Switzerland – Being Prepared

In most markets, it wouldn’t qualify as news but in the conservative Swiss legal community, the creation last April of Meyerlustenberger Lachenal via a merger between Zürich’s meyerlustenberger and Geneva’s Lachenal & Le Fort is still making waves. Currently listed as one of the largest law firms in Switzerland, it is present in Zug, Lausanne and Brussels, in addition to Zürich and Geneva.

The roots of Lachenal & Le Fort date back to 1882, while meyerlustenberger was established in 1975. According to Christophe Rapin – a Lausanne-based partner at the combined firm – an important driver behind the merger, which created a 30-partner practice, was to ensure national coverage of the Swiss market, particularly for the firm’s international clientele.

The tie-up strengthened the range of services offered by Meyerlustenberger Lachenal in both Geneva and Zürich, with the firm citing a nationally improved platform in M&A and intellectual property (IP), while the legacy Zürich firm benefited from Lachenal’s established position for banking regulatory and EU/competition law.

The question the tie-up raises is whether rivals need to undertake similar dramatic steps to reposition themselves for a changing market. After all, the Swiss legal community has had to cope with several years in which the national economy’s once unquestioned equilibrium has come under considerable pressure, not only from the state of Europe’s wider economy but intense international pressure to curb bank secrecy and corporate excess. At the same time, regulators have moved to introduce tougher oversight of the country’s banks, leading to fears that Switzerland’s position as a global finance centre is under threat.

True, in comparison to the country’s banks and corporates, Swiss law firms appear to have coped well with the tougher trading environment. The country’s economy has been less affected by the financial crisis than most other European countries, given the relative strength of public finances and the comparatively manageable costs of its banking system’s bailout.

Furthermore, while Switzerland’s finance lawyers adjust to a more competitive environment, as well as increased regulatory mandates in place of transactional instructions, litigation and arbitration remain buoyant practice areas. Moreover, the high standards of local lawyers, and the entrenched position and sophistication of the country’s top law firms, mean that few international rivals have attempted to penetrate the market.

Larger pool

The background to the Meyerlustenberger Lachenal merger, which created a practice of 85 lawyers, derives from the union in 2000 between Geneva practice Lachenal Brechbuhl Cottier & Roguet with Zürich’s Pestalozzi, which became Pestalozzi Lachenal Patry.

In late 2010, the two parties separated. Eight partners, including Bernard Lachenal and Alain Le Fort, departed to form Lachenal & Le Fort and Pestalozzi opened a Geneva office (see ‘On the Rise’, LB212, page 78). In addition to personal conflicts, the reasons cited for the split were different cultural attitudes to the profession and strategic discord.

‘Among the largest and most successful law firms in Switzerland,
there are both law firms with, and without, a presence in
Francophone Switzerland.’
Daniel Hayek, Prager Dreifuss

Meyerlustenberger Lachenal’s Rapin tells Legal Business that one of the major challenges of the 2012 merger was to ensure that the organisation benefited from the larger pool of specialised professionals. From the beginning, the new full-service law firm – which had its strongest practice areas in corporate, finance, IP, competition and private client – has implemented regular and frequent practice group meetings, both physically and by video conferencing.

‘The client benefits from teams that comprise professionals from both locations, ensuring he gets high service levels from experienced specialists,’ says Rapin. Furthermore, thanks to a joint IT basis, professionals in each location are using the same standardised documents and are accessing the same resources in terms of know-how.

Full integration

According to Geneva-based Thomas Legler, a partner at Python & Peter, the Meyerlustenberger Lachenal merger is a positive development for both firms. It gives two practices that were previously well known in their respective hometowns, a national platform, thereby also attracting more international clients.

Charles Adams, head of the Geneva branch of leading US practice Akin Gump Strauss Hauer & Feld, argues that such tie-ups remain a challenge in Switzerland due to the diverging cultural legacies that have shaped the country.

‘Most of the Magic Circle firms have stated that, for the time
being, they are not interested in opening up Swiss outposts.’
Daniel Daeniker, Homburger

Switzerland is a small market, but there are significant differences between the country’s French and German regions: they do not share a common language, the cantonal laws are different, the Bar admission criteria vary, and the legal cultures likewise diverge in many respects..

‘From certain points of view, the Geneva and Zürich law firms involved in these mergers might just as well be on different sides of the Atlantic Ocean, even if they do share a common core nationality,’ Adams maintains.

Challenges are bound to arise in relation to Zürich and Geneva mergers. The law firms must carefully gauge the benefits of growing in another market with the integration challenges of lawyers that speak a different language and have diverse cultural backgrounds.

Nevertheless, the consensus view is that Switzerland is slowly evolving towards more of a national legal market in which there is a stronger rationale for such tie-ups. In essence, the once stark divisions between the German-speaking Zürich focused on banking and institutional work on one hand and Francophone Geneva geared towards private client work on the other have become considerably more blurred in recent years.

Many see this linguistic and cultural diversity as a positive part of the nation’s character. ‘This mix of two different ways of thinking, communicating and decision-making makes such differences a strength,’ says Schellenberg Wittmer’s Geneva-based managing partner, Vincent Jeanneret. In his firm’s case, it has two offices that are fully integrated, which enables a free flow of information and exchange of ideas.

Some doubt the extent of the merger’s integration between the French and German-speaking offices. To Manuel Bianchi della Porta, managing partner of BCCC, the Geneva and Lausanne law firm founded in 2001, the union does not appear to be a fully integrated merger. ‘No doubt they share some costs, and have a common name and brand, but I do not believe that they profit-share; they are effectively two law firms, one on the French-speaking side, the other in the German-speaking zone,’ he says.

