Switzerland. Dieter Gericke, Reto Heuberger and Jürg Frick Homburger AG. Country Q&A. Private Equity Handbook Country Q&A

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1 Switzerland Dieter Gericke, Reto Heuberger and Jürg Frick Homburger AG MARKET TRENDS AND ACTIVITY 1. Please describe briefly the private equity market in your jurisdiction, in particular: The sources from which funds established to invest in private equity transactions (private equity funds) obtain their funding, such as institutional investors (for example, pension funds, insurance companies and banks), companies, individuals and government agencies. Market trends (for example, the role of hedge funds in private equity). Any proposed or pending regulatory changes. Sources of funding According to the European Private Equity and Venture Capital Association (EVCA), in 2009 private equity fundraising in Switzerland contracted significantly, following the broader trend of the European market. In 2008, Swiss private equity firms raised about EUR3.3 billion (as at 1 November 2010, US$1 was about EUR0.7), whereas in 2009 funds raised an aggregate amount of EUR807 million. The main sources were: Pension funds: 29.7% (2008: 7.5%). Funds of funds: 14.3% (2008: 1.2%). Endowments and foundations: 14.3% (2008: 0.1%). Corporate investors: 12.2% (2008: 11.5%). Private individuals: 7.0% (2008: 17.7%). Insurance companies: 5.6% (2008: 4.2%). Most Swiss funds were raised from within Europe, and the Swiss domestic investors share in Swiss funds fell from 46% in 2008 to about 20% in Despite the unfavourable market environment in 2009, five Swiss funds reached final closings raising a total of EUR652 million. All five funds were venture capital funds and two were early-stage funds. Two of the funds focus on life sciences, and one fund focuses on information and communication technology. The other two funds are generalist funds. Market trends In 2009, venture capital s share of the total private equity amount invested in Switzerland more than doubled, reaching 39%. This was due not only to an increase in venture investments, but also to a significant decrease in buyout and later-stage growth investments. In terms of the number of companies financed, distribution remained stable, with venture companies accounting for 74%, buyout taking 15% and later-stage growth companies accounting for 10%. Regulatory changes Swiss Federal Collective Investment Schemes Act (CISA). The enactment of CISA on 1 January 2007 was a groundbreaking regulatory development. CISA: Enlarged the competences of the Swiss Financial Supervisory Authority (FINMA) (at that time the Federal Banking Commission (FBC)). Introduced new company forms into Swiss law, in particular, the Swiss limited liability partnership for collective investments in risk capital (Kommanditgesellschaft für kollektive Kapitalanlagen) (SLLP). The SLLP was envisaged to become the Swiss equivalent of the limited partnership. The SLLP was well received by the Swiss venture capital and private equity market. However, after almost four years of CISA being in force, the success of the SLLP is moderate. FINMA has approved fewer than a dozen SLLPs, and only a small number of SLLPs are in the process of seeking FINMA approval. Of the FINMA-approved SLLPs: three are real estate funds; one SLLP has the purpose of investing in over-thecounter securities; one was set up by the Swiss National Bank to take over the illiquid assets of UBS AG. The moderate success of the SLLP as legal form for venture capital and private equity funds can be explained by: the lack of transparency of FINMA s approval practice; uncertainties with regard to the taxation of the carried interest of the general partner of the fund manager. EU Directive on Alternative Investment Fund Managers (AIFM Directive). The European market is key for Swiss venture capital or private equity funds, and for funds which are managed outside of Switzerland. Therefore, FINMA, the Swiss Private Equity and Corporate Finance Association (SECA), the Swiss Funds Association (SFA) and other interested parties closely follow regulatory developments in the European Union (EU). Closest attention was paid to the legislative process regarding the AIFM Directive, which was voted through by the European Parliament in November 2010 and is expected to come into force in early It is to be transposed into national law and applied by the EU member states by This article was first published in the PLC Cross-border Private Equity Handbook 2011 and is reproduced with the permission of the publisher, Practical Law Company.

