• Credit Suisse and UBS before forced merger
• Federal Council uses emergency law to initiate emergency merger
• Shareholder rights severely curtailed and competition concerns put aside
The news that Credit Suisse, which had come under pressure, was being swallowed up by its Swiss rival UBS hit the market like a bang. Even if many shareholders had hoped that the big bank could perhaps still be saved, the great loss of confidence and the numerous outflows of money ultimately meant that a solution had to be found as quickly as possible – an emergency merger.
Swiss authorities intervene
This extraordinary step was made possible by the emergency law that the Federal Council seized to thread the elephant wedding together with the Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank. In their respective statements, the three institutions referred to “securing financial market stability” and “protecting the Swiss economy”, as the SNB put it.
And so the SNB is helping both banks with the takeover with liquidity assistance of up to CHF 100 billion. The federal government is also giving UBS a guarantee of nine billion francs to protect against potential losses arising from the takeover. This is to ensure that the takeover does not fail due to a lack of liquidity.
Credit Suisse CoCo-Bonds become worthless
In the course of the takeover, FINMA had announced that the riskiest Credit Suisse bonds, the so-called Additional Tier 1 bonds, which together were worth more than CHF 16 billion, would lose their value completely. The announcement had led to great uncertainty in the market for contingent convertible bonds, also known as CoCo bonds. According to the awp news agency, AT1 bonds are a popular investment product that was launched after the 2008 financial crisis. The aim of the CoCo bonds is to shift the banking risk from the taxpayer to the bondholders.
The bonds lured with an attractive yield, which attracted numerous investors to the bond market, especially before the interest rate turnaround. Of course, the complete loss is more than painful for bondholders, but it is not the first case that the worst-case scenario has occurred. Back in 2017, AT1 bondholders at Spain’s Banco Popular Español lost everything after the bank had to be rescued through a merger with Banco Santander.
In addition to this drastic decision by the Swiss authorities, the fact that two other important aspects of the open markets were suspended by the Swiss emergency decree, namely the competition law and shareholder rights, as Bloomberg argued, also caused resentment.
Rule of law suspended?
Law professor Peter V. Kunz found clear words here in relation to the news agency: “Foreign investors may be wondering whether Switzerland is a banana republic where the rule of law does not apply.” In his estimation, the Swiss authorities acted “on very thin ice”. The country itself is “not endangered, but there is a risk of lawsuits”. The expert is also critical of the shareholders’ passing over, as he told Blick: “The fact that the CS shareholders are no longer asked about the deal is a completely extra-legal regulation.” He is therefore certain: “Lawsuits will come.” Although the deal can no longer be contested, Kunz can imagine that the federal government will have to deal with state liability lawsuits, as the Neue Zürcher Zeitung reports. After all, the financial damage suffered by shareholders is easy to calculate. Whether such lawsuits will be upheld will depend on whether the Federal Council acted illegally.
Federal Council relies on emergency law
In fact, in its opinion on the merger of Credit Suisse and UBS, the Swiss Federal Council referred to its right to issue emergency ordinances “to counteract existing or imminent threats that could lead to the disruption of public order or internal or external security” and thereby suspending voting rights for shareholders in the event of mergers. In addition, when asked about competition concerns, FINMA Chair Marlene Amstad made it clear in the press conference on the merger that competition concerns would come before concerns about financial stability: “The regulatory law gives us the power to override the competitive situation in the interest of financial stability and that we used here.”
All in all, these decisions by the Swiss authorities are likely to make foreign investors think twice about parking their money in the country otherwise known as a “safe haven”, agree different financial professionals.
Financial Experts Not Enthusiastic – Lawsuits Ahead?
University professor Kern Alexander told Bloomberg that the authorities reacted “panically” and “undermined the rule of law and Switzerland” with their actions. Meanwhile, Jacob Kirkegaard from the Peterson Institute for International Economics is certain that the discontinuation of the CoCo bonds in particular will give rise to numerous lawsuits: “Many lawsuits will result from this, which will highlight the erratic and selfish behavior of the Swiss authorities in this saga. ”
Meanwhile, the first law firms have already taken the first steps. Pallas Partners announced that it is currently putting together a team to examine legal action: “We are currently evaluating a coherent, multi-jurisdictional strategy that could be pursued by a group of international investors in the AT1 bonds in order to offset the losses,” said the office to awp. The world’s largest commercial law firm, Quinn Emanuel Urquhart & Sullivan, has announced the same thing.
For the Zurich constitutional law professor Andreas Kley, the fact that the Federal Council would have made use of emergency law again is particularly unsatisfactory. This has happened far too often since UBS had to be rescued in 2008: “One acts headlessly or at least hasty, and everyone acts as if there is simply no other solution possible,” the expert told the NZZ. The Federal Council’s competences in emergency law have been continuously expanded since 1999. With reference to the emergency law article, the executive can no longer only supplement existing laws or fill gaps, they can also amend or override existing laws.
It remains to be seen whether the Federal Council has leaned too far out of the window with the significant curtailment of shareholders’ rights in this case. In any case, his actions should ensure that domestic and foreign investors in Switzerland will act more cautiously in the future.
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