This chapter provides an overview of the current practice in relation to the buyback of equity and debt securities in the Swiss capital markets. This article is part of the PLC multi-jurisdictional guide to Capital Markets. For a full list of contents visit www.practicallaw.com/capitalmarketshandbook.
The principal sources of Swiss law relevant to buyback programmes of equity securities are Swiss corporate law, Swiss securities and stock exchange law, and most importantly, Swiss public takeover law.
In relation to Swiss takeover law, the Swiss Takeover Board (TOB), a regulatory authority established under the Swiss Act on Stock Exchange and Securities Trading (SESTA), is the principal source for administrative guidance relating to buyback programmes. It monitors issuers' and investors' compliance with the Swiss takeover law regime, and issues orders and guidelines. The Swiss Financial Market Supervisory Authority (FINMA) supervises the TOB.
The public takeover law regime is mainly regulated by the SESTA and the Takeover Ordinance (TOO) issued by the TOB on the basis of the SESTA. As, in relation to buyback programmes, the SESTA and the TOO only provide for a framework of rules, the TOB issued its Release No. 1 Regarding Equity Security Repurchases, originally dated 28 March 2000 (Release). This governs in more detail the rules on buybacks of equity securities, in particular the requirements and conditions to be fulfilled for buyback programmes to benefit from a general exemption from the takeover law regime. The Release has been fully amended and restated. On 26 February 2010, the TOB issued its new Circular No. 1 on Buyback Programmes (Circular), fully replacing the Release.
While the Circular is not binding, it has soft law effect and enforceability and reflects the common practice of the TOB established over the years.
This article provides an overview of the legal and regulatory framework for buyback programmes of equity securities in the Swiss capital markets, with a focus on the changes introduced by the new Circular. In particular:
The takeover law regime for public buyback of equity securities.
Exemptions from the takeover law regime.
The most important changes under the Circular.
Swiss corporate law relevant to buyback programmes.
Further sources of law relating to buyback programmes.
Buyback of convertible bonds.
Most offers by issuers to buy back equity securities from their shareholders are deemed public offers. Therefore, the offer is subject to the takeover law regime (in the same way as any other public tender offer). The TOB has consistently ruled that the SESTA provisions on public takeovers apply to public buyback offers (under Article 2(e)). This constant practice is now explicitly reflected in the new Circular (note 1 of the Circular). The public takeover law regime applies to fixed price offers, offers at market price and to offers structured through the issuance of put options.
However, buyback programmes of equity securities are not subject to the takeover law regime, if qualified as non-public (that is, if addressed to a very limited number of investors and investors are approached on an individual basis). However, even if not publicly announced, an offer may still be qualified as public (TOB Order 0067/04 relating to Intersport PSC Holding AG, dated 11 August 2000) if the number of addressees would make it impossible or unlikely that either:
The addressees can co-ordinate their behaviour in relation to the offer.
Individual negotiations with the issuer may occur.
If a buyback programme qualifies as public, the takeover law regime basically applies. However, the issuer may still be entirely exempt from its application or subject to relaxed standards. The TOB promulgated certain safe harbour rules and exemptions for buybacks of equity securities by issuers in the Circular (formerly in the Release).
If the buyback offer relates to no more than 2% of the offeror's share capital, the buyback programme is fully exempt from the takeover law regime without any further requirement or condition. The launching of the buyback programme must be notified to the TOB on the date of announcement at the latest. Only one buyback programme "is permitted" in any financial year.
If the buyback programme is not eligible for general exemption under section 5.1, but meets the conditions and requirements set up under sections 1 to 4 of the Circular, the issuer must report the buyback programme, together with a draft of the buyback offer to the TOB. The draft buyback offer must contain the minimum information contemplated in the Notification of a buyback programme, which is posted on the TOB’s website (www.takeover.ch). The report must be submitted to the TOB five trading days before public announcement of the buyback programme. Within three trading days after submission, the TOB conducts a short assessment of the buyback programme and, subject to compliance of the buyback programme with sections 1 to 4 of the Circular, confirms to the issuer that the buyback programme is exempt from the takeover law regime.