2 One of the primary goals of the AIFM Directive is to subject all AIFMs active in the EU to the same standards of transparency and conduct, wherever they, or the funds they manage, are located. AIFMs incorporated in Switzerland qualify as non-eu managers and will be subject to the third country regime. Under this regime, AIFMs can access EU passports, but only in 2015 after a phased introduction of two years. Before the third country passport is introduced, and for a period of three years after that, national regulatory regimes, in particular national private placement regimes, will remain available for third country AIFMs. During the legislative process, much stricter third country regimes were discussed. The Swiss AIFMs now appear more relaxed about the introduction of the AIFM Directive. However, the AIFM Directive will require certain Swiss laws, including CISA, to be amended. This is because Swiss AIFMs will only be granted an EU passport if, in their home country, they are subject to equivalent supervision as if they were located in an EU member state. In addition, FINMA will have to enter into: Co-operation agreements with various EU member states regulators. Agreements with the EU member states that fully comply with the standards in Article 26 of the OECD Model Tax Convention and ensure the effective exchange of information in tax matters. 2. Please summarise any changes in the level of activity in recent years in relation to: Fundraising by private equity funds and hedge funds. Private equity investment in established, early stage and start-up businesses. Private equity financed transactions (for example, management buyouts (MBOs), management buy-ins (MBIs), leveraged buyouts and public to private transactions). Exits by private equity funds (that is, the realisations of the investments). Swiss venture investment proved resistant to the crisis, up nearly one-third to EUR215 million. This was mainly driven by a surge in start-up investment, which increased by more than 60% to EUR133 million. Buyout investments more than halved to EUR259 million, but the number of businesses bought decreased by less than one-fifth, reflecting a smaller deal size in the buyout segment. In terms of market segments, life sciences accounted for more than half of the private equity capital invested in 2009 and 44% of the businesses. Life sciences attracted more than 80% of the venture capital invested. Transactions In general, there are no changes to the common structures of buyout or venture capital transactions. Exits In 2009, private equity firms based in Switzerland exited 34 companies, with a total amount divested at cost of EUR153 million, only 4% down on 2008 levels. The exit environment showed the following characteristics: The total amount divested at cost fell 70% to EUR118 million, due to an absence of large-scale exits that boosted overall exit value in 2008, and the number of companies exited remained stable at 24. Unlike other European countries, write-offs were very rare: sales to other private equity firms became the main method of exit, accounting for 39% of the value (EUR46 million) and 29% of the number of companies exited; trade sales were the second most used exit route, accounting for 29% of the amount divested at cost (EUR34 million) and 21% of the number of companies exited; the venture segment accounted for 86% of exited value, of which life sciences made up 61%. Fundraising According to the European Private Equity and Venture Capital Association (EVCA) Yearbook 2010, in a difficult fundraising environment, Swiss private equity firms raised EUR807 million in 2009, down 72% on the 2008 level of EUR3.3 billion. However, 2008 was a record year for fundraising, largely due to the raising of a EUR1 billion fund. In addition, the four preceding years of strong fundraising left Swiss private equity firms with a lot of capital to invest. Investment After growth of 44% from 2007 to 2008, the amount invested by private equity firms based in Switzerland fell by 42% in Therefore, 2009 s total investment of EUR710 million remained close to the investment levels in 2006 and In 2009, investment was spread among 168 companies, only 17% down on the 202 companies that were private equity financed in the previous year. Investments in Swiss companies in 2009 showed the following characteristics: TAX AND STRUCTURING 3. What tax incentive schemes exist to encourage investment in unlisted companies? At whom are the schemes directed? What conditions must be met? Swiss-resident corporate shareholders In general, capital gains from the sale of equity investments of at least 10% are tax free for Swiss-resident corporate shareholders (participation exemption). The participation exemption also applies to dividend income from equity investments of at least 10%, or worth at least CHF1 million (as at 1 November 2010, the US$ was at approximate parity with the CHF), which have been held for at least one year. Switzerland has not adopted any controlled foreign company (CFC) rules. Swiss-resident individual shareholders Capital gains from the sale of equity investments are generally tax free for Swiss-resident individual shareholders. Capital gains in