Although some of the other large, national firms do not work on a profit-sharing basis between Geneva and Zürich, Meyerlustenberger Lachenal’s Rapin tells Legal Business that the firm’s goal, from the beginning, was to work towards full integration.

This is being approached step by step. ‘Differences in fiscal, accounting and profit sharing are being dealt with,’ he comments.

More to come

After the Meyerlustenberger merger, many are asking if this points to future consolidation for the Swiss legal market and/or more combinations between Geneva and Zürich law firms.

‘If this merger shows anything, it is that, apparently, it still makes sense for Zürich and Geneva law firms to join forces,’ contends Zürich-based Christian Lang, a partner at Prager Dreifuss.

According to Zürich-based Catrina Luchsinger Gähwiler, the managing partner at Froriep Renggli – which opened its Geneva office back in 1979 – there will always be mergers between law firms as visibility is a key element to attracting clients. ‘In particular, many larger law firms pride themselves on maintaining both a Zürich and a Geneva office, as there is little competition between the law firms of Geneva and Zürich due to the language barrier and cultural differences,’ she says.

BCCC’s Bianchi della Porta also anticipates more unions between law firms. ‘Things are happening in Switzerland and they are happening fast,’ he says. For the first time, Switzerland has begun to create a nationally unified legal market, something that is taken for granted in the rest of Europe.

The country’s cantons now have the same civil and criminal procedure rules (see ‘Fighting Fit’, LB222, page 98) and language differences are less of an issue than in the past, with most lawyers speaking both French and German.

Some expect further consolidation, not just between Geneva and Zürich advisers, but also among practices from the Basel-Stadt, Bern and Neuchâtel cantons. ‘The economies of scale of merged firms make it easier for them to compete in the Swiss market for the most sophisticated transactions, especially when considering the lack of international firms in Switzerland,’ says Akin Gump’s Adams.

Consequently, there is a willingness at law firms to operate at a national level, with Geneva firms looking to Zürich for areas they do not cover, such as corporate finance, and Zürich sizing up Geneva for its greater expertise in areas such as arbitration and trade law.

The vicinity to certain administrative bodies is also key. ‘This is one reason why GHR Rechtsanwälte has its offices in Zürich, as well as in Bern,’ says Michael Walther, the firm’s managing partner.

Through this strategy, GHR has direct contact with Zürich’s major financial market players, while maintaining relations with representatives from Bern’s federal government and tax authority. ‘The short distance to the administrative and banking bodies, through the firm’s local offices, enhances the negotiations of clients’ federal level projects,’ Walther says.

But of the several law firms with longer-standing presences in both Zürich and Geneva, only a couple have succeeded in building a strong brand in both locations, believes Benedict Christ, a Zürich-based partner at Vischer.

Furthermore, many successful examples of law firms show that, although an asset, a Geneva presence is not necessary to serve the domestic and international client base of the Zürich firms that have national coverage. ‘Among the largest and most successful law firms of Switzerland, there are both law firms with, and without, a presence in Francophone Switzerland,’ says Prager Dreifuss’ Zürich-based corporate and M&A head, Daniel Hayek.

Wenger & Vieli, a Zürich-based law firm that also has an office in Zug, has established relationships with several law firms in Geneva. ‘For the moment, we do not see an advantage in opening an office in the area,’ says Beat Walti, Wenger & Vieli’s managing partner.

Moreover, clients do not, typically, ask for a second platform and they get little added value, according to Christ. Vischer has always been a national law firm, serving international clients globally and domestic clients from all over Switzerland, and it has a dedicated French desk with native French-speaking lawyers for its French-speaking clients.

Not so fast

Because the Meyerlustenberger merger followed a split between a Zürich and a Geneva firm, some doubt that there will be much further consolidation within Switzerland’s legal market, or a trend for Geneva and Zürich law firm alliances, in the short term at least.

The merger appears more the result of two law firms’ specific situations. ‘Lachenal rejoined a Zürich practice after splitting from Pestalozzi about two years ago, while meyerlustenberger was known to be looking for a merger for quite some time,’ says Christ.

But according to Schellenberg’s Jeanneret, the general trend, in recent years, has been to expand, and the most respected practitioners are increasingly attracted to larger firms. ‘To grow, and to be well-organised in relation to this growth, is the only way we can stay competitive when faced with the demands of clients from large companies, and when our main competitors are international law firms,’ he says.

Others maintain that during the global financial crisis, and in the past two to three years, the Swiss legal market has remained fairly stable. ‘The emergence of national players has slowed down,’ says Nicolas Piérard, a partner at Geneva firm Borel & Barbey.

And considering Europe’s current slow-growth environment, Swiss law firms are unsurprisingly reluctant to expand, resulting in a legal market that is static.

‘It is very much a wait and see situation, with most large firms deciding not to seek mergers or grow extensively under the present circumstances,’ says Niels Schindler, a partner at Geneva firm DGE Avocats.

Spin-off

If the large law firms have limited appetite for further growth, there is evidence that Switzerland will see more spin-off practices from bigger firms.

Such was the case with Geneva practice ABELS Avocats, which opened in October 2009 and currently has four lawyers, three of whom are partners: Sébastien Bettschart, Antoine Amiguet and Stefan Eberhard, respectively a former Tavernier Tschanz partner in Geneva and senior associates from Lenz & Staehelin’s Geneva office.

Eberhard tells Legal Business that the move was driven by the wish to forge their own practice. ‘To be able to design a law firm from a clean slate was a key element to the launch of our firm,’ he says.

