Treatment of Participation Plans in Swiss Public Tender Offers

When a bidder submits a public tender offer to shareholders of a company listed in Switzerland, it typically wants to obtain full control over the target – ie, acquire 100% of the target’s shares. This will, however, only be possible if the participation plans of the target contain specific rules in case of a change of control offer which allow the beneficiaries of the participation plans to either tender their restricted or unvested shares into the offer or foresee an early cash settlement of outstanding awards. If the plans lack such provisions, they will need to be modified by the target’s board. In either case, the support of the offer by the target’s board of directors is key as the participation plans are usually not public, but are typically disclosed in the due diligence process and only the target’s board of directors can modify the plans.

Swiss takeover law does not contain any provisions explicitly dealing with the treatment of participation plans in case of a public tender offers. Therefore, the Swiss Takeover Board (TOB) has to assess and decide such questions – which are regularly highly complex – by applying general rules and principles of Swiss takeover law.

The main general rules relevant in connection with the treatment of participation plans in the context of public tender offers are the minimum price rule and the so-called best price rule. According to the minimum price rule, in mandatory offers (and lacking an opting-out clause in the target’s articles of association), the offer price must be at least equal to the 60-day volume weighted average price (VWAP) (if the stock is liquid) or the highest price paid for securities of the target company by the offeror in the last 12 months preceding the offer, whichever is higher. The best price rule, on the other hand, stipulates that if a bidder, from the publication of the offer until six months after the expiration of the additional acceptance period, acquires equity securities of the target company at a price which is above the offer price, the bidder must offer the higher price to all recipients of the offer (ie, to all shareholders). In applying these rules, the TOB developed its practice on ancillary benefits (Nebenleistungen). According to this practice, if a shareholder – besides the official offer price – receives benefits (which must not necessarily be in cash) from the bidder or a person acting in concert with the bidder, the value of such benefits must be determined and paid to all recipients of the offer to comply with the best price rule.

So far, the TOB has taken a rather relaxed approach when applying the above practice on the treatment of participation plans. In essence, the TOB has taken the view that the unblocking of restricted shares, the acceleration of vesting periods and the cash settlement of outstanding awards are not relevant against the background of the minimum price rule and the best price rule and that thus, no valuation must be made, and the best price rule is not violated.

With regards to the applicability of the best price rule from a timing perspective, the TOB has developed another practice regarding so-called combined overall transactions (gekoppelte Gesamttransaktionen). According to the TOB, the best price rule exceptionally already applies before the publication of the offer in case an acquisition of shares is conditional upon or subject to the same conditions as the public tender offer.

On 10 May 2023, the TOB published a newsletter regarding the treatment of participation plans in connection with public tender offers, in which it seemed to announce a change of its previous practice. According to the newsletter, the TOB’s practice on ancillary benefits (valuation of ancillary benefits in connection with a public tender offer by the bidder and verification of the appropriateness of the valuation by the review body) shall apply by analogy to benefits from participation plans of the target company that are modified in connection with a public tender offer; in particular, “a vesting triggered or accelerated by a change of control should also be considered an adjustment”. This seemed to contrast with the TOB’s previous practice (see above), where the acceleration of vesting periods has not been treated as relevant under the best price rule.

However, in a recent decision (TOB Order 849/04 of 6 November 2023 in the matter Schaffner Holding AG, N 8), the TOB clarified that the newsletter was not meant to announce a change of practice, but to confirm the previous practice of the TOB and emphasise that benefits from participation plans may be relevant under the best price rule.

Finally, in two recent decisions (TOB Order 849/02 of 15 August 2023 in the matter Schaffner Holding AG, N 14 et seq. and TOB Order 846/02 of 4 August 2023 in the matter Von Roll Holding AG, N 22 et seq.), the TOB found that the best price rule does not apply to modifications of participation plans or arrangements on additional compensation (gratifications) for members of the management or the board of directors of the target which were made or concluded (shortly) before the publication of a public tender offer, as such modifications or arrangements were not formally linked to the public tender offer and did therefore not constitute a combined overall transaction. The TOB made a reservation stating that the above does not apply to potential circumventions disregarding the meaning and purpose of the best price rule, but did not specify in which scenarios a circumvention should be assumed.

The treatment of participation plans in public tender offers has become increasingly important in the past years. It is to be seen whether as a result of the ambiguous practice of the TOB regarding the applicability of the best price rule on modifications of participation plans and its recent practice regarding pre-offer modifications and arrangements, target companies will in future transactions more frequently modify participation plans or enter into arrangements on additional compensation prior to the publication of the offer and how the TOB would react to such increase of pre-offer modifications and arrangements.