Despite its relatively small size, Switzerland is home to several large and well-established international companies, spanning a diverse range of industries. These include major banks such as Credit Suisse and UBS, large insurance and reinsurance corporations such as Zurich Insurance and Swiss Re, and food and beverage, healthcare and biotech companies such as Nestlé, Novartis and Roche. Switzerland is also home to mechanical and electrical engineering companies specialising in high-technology, knowledge-based production such as the Swatch Group, Oerlikon and ABB. Tourism also plays an important role for Switzerland’s economy. While Switzerland has large global companies, most businesses are small or medium-sized, and many of them specialise in niche machinery and high technology. Switzerland is one of the world’s most competitive economies, thanks to its large and well-established corporate base, modern infrastructure and highly skilled workforce. Its political stability, comparatively flexible labour market regulations, transparent legal system, efficient capital markets and low corporate tax rates also play a part.
Switzerland's GDP grew stronger than expected in 2018. Therefore, the Federal Government's Expert Group on Economic Forecasts increased its GDP growth forecast for 2018 from 2.4% to 2.9%. For 2019, the Federal Expert Group expects GDP to grow by 2%, mainly due to a growth in foreign trade and investments.
Market developments in 2017/2018
Mergers & acquisitions
Swiss M&A activity increased significantly in 2018 compared to 2017, both in terms of the number and the value of transactions. More than a third of the M&A transactions involved private equity companies. Public M&A activity was very strong in both 2017 and 2018, with the most noteworthy transactions being the USD30 billion acquisition of Actelion by Johnson & Johnson (completed in June 2017), the USD13 billion buy-out of Novartis by GlaxoSmithKline from their consumer healthcare joint venture (completed in March 2018), and the USD7.2 billion acquisition of Starbucks' Consumer Packaged Goods and Foodservice distribution business by Nestlé (completed in May 2018). In addition, the long-running takeover battle for Sika was finally resolved in May 2018. Saint-Gobain acquired all outstanding shares of the Burkard family for a purchase price of CHF3.22 billion. In turn, Sika purchased back a 6.97% stake in Sika (representing a 23.7% voting interest) for a total consideration of CHF2.08 billion. The parties agreed to terminate all legal proceedings and Sika introduced single class registered shares.
During the first three quarters of 2018, the Swiss IPO market was strong, with an aggregate issue volume of more than CHF3.7 billion. In total, six companies joined the SIX Swiss Exchange so far in 2018. The largest Swiss IPO in the first three quarters of 2018 was the beverage packaging manufacturer SIG Combibloc (CHF1.7 billion), followed by the logistics company CEVA Logistics (CHF1.2 billion). Other notable IPOs on the SIX Swiss Exchanges included the sensor technician Sensirion (CHF318 million), orthopaedics company Medartis (CHF144 million), biotechnology company Polyphor (CHF155 million) and mechanical engineering company Klingelnberg (CHF241 million). The Swiss market has also been active in terms of rights offerings. The largest transaction in 2018 is likely to be Aryzta (expected to raise up to CHF790 million), followed by Bell Food Group (CHF612 million). Other notable rights offerings included real estate company Swiss Prime Site (CHF320 million) and structured investments & fintech solutions provider Leonteq (CHF118 million).
Amid historically low interest rates and economic growth, the Swiss securitisation market continued its steady growth in 2017 and 2018. Public transactions included the auto leasing transactions of BMW (Schweiz), MultiLease (Emil Frey Group's auto leasing company) and AMAG Leasing (the leasing company of AMAG Group, the exclusive importer of Volkswagen Group vehicles in Switzerland), as well as a credit card receivables transaction by Credit Suisse and American Express' joint venture Swisscard AECS. In addition, there were several private transactions.
Pre-eminent key political and legal topics discussed in 2017/2018
New financial market legal architecture
In 2018, the Swiss financial markets' legal architecture continued its significant transformation. One of the aims of the new rules is the regulatory harmonisation with the relevant EU rules (in particular MiFID II, MiFIR, the Prospectus Regulation, the PRIIPs Regulation) to attain third-country equivalency thereunder, with adjustments made to reflect the specific circumstances of the Swiss financial markets.