‘There is indeed a strong pool of construction specialists in this
country, in terms of both counsel and arbitrators.’
Domitille Baizeau, Lalive

To date, Eberhard is satisfied with the evolution of the firm’s start-up phase. In particular, the practice has been able to provide services on sizeable transactions. ‘This is because clients recognised that we could deliver our services swiftly, while guaranteeing constant partner involvement, one of the valuable pluses of working with a boutique firm,’ he says.

More recent spin-offs occurred in 2011 when former Secretan Troyanov partner André Gruber launched Geneva firm DGE Avocats; while in Basel, Vischer’s Hubertus Ludwig, Franziska Bur Bürgin and Thomas Ziegler established tax boutique Ludwig + Partner; Vischer’s former private client partner Jacqueline Burckhardt Bertossa set up boutique law firm burckhardt; and Stefan Widmer founded Zürich-based tax law practice, Prime Tax.

Foreign entrants

Although Meyerlustenberger Lachenal’s Rapin acknowledges that the Swiss legal market evolves at a sedate pace, he can imagine other firms taking similar steps to his firm’s. But he does not expect a shake-up in this most conservative of markets unless one of the big international players decides to set up a Swiss venture.

Although several UK law firms have already launched offices in Switzerland (see ‘Climb every mountain’, LB222, page 106) to enhance their private client practices – UK law firms Speechly Bircham and Farrer & Co opened in Zürich in June 2011; Charles Russell has been in Geneva since 2006; Withers arrived in Geneva in 2005 and opened a Zürich office in April 2011; and Holman Fenwick Willan’s Geneva office was launched in October 2010 – the big foreign legal practices are, largely, absent in Switzerland.

And because of the comparatively small size of the Swiss legal market, no remarkable increase in the number of foreign legal providers opening offices in Switzerland is expected any time soon.

‘Unless the global headquarters of a particular practice is in Switzerland – as is the case with Akin Gump’s global international arbitration practice – international law firms are unlikely to descend on a market that is already so well-lawyered,’ Akin Gump’s Adams says.

Consequently, no significant Anglo-Saxon entries are expected. ‘Most of the Magic Circle firms have stated that, for the time being, they are not interested in opening up Swiss outposts,’ says Homburger corporate and M&A head, Daniel Daeniker.

Application rejected

Whatever the official reasons for the spin-offs and mergers of recent years – and despite the resilience of Switzerland’s economy – the country’s legal market has been affected by the global economy’s slowdown, as well as the attacks upon the Swiss banking sector and its tradition of secrecy (see ‘Time for change’, LB202, page 70).

The latest blow is the German parliament’s rejection of the 2011 Rubik regularisation scheme – agreed by Germany and Switzerland on the tax treatment of future capital investment income and previously undeclared funds – in late 2012.

‘In the short run, the rejection may have been a relief for many private bankers, who fear losing part of their German client base, either before or following the tax agreement’s implementation,’ says Rashid Bahar, a Zürich banking partner at Bär & Karrer.

In the long run, however, the rejection of the tax agreement means that the question remains on the table and is a source of uncertainty for Swiss financial institutions and their clients. It forces banks to allocate resources to cleaning up issues from the past, rather than focusing on tackling the challenges of the future.

What happened in Germany is seen to be a political issue. ‘But I would not be surprised if this issue re-emerged within the next couple of years,’ says BCCC partner Thomas Goossens.

Many find the rejection of the tax treaty baffling. ‘It would have been a win-win situation for them,’ argues Homburger’s Daeniker. Germany had the opportunity to reclaim all the taxation due to it in relation to assets sitting in Swiss banks on a no-names basis, and it would have been the Swiss banks that would have done the legwork on Germany’s behalf, and at their own cost.

According to German government estimates, revenue from tax arrears alone would have been worth E10bn under the tax agreement. Consequently, the negative impact is also felt on the other side of the border. Now Germany will only be able to get its hands on these monies if it finds the tax evaders itself.

Withheld

Meanwhile, the Swiss government shall try, in parallel, to negotiate new withholding tax agreements, such as those it has with Austria and the UK as of January 2013, which deal with past, undeclared assets. There are currently also discussions with Italy, Hungary and Greece in this regard.

As for the future, withholding tax agreements will be utilised unless clients permit the banks to disclose their assets.

Some banking clients find the withholding taxes costly; others say they are feasible. In relation to the former, BCCC’s Goossens has heard that some are choosing to relocate to Panama, Dubai, Israel, and even certain US states, where there is less regulation. In the cases of Panama and Dubai, there is perhaps also less legal security.

And around five years ago, there was a tendency for some banking clients to relocate to Singapore; but this has already stopped, according to Dominique Christin, a Geneva-based partner at BCCC. This is not something encouraged by Singapore’s business market as it wishes to be the place of choice for new business coming out of India, China and other Asian countries, rather than a destination for undeclared assets for European clients. ‘Singapore is a fully compliant regime and has very strict rules,’ Christin says.

Higher standards

Meanwhile, the increasing compliance costs created by the complexity of international and local regulations continue to erode banking revenues and put pressure on banks’ margins.

The regulation pot includes the Basel III accord – a global regulatory standard on bank capital adequacy that is scheduled to be introduced from 2013 until 2018; while the business model of many Swiss private banks is challenged by the branching requirement under the MiFID II draft – the Markets in Financial Instruments Directive. MiFID II provides harmonised regulation for investment services across the 30 member states of the European Economic Area, but will prevent Swiss banks from servicing their clients in the EU directly out of Switzerland.

