SWITZERLAND Law and Practice Contributed by: Christoph Neeracher, Philippe Seiler and Lukas Bründler, Bär & Karrer Ltd
have maximum flexibility, in particular with regard to a possible exit. 9.2 Shareholder Liability As a general principle, under Swiss law there is a separation between a company and its shareholders, and a shareholder may not be liable for the actions of the company. However, according to case law, under special, limited circumstances the legal independence of the com - pany and its exclusive liability are considered abusive and therefore unlawful, and consequently the control - ling shareholder might be held responsible (piercing the corporate veil). Further, a private equity investor or an individual act - ing for it may be considered as a de facto director of the company (eg, in the case of a material decisive operational influence) and, consequently, be bound by directors’ duties as well as being held responsible for possible damages resulting from a breach of those duties. Lastly, a private equity investor that (solely or jointly) controls a portfolio company that has infringed com - petition law could be made jointly and severally liable for paying the resulting fine, as, in Switzerland, holding companies tend to be found to be jointly and sever - ally liable for the antitrust fines of their subsidiaries. Private equity investors should, therefore, implement a robust compliance programme in their portfolio com - panies to avoid antitrust law infringements. In private equity transactions, the exit strategy is a critical consideration, often assessed by investors pri - or to committing capital. The primary exit mechanisms for successful portfolio companies are trade sales and IPOs. These strategies may be pursued individually (single track) or in combination, structured as double- or triple-track processes. The double- and triple-track approaches (simultaneously pursuing an IPO and a sale process) are significantly influenced by prevailing market conditions. When an IPO is contemplated, it 10. Exits 10.1 Types of Exit
is frequently accompanied by a trade sale (auction) process. However, a complete exit at the time of list - ing, involving the sale of all shares held by the private equity seller, is generally not feasible through an IPO. Consequently, the private equity seller must divest the remaining shares incrementally or through block trades. 10.2 Drag and Tag Rights Drag rights or drag-along provisions/mechanisms are common in private equity transactions in Switzerland, as an investor typically wants to ensure that, in the case of an exit, potential buyers may acquire 100% of the shares in the target company, which increases the attractiveness of the sale. Hence, unless the poten - tial buyer intends to continue (eg, with the investment of managers), the drag right will typically be utilised within the course of a transaction. The threshold to trigger the drag-along mechanism usually relates to the shareholding of the investor but is usually at least 50%. In accordance with the high frequency of drag rights, tag rights are also very common, especially for the management shareholders, while they are less com - mon for institutional co-investors. As tag rights are typically subordinated to drag rights, and due to the fact that the retention of management shareholders will regularly be addressed at an earlier stage of the transaction, as well as in view of the deal certainty, the utilisation of such rights by the management share - holders is rather rare. Even though it may depend on the leverage of the negotiating parties, the threshold to exercise the tag rights is usually also at least 50%. 10.3 IPO On an exit by way of a Swiss IPO, the underwriters require sponsors and other large shareholders to enter into lock-up arrangements, usually for a period of six months after the IPO. For the company, its directors and managers, however, often a lock-up of 12 months is agreed. After the lapse of the lock-up, the sponsor will sell down shares, depending on prevailing market conditions pursuant to “dribble-out” trading plans or
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