With the entry into force of the amendment to the Banking Act relating to bank restructurings on 1 January 2023, another little noticed provision amending the Swiss Code of Obligations has become effective. That provision allows Swiss issuers of debt capital market instruments to directly tap the US market for registered bonds. This contribution explains how that will work.
By René Bösch / Benjamin Leisinger (Reference: CapLaw-2023-01)
The Swiss Code of Obligations contains a framework of detailed provisions about the community of bondholders that is mandatorily applicable if a Swiss company issues bonds by way of public offer, irrespective of where – i.e., in which market – the bonds are offered. Although some commentators, including the authors hereof, offered a more liberal interpretation, arguing for an application of this framework only if the public offer is solely or at least also made in Switzerland, the predominant conservative view remains that the provisions relating to the community of bondholders is applicable at all times if the domicile of the issuer is in Switzerland.
The provisions about the community of bondholders had been introduced as a predecessor of the more modern “collective action clauses” in reaction to bankruptcies of mainly Swiss shipping and railroad companies after World War II. Its procedural requirements are outdated in a modern world, some of its requirements do no longer fit into modern financial markets issuances. Therefore we have argued that these provisions should be amended in connection with the establishment of a new prospectus framework in the new Financial Services Act (which entered into force in 2020), but that did not happen.
Some 8 to 10 years ago, the authors of this contribution conducted an analysis with the assistance of US counsel to ascertain whether the Swiss provisions on the community of bondholders were compliant with the mandatory provisions of the US Trust Indenture Act (the TIA) which applies mandatorily in case of debt capital market issuances in registered form into the US under the US Securities Act of 1933. The result of the analysis was as clear as frustrating: the two sets of laws are not reconcilable. And because both acts are mandatorily applicable, Swiss issuers of debt capital market instruments were not able to issue such instruments into the US market for registered instruments directly, but only through non-Swiss issuance vehicles.
The new article 1186 of the Code of Obligations now opens the door to Swiss issuers to directly issue registered bonds in the US. In essence, this article now allows to disregard and disapply the Swiss provisions on the community of bondholders if the bonds are issued in a foreign market under the relevant foreign law if that foreign law does know provisions about the formation and representation of and resolutions by the community of bondholders. The legislative materials do explicitly refer to the TIA which constitutes such equivalent legal framework. Accordingly, since 1 January 2023 Swiss issuers can issue registered bonds directly into the US market for registered bonds by applying New York law (or the law of another suitable State of the United States of America) and the TIA, and by disapplying the corresponding Swiss provisions.
One major hurdle, however, still exists for most of the Swiss issuers of debt capital market instruments to tap the US market directly: the Swiss Withholding Tax Act. It provides that interest payments on debt instruments issued directly by a Swiss company are subject to a 35% withholding tax, unless the instruments are exempt from such withholding tax. In effect, such withholding tax is a “deal killer” for most Swiss issuers of debt capital market instruments to issue directly in other jurisdictions – only the regulatory capital instruments as well as the bail-in (TLAC) instruments issued by Swiss banks under Swiss banking legislation are exempt from such tax.
Sadly, in a public referendum in September 2022 the Swiss voters did not approve a general exemption from the Swiss Withholding Tax Act for all debt capital market instruments issued by all Swiss issuers. Therefore, the new provision in the Code of Obligations may only provide a new opportunity to Swiss banks for said capital and TLAC instruments, but not – yet – for other Swiss issuers such as – oddly enough – insurance companies and Swiss corporates.
René Bösch (rene.boesch@homburger.ch)
Benjamin Leisinger (benjamin.leisinger@homburger.ch)