Meanwhile, the Swiss regulatory framework is adapting itself to the new rules from Europe, in particular the Alternative Investment Fund Managers (AIFM) Directive, which aims to create an effective regulatory and supervisory framework for AIFMs at European level. In September 2012, the revised Collective Investment Schemes Act (CISA) was approved by the Swiss Parliament, meaning that the Swiss Financial Markets Supervisory Authority (FINMA) will, in the future, regulate managers of collective investments schemes (CIS).

The CISA rules concern the management, custody and distribution of funds. They affect both local and foreign investment schemes in Switzerland, and enable Swiss CIS asset managers to continue to service foreign CIS. ‘The new legislation is especially significant because asset management is a large part of what Geneva has to offer,’ says DGE’s Schindler.

Many perceive the revised CISA as a tough piece of legislation that aims to be compatible with European law, but gives the regulator too much discretion. ‘For the time being, scant certainty exists for market participants as to what the new provisions mean in individual cases,’ says Wenger & Vieli’s Walti.

Declare yourself

Adding to the banks’ woes are the Swiss government’s plans to extend the due diligence requirements of banks, thereby preventing banks from accepting untaxed assets, even though it is difficult for the banks to know if their clients have declared such assets or not.

The banks will soon be required to ask their clients the undeclared assets question in practice. They will create a list of clients that are likely to form a high risk, based on certain criteria that are yet to be established: the higher the risk, the more likely that the bank will ask its client either to regularise matters or to leave the bank.

There are even plans for the Swiss federal government to introduce a law making tax evasion a criminal act.

BCCC is one law firm that is currently in talks with banking clients as to such a law’s consequences, as well as the repeated attacks coming from France that relate, mainly, to Switzerland’s advantageous tax regimes, which are applicable to foreign nationals.

Payback

More ripples within Switzerland’s private wealth industry occurred at the end of October 2012, when a significant judgment on so-called retrocessions or trailer fees that have been received by Swiss banks, was handed down by the Swiss Federal Tribunal.

The ruling held that trailer fees, received by banks for asset management services, belong to the clients, when the compensation is directly related to the asset management agreement. Following this decision Switzerland’s biggest bank, UBS, has to surrender the fees it received from a private client’s discretionary portfolio.

Schellenberg’s Zürich-based partner, Martin Bernet, acted for UBS. P Christoph Gutzwiller, a sole practitioner, represented the bank’s client.

According to Zürich-based Philippe Weber, an M&A partner at Niederer Kraft & Frey (NKF), the court took a customer-friendly approach, with the case producing a landmark decision.

The decision, which has retroactive effect on commissions paid, and which may be reclaimed by clients, will apply to all Swiss banks. It is expected to lead to claims for reimbursement from investors in discretionary portfolios.

The banks are likely, again, to see their profit margins reduced, unless they obtain a sufficiently informed waiver from these clients in relation to the essential features of the agreement on which the commissions are calculated and paid, as well as the foreseeable amount of such retrocessions.

Nicolas de Gottrau, a partner at Python & Peter, says that he is not surprised by the decision. The Federal Tribunal had declared in a historic 2006 decision that independent – or external – asset managers were only entitled to keep the retrocessions and finders’ fees obtained from third parties – notably from custodian banks holding the funds of their clients – provided their clients were properly informed about the foreseen scope and frequency of the payments, and expressly agreed to renounce such restitution of commissions. Otherwise, such fees had to be repaid.

The recent decision confirms this principle for the banks. ‘There is nothing especially new about the 2012 judgment,’ maintains Schellenberg’s Jeanneret.

Impact

Because the 2006 decision had already changed practice within the Swiss financial industry, albeit mainly over inducements paid by banks to independent asset managers, it is difficult to know exactly what the impact of the latest retrocession case will be.

Most of the banks will probably be reluctant to make the repayments, according to de Gottrau, but the pressure put on them by FINMA is considerable. Others, such as retail bank Migros, have decided, spontaneously, to reimburse their clients the last ten years of commission charges, totalling CHF4.3m.

‘This retail bank [Migros] made a strategic decision, but was not, otherwise, greatly impacted by the decision in the same way that a large commercial bank would be,’ says BCCC’s Goossens.

When compared with the potential liability of the bigger institutions, this is a drop in the ocean. ‘If all the large commercial banks have to do this, some of them will go bust overnight,’ says Alexander Troller, a partner at Lalive.

The total amount of the retrocessions received by Swiss banks could, according to certain sources, be estimated at approximately CHF17bn per year. Bearing in mind the retrocessions could, in principle, be reimbursed to clients for the last ten years, the impact of the decision could be significant.

In reality, it will be easier for institutional clients, such as pension funds, to claim for the reimbursement of trailer fees than for private clients, in view of the costs of filing actions against the banks. Homburger’s Daeniker expects that there will be a small number of disgruntled investors making claims against the banks for commission charges, possibly around 5-10%, with the remainder leaving the matter alone.

Embarrassing questions would need to be asked. The relationships with the banks are personal and built up over time; those who have undeclared assets in these banks are especially unlikely to request the repayment of such charges.

Get cracking

For the moment, the banks have a lot of homework to do. Within weeks of the retrocession decision, FINMA indicated, in terms of regulation, which precautionary measures it expected the banks to adopt.

FINMA’s specific requests for the banks include: taking account, promptly, of the Federal Tribunal’s decision on its current business activities; contacting clients that are potentially affected, and informing them about the decision in order to ensure transparency; providing these clients with the details of contact persons within the banks, so as to obtain further information; and informing the clients, upon request, about the amount of the retrocessions received.

