While the entry into force of the Financial Market Infrastructure Act (FMIA) on 1 January 2016 has brought a number of substantial changes to the Swiss disclosure rules, in particular with regard to the reporting of discretionary voting power related to equity securities, the takeover provisions contained therein have largely remained unchanged. This article examines the exemptions from (1) the disclosure duties related to significant shareholdings and (2) the duty to make an offer granted by the financial market authorities to the banks that provide financing facilities.

By Julia Tolstova / Olivia Biehal / Aurèle Bertrand (Reference: CapLaw-2018-29)

1) Disclosure obligations

a) General Framework of the Disclosure Regime

Under the Swiss disclosure regime, the general disclosure obligations apply to everyone who directly or indirectly or acting in concert with third parties acquires or disposes of shares or acquisition or sale rights relating to shares (i) of a company with its registered office in Switzerland whose equity securities are listed in whole or in part in Switzerland, or (ii) of a company with its registered office abroad whose equity securities are mainly listed in whole or in part in Switzerland and thereby reaches, falls below or exceeds the threshold of 3, 5, 10, 15, 20, 25, 331/3, 50 or 662/3% of the total voting rights, whether exercisable or not (article 120 (1) FMIA). Besides direct or indirect holdings, the disclosure duty also applies to anyone who has the discretionary power to exercise the voting rights associated with equity securities directly or indirectly held by a third party (article 120 (3) FMIA). It is important to note that the obligation to notify does not only arise with the acquisition, but also by pure sale positions (the so called “two-basket-principle”). Both baskets must be calculated individually and independently of each other, in other words no netting is permitted to determine whether a disclosure threshold is met.

The notification must be received by the company (i.e., the issuer) and relevant disclosure office within four trading days after the obligation to notify is triggered (i.e., upon the conclusion of the agreement). Subject to the notification duty is generally the beneficial owner of equity securities, i.e., the direct or indirect holder controlling the voting rights stemming from a shareholding and bearing the associated economic risk (article 10 (1) FMIO-FINMA). If the beneficial owner confers the full discretionary powers to exercise the voting associated with equity securities to a third party, such third party is obliged to make a separate, additional notification if relevant disclosure thresholds are triggered by such third party (article 120 (3) FMIA in conjunction with article 10 FMIO-FINMA). The party subject to the disclosure duty of article 120 (3) FMIA is the party actually deciding on the exercise of the voting rights. However, if such person is directly or indirectly controlled, the notification pursuant to article 120 (3) FMIA can alternatively be made by the controlling person on a consolidated basis. In its explanatory report to FMIO-FINMA, the Swiss Financial Market Supervision Authority (FINMA) states that the discretionary power only exists if the beneficial owner is not influencing the manner in which the voting rights are being exercised (see FINMA Explanatory report of on the proposed FMIO-FINMA dated 20 August 2015, p. 25 (Erläuterungsbericht zur FinfraV-FINMA)). FINMA then later refined this statement by explaining that the mere fact that an instruction may be given or revoked at any time is irrelevant for the purpose of the assessment of the discretionary power (see FINMA Report on the results of the consultation regarding the proposed FMIO-FINMA dated 9 December 2015, p. 22 (Bericht der FINMA über die Anhörung vom 20. August bis 2. Oktober 2015 zum Entwurf der FinfraV-FINMA)).

b) Specific Exemptions for Banks and Securities Dealers 

The disclosure regime provides for a number of general exemptions from the disclosure obligation as well as for some specific exemptions applicable to banks and securities dealers. Pursuant to article 19 FMIO-FINMA, banks and securities dealers, when calculating the positions held, are not required to take into account equity securities and equity derivatives that they hold (i) in their trading book, provided they do not reach the threshold of 5% of the total voting rights of the issuer; (ii) in the context of securities lending, transfer of title for the purpose of collateralization or repo transactions, under condition they do not reach 5% of the total voting rights; or, (iii) exclusively and for a minimum of two trading days for the purpose of clearing or settlement. This calculation pursuant to (i) to (iii) above, however, is only permitted if and as long as the bank or securities dealer has no intention to exercise voting rights or to otherwise influence management of the issuer. In addition, the exemptions for banks and securities dealers do not apply, and all positions must be disclosed if the total of voting rights held (shares and equity derivatives) reaches or exceeds 10% of the total voting rights of an issuer.

Besides the specific exemptions set out in article 19 FMIO-FINMA, there is a possibility to obtain an exemption for good cause from the relevant disclosure office (article 26 FMIO-FINMA).

c) Interests that trigger the disclosure obligation

As a general rule, the disclosure obligation is triggered by interests in shares and related equity derivatives. The beneficial owner of equity securities which are directly or indirectly acquired or sold has a duty to notify an acquisition or a sale if it reaches, exceeds or falls below the threshold of the issuer’s total voting rights (article 120 (1) FMIA). For the purpose of FMIO-FINMA, equity derivatives are instruments whose value is derived at least partially from the value or performance of equity securities (article 15 (1) FMIO-FINMA). Securities lending and similar transactions, such as repo transactions and transfer of title as collateral are deemed to create a relevant interest in shares and must therefore be reported. An exemption applies to lending and repo transactions that are processed through standardized trading platforms for the purpose of liquidity management (article 17 (4) FMIO-FINMA).

