Joint Ventures in Switzerland
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1 Joint Ventures in Switzerland by Dr Peter C Schaufelberger, LLM and Dr oec HSG Richard W Allemann, of SvH Schaufelberger & van Hoboken, attorneys at law, Zurich-Zollikon Introduction Traditionally, Switzerland offers a sound and favourable environment for the establishment of national or cross-border joint ventures. Because of attractive legal and tax rules, Switzerland often serves as an operational base for foreign joint venture partners who also benefit from the established legal and political environment, the stable economy, and the quality of financial services and qualified labour force that the country provides. This article gives an overview of the legal structures available for joint ventures in Switzerland. The term joint venture is generally understood as a short-term or long-term cooperative relationship between two or more parties with regard to a specific purpose. The purposes of joint ventures are manifold and include research and development, manufacture, distribution and sale, marketing, specific construction projects, pooling of capital for investment or other financial purposes, as well as the spin-off of business segments. Generally, Swiss law does not provide for specific rules regulating joint ventures. The formation and operation of a joint venture under Swiss law is, therefore, governed by the general rules concerning contracts and companies which are contained in the Swiss Code of Obligations. Furthermore, there are no rules which would prohibit foreign participation in a Swiss joint venture. Swiss tax law provides for favourable taxation of joint ventures which are mainly active abroad. However, certain businesses if conducted in Switzerland (including banking, certain financial services, insurance business, real estate business, certain businesses in the health sector and trading with specific goods) are subject to licences or approval by regulatory authorities. In principle, two different forms of joint ventures are known in Switzerland: Corporate joint ventures (also called equity joint ventures) which occur if the joint venture enterprise is an independent legal entity which is owned by the members of the joint venture (partners). Joint venture companies are generally organized as stock corporations (Aktiengesellschaft, AG). In this case, the basis of the joint venture and the respective rights and obligations of the partners are usually regulated in a shareholders agreement (also referred to as a joint venture agreement (JVA)). Contractual joint ventures, which are solely based on a cooperation agreement between the partners (JVA). 111
2 Formation: no specific formalities are required. Nevertheless, the partners will usually enter into a written JVA. Certain disadvantages of contractual joint ventures relate to the following: Joint ventures Contractual joint ventures When to choose A joint venture may be organized on a purely contractual basis, if it relates to a short-term project or to a project which is limited in scope and time and which does not require a permanent structure (for example, a consortium formed between two or more entrepreneurs to carry out a particular project). However, a contractual joint venture is usually not suitable for a long-term cooperation concerning a specific business operation, which is independent from the partners main operations. Advantages and disadvantages In comparison to corporate joint ventures, a contractual joint venture has certain advantages with regard to the following: Flexibility: the parties may amend or modify their agreement by mutual consent at any point of time. Termination: contrary to corporate joint ventures, a contractual joint venture may be terminated by mutual consent of the partners at any point of time. Tax: contractual joint ventures do not constitute a taxable entity in Switzerland, as the profits and losses of the joint venture accrue directly to the partners. Confidentiality: the contractual joint venture provides complete secrecy. The partners may structure the joint venture in a form so that only one or certain partners deal with third parties and the other partners remain undisclosed. Liability: no limitation of liability of the partners applies towards third parties. The partners may be held directly liable for the debts incurred by the joint venture, even if they were incurred by another partner. No legal entity: because a contractual joint venture does not constitute a legal entity, it may not enter into contracts or liabilities or own assets in its own name. Financing: if external financing of the joint venture is required, third parties, in particular banks, generally prefer to deal with legal entities as debtors. Limited ability to transfer the contractual interest: under Swiss law, no partner may transfer his or her interest in a simple partnership to another party without the consent of all other partners. Even if such consent is given, the transferring partner will remain liable for the debts of the joint venture for a period of two years from the date of the transfer. 112
3 internal management and decision-making of the joint venture; power to represent the joint venture to third parties; Joint ventures Contents of the Joint Venture Agreement Unless the partners agree otherwise, the statutory provisions concerning the so-called simple partnership (Die Einfache Gesellschaft) apply to contractual joint ventures. However, because these statutory rules may not meet the particular intentions and requirements of the joint venture partners the following should be specifically regulated in the JVA: the purpose and scope of the joint venture; funding and contributions by each partner; profit and loss allocation; non-competition covenants; confidentiality; duration and termination; governing law (if national and foreign partners are parties to the JVA); usual miscellaneous provisions and dispute resolution (jurisdiction or arbitration) clauses. Corporate joint ventures When to choose Joint