3 the hands of a private individual are in certain cases partly classified as taxable investment income if the target distributes funds to the purchaser within five years after the purchase (indirect partial liquidation (indirekte Teilliquidation)). The seller is advised to include a tax indemnity in the share purchase agreement. The purchaser is advised to obtain a tax ruling from the competent cantonal tax administration, to ensure that any planned distribution or reorganisation involving the target after the purchase will not trigger adverse tax consequences. Private individuals also benefit from the capital gains tax exemption when investing through a fiscally transparent fund (that is, tax is levied on the individual investors rather than the fund itself). 4. What legal structure(s) (domestic or foreign) are most commonly used as a vehicle for private equity funds in your jurisdiction? SLLP CISA introduced the SLLP (see Question 1). This legal structure: To a large extent replicates the features of the common law limited liability partnership. Is designed as a closed-ended partnership to invest in risk capital. An SLLP consists of a general partner and a number of limited partners: Investment company with fixed capital (société d investissement à capital fixe) (SICAF). The SICAF is subject to the same capital protection principles as apply to corporations, and the share capital can only be increased or decreased based on shareholder resolutions. SICAV and SICAF are based on the legal concept of the corporation. In terms of formation, structure and governance, the same provisions apply as for corporations. Both the SICAV and the SICAF are subject to FINMA approval, although there is an exemption in relation to SICAFs listed on a stock exchange. Contractual funds are rarely used as legal structures for private equity funds, because of their open-ended structure. Foreign limited liability partnership The most common foreign legal structure used by private equity funds is the limited partnership governed by US or UK law, in particular Guernsey and Jersey law. These foreign limited liability partnerships are not subject to FINMA approval and supervision, provided investments in these funds are not publicly marketed or advertised in, or from, Switzerland. 5. For each structure identified in Question 4, identify whether it is taxed, tax exempt or fiscally transparent (that is, tax is levied on the individual investors rather than the fund itself): So far as domestic investors are concerned. So far as foreign investors are concerned. General partner. The general partner must be a stock corporation incorporated in Switzerland. This stock corporation can only be general partner in one SLLP at a time, although it can delegate investment decisions or other activities to third parties. The shareholders in a general partner can at the same time be shareholders in, and control, other stock corporations acting as general partner in other SLLPs. Limited partners. The limited partners in SLLPs must be qualified investors under CISA, for example, institutional investors, enterprises with their own treasury operations or high net-worth individuals (that is, individuals with investment assets worth more than CHF2 million). In principle, SLLPs can be set up for an unlimited period of time. However, in practice, an SLLP s lifespan is usually contractually restricted to ten to 12 years, with an extension option for another three years. SLLPs are subject to FINMA approval and supervision (see Question 8). SICAV, SICAF and contractual funds In addition to the SLLP, CISA introduced the: Investment company with variable capital (société d investissement à capital variable) (SICAV). The SICAV can be used as an open-ended investment vehicle. Its shares have no nominal value. The number of shares outstanding is flexible because the SICAV can, at any time, issue (or the shareholders can, at any time, redeem) shares at net asset value. SLLP, SICAV and contractual fund Income. The SLLP, the SICAV and the contractual fund are fiscally transparent and not subject to corporate income tax. Income from directly held real estate is subject to income tax at reduced rates, and tax free at investor level. Distributions. Distributions made by a SLLP, SICAV or contractual fund are only subject to the 35% withholding tax to the extent that the underlying income is not derived from capital gains or income from real estate. Withholding tax obligations can be met with the notification procedure for foreign resident investors if at least 80% of the underlying income is derived from foreign sources (affidavit procedure). SICAF Income. The SICAF is fiscally non-transparent and subject to the regular corporate income tax regime. Federal, cantonal and municipal income tax apply at the standard rates of 12% to 24%, depending on the place of residence. The participation exemption applies on: Dividends from equity investments of at least 10%, or worth at least CHF1 million. Capital gains from the sale of equity investments of at least 10% which have been held for at least one year. Dividends. Dividends paid by a SICAF are subject to a 35% dividend withholding tax. This may be fully or partly reduced, or refunded, under an applicable double taxation treaty. However, SICAFs are very rarely used.