It is not possible to provide a comprehensive list of equity derivatives that may qualify as having a voting right. In case of doubt it is recommended to discuss the matter with the disclosure office informally and possibly also seek a formal preliminary ruling regarding the applicability of the reporting requirements from the relevant disclosure office prior to the contemplated transaction. For instance, while equity securities held in connection with an outright transfer of title as collateral need to be included for the calculation of positions held for the duration of the ownership of the collateral taker over the collateral (article 17 FMIO-FINMA), no specific provision exists with respect to taking of a collateral over securities without transfer of title (e.g., pledges). Pursuant to the case law of the disclosure office of SIX Swiss Exchange (DO) however, generally, no obligation to notify arises if the shares are pledged, but voting rights remain with the collateral giver (see Disclosure Office of SIX Swiss Exchange annual report 2013, p. 36 and annual report 2010, p. 62 (with further references)).

In a case concerning a refinancing transaction structured as a combination of cash-settled prepaid share basket forwards and cash-settled share basket swaps, all under the ISDA documentation, the parties sought the DO to issue a preliminary ruling confirming that the refinancing transaction and, in particular, the collateral agreements entered into for the purpose of securing the bank credits did not trigger the obligation of the banks to disclose (see Recommendation of the SIX Disclosure Office V-01-13 concerning Sulzer AG and OC Oerlikon Corporation AG, annual report 2013, p. 21 et seq). Under the collateral agreements no transfer of title to the banks was stipulated, except for the banks’ possibility to appropriate the shares of the companies upon occurrence of a “Deemed Optional Termination Event” or an “Enforcement Event”. Under certain circumstances, upon the occurrence of the Enforcement Event, the banks were also entitled to exercise the voting rights relating to the pledged shares upon written notification to the companies. The DO considered whether the collateral agreements with an appropriation option would qualify as a conditional acquisition/sale of equity securities or a conditioned purchase right over the securities. It ultimately came to the conclusion that the mere entering into such collateral agreements does not trigger the reporting obligation. At the same time the DO emphasized that the individual contractual arrangements need to be analyzed on a case-by-case basis and that it may revisit its practice at a later stage. The DO further clarified that the disclosure obligation would arise at the point in time the voting rights may be exercised or the shares are appropriated. With regard to the intercreditor deed governing the relationship
between and coordination among the banks in case of an enforcement scenario (Intercreditor Deed), whereby the banks have an option of a coordinated sale of the pledged shares in case of a Deemed Optional Termination Event or an Enforcement Event, the DO concluded that no constitution of a group acting in concert can be assumed in respect to the shares that have not yet been appropriated by the group and thus, no disclosure obligation can be triggered.

In the second, similarly structured refinancing transaction among virtually the same parties, the details of which are outlined below, no preliminary ruling of the DO was made available. Taking into consideration, however, that the terms of the relevant provisions in the agreements are substantially the same, the outcome of such ruling would likely be the same.

On another occasion, the DO had an opportunity to rule on a similar issue with respect to the notification duty of a bank holding its clients’ equity securities in custody (see Recommendation of the SIX Disclosure Office A-04-16, annual report 2016, p. 62 et seq). The agreements with clients stipulated a right of the bank to exercise the voting rights attached to the shares pledged for the benefit of the bank in the event of default by a client in repaying a credit granted by the bank. In this respect, the DO confirmed its practice by stating that the conclusion of the pledge agreement itself does not trigger the disclosure obligation and does not confer discretionary power onto the bank to exercise the voting rights. With respect to securities of foreign companies having main listing on SIX Swiss Exchange and held for managed clients, the terms and conditions stipulate a general right of the bank to exercise the membership rights attached to the assets held for the account of the client. In the view of the DO, such clause does confer discretionary powers to exercise the voting rights and therefore triggers the notification duty. The fact that the clients retain the right to give instructions on how the voting rights have to be exercised, does not exclude the discretionary power to exercise the voting rights within the meaning of article 120 (3) FMIA.

2) Duty to make an offer

a) Duty to make an offer in general

Under the framework of Swiss takeover law, anyone who directly, indirectly or acting in concert with third parties acquires equity securities which, added to the equity securities already owned, exceed the threshold of 331/3% of the voting rights of a target company, whether exercisable or not, has a duty to make an offer to acquire all listed equity securities of the company (article 135 (1) FMIA). Pursuant to article 33 in conjunction with article 12 (1) FMIO-FINMA, any party whose conduct regarding the acquisition or sale of shareholdings or exercising of voting rights is coordinated with third parties, by law, by a contractual agreement or by some other organised procedure, is deemed to be acting in concert or as an organised group.