ventures often relate to long-term cooperation arrangements between two or more parties. A frequent example is that two enterprises decide to cooperate with regard to research, development and exploitation of a new technology, possibly also the manufacture of products, which are based on such technology. The joint venture may choose to market and distribute the products or, alternatively, manufacturing, marketing and distribution may be carried out by the partners. Other recent examples include joint projects of banks regarding internet-based businesses such as financial portals or online banking platforms. In such cases, if the joint venture concerns a separate business operation for which an organizational long-term structure is needed, the partners will often set up a company (a joint venture company (JVCo)), in which the partners hold a participation and make available staff, certain assets, IPR, know-how and other resources to the JVCo. In Switzerland, joint venture companies are generally organized as stock corporations (Aktiengesellschaft, AG), which provide the most flexibility and allow tailor-made structuring pursuant to the particular needs of the joint venture partners. Other company forms are generally not taken into consideration due to less flexibility in structuring. 113
4 Advantages and disadvantages The JVCo constitutes a separate legal entity which may last for an indefinite period of time and which has an organizational structure. The main advantages of a corporate joint venture relate to the following: It is a separate legal entity: as a legal entity, a JVCo has the legal capacity to enter into contracts or liabilities (including financing agreements with third parties) and to own assets in its own name, which a mere contractual joint venture cannot. There are limitations to liability: the liability of the partners is basically limited to the payment of the amount subscribed in the share capital of the JVCo. Shares in a JVCo are easily transferable: unless the articles of association provide that the transfer of shares may be refused by the board of directors for important reasons the shares in a Swiss company are freely transferable without formalities. Disadvantages that should be considered include the following: Formalities and costs in connection with the formation of a JVCo: the formation of a JVCo has to follow statutory provisions regarding the formation of a Swiss company and generates higher formation and running costs than a contractual joint venture. As explained in more detail below, the formation and professional structuring of a corporate joint venture requires a variety of documents. Formalities in connection with the administration of a JVCo: A Swiss company must prepare annual financial statements which must be audited by independent auditors. In addition, the board must issue a business report. The audited accounts and the business report have to be approved by an annual meeting of the shareholders. However, and unless a company qualifies as a public company, the annual accounts and the business report must not be published or registered. Limited secrecy: unless the JVCo is a public (listed) company, the disclosure requirements with regard to Swiss companies are less stringent compared to other jurisdictions. However, the following data must be entered into the Trade Register and are accessible to the public: the company name and domicile; the foundation date; the purpose of the company; the share capital and denomination of the shares and type of shares (registered or bearer shares) as well as possible restrictions on the transfer of shares; the board members (name, nationality, domicile and signing authority); the same data regarding other signatories (managers, representatives, etc); 114
5 the name and domicile of auditors. The shareholders are not registered in the Trade Register. Liquidation and winding-up: the liquidation of the JVCo has to follow a formal procedure pursuant to statutory provisions. Taxation: the JVCo is subject to taxation (see below). Documentation and structure For the formation and structuring of a corporate joint venture, several documents are necessary, the purpose and interdependence of which are outlined hereafter. Shareholders agreement The shareholders agreement between the joint venture partners (the JVA) is the main agreement which regulates the respective rights and obligations of the partners with respect to the JVCo and the terms and conditions which will govern the joint venture. The JVA constitutes only a contractual relationship between the partners. In particular, it has no corporate effects and, as a general rule, does not bind the JVCo itself. For this reason, it is often recommended that the JVCo should also be a party to the JVA. However, it is disputed and, in the view of the author, questionable, whether this is legally possible under Swiss law. The corporate relationship between the partners (shareholders) and the JVCo is governed by the articles of association of the JVCo which have absolute binding effect. Therefore, specific corporate relations between the partners should also be regulated in the articles of association, to the extent that Swiss law permits this. However, as certain issues to be regulated between the partners may not be provided for in the articles of association, the conclusion of a JVA between the partners which sets out the detailed terms and conditions applicable to the joint venture is indispensable. The principle terms of a JVA are outlined below. Set-up agreement Although the JVA often provides for the setting-up of the JVCo, the formation process should be regulated in a separate agreement, the set-up agreement (Zusammenschlussvertrag). The setting-up of the JVCo is completed on incorporation, while the JVA regulates the future, long-term relationship between the partners, which follows, in various respects, different legal principles than the transactions to be performed in connection with the formation of the JVCo. The set-up agreement should regulate the following aspects: the mechanics for the formation of the JVCo, including contributions by the partners to the initial capital of the JVCo (cash contributions or transfer of assets as contribution in kind); 115