4 6. What (if any) structures commonly used for private equity funds in other jurisdictions are regarded in your jurisdiction as not being tax transparent (in so far as they invest in companies in your jurisdiction)? What parallel domestic structures are typically used in these circumstances? A foreign fund is generally classified for Swiss tax purposes as a transparent investment vehicle if it meets one of the following criteria: It is authorised for distribution in Switzerland by the FINMA. It is regulated as a fund in its country of registration. Its purpose is collective investment. This third criteria is analysed in each case, looking at whether: the investment vehicle has a limited term; there is an offering memorandum; the investors have decision-making powers; the reporting is done in the same way as in regulated funds; the vehicle has the typical bodies of a fund, such as an investment manager, custodian bank and so on. If the foreign fund is a legal entity, it is only fiscally transparent if the investors have the right to redeem their investment at the net asset value yearly. do not exert detrimental influence on the fund. Internal regulations and appropriate organisation of the SLLP ensure fulfilment of the obligations under CISA. Sufficient financial guarantees are granted. Any additional CISA approval requirements are satisfied. FINMA will permit an SLLP as a collective investment scheme if the partnership agreement and the fund s prospectus contain certain minimum information. SECA and SFA (see Question 1) prepared a template prospectus for SLLP, including a template partnership agreement, which FINMA has reviewed and acknowledged. Non-Swiss funds Fund management companies managing non-swiss venture capital or private equity funds can become subject to Swiss regulation if their main place of management is located in Switzerland. A fund management company s main administrative place is considered to be in Switzerland if the following fund management activities, among others, are carried out in Switzerland: Determination of investment policy. Asset valuation. Determination of issuance or redemption price. Determination of distribution of profits. Reporting. Accounting. LICENSING AND REGULATION 7. Are a private equity fund s promoter, principals and manager required to be licensed? FINMA approval An SLLP s promoter or sponsor is not subject to specific regulation. However, the SLLP itself requires dual FINMA approval: It must obtain approval from FINMA as a legal subject carrying the collective investment scheme (Bewilligung als Träger einer kollektiven Kapitalanlage). The collective investment scheme itself must be permitted by FINMA (Genehmigung als Produkt der kollektiven Kapitalanlage). An SLLP can only be registered with the Commercial Register if it has FINMA approval. The approval requirements primarily relate to the characteristics of the fund manager and the principals, and include requirements that: The persons managing the SLLP or the fund have a good reputation, will properly discharge their duties, and are sufficiently knowledgeable and experienced to run a venture capital or private equity fund. The qualified investors, acting alone or together, holding more than 10% of the capital of, or the voting rights in, the SLLP: have a good reputation; and If these activities are carried out in Switzerland, a non-swiss fund can qualify as a Swiss fund and become subject to Swiss approval requirements. 8. Are private equity funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions? Venture capital or private equity funds organised as SLLPs (see Question 1, Regulatory changes: Swiss Federal Collective Investment Schemes Act (CISA)) are subject to FINMA approval (see Question 7). The main consequence of venture capital or private equity funds being organised as SLLPs is that investments can only be advertised or offered to qualified investors under CISA, which include: Regulated financial intermediaries such as banks, securities dealers and fund management companies. Regulated insurance companies. Public entities and retirement benefit institutions (pension funds) with professional treasury operations. Companies with professional treasury operations. High net-worth individuals. Investors with written discretionary management agreements with regulated financial intermediaries, or a Swiss independent asset manager who is subject to anti-money laundering supervision.