Exemption will be confirmed, if the buyback programme meets the following conditions and requirements (as per sections 1 to 4, Circular):
General requirements for all buyback programmes:
The purpose of the buyback programme must be defined.
The buyback programme must extend to all classes of equity securities listed.
The consummation of the buyback programme must not result in a material change of control over the issuer.
The buyback programme must not extend to more than 10% of the issuer's capital or voting rights.
The buyback programme must not extend to more than 20% of the free float of the relevant calls of equity securities.
The buyback programme must not extend to such percentage of the free float that would result in listing requirements no longer being met.
General conditions for all buyback programmes:
Different prices offered for different classes of securities must be in an appropriate ratio.
The offeror must not purchase securities for the same purpose outside the programme. If purchased outside the programme (with a different purpose), the trades must still be reported to the TOB every five trading days.
Black out periods apply and the issuers cannot announce a buyback programme, purchase under the programme or issue put options under the programme, either:
while price-sensitive information is available to the offeror but not yet disclosed under the relevant listing rules;
during ten trading days before publication of the offeror’s financial results;
if the offeror’s latest consolidated financial statements date back more than nine months (exemptions apply if buyback programme is executed through a third party bank or broker dealer; see below for details.
Corporate law rules must be complied with, but will not be scrutinised by the TOB (see below).
Further requirements and conditions for buyback programmes with a fixed price offer:
The offer must not be conditional.
The offer period must be at least ten trading days.
If the number of securities surrendered exceeds the number of securities for which a buyback offer has been made, the number of securities surrendered by shareholders must be reduced in proportion to the number of securities for which the offer has been made.
If, during the offer period, the offeror acquires securities at a higher price, it must offer this price to all tendering shareholders (best price rule).
Within three trading days after the end of the offer period, the offeror must confirm to the TOB in writing that the conditions (as per section 5.1 of the Circular) have been met.
Further requirements and conditions for buyback programmes with an offer at market price:
The duration of the buyback programme must not exceed three years.
The offeror can purchase securities even during a black-out period, provided these purchases are made through a mandated bank or broker dealer (or, in case of a bank, by its own trading unit, subject to Chinese walls being implemented) acting without instructions for single purchases and without insider knowledge (that is, the bank or broker-dealer must act on the basis of parameters set before launching of the programme; the parameters may be amended by the offeror no more often than once a month and not during black-out periods).
The buyback programme can be suspended at any time but cannot be resumed during black-out periods.
On termination of the buyback programme (and additionally at least once a year), an audit firm must confirm compliance with the two requirements in the two bullet points above.
If the programme covers various classes of securities, the offeror must place bids for each class simultaneously.
The buyback on the regular trading line cannot exceed 25% of the daily trading volume on that line of either the same trading day or the preceding trading day.
To the extent the trading rules of the relevant stock exchange allow for off-exchange transactions (block trades), the price for the block trade cannot exceed the last price paid or offered by another entity (other than the offeror).
The offeror must not place repurchase orders during the opening and closing auctions, nor during the auction performed after a stop trading.
If the repurchases are executed through a separate trading line, the price offered on the separate trading line must not exceed the price offered on the regular trading line by more than 5%.
If a buyback programme does neither qualify as exempt under section 5.1 nor under section 5.2. (because of non-compliance with the requirements and conditions set out in the Circular), a buyback programme may still be exempt from the takeover law regime on specific request by the issuer to the TOB.
In these instances, the offeror must submit a detailed request for exemption by specific order of the TOB, and provide explanations for the buyback programme not being in compliance with the requirements and conditions of the Circular. The request must be submitted to the TOB 20 trading days before public announcement of the buyback programme.
The TOB may grant a general exemption or apply relaxed standards (grant exemptions to specific provisions). However, as a basic rule, the TOB will only grant exemption by order if both:
There are valid reasons for the non-compliance with the requirements and conditions of the Circular.
The basic spirit of the SESTA, the TOO and the Circular are still met (in particular, in relation to equal treatment of investors and transparency).