Because the EU’s third-country equivalence rules give the EU wide discretion in granting or withdrawing equivalence for a third country, relying on third-country equivalency to gain access to EU financial markets remains subject to substantial challenges. For example, in December 2017 the EU granted equivalence for Swiss stock exchanges only on a temporary basis for one year until 31 December 2018 amid open issues on a broader framework agreement that would define Switzerland’s ties with the EU.
Entry into force of Swiss Financial Market Infrastructure Act
As a first cornerstone, the new Financial Market Infrastructure Act (FMIA) came into force on 1 January 2016. The FMIA established a regulatory framework for financial market infrastructure and trading venues, disclosure of significant shareholdings in listed companies in Switzerland, insider trading and market manipulation, and public takeovers, each modelled after the relevant EU rules. The FMIA also introduced regulations applicable to the over-the-counter (OTC) derivatives market.
While FMIA entered into force on 1 January 2016, certain obligations and provision thereunder only apply as from a later date. In particular, the obligatory trade reporting under FMIA for large non-financial counterparties entered into force on 1 January 2018 (for OTC derivatives) and 1 July 2018 (for exchange-traded derivatives). For small non-financial counterparties, the reporting requirements will apply as from 1 January 2019 (OTC derivatives) and 1 July 2019 (exchange-traded derivatives).
Swiss Federal Financial Services Act
The Swiss Federal Parliament adopted the new draft of the Federal Financial Services Act (FinSA) on 15 June 2018. The act is currently expected to enter into force as of 1 January 2020.
The FinSA will set out cross-sector rules (except for insurance and insurance products, which are excluded) for the provision of financial services. It will also introduce a comprehensive and harmonised prospectus regime that aims to achieve harmonisation with relevant EU rules while reflecting specific Swiss circumstances.
In connection with the offering and listing securities in the Swiss market, the FinSA includes the following novelties:
• The requirement to approve all offering and listing prospectuses by a new regulatory body (the 'review body') that is licensed and supervised by the Swiss Financial Market Supervisory Authority (FINMA), subject to certain exemptions.
• A new obligation to publish a prospectus not only for primary but also for secondary public offerings of securities in Switzerland.
• The codification of the private placement exemption and other exemptions from the requirement to publish a prospectus based on accepted Swiss standards and the EU Prospectus Directive.
• The requirement to prepare and make available a basis information document when offering financial instruments other than shares (or comparable equity securities) or certain debt instruments without derivative character to retail investors containing all necessary information to make an investment decision, presented in an easily comprehensible way and designed to make financial instruments easier to compare.
According to the new regime, the review body would have to approve a prospectus prior to a public offering or an admission of securities to trading on a Swiss trading platform. However, for certain debt securities (e.g. bonds) a prospectus can be approved after its publication provided certain requirements are met, reflecting longstanding Swiss market practice. By preserving the advantage of the current approval process for listing prospectuses in the Swiss debt capital markets, Switzerland continues to ensure attractive time-to-market conditions for issuers of debt instruments.
Swiss Federal Financial Institutions Act
On 15 June 2018, the Swiss Federal Parliament adopted the draft of the Federal Financial Institutions Act (FinIA). The act is currently expected to enter into force as of 1 January 2020. The FinIA essentially harmonises the authorisation rules for financial service providers and will, for the first time in Switzerland, subject independent portfolio managers and trustees to licensing requirements and continuous prudential supervision.
Public consultation regarding implementing ordinances for the FinSA and FinIA
On 24 October 2018, the Swiss Federal Council published drafts of the three implementing ordinances regarding the FinSA and FinIA for public consultation. The public consultation period will last until 6 February 2019. The implementing ordinances are expected to enter into force on 1 January 2020.
• The Financial Services Ordinance (FinSO) includes detailed provisions regarding the duties of financial service providers to provide advice and information and contains provisions on their organisation and implementing provisions regarding the new prospectus regime.