5 9. Are there any restrictions (for example, nationality, age and number) on investors in private equity funds? An SLLP must have at least five limited partners within one year after the SLLP s incorporation (Swiss Federal Collective Investment Schemes Ordinance (CISO)). These limited partners must be qualified investors within the meaning of the CISO (see Question 8). There are no restrictions in relation to investors age or nationality. 10. How is the relationship between the investor and the fund governed? What protections do investors typically seek? The partnership agreement governs the relationship between the limited partners in an SLLP and the SLLP s general partner. Partnership agreements usually govern, among others things: Total capital commitment. Duration of the fund and extension. Conditions for admission of new, and withdrawal of existing, investors. Management participation in the fund. Further restructuring potential. No need for material investments in the near future. Potential for a medium-term exit to realise a potentially taxfree capital gain. INTERESTS IN PORTFOLIO COMPANIES 13. What forms of equity and debt interest are commonly taken by a private equity fund in a portfolio company? What are the relative advantages and disadvantages of each? Are there any restrictions on the issue or transfer of shares by law? Private equity funds usually invest in preferred shares that provide for: Liquidation preferences of at least the invested amount. Preferred subscription rights. Anti-dilution preferences (mostly contractual). A portfolio company s articles of incorporation may restrict the transfer of shares. If a portfolio company s articles of incorporation contain transfer restrictions, approval of the board of directors is required for any transfer. Reporting. Repayment of capital. Distribution of proceeds (for example, hurdle rates and clawback provisions). Management fees. Voting quorums and majorities. Co-investments and committees. 11. Are there any statutory or other limits on maximum or minimum investment periods, amounts or transfers of investments in private equity funds? If private equity investors also invest debt capital, then the debt capital or loans are usually subordinated to bank loans or other senior financings. BUYOUTS 14. Is it common for buyouts of private companies to take place by auction? If so, which legislation and rules apply? Auctions are common in buyout transactions. Specific rules only apply if the target company is listed on the SIX Swiss Exchange and is therefore subject to the Swiss takeover regulations. In relation to SLLPs, under Swiss statutory law, there are no limits on maximum or minimum investment periods, or amounts or transfers of investments. However, in practice, the duration of the fund is usually contractually limited to ten to 12 years, with an extension option for another three years. INVESTMENT OBJECTIVES 12. What are the most common investment objectives of private equity funds? Private equity funds seek to invest in companies with: An experienced, committed and accessible management team. Stable cash flows. The possibility to divest non-operational assets to increase cash flow. 15. Are buyouts of listed companies common (public to private transactions)? If so, which legislation and rules apply? Public to private transactions by private equity sponsors are rare. The legal framework for this kind of transaction is contained in the: Swiss Federal Stock Exchange and Securities Trading Act (SESTA) and its accompanying ordinances. SIX Swiss Exchange regulations. 16. What are the principal documents produced in a buyout? The principal documents produced in a buyout transaction are: A confidentiality and exclusivity agreement. A term sheet. A purchase agreement relating to the shares (share deal) or the assets (asset deal) of the target company.

6 A shareholders agreement among the private equity investor, the management of the company and other shareholders of the portfolio company, if any. 19. What terms of employment are typically imposed on management by the private equity investor in an MBO? New employment agreements with management. The portfolio company s corporate documents (for example, articles of incorporation, organisational regulations or incentive plans). Credit facility agreements with banks providing bank loans. Security agreements to secure banks rights under the credit facility agreement. Shareholder loan agreement and vendor loan agreements, if appropriate. Bonds or notes documentation if the acquisition is financed by bonds or notes, including high yield bonds. 17. What forms of contractual buyer protection are commonly requested by private equity funds from sellers and/or management? Purchase agreements are usually drafted in accordance with international standards and include a comprehensive set of representations and warranties, as well as full indemnities for black-box risks (for example, tax). Since private equity investors (financial buyers) are often less familiar with the target s business than strategic buyers, private equity investors both: Are more dependent on seller s representations. Have a strong preference for earn-outs. However, representations and warranties by the target company are rare, in particular because capital maintenance rules limit their enforceability. 