Such changes mark a new dawn for the banks. ‘This wouldn’t be anything new to lawyers, as we are already used to high levels of scrutiny and accountability, but the banks now have to show how much money they earned,’ says Georg Umbricht, a partner at Umbricht Attorneys At Law.

‘The initiative on executive compensation is yet another
move that could potentially make Switzerland less popular. ’
Georg Umbricht, Umbricht

In addition, FINMA wants banks to factor in the possible repayment obligations into their annual accounts, even though they are difficult to calculate.

‘It is very complex to determine what should fall under the definition of repayable inducements and it is legally moot as to whether the applicable statute of limitations will be five or ten years,’ says BCCC’s Christin. Furthermore, the starting date for such calculation could arguably commence only upon termination of the mandate.

For many, beyond the repayment of past fees, the Federal Tribunal’s decision is especially relevant to the future, in terms of whether the banks will refashion their business models to include these lost charges into their asset management fees.

According to Georg Umbricht, banks will need to take such drastic measures if most of their clients decide they want the commission charges back.

The banks are, no doubt, currently scrutinising their general conditions to assess the scope of waiver clauses relating to trailer fees. Even so, several banks have rewritten their terms and conditions in the past in response to earlier court cases and FINMA guidelines, according to NKF’s Weber, and there has been no revolt on the part of their clients.

Some products will simply become less attractive for banks to sell. ‘This will influence the marketing of these products, but will, in our view, not amount to a general revamp of the banks’ business models,’ Prager Dreifuss’ Hayek says.

Taking Initiative

Companies listed on the SIX Swiss Exchange also face challenges ahead, in the form of a vote on new corporate governance rules, including shareholder approval and executive compensation issues. This follows the launch of a populist campaign led by Swiss businessman Thomas Minder to curb corporate excesses.

Minder, who was elected to the Swiss Parliament as an independent in 2011, has forced a referendum to bring in tough new rules limiting the ability of Swiss bluechips to award lavish benefits to executives against the wishes of shareholders.

As Legal Business went to press, the Swiss were due to vote in the referendum on proposed pay and governance reforms in March. Minder was able to gain 100,000 signatures for the move, meaning a constitutional right then triggered a popular vote.

The initiative, which if successful would usher in some of the tightest controls on executive compensation in the world, is the result of outrage over soaring packages paid to executives from large multinationals. This is seen, by parts of the population, as disproportionate in a country as small as Switzerland, and which has a tradition of republicanism and resists the star culture associated with US and UK traditions of free market capitalism. Minder’s campaign has attracted considerable popular support but has been strongly opposed by larger companies who argue that it will severely damage Switzerland’s prized reputation as a business-friendly environment.

‘The initiative on executive compensation is yet another move that could potentially make Switzerland less popular, but it is also no different in spirit to what is happening all over Europe right now,’ says Georg Umbricht.

Under the proposals, the annual shareholders’ meeting must bindingly decide on the executive management’s compensation. It also requires that: the term for members of the board of directors is one year; the chairman of the board must be appointed by the shareholders’ meeting; the approval of bonuses and certain other compensations are prohibited; and that rule breaches would constitute criminal offences.

According to Akin Gump’s Adams, the initiative is being watched with interest by a number of multinationals, including US oil drilling contractors that have established their world headquarters in Switzerland. Such companies would not look too kindly upon rules that put them at the mercy of binding shareholder votes on executive pay, when they are used to answering to their own boards of directors in such matters.

‘Many people, perhaps, do not realise the potential
consequences of [the initiative on executive compensation].’
Manuel Bianchi della Porta, BCCC

If approved, the initiative would be a radical shift in Swiss culture, with management remuneration decisions shifting from the board to the shareholders of public companies. ‘Many people, perhaps, do not realise the potential consequences of such a law, in that many of the multinationals headquartered here really may decide to reconsider their presence in the country,’ says BCCC’s Bianchi della Porta.

Many consider the initiative as being overly rigid. ‘The concern with the populist proposal is its strictness,’ says Vischer’s Christ. Moreover, the new rules will not resolve the perceived issue, critics argue, as the majority of shareholders are not retail investors, but institutional investors that are not concerned about current management compensation levels.

The upcoming initiative has, possibly, been sold by the press as being more dramatic than it really is; but the initiative could well transform itself into law. A recent survey shows a majority in its favour, with legislation likely to emerge from the result. Even if Minder’s reforms fail to win enough support to be enacted, the Swiss Parliament is expected to bring in a counter-proposal forcing companies to hold votes on executive pay, albeit non-binding ones.

Many market observers hope that the Swiss people will reject the populist proposal and accept the compromise legislation, counter-proposed by the federal government, which is widely judged to be a more reasonable outcome.

The counter-proposal provides for similar restrictions as under the populist proposal, but the corporate governance rules include more options for companies to opt out, thereby granting companies more flexibility to adapt their rules to their specific situation. Plus it addresses the key remuneration issues, while complying with EU law, in that remuneration regulations issued by the board, and reviewed at annual board meetings, would be reported to shareholders.

The counter-proposal specifically allows for: a provision in the articles of association that the AGM vote is only consultative and not binding; the term for listed companies’ board of directors’ members would be up to three years, with the approval of shareholders; a provision whereby the board could appoint the chairman from its members; and more flexibility on signing off bonuses and other compensations. Breaches of the same would not constitute a criminal offence.

The multinationals would prefer the counter-proposal, says Akin Gump’s Adams, because it affords much greater flexibility and much greater deference to corporate management.