• The Financial Institutions Ordinance (FinIO) details the conditions for authorisation and duties of financial institutions and their supervision.
• The Supervisory Organisation Ordinance (SOO) governs the authorisation conditions and activities of the newly introduced supervisory organisations (SO) that will be responsible for the ongoing supervision of portfolio managers, trustees and trade assayers in accordance with the Precious Metals Control Act.
Corporate tax reform
Switzerland has been undergoing major corporate tax reforms. The so-called third corporate tax reform package proposed by the Swiss Federal Council intended to abolish certain tax advantages for holding, domiciliary and mixed companies pursuant to an agreement with the European Union as well as implementing tax advantages deemed in line with EU rules.
The third corporate tax reform package hit a political roadblock when voters rejected it in a referendum with an unexpectedly high proportion of 59.1% of the popular vote in February 2017. While the Federal Council announced its intention to propose a new reform package as soon as possible, the referendum added a lot of uncertainty in part because it is unclear whether a new package will be in place within the timeframe agreed with the EU.
In the meantime, the Federal Council has proposed a new reform package and submitted it to the Swiss Federal Parliament that adopted the Tax Proposal 17 on 28 September 2018. The new proposal stipulates that all special Swiss income tax regimes, such as the mixed company or holding company regimes will be replaced with measures that are both internationally accepted and that ensure Switzerland will remain attractive for multinational companies. Before the Federal Council can definitively set the date of entry into force, scheduled for 1 January 2020, it is likely that the approval of the Swiss electorate will also become necessary in a referendum. This is likely to be held on 19 May 2019.
Withholding tax reform
Another troubled Swiss tax reform project relates to withholding tax. Currently, a Swiss issuer of bonds must deduct a withholding tax of 35% from interest (and certain other) payments made to investors inside and outside of Switzerland (debtor-based regime).
Because it may be difficult for investors outside Switzerland to reclaim Swiss withholding tax, the current system makes it impracticable for Swiss issuers to directly access investors outside Switzerland. This had a material adverse effect on Swiss capital markets for decades. To address this issue, the Swiss Federal Council published in December 2014 draft legislation to, among other things, replace the current debtor-based regime with a paying agent-based regime for Swiss withholding tax, where a withholding would be required only for Swiss investors. The Federal Council withdrew the draft legislation in June 2015 and mandated the Swiss Federal Finance Department to appoint a group of experts to prepare a proposal for reform of the Swiss withholding tax system. Because of a popular initiative to enshrine banking secrecy in the Swiss constitution, the project of the group of experts has been put on hold in 2015 pending the results of the popular vote. To facilitate compliance by banks with the tougher capital requirements under Basel III prior to the reform of the Swiss withholding tax system, the Swiss Federal Council exempted contingent capital instruments and bail-in bonds from the withholding tax until 2021.
On 9 January 2018, its sponsors withdrew the banking secrecy initiative. Following this withdrawal, the Swiss Federal Council and the group of experts have recommenced the withholding tax reform project. Implementation of the reform is expected to take about two years.
Cross-border investigations involving Swiss banks
With respect to the US client legacies of Swiss banks, a key area of concern in previous years has been the US Program for Non-Prosecution Agreements or Non-Target Letters (NPAs) for Swiss Banks (published on 29 August 2013) that enabled Swiss banks to resolve certain US-client-related legacies with the US Department of Justice in a defined framework. In light of the ongoing co-operation duties of the participating Swiss banks, the still-unresolved investigations against some of the banks against which the US DOJ had authorised formal investigations prior to the announcement of the US Program ("Category 1 Banks") – as well as ongoing or potential further investigations against individual bank employees – the US client legacies of Swiss banks will remain an attention point at least until 2019, when the four-year co-operation period under the non-prosecution agreements ends.
In addition, a number of ongoing large-scale Swiss and foreign regulatory, criminal and civil investigations – such as those related to the Malaysian Sovereign Wealth Fund 1MDB, FIFA and Petrobras – will continue to occupy a number of Swiss banks and their employees throughout 2018.