Beneficial ownership in Swiss PE acquisitions

Bär & Karrer’s Christoph Neeracher and Luca Jagmetti advise on the new rules.

As part of a new Swiss legislation aimed at preventing money laundering and tax evasion, any entity acquiring 25% or more of a non-listed Swiss company must inform the latter regarding the acquiring entity’s beneficial owner and update such information in case of changes.

In standard private equity structures, the administrative burden of the new legislation can be minimised by implementing a practicable solution compliant with the rules. As typically the general partner (GP) takes the relevant decisions regarding the fund and its portfolio companies, the individuals controlling the GP (respectively controlling the ultimate shareholder of the GP) should be disclosed as beneficial owners. If such individuals cannot be determined, the top executive officer (chair or chief executive) of the GP, or respectively of its ultimate shareholder, may be disclosed.

Acquirers under the obligation to notify

On 1 July 2015, a new Swiss law entered into force to implement the recommendations of the international Groupe d’action financière (GAFI) aimed at preventing money laundering and tax evasion. According to the new legislation, any person or entity acquiring (including via primary subscription) – alone or in concert with third parties – shares representing 25% or more of the share capital or voting rights in a non-listed Swiss stock corporation must notify to the latter the name and address of the ultimate beneficial owner of the acquiring entity (article 697j Code of Obligations (CO)). The deadline for the notification is one month from the closing of the acquisition. Later changes regarding the name or address of the beneficial owner must also be disclosed. Identical reporting obligations exist regarding limited liability companies.

Interestingly, the new rules impose a reporting obligation on the acquiring entity, although it may not know who its ultimate beneficial owners are. According to the explanatory notes of the federal government regarding the draft legislation submitted to parliament, the acquiring entity has to undertake inquiry efforts and make the notification to the best of its knowledge; if the acquirer simply makes a notification without knowing its beneficial owner, it risks sanctions due to non-compliance.

As there is no case law on the new regulations yet, their interpretation remains uncertain.

Who must be disclosed as beneficial owner in private equity setups?

While the new article 697j CO states that the beneficial owner to be reported must be a natural person, it remains silent on who qualifies as beneficial owner in holding structures. This ambiguity caused a debate among legal scholars and practitioners about who shall be disclosed as beneficial owner of an acquisition company – indirectly – held by a private equity fund to acquire a Swiss target company.

‘The acquirer has to undertake inquiry efforts and make the notification to the best of its knowledge or risk sanctions due to non-compliance.’

In our view, in line with the interpretation of the GAFI rules by the EU (directive 2015/849) the natural person(s) exercising actual control over an entity should be considered as beneficial owner in the sense of the provision. In standard private equity setups, the GP usually controls the decisions of the fund and the acquisition company. Hence, the individuals ultimately controlling the GP are the beneficial owners of the company in the sense of the new legislation.

If such individuals cannot be determined, the top executive officer of the GP, or of its ultimate shareholder, may be reported in our view (chief executive, chair of the board or other person, depending on the structure).

A different reporting obligation may exist depending on the specific circumstances. If, for instance, based on the actual contractual setup in place, a limited partner (LP) can exercise control over the fund (instead of, or together with, the GP), the individuals controlling such LP should be disclosed as beneficial owners (instead of the GP or in addition to it).

Obligation to maintain a register

Based on new article 697l CO, the target company must maintain a register of the beneficial owners disclosed to it and keep all supporting documents. Such register must be accessible in Switzerland by a director or officer with signatory power and residing in Switzerland (article 718 para 4 CO).

Sanctions

If an acquiring entity does not comply with its disclosure obligation regarding beneficial owners, its voting rights in the Swiss company are suspended until notification is made (article 697m para 1 CO).

Further, the acquiring entity’s right to dividends (and repayment of capital) is irrevocably forfeited for the period until disclosure is made (article 697m para 2 and 3 CO). Any dividends paid out prior to a notification could be reclaimed by the company, which could primarily become relevant in a bankruptcy of the latter and may impact dividend recaps. The board of a Swiss company must procure that no shareholder exercises voting rights or receives dividends while violating its disclosure obligation (article 679m para 4 CO). Board members not living up to this duty may become liable for damage caused, which is again primarily relevant in a bankruptcy scenario.

It may be noted that the parliament decided not to introduce criminal sanctions for violations of the disclosure obligation under article 697j CO – against the proposition of the federal government.

Bearer shares

If a company has issued bearer shares, all shareholders and any acquirer of shares face additional disclosure obligations. In case portfolio companies still have bearer shares issued, we recommend converting them into registered shares to avoid unnecessary administrative burden.