While the 2% safe harbour exemption has remained, the launch of a buyback programme affecting less than 2% must be announced with the TOB under the Circular. Also, only one such programme is permitted per any financial year. Under the old regime, these restrictions did not apply and it remains to be seen how issuers will deal with these. In particular, the newly introduced notification duty may lead to questions about what is considered to be a public offer (for example, the announcement of an employee stock option plan under which the issuer may buy securities over the market).
The TOB recently ruled (TOB Order 461/01 relating to Transocean Ltd, dated 16 November 2010) that only one buyback programme is permitted in any given financial year, even in situations where two or more buyback programmes would relate, in aggregate, to less than 2% of the offeror's share capital. While the TOB has not ruled on the question whether several buyback programmes (of more than one year in duration) may overlap (provided they are not launched within the same financial year), it seems to be obvious that this should be allowed, as there is no justification to treat buyback programmes with a duration of one year or less more favourably than buyback programmes with a longer duration.
Under the Circular, buyback programmes cannot affect more than 20% of the free float of the relevant securities. The same rule applied under the old regime but only as a requirement to get exemption from the general 10% threshold requirement. The new provision aims to ensure that a liquid market will remain, to avoid negative impacts for other (minority) shareholders. In a recent order (TOB order 447/01 relating to Edipresse SA, dated 8 July 2010) the TOB ruled that exemption may be granted from the 20% free float threshold rule in situations where the buyback would not change the liquidity (or illiquidity) of the securities. As the total free float was only about 1.2% of the relevant class of equity securities issued, there was hardly any liquidity in the market. The buyback offer related to 100% of the free float. Even though exceeding the 20% threshold, the TOB granted exemption by stating that the buyback programme would add liquidity to the market by offering the minority shareholders and exit opportunity that would otherwise not have existed.
Also, buyback programmes must not lead to a material change of control in the issuer. The same condition did apply under the former regime, but only to get exemption in situations where buyback programmes did affect more than 10% of the securities issued by the issuer (therefore, the requirement did not apply for any buyback programme relating to less than 10% of the securities). Accordingly, the question of what will constitute a "change of control" becomes more important and it remains to be seen how the TOB will rule on this question. Surprisingly, the TOB ruled under the new regime (TOB Order 459/01 relating to Actelion Ltd, dated 3 November 2010) that the 10% maximum threshold to which a buyback programme may relate can be exceeded, provided that, among others, the buyback does not result in material change of control in the issuer. While the Circular states that the "no material change of control" condition would apply per se, the wording in the relevant TOB order suggests (implicitly) that this is only the case when the 10% threshold will be exceeded. It remains to be seen how the TOB will rule on this provision in the future.
So far, it was a requirement that the execution of the repurchase does not lead to the de-listing of the securities concerned. The new Circular introduces a more restrictive rule. According to this, the free float in the securities concerned must not, due to the buyback programme, fall below any minimum threshold of the listing rules issued by the relevant stock exchange. As any issuer would have to comply with the listing rules anyway, the new rule only seems to be relevant in situations where the issuer is granted an exemption by the stock exchange. However, in these circumstances, issuers should be granted an exemption by the TOB as well, as the contradicting requirements would not make sense.
Whereas the TOB intended to introduce a total prohibition on the offeror purchasing securities that are the subject of a buyback programme outside the programme, it has relaxed this prohibition to only prohibit purchases if made with the same purpose as that of the buyback programme. This newly introduced rule makes it essential to narrowly describe the purpose of the buyback programme, to avoid being unnecessarily affected by the prohibition. Purchases made outside the buyback programme must still be reported to the TOB every five trading days.
The Circular provides certain exemptions from the prohibition to repurchase under a buyback programme during black out periods. Mainly, even during black-out periods, repurchases are permitted if execution is delegated to a bank or a broker dealer, in parameters as instructed during non black-out periods. If the offeror is a bank or a broker dealer, such delegation may be made to its own trading unit, subject to Chinese walls being imposed. The offeror can, however, interrupt the programme at any point (and take it up again, outside black-out periods). The parameters of the delegation can be changed no more than once a month, and only during non black-out periods.