When determining whether the threshold has been exceeded, all equity securities are taken into account which are directly or indirectly owned or whose voting rights have been transferred to the acquiring person in another way, regardless of whether the voting rights may be exercised (article 34 (2) FMIO-FINMA).

b) Specific Exemptions for Banks and Securities Dealers

In principle, a person obliged to make an offer may be granted an exemption from its duty by the Swiss Takeover Board (TOB) in justified cases (article 136 FMIA). In particular, an exemption may be granted where the statutory threshold is exceeded only temporarily (article 136 (1) (c) FMIA). For banks and securities dealers specifically, the duty to make an offer lapses, if banks or securities dealers acting independently or as a syndicate, acquire equity securities as part of an issue and undertake to sell the share of equity securities exceeding the statutory threshold within three months of exceeding the threshold. In such case, the claim to this exception needs to be only notified to the TOB, which may upon request extend the said period in case of adequate justification (article 136 FMIA in conjunction with article 40 FMIO-FINMA).

c) Practice of the TOB in Relation to Financing Banks

In the case described above concerning Sulzer AG and OC Oerlikon Corporation AG, the TOB had to assess whether the mere fact of entering into agreements in connection with the refinancing transactions as contemplated by the parties imposes a duty to make an offer (see Order of the Swiss Takeover Board 536/01 dated 24 July 2013 concerning Sulzer AG and OC Oerlikon Corporation AG). In the view of the TOB, the decisive element is whether the coordinated conduct of the parties of the transaction is aimed at taking over the company and consequently they shall be deemed as persons acting in concert. In this regard, the TOB found that the conclusion of the agreements in question does not trigger the duty to make an offer because the terms of these agreements neither confer the automatic right to exercise the voting tights, nor aim at coordinating the company’s strategy or composition of its board of directors and therefore do not (at least until the occurrence of the Enforcement Event) facilitate a takeover of the company. In addition, the forwards and swaps were cash-settled and no shares had to be delivered thereunder. Regarding the right of the banks to appropriate the pledged shares in the Enforcement Event, the Intercreditor Deed did not aim at taking over the company, but rather coordinating the realisation of the pledged shares. In particular, the TOB held that there was no agreement among the banks as to a coordinated exercise of the voting rights related to the pledged shares or coordinated control of the company. The interest of the banks was limited to the disposal value of the pledged shares.

In the second decision of the TOB related to a refinancing transaction structured similarly as the one outlined immediately above, the Sulzer AG shares were also used as an underlying for cash-settled forwards and swaps (see Order of the Swiss Takeover Board 641/01 dated 7 October 2016 concerning Sulzer AG). In addition to refinancing transactions with a syndicate of banks, the company had also entered into a loan agreement with Sberbank. These credit agreements with the syndicate of banks and with Sberbank were secured by the pledge of Sulzer AG shares. Notably, the first ranking collateral agreement with Sberbank corresponded to 42.14% of voting rights of the company. Consequently, in case of exercise of the voting rights or an appropriation of the pledged shares following an event of default, Sberbank would exceed the statutory threshold of 331/3% on an individual basis.

As mentioned above, according to article 136 (1) (c) FMIA, the TOB may grant an exemption to the duty to make an offer where the threshold is exceeded only temporarily. Pursuant to the TOB’s practice, a period of three months is deemed temporary (see article 40 (1) (b) FMIO-FINMA, which the TOB applies by analogy). In some instances, the TOB has qualified even longer terms as temporary (see Order of the Swiss Takeover Board 203/02 dated 24 August 2004 concerning SGF Societe de Gares Frigorifiques et Ports Francs de Geneve SA, c. 1.2.1 and 1.2.6; Order of the Swiss Takeover Board 56/04 dated 7 April 2000 concerning Flughafen-Immobilien-Gesellschaft, c. 3). In the case at hand, Sberbank’s intention was not to acquire control over Sulzer, but to resell the pledged shares in order to cover potential losses arising from an event of default. Thus, Sberbank’s interests were deemed similar to those of underwriting banks in the instance of a share issuance. Moreover, the Intercreditor Deed set forth that the pledged shares shall be resold within 180 days. Given the fact that the resale of shares in the context of the liquidation of a pledge may take more time than the resale of shares in the context of an underwriting process, the TOB considered the period of 180 days as temporary and thus granted Sberbank an exemption from the duty to make an offer, provided that Sberbank resells the pledged shares within 180 days and does not exercise any significant influence on Sulzer while the threshold is exceeded.

3) Conclusion

Thus, although the entry into force of the Financial Market Infrastructure Act (FMIA) on 1 January 2016 has brought a number of substantial changes to the Swiss disclosure rules, in particular with regard to the reporting of discretionary voting power related to equity securities, while the takeover provisions contained therein have largely remained unchanged, as illustrated by certain recent decisions of the DO and the TOB, the previous practice in respect to the financing banks has been refined and reaffirmed.

Julia Tolstova (julia.tolstova@nkf.ch)
Olivia Biehal (olivia.biehal@nkf.ch)
Aurèle Bertrand (aurele.bertrand@nkf.ch)