18. What non-contractual duties (for example, of confidentiality and employment) do the portfolio company managers owe and to whom (for example, when approaching possible investors in relation to an MBO)? Under Swiss statutory law, portfolio company managers, in their capacity as employees and executive members of the company, owe a duty of care (Sorgfaltspflicht) and fiduciary duties (Treuepflicht) to the company. These duties include a: Confidentiality and non-compete obligation. Duty to act in the company s best interests. Duty to act in the interests of the shareholders and the other stakeholders of the company, to the extent they do not conflict. In a management buyout, managers remain bound by their duties to the company and must handle conflicts of interest with due care. This includes a duty to inform the board of directors of any serious approach by a potential buyout investor. Negotiations with the buyout investor are led by the board of directors and not by the management. In addition to the usual terms in an employment agreement, in a buyout transaction the following provisions can be included in managers employment agreements: Terms regarding equity participation. Good leaver and bad leaver provisions (for example, a manager leaving a portofolio company without cause is considered a bad leaver and can be made to sell all or part of his shares in the company to the private equity or venture capital investor below market value). Non-compete clauses regarding the period after termination of employment with the company. Clauses regarding the transfer of intellectual property rights and know-how to the company. 20. What measures are commonly used to give a private equity fund a level of management control over the activities of the portfolio company (for example, representation at board level)? Are such protections more likely to be given in the shareholders agreement or company bye-laws? Private equity investors often acquire a controlling stake in the portfolio company. Private equity investors therefore control the target company, which is owned by the portfolio company, by virtue of their voting rights. To exert control, private equity investors delegate and appoint their own board members. The right to appoint board members is typically set out in the shareholders agreement and not in the company s articles of incorporation. In addition, shareholders agreements (and sometimes articles of incorporation) usually include supermajorities, veto rights or voting requirements in favour of private equity investors. DEBT FINANCING 21. What percentage of finance is typically provided by debt and what form does that debt financing usually take (for example, term loans, working capital facilities, convertible loans and bonds)? Corporate law does not provide specific rules on a company s debt-equity ratio. The proportion of debt finance, for example, bank loans, shareholder and vendor loans, as well as bond financings to equity capital, largely depends on economic factors, including: Interest rates. The target company s cash flow. In the wake of the global financial crisis, debt levels have been reduced significantly and are only now starting to recover. One of the board s inalienable and non-transferable duties is financial planning for the company. Therefore, excessive debt burdens which lead to bankruptcy can give rise to directors liability.

7 22. What forms of protection do debt providers typically use to protect their investments, in particular through what types of: Security? Contractual and structural mechanisms (for example, covenants or subordination)? Security Debt providers such as banks typically protect their rights under the finance documents by taking a pledge over the shares both: In the portfolio company. Of any material subsidiary of the portfolio company. In addition, the portfolio company and material subsidiaries often must grant the following security: A pledge over bank accounts. Security assignments of their rights under the acquisition documents, of intra-group receivables, of insurance claims and trade receivables. A pledge over certain intellectual property rights. In addition to this security package, the lenders and certain other guarantors give guarantees to the banks. Contractual and structural mechanisms A structural means to protect the banks rights under the finance documents is the subordination of shareholder loans to intragroup loans or to other payments due to the banks. To avoid or limit the effect of up-stream or cross-stream restrictions in leveraged buyout transactions, debt obligations are usually pushed down, ideally to the target company s level. 24. What is the order of priority on insolvent liquidation? Are certain debt providers given priority over other debt providers? Are debt providers given priority over other stakeholders by law or is priority purely a matter of contract and company constitution? For the final distribution of bankruptcy dividends, creditors are ranked in three classes (Swiss Federal Debt Enforcement and Bankruptcy Act): The first and the second class, which are privileged, comprise claims under: employment contracts; accident insurance; pension plans; family law. All other creditors are treated equally in the third class. A secured party participates in the third class to the extent its claim is not covered by the enforcement proceedings under its collateral. Within a certain class, contractual arrangements regarding subordination can apply. Unless otherwise agreed with a creditor, all creditors rank above equity. 25. Is it possible for a debt holder to achieve equity appreciation through conversion features such as rights, warrants or options? 