Under Swiss corporate law, a corporation is generally prohibited from holding more than 10% of its own equity securities. Under the Release, the TOB started scrutinising compliance with this corporate law rule. The TOB even introduced corporate law standards that became conditions to the granting of exemption to the 10% threshold. This practice was under heavy debate, as the TOB ruled on questions of corporate law that are generally within civil courts competence only. Under the Circular, the TOB abandoned this practice. The Circular now explicitly states that the TOB will no longer scrutinise compliance with the corporate law 10% threshold. Of course, the general principles of Swiss corporate law remain applicable, and the Circular makes clear that the offeror’s board of directors remains responsible for compliance with Swiss corporate law.
Purchases by the offeror on the regular trading line cannot exceed 25% of the daily aggregate volume traded on that regular trading line, on the same or the previous trading day. Under the former regime, the same threshold applied. However, it was calculated on the basis of the average daily volume traded during the 30 preceding trading days.
The well established practice of the TOB that changes to the purpose of purchase programmes must be submitted to the TOB for approval and publicly announced has now been implemented as a rule into the Circular (note 51).
The Circular provides for a more stringent and comprehensive set of rules than the Release. Also, established practice of the TOB has been implemented into the Circular.
However, various rules have been tightened and it remains to be seen whether this will over time provide for an increased standard of transparency and equal treatment of investors in the market. As an example, the fear is that the newly introduced requirement to notify the TOB before launching a buyback programme, even where it relates to less than 2% of the securities issued, results in issuers structuring these programmes as non-public (if possible). This, for example, may result in less transparency for investors and bears a risk of investors not being treated equally. The TOB's aim for as much transparency as possible may on some points be a pitfall. Accordingly, the hope is that the TOB will interpret the Circular liberally.
Under Swiss corporate law, a Swiss company is allowed to acquire its own equity securities (whether or not listed on a stock exchange), if the following conditions are met:
The company does not acquire more than 10% of its issued share capital (for registered equity securities, the threshold is 20% in particular circumstances) (Article 659, Code of Obligations).
The acquisition of the securities is financed by retained earnings and/or freely distributable reserves of the company.
All shareholders are treated equally when offering a buyback. The company must do all of the following:
address a buyback offer to all shareholders of all categories of securities (unless there are valid reasons to do otherwise and there is no economic discrimination in relation to other shareholders);
offer identical economic terms (in particular price) to all shareholders;
structure the repurchase at arm’s length.
Swiss legal scholars state that the limitations contained in Article 659 of the Code of Obligations are subject to exemptions. For example, a Swiss company can repurchase its own equity securities in excess of the 10% threshold, if both:
The shareholders approve the repurchase (with a subsequent reduction of share capital).
The procedure for reducing share capital is and will be complied with.
Under Swiss criminal law, any shareholder, director, manager or other insider using price-sensitive and confidential information about an issuer, when buying or selling securities listed on a stock exchange, can be punished by a fine or imprisonment if the transaction results in an economic benefit for the acquirer or seller. In addition, any person trying to manipulate the price of securities on a Swiss exchange, with the aim to achieve an economic benefit, can be punished by fine or imprisonment.
The launch of a buyback programme and completion of repurchases must comply with insider trading and market abuse rules. The blackout period rules in the Release are designed to mitigate the risk of potential non-compliance. However, issuers are advised to give ample attention to these potential pitfalls, in particular if they use in-house trading desks for the buyback or delegate the repurchase transaction to third party brokers.
In addition, Circular No. 08/38 of FINMA on market behaviour applies to FINMA-regulated brokers and dealers that are involved in buyback programmes (as financial adviser or agents executing the buyback programmes). This imposes further obligations on brokers and dealers relating to the use of price sensitive information, acting in good faith, organisational requirements and so on.
Any person that acquires or sells shares in a company listed on a Swiss exchange and reaches, exceeds or falls below a certain threshold, must disclose to the Disclosure Office of the relevant stock exchange, and to the issuer, the transaction and the number of voting rights and shares directly (or indirectly) controlled. The relevant thresholds are 3%, 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50% and 66 2/3%. This disclosure duty also applies to the offeror in relation to its own shares held or acquired in connection with a buyback.
