Private Equity Minority Investments - Universität St.Gallen

Part Two: Legal Framework and ToolsPart One examines the motivations, interests, and potential concerns of bothcontrolling owner families and PEMIs. Possible conflicts of interest areidentified and the risks associated with minority investments are outlined.Part Two of this dissertation presents various legal tools and arrangementsto address these risks. In the context of shareholder behavior, the primarynon-financial mechanisms for PEMIs to mitigate minority investor risksand to protect their interests commonly referred to in the economic andlegal literature are: 365 (i) enhance voice so that the PEMI can activelyparticipate in corporate decision making and thereby change unsatisfyingdevelopments, and (ii) increase exit options so that the PEMI can readilyabandon an unsatisfactory investment. (iii) A third tool discussed in thisdissertation is access to information, which is a prerequisite for deciding onwhether to pursue a voice or exit strategy. Yet, before analyzing the toolsand arrangements related to these protection mechanisms, severalintroductory considerations are necessary.IIIIntroductory ConsiderationsAThe Portfolio Company’s Business Form: AG versusGmbH1 OverviewFirst and foremost, the PEMI’s voice and exit rights and structuring optionsavailable under Swiss corporate law are a function of the target company’sbusiness form. The stock corporation is by far the most common structurefor privately held companies in Switzerland. The Swiss Code of Obligations(CO) defines the stock corporation as “a company with its own companyname whose predetermined capital (share capital) is divided into parts(shares) and whose liability is limited to the company’s assets”. 366 Thestock corporation model, as envisioned by Swiss lawmakers, is that of acompany with a sizable share capital, whose shares are tradable, and heldby a large number of small, anonymous, and frequently changing shareholderswith limited influence. 367 Yet, the law enables this stock365For these and other protection mechanisms, see Section II.B.1.2.2.366CO 620. The official text of the CO is written in German, French and Italian. For the purposeof this dissertation the English translation of the official text is based upon the work of theSwiss-American Chamber of Commerce. In detail on this definition, see DRUEY/GLANZMANN, § 7; FORSTMOSER/MEIER-HAYOZ/NOBEL, § 1, N 2 et seqq.367See Federal Council report, BBI (1983), p. 747 (“dass das Leitbild des Aktienrechtes dieGesellschaft mit einem grossen Aktionärskreis ist, den einzig in solchen Grossgesellschaftenkann sich das Grundprinzip – Festigkeit des Aktienkapitals und Handelbarkeit der Aktien –74