Investment control in Switzerland

On 18 May 2022, the Federal Council published the preliminary draft for an Investment Audit Act (“VE-IPG“) together with an explanatory report. The purpose of this is that certain takeovers of Swiss companies by foreign investors must be reported in the future and are subject to a prohibition of execution until official approval.

The public discussion of the VE-IPG (consultation) will last until 9 September 2022. Parliament will then discuss the law or the introduction of an investment control in Switzerland.

What is the Investment Audit Act about?

Switzerland has always been open to foreign investment. Outside of regulated markets (e.g. in the banking sector), foreign direct investment – if certain turnover thresholds are met – is only subject to a competition law review.

Marked by a strong increase in Chinese investment in Switzerland, which culminated in 2017 with the acquisition of Syngenta by Chemchina for USD 43 billion. However, this topic was also taken up by Swiss politicians.

In 2018, National Councillor Beat Rieder submitted the motion “Protection of the Swiss economy through investment controls”. She demanded that the Federal Council draft a law to control foreign direct investment. In addition, two postulates called on the Federal Council to comment on takeovers by foreign investors and on an investment review.

In its 2019 report, the Federal Council came to the conclusion that the applicable laws were sufficient and that the cost-benefit ratio of investment control was unfavourable. Nevertheless, in spring 2020, the Swiss Parliament adopted the Rieder 2020 motion, prompting the Federal Council to act.

What is the aim of the Investment Audit Act?

The Federal Council is committed to an open and liberal Swiss economic policy. Switzerland should be perceived abroad as an attractive investment location. Against this background, the Federal Council, which continues to oppose the introduction of an investment audit, proposes a narrowly formulated goal: The purpose of the Investment Audit Act is to prevent a threat or threat to public order or security through takeovers of domestic companies by foreign investors. The Federal Council would like to dispense with other possible goals, such as the protection of Swiss jobs or the support of specific sectors or industries.

In the past, critical voices have repeatedly pointed out that takeovers motivated by economic policy by state-affiliated investors can lead to distortions of competition, for example if a foreign investor first takes over a Swiss company, incorporates its know-how and then, thanks to state subsidies in the home country, pushes Swiss competition out of the market with low prices. In the opinion of the Federal Council, however, such distortions of competition should only be prevented if they can endanger public order or security.

Which takeovers should be examined?

The Investment Audit Act is to apply to takeovers of domestic private and public companies.

On the question of what should be considered a domestic company, the Federal Council is making two proposals. According to the first variant, any company entered in the Swiss commercial register is considered to be domestic. The second variant requires, in addition to the requirement of registration in the Swiss commercial register, that the company is not part of a foreign group of companies.

If a foreign parent company wants to sell its Swiss stake to a foreign investor, this would only be covered by the Investment Audit Act if the first variant is adopted. Also covered only by this variant would be the acquisition of a foreign group with a subsidiary in Switzerland by a foreign investor.

Under the first variant, significantly more takeovers would therefore be covered by the scope of the Investment Act. With variant 2, the probability would probably be greater that potentially problematic takeovers would not be recorded. According to a regulatory impact assessment commissioned by SECO, from 2016 to 2020 about 45 takeovers of variant 1 and about 23 takeovers of variant 2 would have been recorded annually.

Foreign investors are companies with headquarters and head office outside Switzerland. If a Swiss subsidiary of a foreign group of companies acts as an investor, it also qualifies as a foreign investor. Foreign investors are also assetable companies (e.g. fund companies) that are controlled by persons abroad or by another state.

Then, persons without Swiss citizenship who act as investors are considered foreign investors. Due to the obligations under the Agreement on the Free Movement of Persons with the EU and the EFTA Convention, citizens of an EU/EFTA member state are exempt from this rule if they want to take up self-employment in Switzerland by taking over the company.

The concept of takeover is based on the concept of control under antitrust law. A takeover is any operation by which control is acquired, directly or indirectly, over an undertaking or parts thereof. The VE-IPG mentions in particular the merger, the acquisition of a shareholding, the acquisition of significant assets and the conclusion of a contract.

According to VE-IPG, two categories of takeovers are to be subject to approval:

• If the investor is a foreign state or state-related investor, all takeovers are subject to approval.
• Takeovers by foreign private investors are subject to approval if a threat to public security or order cannot be ruled out. The following applies:

Irrespective of the turnover of the target company, the acquisition of the following companies must be examined:

• companies that supply armaments or provide services that are of crucial importance for the operational capability of the Swiss Armed Forces;
• companies that produce dual-use goods;
• companies active in the field of energy and water supply;
• Companies that provide central security-relevant IT systems or security-relevant services for domestic authorities.