23. Are there rules preventing a company from giving financial assistance for the purpose of assisting a purchase of shares in the company? If so, how does this affect the ability of a target company in a buyout to give security to lenders? Are there exemptions and, if so, which are most commonly used in the context of private equity transactions? To provide debt holders with an equity kicker (that is, the possibility to profit from an increase of the company s value), subordinated loans or other subordinated debt capital can be accompanied with conversion or option rights. To cover the conversion or option rights, the company usually must create conditional share capital in its articles of incorporation. As a consequence of the Swiss capital maintenance rules, Swiss corporations can only grant up-stream or cross-stream security or loans (that is, security to secure the obligations of, or loans granted to, any of the company s direct or indirect parent or sister companies), to the extent the: Security or loans are in the corporation s interest. Security or loans are within the Swiss corporation s corporate purpose. Swiss corporation has freely disposable reserves (that is, the total equity capital, minus aggregate share capital and statutory reserves, must meet or exceed the amount or value of the assistance). The amount of freely disposable equity is determined at the time of the enforcement of the security, based on an interim balance sheet. In addition, the grant of up-stream or cross-stream security or loans, and the enforcement of these security or loans, require the approval of the shareholders of the company granting the financial assistance. The benefit of subordinated debt combined with an equity kicker is that both: Bank loans and other financings needed for leverage are not impaired in their priority rights. In turn, subordinated debt holders can participate in the upside potential of the portfolio company by executing the conversion or option rights. PORTFOLIO COMPANY MANAGEMENT 26. What management incentives are most commonly used (for example, shares, options and ratchets) to encourage portfolio company management to produce healthy income returns and facilitate a successful exit from a private equity transaction? The most commonly used incentive is a participation in the portfolio company s equity capital in the form of share options or

8 restricted shares. In addition, performance-related cash bonuses are a basic element of management compensation. 27. Are any tax reliefs or incentives available to portfolio company managers investing in their company? No specific tax reliefs or incentives are available to portfolio company managers investing in their company. In principle, they can invest in the fund and realise tax-free capital gains when the fiscally transparent fund realises these gains. However, the tax authorities generally accept these private investments only to the extent that the managers do not receive a higher return on their nominal investment than the investors do on theirs. Managers are advised to appropriately structure their investments and fee streams, considering international transfer pricing rules, to obtain a beneficial overall tax result. EXIT 28. What forms of exit are typically used to realise a private equity fund s investment in a successful company (for example, trade sale, initial public offering (IPO) and secondary buyout)? What are the relative advantages and disadvantages of each? Venture capital and private equity funds usually exit their investment in successful portfolio companies through an initial public offering (IPO) or a trade sale. Secondary buyouts occur occasionally. The advantages of an IPO are, among other things: Selling shareholders can wait for a higher price. The company and the fund increase their visibility and credibility in the market. Employees can be incentivised to the company with marketable but not yet vested shares or options. With listed shares, the company receives a second currency for acquisitions. Further financings can be obtained in the capital market. The disadvantages of an IPO include: Lock-up provisions bind the core shareholders for periods of between six to 18 months. High transaction costs. Public attention. PRIVATE EQUITY/VENTURE CAPITAL ASSOCIATION Swiss Private Equity and Corporate Finance Association (SECA) Head. Bernd Pfister (Chairman) and Maurice Pedergnana (General Secretary) Address. Grafenauweg Zug Switzerland T F E info@seca.ch W Status. SECA is a non-governmental organisation. Membership. SECA has more than 300 members who are equity investment companies, banks, corporate finance advisors, auditing companies, lawyers, management consultants and private investors. Principal activities. SECA is the representative body for Switzerland s venture capital, private equity and corporate finance industries. SECA: Promotes venture capital, private equity and corporate finance activities. Promotes the exchange of ideas and co-operation among SECA members. Contributes professional education and development for SECA members and their clients. Represents SECA members views and interests in discussions with the government authorities and other bodies. Establishes and maintains ethical and professional standards. Published guidelines. SECA publishes the: The code of conduct for private equity professionals. The code of conduct for corporate finance professionals. The code of conduct for private equity investments. Standard venture capital investment and shareholders agreement. The listing process uses a lot of resources from both the company and the fund. The company becomes a public company subject to various compliance rules and ongoing disclosure obligations. Due to the financial crisis, many planned IPOs were postponed and are now being reconsidered. In the recent past, trade sales were a more common exit route. The advantage of trade sales are: Lower transaction costs. Information sources. See website above. The selling shareholders receive the sale price immediately (save any amount to be deposited in escrow or earn-outs). The sale can be carried out confidentially. A sale to a strategic buyer can increase the company s options to develop its business. The disadvantage of a trade sale can be the loss of the company s autonomy and the lack of a possibility to participate in future success.

