Swiss law offers two ways to acquire control of a locally-listed company: public tender offers and statutory mergers. Under the new takeover rules, which entered into effect on 1 January 2009, shareholders holding at least 2% of the voting rights of the target company have the right to become a party to the proceedings before the takeover board (TOB) and to challenge the TOB's orders and bring appeals to the Financial Markets Supervisory Authority (FINMA) and the Federal Administrative Court.

The effects of these strengthened procedural rights quickly became evident in two prominent transactions announced in 2009. In both transactions, minority shareholders acceded to the proceedings as parties and challenged the way in which the applicable minimum price was determined.

In the first offer, the issue did not have to be resolved, as the offeror voluntarily increased the offer price. In the second case, both the TOB and FINMA rejected the appeal and the offer was settled on the basis of the original price. However, the minority shareholder brought an appeal before the federal administrative court which is still pending. Should the appeal be upheld, the offeror might have to make an additional payment to all target shareholders who had accepted the offer.

These two cases show that the granting of party rights to qualified shareholders has undoubtedly increased the litigation risk involved in public tender offers in Switzerland. Neither the offeror nor the target company is able to rely on a favourable decision of the TOB when the offer is publicly announced but must live with the risk that qualified shareholders will raise objections.

If such objections are rejected, a delay will result. If the objecting shareholders are successful, the terms and conditions of the offer, including the offer price, may have to be improved, without there being an exit right for the offeror. In this context it is also important to note that the offeror and the target will not necessarily know all qualifying 2% of shareholders, since the lowest threshold triggering a disclosure obligation in a Swiss-listed company is 3%.

Another form of litigation that has become increasingly important in Swiss public tender offers may be labelled 'back-end' or 'squeeze-out' litigation. In Swiss tender offers, the offeror will often reach 98% of the voting rights as a result of the successful offer and the minority shareholders will not have any meaningful defence rights in the subsequent squeeze-out proceedings. If the offeror, however, holds less than 98% but more than 90%, it will have to squeeze-out minority shareholders by way of a squeeze-out merger where the minority shareholders do have statutory appraisal rights.

In view of the increased litigation risks associated with public tender offers, acquirers may wish to look more closely at statutory mergers as an alternative structure to acquire (full) control of the target.

However, mergers bear their own risks of legal scrutiny, as the announced Alcon-Novartis merger shows. Novartis acquired a controlling interest in Alcon from Nestle and proposed a subsequent merger with Alcon, under which the minority shareholders would receive less valuable consideration than Nestle received in the preceding control transaction. A number of Alcon shareholders (and its independent board committee) have announced their resistance. The outcome of any legal proceedings may become a landmark for assessing the respective legal risks associated with statutory mergers as compared to public tender offers.

Hans-Jakob Diem (pictured above) and Matthias Wolf are partners in the M&A and corporate practice of Lenz & Staehelin in Zurich.