The acquisition of the following companies is subject to a reporting obligation if the target company has achieved an average turnover of at least CHF 100 million in the past two years prior to the planned takeover:

• general hospitals;
• companies active in the field of research, development production and distribution of pharmaceuticals, medical devices, vaccines and personal medical protective equipment;
• companies in the field of freight and passenger transport and logistics, such as operators/owners of airports, railway infrastructures or food distribution centres;
• operators/owners of domestic telecommunications networks;
• Operators of systemically relevant financial market infrastructures and systemically important banks.

According to the VE-IPG, small companies should be exempt from the approval requirement. It cannot be ruled out that small companies such as start-ups have also developed security-relevant technologies or products and that their takeovers could lead to a threat to public order or security. Nevertheless, takeovers of domestic companies should not be subject to the audit obligation if they have on average fewer than 50 full-time positions in the past two financial years and have generated worldwide annual sales of less than CHF 10 million.

On the other hand, according to the preliminary draft, the law grants the Federal Council the right to subject further categories of domestic companies to the authorisation requirement for a maximum of 12 months, provided that the granting of public policy or security so requires.

What are the criteria for approving the acquisition?

The proposed takeover must be approved if there is no reason to believe that public order or security in Switzerland is endangered or threatened by the takeover. The consequences of the proposed merger on and in Switzerland must therefore be examined.

The VE-IPG lists exemplary and not exhaustive criteria that should be taken into account. Of interest, for example, is the reputation of the foreign investor or whether the foreign investor can guarantee flawless business activity in Switzerland. This would be excluded if the foreign investor is or has engaged in espionage. It is then necessary to examine whether the services, products or infrastructure of the domestic undertaking can be replaced within a reasonable period of time. Finally, it must be assessed whether the takeover causes significant distortions of competition which endanger or threaten public order or security. The willingness of the foreign investor to cooperate is also significant. If the latter wrongly refuses or makes it more difficult to cooperate with the audit authority, this may lead to a refusal of approval.

How does the approval process work?

The State Secretariat for Economic Affairs SECO is responsible for carrying out the investment audit. The preliminary draft provides for a two-stage approval procedure, with the first step being to quickly clarify whether the takeover can be approved directly or whether an in-depth examination is required. In the latter case, a test procedure is carried out in a second step.

The approval procedure is initiated with an application by the foreign investor to SECO. Within one month of the submission of the application, SECO decides, in agreement with interested administrative units and after consulting the Federal Intelligence Service (“NDB“), on the direct approval of the takeover or the initiation of an examination procedure. If SECO and the participating administrative units are unable to reach an agreement, an investigation procedure is initiated.

Once the investigation procedure has been initiated, SECO will again decide on the approval in agreement with the participating administrative units and after consulting the FIS. Approval shall be granted by consensus of SECO and the administrative units. If SECO and the administrative units are unable to reach an agreement or if they agree that the approval decision is of considerable political significance, the Federal Council shall decide on the approval at the request of the Department of Economic Affairs, Education and Research. In principle, the test procedure must be completed within three months.

Until approval, the civil validity of a takeover subject to approval remains deferred.

What are the consequences of breaches of duty?

Although a takeover subject to approval is invalid under civil law until approval, the preliminary draft expressly provides that the Federal Council may order the necessary measures to restore the proper condition, in particular a divestment, if a takeover subject to approval is carried out despite the lack of approval.

In addition to these measures, the preliminary draft also provides for sanctions. For example, a charge of up to 10% of the transaction value may be threatened if (i) a takeover subject to approval is carried out without approval, (ii) a takeover is carried out that has been approved on the basis of intentionally provided false information and is prohibited after re-examination, or (iii) a measure to restore the proper condition is not carried out.

If the foreign investor, the domestic company or other persons involved in the takeover violate the obligation to provide information to SECO during the approval procedure, they may be sanctioned with an amount of up to CHF 100,000.

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The consultation on the VE-IPG will last until 9 September 2022. After examining the feedback, the Federal Council will finalise the draft and, together with the dispatch, refer it to Parliament for consultation. In view of geopolitical developments, in particular the war in Ukraine, the Investment Review Act should have a good chance of finding a majority in the Swiss parliament.

We will closely follow the further legislative process and keep you informed.

By Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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