9 29. What forms of exit are typically used to end the private equity fund s investment in an unsuccessful company? What are the relative advantages and disadvantages of each? The most common exit routes for investments in unsuccessful companies are: Secondary buyout sales to distressed funds and investors. Write-offs. Liquidations. The most popular exit route appears to be write-offs, possibly followed by secondary buyouts. This is because they allow immediate write-downs without incurring further transaction costs and, more importantly, negative public attention. Redemptions within the narrow boundaries of Swiss law. CONTRIBUTOR DETAILS DIETER GERICKE Homburger AG T F E dieter.gericke@homburger.ch W RETO HEUBERGER Homburger AG T F E reto.heuberger@homburger.ch W Qualified. Switzerland, 1994 Areas of practice. International and domestic mergers and acquisitions; public takeovers; corporate law and governance; capital markets; private equity and finance; recognised issuers representative at the SIX Swiss Exchange. Recent transactions Sale of Preglem to Gedeon Richter (2010). Sale of Beldona to Triumph (2010). Financing in relation to Delenex Therapeutics (2010). Financing in relation to Kuros Biosurgery (2010). Sale of Alcon to Nestlé (2010). Acquisition of Nitec Pharmaceuticals (2010). Public takeover of BioXell by Cosmo Pharmaceuticals (2010). Sale of EsbaTech to Alcon (2009). Qualified. Switzerland, 1996 Areas of practice. Domestic and international tax law. Recent transactions Tax structuring of several relocations of listed and non-listed groups, headquarters, principal companies, funds and fund managers to Switzerland in 2010 and beforehand. Tax structuring of Swiss-managed venture capital and private equity funds, and their investments in and outside Switzerland. Tax structuring of M&A transactions including the sale of EsbaTech to Alcon (2009). JÜRG FRICK Homburger AG T F E juerg.frick@homburger.ch W Qualified. Switzerland, 2000 Areas of practice. Financial markets and banking law; financial services and collective investment regulations; international bond offerings; syndicated debt financing; venture capital and buyout financings. Recent transactions Financing of CVC Capital Partners CHF3.3 billion acquisition of Sunrise Communications AG from TDC (2010). Financing in relation to Kuros Biosurgery (2010).

10 Homburger AG Weinbergstrasse 56 I 58 CH-8006 Zurich P.O. Box 194 I CH-8042 Zurich Phone Fax lawyers@homburger.ch The leading edge in business law Homburger is a major Swiss business law firm. Since its establishment in 1957, Homburger has advised and represented Swiss and international corporate clients and individual entrepreneurs on key aspects of business law. We offer our clients expert legal advice, support them in business negotiations, represent them in court, and protect their interests in civil and administrative proceedings. Homburger is organized into six practice teams and five working groups, integrating the skills and experience of more than 100 lawyers and tax experts focusing on specific areas. Our practice teams are Corporate M&A, Financial Services, Litigation Arbitration, Tax, IP IT, and Competition. The working groups cover the areas Employment, Insolvency Restructuring, Insurance, Private Clients, and White Collar Investigations. The Homburger Corporate M&A practice team offers a comprehensive range of legal services in the areas of - mergers & acquisitions (national and international) - public takeovers - corporate finance including ECM transactions and IPOs - private equity and venture capital transactions - corporate governance - full range of corporate legal services Contacts Daniel Daeniker (daniel.daeniker@homburger.ch) Heinz Schärer (heinz.schaerer@homburger.ch) Ueli Huber (ueli.huber@homburger.ch) Harold Grüninger (harold.grueninger@homburger.ch) Flavio Romerio (flavio.romerio@homburger.ch) Claude Lambert (claude.lambert@homburger.ch) Hansjürg Appenzeller (hansjuerg.appenzeller@homburger.ch) Dieter Gericke (dieter.gericke@homburger.ch) Frank Gerhard (frank.gerhard@homburger.ch) David Oser (david.oser@homburger.ch)