6 any loans to be granted to the JVCo; any assets to be transferred by each of the partners to JVCo; the valuation of assets; due diligence (if not conducted beforehand); the usual representations and warranties of the partners regarding the assets transferred to the JVCo; any rules and mechanics for transfer of personnel to JVCo; the remedies in case of breach or inaccuracy of representations and warranties; the usual miscellaneous provisions, governing law and dispute resolution (jurisdiction or arbitration) clauses. Articles of association of the JVCo As a rule, standardized articles of association may be used. However, since the articles of association have a stronger (corporate) binding effect than the JVA, certain aspects (for instance, special voting thresholds or limitations regarding the transfer of shares in the JVCo) should be regulated also in the articles of association. Business organisation regulation of the JVCo Swiss law provides that the board of directors of a Swiss company must, in principle, manage the company, unless the management authority is assigned (delegated) to one or more managers. Such delegation by the board is permitted only on the basis of a written organization regulation which must be implemented by the board. The organization regulation will provide for the management functions, their powers, responsibility and limitation of authority, reporting as well as the basic organization of accounting and controlling. However, mandatory law provides that certain duties are reserved to the board of directors and may not be delegated. Additional agreements between the JVCo and the joint venture partners A joint venture often requires that the partners will provide financing, or will transfer, supply or make otherwise available assets, IPR or products to the JVCo or that products developed and manufactured by the JVCo are being distributed through the distribution channels of one or more of the partners. For this purpose, and because the JVCo is a separate legal entity which should not be a party to the JVA, it is indispensable that separate agreements between the JVCo and the respective partner(s) are entered into (often referred to as satellite agreements). Such satellite agreements may include the following: a loan agreements; purchase agreements regarding the sale and transfer of specific assets by a partner to JVCo; license agreements; 116
7 leasing agreements; supply agreements; distribution agreements. Contents of shareholders agreement It is important to understand that the JVA, in principle, is binding only between the partners, and does not bind the members of the board of directors of JVCo. Regardless of the contents of the JVA, the directors have to comply with statutory duties, in particular the duty to act primarily in the interest of the company (which interest may not necessarily coincide with that of the partners). Furthermore, the JVA needs to be tailored to the specific purposes of the joint venture and the particular requirements of the partners. As an overview checklist, the following lists certain basic matters which the JVA should usually address: The purpose: this should include a general description of the business purpose and functions of the joint venture and general understandings of the partners with regard to the joint venture. Participation ratio: this should outline the respective participation of the partners in the initial share capital of the JVCo. Financing: if the operations of the JVCo require financing in addition to the initial share capital, the JVA should regulate how such additional financing is provided and at what conditions (debt/equity financing). Operations: this should include the rights and obligations of the partners with respect to the operations of the JVCo (for example, provision of staff, know-how, assets or other obligations) and entering of respective satellite agreements between the JVCo and the respective partner(s). The partners should also agree on a business plan which should be an exhibit to the JVA. Shareholders meeting and decision making between the partners: the shareholders meeting is the supreme body of a Swiss stock company and has specific powers provided by law. In order to protect the interests of the partners in JVCo, the JVA should provide that the shareholders meeting is duly constituted only if all or a specific minimum of the partners is present or represented in the meeting; and/or certain important decisions (for example, changes to the capital structure of the JVCo, merger and/or liquidation of the JVCo and so on) shall be possible only with the consent of all or a qualified majority of the partners. Board of directors: usually the partners have the right to nominate certain members of the board. In this connection the partners have to consider that a majority of the board must consist of persons who are Swiss citizens domiciled in Switzerland. 117
8 The JVA should also provide for important decisions which require majority votes. Such majority requirements should be reflected also in the Business Organization Regulation. Management: this should include the organization of the operative management of the JVCo and the appointment of the initial management and respective rights/veto rights of the parties regarding the appointment or dismissal of key executives. There should be a dividend policy. Transfer of shares in the JVCo: as a general rule, the shares in a Swiss stock company are freely transferable. To a limited extent, it is possible, to implement certain transfer limitations in the articles of association (so-called Vinkulierung, that is the power of the board of directors to refuse a transfer of shares for specific important reasons provided for in the articles of association). In the JVA specific restrictions regarding the transfer of shares in