Worst-case scenario

Because the people cannot vote directly on a law, the constitution initiative – if approved – would still require implementation through a federal law. In such an event, most advisers expect that Parliament would attempt to water down the initiative.

Even with such a law passed, few predict a mass exodus of foreign companies that are domiciled in Switzerland. ‘It takes a lot of effort to move into the country, and it would also require significant efforts to exit,’ says NKF’s Weber.

The initiative, if it becomes law in its present form, is more likely to be a negative component for foreign corporations that are currently outside of the country but that were considering re-domiciling to Switzerland.

‘Switzerland’s competitive advantages, as a jurisdiction for the relocation or establishment of new, multinational companies, could be harmed if the initiative is successful,’ says Prager Dreifuss’ Lang.

Moreover, although the initiative refers to Swiss companies that are listed in Switzerland or abroad, it is still unclear whether Swiss companies that have a listed, foreign parent, will be impacted. Such examples include Glencore, Procter & Gamble and Gillette, which have their European headquarters in Switzerland.

Cashing in

If rising impatience over corporate excess and less tolerance for tax and banking secrecy has unsettled Switzerland’s business establishment, in many regards, this more contentious environment has proved lucrative for legal advisers. This is certainly notable as regards tougher oversight of the financial sector, where lawyers find no shortage of work linked to new regulation and compliance. In 2012, Homburger’s banking practice had its best year ever because of regulatory and investigations work.

But it is no longer sufficient for Swiss lawyers to specialise only in Swiss law and regulation; they must also have a good understanding of the laws of the country in which the client is resident – for example, legislation such as the controversial new US Foreign Account Tax Compliance Act (FATCA), which obliges banks to share information about US clients’ assets – as well as the international regulations.

In December 2012, the Swiss federal government confirmed its signing of a deal with the US that will bring Switzerland in line with FATCA. Such moves are only the latest in a series of attempts by foreign governments to peel back the secrecy for which Swiss banking was once famed but now attracts much controversy.

Because of the current legal and regulatory complexities, the banks need true banking specialists at their favoured law firms. ‘In the Swiss financial services sector, new regulatory frameworks are triggering the substantial need for cutting-edge advisory services,’ says Wenger & Vieli’s Walti.

According to Schellenberg’s Jeanneret, his firm is well positioned in this market, with specialised partners and lawyers. ‘But it will be much more difficult for smaller firms and/or generalist lawyers that give some banking advice occasionally,’ he says.

Although the upside for lawyers of the extra regulation and compliance requirements is the need for more legal advice, the cost pressures on the banks still affect legal work that would have been outsourced in the past.

Banks are tending to do a lot of the standardised legal work themselves with a view to avoiding lay-offs of internal staff, and legal services clients are more demanding than ever before in what they require of their legal advisers in terms of outcomes and the meeting of deadlines.

‘This is happening in every market sector,’ says Jeanneret, whose firm is able to use its scale as one of Switzerland’s largest firms to deliver internal economies and the kind of slick support services that under-pressure banking clients have come to expect.

The best service is also expected at a lower price. The increased burden on the banks’ profits and costs means that the law firms advising in such areas have to be open to discussions on flexible fees. Corporate clients, the largest of whom have been substantially impacted by the wider malaise in the EU, are similarly showing an increasing cost awareness.

Responding to this more demanding environment has led to several approaches. For example, Wenger & Vieli’s Walti says his firm is aiming to focus increasingly on specialised, high-end services for which it can forge a national reputation. Meanwhile, Raffael Büchi, who is responsible for know-how and business development at leading practice Bär & Karrer, says the challenging environment is a chance to differentiate the firm from other legal practices by creating a more sophisticated and commercially minded service culture.

As for dispute resolution practices, although Swiss lawyers cannot offer contingency fees in the same way as in the US, it increasingly happens that basic fees, which have been initially discussed with clients, are then topped up if the law firm is successful on behalf of the client.

For many Swiss lawyers, the additional regulation in the banking sector serves to compensate for a sluggish M&A market.

Homburger’s Daeniker tells Legal Business that there were very few big-ticket M&A deals in 2012: ‘It was an odd year, characterised mostly by complex restructurings, which presented a number of legal challenges.’

Apart from deals requiring an alignment of their industries, strategic transactions were rare in 2012, and the private equity funds had a poor appetite for investment opportunities. And although deal finance appeared generally available – as well as being cheap – the uncertainty regarding the global economy and the Euro-crisis restricted transaction numbers and volumes.

An additional impediment for inbound M&A transactions has been the Swiss Franc’s strength, although Swiss investors in outbound transactions benefit from the strong Swiss Franc.

But although the Swiss M&A market has been generally quiet, a few lucrative deals have, nonetheless, kept the country’s top M&A practices busy.

A key deal last year saw NKF’s Weber lead as Swiss counsel to Alliance Boots, the Swiss parent company of the international pharmacy-led health and beauty group, and US private equity giant Kohlberg Kravis Roberts & Co (KKR) on the sale of a 45% stake in the business to Walgreen Corporation, the largest drug store chain in the US.

With Swiss law playing a key role, the transaction, which valued the stake at around $6.7bn, also included the option for Walgreen to proceed to a full combination, by acquiring the remaining 55% of Alliance Boots, at a later date, for approximately $9.5bn in cash and stock.

The KKR transaction is expected to create the world’s largest network of pharmacy-led health/beauty retail stores, and buyer of prescription drugs. It was particularly complex because it was not a full sale, instead involving the formation of a strategic partnership between Alliance Boots and Walgreen during the first stage.

