurrence of a bankruptcy or insolvency event with the Swiss debtor (see section 7 Bankruptcy and Insolvency). 7. Bankruptcy and Insolvency 7.1 Company rescue or reorganisation procedures outside of insolvency The DEBA provides for composition proceedings that can be used to liquidate and realise a debtor s assets in a more flexible manner than in a bankruptcy scenario or that may result in a debt restructuring. In other words, a debtor will either postpone the payment of the debts (debt moratorium) or propose the settlement of the debts according to a specific plan. This rescue proceeding can be initiated either by the Swiss debtor or, under certain circumstances, by its creditors. In practice, a demand for a reorganisation by creditors is not common. In addition, a court may also stay a judgment requesting the opening of bankruptcy proceedings of its own motion if it appears that an agreement can be 11

12 SWITZERLAND Law and Practice reached with creditors. In this case, the bankruptcy court will transfer the file to the composition court. Generally, a provisional moratorium of up to four months will be granted first. If the court finds that there are reasonable prospects for a successful reorganisation or that a composition agreement is likely to be concluded, it will then grant a definitive moratorium for a period of four to six months (which can be extended to a maximum of 24 months) and appoint an administrator. Where a mere restructuring moratorium does not appear sufficient, a debtor may then choose to negotiate a composition agreement with its creditors. Such an agreement may take the form of: i) a debt-rescheduling agreement, where a debtor offers creditors full discharge of their claims according to a timeline; or ii) a dividend agreement where a debtor offers creditors only a partial payment of their claims. The composition agreement must be approved by creditors. It is deemed ratified if approved either: i) by a majority of creditors representing at least two thirds of the total claims; or ii) by one quarter of creditors representing at least three quarters of the claims. During a moratorium, realisation of collateral through enforcement proceedings or private realisation is not permitted. After the moratorium however, creditors are generally entitled to liquidate the collaterals through official enforcement proceedings or, if the security agreement so provides, by private sale. 7.2 Impact of insolvency processes Once bankruptcy has been declared over a Swiss obligor or a composition agreement, or a composition agreement with assignment of the Swiss obligor s assets has been approved, the Swiss obligor becomes insolvent. All its obligations become due and payable and the insolvent loses legal capacity to dispose of its assets. All of its assets will form part of the bankruptcy estate, including pledged assets. Private enforcement of any assets that are part of the bankruptcy estate is no longer possible. The enforcement of creditors rights in this context will be governed by the DEBA. Assets from which the legal title was transferred for security purposes, however, do not fall in the bankruptcy estate but remain with the assignee, respectively the transferee. Such assets may still be privately enforced by the secured party. Any eventual surplus from liquidation must then be returned to the bankruptcy estate to be made available for distribution to other creditors. Subject to avoidance actions (see 7.4 Risk areas for lenders), the initiation of insolvency proceedings should not affect valid acts of disposition made prior to such occurrence. 7.3 The order creditors are paid on insolvency In bankruptcy proceedings, claims of creditors are satisfied pursuant to a statutory order. All costs of the bankruptcy administration are paid directly out of the proceeds first. Then, proceeds from the enforcement of collaterals are used to satisfy the claims that they secure. If several items of collateral secure the same claim the amount realised is applied proportionally to the claim. The remainder of the enforcement proceeds is eventually used to satisfy unsecured creditors. Unsecured creditors, together with secured creditors for the uncovered part of secured claims, are divided into three classes and satisfied out of the proceeds of the entire remainder of a bankrupt estate. The first class consists of, among others, claims of employees, claims of pension funds and some family-law claims. The second class consists, among others, of all social insurance claims and tax claims, as well as privileged deposits if the insolvent is a Swiss bank. The third class includes all other claims. Creditors of the lower ranking class will only receive payments once all claims in the higher ranking classes have been satisfied in full. Claims within a class are treated equally and, as the case may be, satisfied proportionally. 7.4 Risk areas for lenders Under the DEBA, dispositions taken to disadvantage certain creditors prior to the opening of bankruptcy proceedings may be subject to avoidance actions. This includes acts of disposition of assets made against no consideration or against inadequate consideration during the year preceding the declaration of bankruptcy. It also includes acts taken during five years prior to the opening of bankruptcy proceedings with the purpose of disadvantaging creditors or favouring some creditors to the detriment of others. In addition, the following acts may be voidable if carried out within the year preceding the opening of a bankruptcy if a debtor was at the time over-indebted: i) the granting of collateral for previously unsecured debts; ii) the settlement of debts by unusual means of payment; or iii) the repayment of unmatured debts. However, such acts are not voidable if the party that benefited from the act demonstrates that it did not know and should not have known about a debtor s over-indebtedness. 8. Project Finance 8.1 Introduction to project finance In Switzerland, the project finance market is mainly focused on infrastructure projects in the area of transport, energy and leisure. Many projects are primarily financed by public funds, although increasing attention is given to private-public partnership (PPP) (see 8.2 Overview of public-private partnership transactions). 12