the JVCo are usually agreed, which may include all or part of the following: mutual pre-emptive rights or first right of refusal of the partners; purchase options in exceptional cases; co-sale (tag-along) rights and co-sale obligations (drag-along) if the other party sells its shares in the JVCo under specific conditions; as security of transfer limitations, the JVA often provides that the partners will deposit their shares into escrow with an independent escrow agent. The mechanism for the admission of new partners. The exit mechanism (for example, in the case of an IPO or trade sale). Anti-competition and confidentiality covenants. Penalties in case of breach of the JVA. Duration and termination of the JVA: the JVA may be entered into for a specific or an indefinite period of time. In the latter case, the JVA must provide for an appropriate termination period. Furthermore, the JVA should provide for immediate termination for cause (for example, in the case of a change of control with regard to a partner). The usual miscellaneous provisions, governing law and dispute resolution (jurisdiction or arbitration) clauses. 118
9 If the JVCo is economically of importance in the Canton of location (for example, by creating new jobs) and is not subject to privileged cantonal taxation, it may, under certain conditions, enjoy tax holidays of up to 10 years. Joint ventures Certain tax aspects of corporate joint ventures When considering corporate joint ventures it is necessary to bear the following tax aspects in mind: The incorporation of a JVCo is subject to Swiss stamp duty at a rate of 1% of the share capital or other equity contributions exceeding SFr250,000 ($150,000). Contributions in kind are valued at fair market value. Contributions in kind to the JVCo from a partner (for example, patents) might be subject to a profit or capital gains tax in the country of residence of that partner. The JVCo is subject to profit taxation on the federal and cantonal level. The cantonal tax rate depends on the canton and the community within the canton where the JVCo is domiciled. Ordinary profit tax rates (before tax) vary between approximately 15% and 30%. In addition, a low cantonal capital tax is imposed on the JVCo. The JVCo may enjoy privileged cantonal taxation. The JVCo is taxed as: mixed company (gemischte Gesellschaft) if it conducts trade activities and at least 80% of its revenues are derived from sources outside Switzerland and at least 80% of its expenses are effected outside Switzerland; or administrative company (Verwaltungsgesellschaft) if its main purpose is to grant licences and loans to foreign persons. Nevertheless, the JVCo may employ personnel and lease premises to a limited extent, without loosing the above tax privileges. In such cases the federal and cantonal tax rates applying to profits derived from foreign sources (before tax) vary between approximately 9% and 12%. Income derived from Swiss sources is subject to the ordinary profit tax rates. The so-called controlled foreign companies (CFC) tax legislation of the country of residence of the respective partner frequently does not apply to a 50%-50% JVCo. Interest or licence fees paid by the JVCo to a partner or any other foreign person are not subject to Swiss withholding taxes. Profit distributions by the JVCo to a partner or a closely-affiliated person are subject to Swiss withholding taxes at a rate of 35%. Swiss withholding taxes may be fully reclaimed by Swiss partners and are partially or fully refundable by foreign shareholders, if the recipient is domiciled in a country with which Switzerland maintains a double tax treaty. Swiss competition law aspects Based on the Swiss Cartels Act a planned concentration of enterprises by joint venture, provided it qualifies under the act, will be notified to the Swiss Competition Commission, if the following thresholds are met: worldwide joint turnover of the enterprises concerned of at least SFr2 billion; 119
10 or joint turnover in Switzerland of the enterprises concerned of at least SFr500 million; and (cumulative) if at least two of the enterprises concerned achieve an annual turnover in Switzerland of at least SFr100 million each. Moreover and generally speaking a joint venture may not result in a materially negative impact on the relevant market, monopolistic control thereof or an abuse of the market position, respectively. For further information or to subscribe to IFLR, please call (0)
11 Contributors Switzerland: Joint ventures Dr Peter C Schaufelberger, LLM Peter C Schaufelberger is a corporate and litigation partner at SvH. He graduated from Zurich University as licentiate of law in 1977 and as Doctor of Law in He was awarded the degree of Master of Laws (LLM) from the Law School of Harvard University, Massachusetts, US in He was a co-founder of SvH in 1992 after having practised with other major law firms in Zurich. Peter Schaufelberger s practice concentrates on corporate law, mergers & acquisitions and litigation. He has extensive experience of managing large domestic and cross-border corporate transactions, takeovers, joint ventures, private equity transactions, and financing structures, and is often involved in international litigation. DR OEC HSG Richard W Allemann Richard Allemann is a corporate and tax partner at SvH. He graduated from the University of St. Gallen Graduate School of Business, Economics, Law and Social Sciences as licentiate of business law in 1982 after having acquired a degree in physics from the Swiss Federal Institute of Technology (ETH) in He was awarded the degree Doctor of Economics from St Gallen University in 1997, based on his thesis on corporate group taxation. Richard Allemann has been active as managing director and member of the board of several enterprises and has practised corporate and tax law with international Zurich law firms. He practices primarily in the fields of corporate taxation, corporate planning and structuring, mergers & acquisitions and contract law. 69
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