Issuers must publicly disclose any price-sensitive information to the market, if it is not already publicly known (Article 53, SIX Swiss Exchange (SIX) Listing Rules) (see also the SIX Directive on Ad hoc Publicity). Buyback programmes relating to equity securities typically have a significant influence on a share's market price.
Some convertible bonds contain early redemption features that the issuer can exercise. However, depending on market conditions, it may be more attractive for the issuer to repurchase the bonds in the market. In relation to mandatory convertible bonds, an early redemption may not be an appropriate option for the issuer, as it could result in a dilution that may not be desirable if the issuer has access to other financing sources. Accordingly, a number of buyback programmes relating to convertible bonds have been launched that lead to a number of important decisions of the TOB.
In relation to Swiss issuers' recent convertible bond buybacks, the TOB held that the takeover law regime and the Circular apply to any bond listed on a Swiss stock exchange (if the bond is convertible into equity securities of the issuer). These rules also apply to issuers that have issued and listed hybrid securities on a Swiss exchange, in relation to regulatory or rating agency capital purposes. Therefore, a buyback offer relating to convertible bonds could also trigger a buyback obligation relating to the issuer's other equity securities on a Swiss exchange (note 6, Circular).
However, the nature of the convertible bond can vary substantially. In certain circumstances, for example, where the convertible bond is far out of the money (OTM) (that is, its strike price is higher than the market price of the underlying asset), the convertible bond's debt feature dominates. Therefore, when applying case law (in particular relating to protection of investors), the variable nature of convertible bonds is taken into consideration and case law is not applied in a uniform manner (particularly when considering whether to grant an exemption from the takeover law regime under the Release).
The TOB has held that sections III 1.2 and 1.3 of the Release (now notes 6 and 10 of the Circular) need not be complied with in all situations to exempt a convertible bond buyback from the takeover law regime (Order 419/01 relating to Petroplus Finance Ltd, dated 18 August 2009 and Order 419/02 relating to Petroplus Finance Ltd, dated 10 September 2009). Therefore, the buyback offer can be limited to the convertible bond and need not include all equity securities listed on a Swiss exchange. In addition, the TOB ruled that the buyback offer may lead to a subsequent de-listing of the bond.
The TOB further granted an exception to the rule in the Release that an offer must not be conditional (section III 2.2, Release, now 18, Circular). The following conditions are acceptable, depending on the facts and circumstances of the offer:
Conditions relating to a minimum percentage of convertible bonds to be tendered.
Conditions relating to the completion of certain refinancing transactions (with which the issuer aims to replace the bond subject to the buyback offer).
The TOB included an economic analysis in its reasoning, considering that the call option has no economic value and therefore it could not be expected that any bondholder would exercise its call option attached to the bond. The bond would be predominantly characterised as a straight debt instrument supporting a more relaxed interpretation of the Release (and SESTA), designed to protect equity and equity-linked investors. However, the TOB did not grant an exemption requested by the issuer relating to a staggered downward offer pricing (common in the Eurobond market) that provided for a reduced repurchase price for bondholders during the last ten days of the offer period only. The TOB concluded that this pricing would violate the equal treatment requirement under the Release and SESTA.
The 10% restriction on equity under corporate law does not apply to convertible bonds (although treasury shares held by the issuer on exercise of the conversion right are subject to this restriction).
The controlling of option or conversion rights are subject to the same disclosure obligations as for equity securities (see above, Further sources of law for buyback programmes).
As other bond buybacks and buybacks of convertible bonds remain subject to the insider trading rules, the following rules apply:
Market manipulation and the FINMA's market abuse rules (see above, Further sources of law for buyback programmes).
The ad hoc publicity rules of the SIX (Article 53, SIX Listing Rules) (see above, Further sources of law for buyback programmes).
Qualified. Zurich, 1991
Areas of practice. Capital markets; public takeovers.
For more details of recent transactions, publications, and so on, see full PLC Which lawyer? profile here.
Qualified. Zurich, 2002
Areas of practice. Capital markets; public takeovers; structured finance; asset finance; securitisation.
For more details of recent transactions, publications, and so on, see full PLC Which lawyer? profile here.