Bär & Karrer partners Roland Truffer and Thomas Reutter represented Walgreen as Swiss counsel.

Global expansion

With one of the consequences of the banking sector’s troubles being increased competition among its biggest players, the large banks are also looking to tap more deeply into emerging markets. ‘Generally speaking, cross-border business and access to foreign markets is one of the biggest challenges for the Swiss banking industry,’ says Bär & Karrer’s Bahar.

In turn, this has led to M&A deals for the legal market. In August 2012, Julius Baer Group, Switzerland’s largest pure private bank, agreed to acquire, for CHF860m in cash and shares, Bank of America Merrill Lynch (BAML)’s international wealth management business (WMB) that is based outside the US. As of the end of June 2012, the WMB had $84bn of assets under management and over 2,000 employees.

The deal, a combination of legal entity acquisitions and business transfers, extends the bank’s global reach, and aims to help Julius Baer compete with UBS and Credit Suisse Group. It is expected to complete in 2013, with the integration to be concluded by 2014.

Lenz & Staehelin partners Rudolf Tschäni and Tino Gaberthüel advised Julius Baer; and Pestalozzi’s Zürich partners Jakob Hoehn and Severin Roelli represented BAML.

‘Some commercial parties appear more willing to utilise
litigation or arbitration as an effective tool to resolve
disputes than in the past.’
Dieter Hofmann, Walder Wyss

Beyond the banking sector, Pestalozzi picked up a globally themed instruction on behalf of its longstanding client Glencore International, one of the world’s leading commodity trading and mining groups. Partners Peter Pestalozzi and Michael Lips advised on the Swiss law aspects – including corporate, tax and competition law issues – of its December 2012 $6.2bn acquisition of Viterra, Canada’s largest grain handler, including Glencore’s agreements with Agrium, and Richardson International, for the sale of certain Viterra assets.

Pestalozzi and Lips also advised Glencore on the Swiss law aspects of the reorganisation of the Viterra group of companies.

Homburger is another leading Swiss law firm that is regularly instructed on the largest mandates. It picked up a key role in the $10bn definitive agreement between Tyco International and Pentair – which completed in September 2012 – to combine Tyco’s Flow Control business with Pentair in a tax-free, all-stock merger. This marked the first M&A transaction that was used by a US public company so as to re-domicile to Switzerland, and included an innovative structure to build up qualifying additional paid-in capital that can be distributed, tax-exempt, to shareholders.

Homburger partners Daeniker and David Oser advised Tyco, while Pentair was represented by Bär & Karrer partner Ralph Malacrida.

Furthermore, in December 2012, Homburger’s Zürich-based corporate and M&A partner Frank Gerhard led the Swiss legal advice to Clariant, a world leader in speciality chemicals, in its agreement to sell three business units to SK Capital Partners, a US-based private investment firm, for approximately CHF502m. The deal is a complicated carve-out transaction, which spans over 35 jurisdictions, mainly emerging markets countries.

With the buyer being a private equity fund, the deal also has all the demands of a debt-backed deal. This is challenging to implement when acquiring a business that has no historical financials and is in the process of being bundled together, with a view to being operated as a standalone business.

SK Capital was advised by Bär & Karrer’s Zürich-based M&A partner, Christoph Neeracher. ‘We have worked on an exceptional number of important M&A cases in 2012, and Clariant was another highlight, particularly in terms of complexity and speed,’ says Neeracher.

Reversing the trend

Due to the difficult market conditions, future consolidation in the financial sector is also likely to feed the Swiss legal market with M&A deals. Neeracher expects further transactions in the commodities and financial services industries, particularly in the private banking sector. ‘Many small players have come under considerable margins pressure, which could lead to further consolidation,’ he says.

There is also still room for growth in the M&A, and corporate and commercial sectors, especially in the financial, energy and medical/pharmaceutical industries. It should also not be forgotten that there are other large industries in Switzerland, and that Switzerland remains a leader in innovation. ‘Consequently, corporate work for start-up companies and their investors will remain important,’ says DGE’s Schindler.

Because their pipelines are considerably fuller than 12 months ago, some market players believe that 2013 already appears to be reversing the trend. ‘Corporate treasurers have been sitting around for too long, and are finally prepared to act, particularly in light of the European Central Bank’s assistance in preventing the Euro from disintegrating,’ says Homburger’s Daeniker.

With a banking sector fighting on multiple fronts, which could see small private banking players disappear, a generally unenthusiastic M&A market, and increased use of in-house counsel over external legal advice, Switzerland’s legal market has recognised the need to shift resources into new areas, and deal with clients’ cost awareness, in order to survive.

Beyond the increased volumes of regulatory law advice required by clients, internal investigations are becoming a regular phenomenon to affect internationally active Swiss companies.

Examples of investigation cases relating to financial institutions include Pestalozzi’s partner, Christophe Emonet, representing Banque Cantonale de Genève (BCG) in criminal proceedings against its former directors and auditors (Ernst & Young employees), which were worth approximately CHF2bn. The case resulted in the condemnation of the former directors for forgery and a settlement with the auditors.

The accused individuals were alleged to have taken part in disloyal management and forgery during the years leading up to the discovery of irregularities in 2000, when losses worth billions were discovered on BCG’s books, ultimately forcing the bank’s recapitalisation.

Dubbed by some as the trial of the century, according to Pestalozzi’s Zürich-based litigation and arbitration head, Michael Kramer, it lasted, in the first instance, from May to July 2011, and on appeal from March to April 2012. The case comprised more than 1,600 bundles of federal documents.

‘In one of the longest pleading sessions ever, this case was quite a challenge to summarise and explain,’ says Kramer.

Schellenberg’s Jeanneret and Pierre de Preux, a partner at Canonica Valticos de Preux, advised the auditors; and BAZ Legal partner Eric Alves de Souza, alongside Froriep Renggli partner Jean-Luc Herbez, represented the State of Geneva.

Emonet also represented BCG in various civil actions against Ernst & Young and several former directors. ‘These proceedings were extremely complex in view of the number of parties, delicate liability issues and time elapsed since the relevant facts occurred,’ says Kramer.

Furthermore, with the State of Geneva also involved, the matter was heavily influenced by political considerations. Consequently, it was difficult to find an easy way out.

However, when negotiations began, the Pestalozzi team developed a specific argument that considerably improved BCG’s position during the tripartite negotiations and favoured the finalisation of a publicly acclaimed, and complex, out-of-court settlement agreement worth CHF110m that earned a standing ovation from the Swiss parliament.

Ernst & Young was represented by Lenz & Staehelin partner, Benoît Chappuis; Alves de Souza and Herbez acted for the State of Geneva.

It is not just in relation to investigations work that litigation remains a busy area for Swiss legal practices.

Dieter Hofmann, the litigation and arbitration head at Walder Wyss, recently advised on a variety of disputes, such as cases arising from joint-ventures and M&A, distribution, banking litigation, disputes between banks and insurers, commercial litigation and construction disputes (see box, ‘Staple diet’, page 98).

‘Some commercial parties appear more willing to utilise litigation or arbitration as an effective tool to resolve disputes than in the past, when matters might have been settled at earlier stages through gentlemen’s agreements,’ says Hofmann.

Bär & Karrer has also advised on several significant disputes and arbitrations. Its Zürich-based arbitration head Daniel Hochstrasser successfully assisted a Chinese company before the Swiss Supreme Court in relation to a Portuguese company’s challenge of a Swiss arbitral tribunal’s interim award, where it was ruled that the insolvency of the Portuguese company did not affect the arbitral tribunal’s jurisdiction.

Branching out

Many Swiss law firms have also recognised the need to invest in competition law practices, which are expected to see growth from the energy markets.

Two years ago, Lalive brought in Zürich-based counsel Daniel Buhr, a former general counsel at Schindler, the elevator manufacturer. The practice is currently representing an investigated entity in relation to the Swiss probe into allegations of rigging of Libor, a widely used interest rate benchmark.

According to Troller, Lalive is also moving into financial regulatory, energy and construction work, not just on the disputes side, but also on the advisory level. Recent representative assignments for Lalive include advising one of the world’s leading agribusiness and food processing corporations on corporate matters; various international banks in the structuring of commodities financing; Chinese state-owned and listed corporations in the structuring of commodity-guaranteed infrastructure projects in Africa; and Asian investors in securing a controlling stake in a European clean technology venture.

And with a new dedicated patent court now open in Lucerne, which can even hear cases in English, BCCC’s Bianchi della Porta expects to see an increase in patent litigants choosing Switzerland as their forum. Previously, they would have gone to Germany or the UK.

Competition

With many Swiss law firms now thinking in national terms, and with ongoing pressure for firms to move out of commoditised practice lines in favour of more complex, high stakes work, the underlying challenge for all Swiss legal practices is the rise in competition in what was until recently one of the most stable global legal markets.

‘Some law firms are even propositioning clients, with whom they do not have any relationship, on an unsolicited basis,’ says NKF’s Weber.

Further stoking such pressures are concerns that the local legal market will be affected by Switzerland’s diminishing global clout as a financial centre, bringing unfamiliar demands for local lawyers to think beyond the country’s own borders.

‘Firms will either have to acquire a more international perspective or adapt to other domestic practice areas, as private client work will no longer be enough to sustain some firms,’ argues Troller.

Faced with this outlook, there are plenty of predictions that Switzerland cannot sustain such a large band of commercial firms, irrespective of what is happening in the economy. Under this reading, lower tier generalists will come under mounting pressure, particularly those firms with weak governance or succession planning, to thrive once their founders retire.

To be best placed to face the future, Pestalozzi’s Kramer believes that Swiss law firms must learn to think more globally and adopt a more commercial and service-orientated approach, features that some would argue are more common to UK and US law firms.

And according to Froriep Renggli’s Luchsinger Gähwiler, with the increased specialisation of lawyers clients are now used to having partners to hand, who have an in-depth understanding of their business, its drivers and the legal and operational issues that confront clients.

‘It is therefore more and more important that associates learn from an early stage, not only to understand the regulatory framework of a specific business, but also to translate that knowledge into hands-on practical advice,’ says Luchsinger Gähwiler.

Kramer argues that Pestalozzi’s lawyers are well prepared to face the future and to continue playing in the top league of Swiss law firms; while Vischer’s Christ tells Legal Business that his firm is braced for the challenges ahead as an independent and full-service, national business law firm with an international network, that is also strongly focused on industry and emerging legal sectors, such as regulatory law.

Others are, likewise, upbeat about the future. ‘As a large Swiss law firm, we feel fortunate when we compare ourselves to US or UK practices, because the volatility experienced by our business is much less pronounced,’ says Homburger’s Daeniker.

In boom periods, the Anglo-Saxon firms that are dedicated to financing and capital markets transactions grow their businesses much more quickly, but in times like these they slow down more dramatically. Daeniker sums up the view of many Swiss lawyers who see longevity in their approach: ‘We weather the storm more easily.’ LB

julian.matteucci@legalease.co.uk