Introduction

The transfer of assets provision in the Swiss Merger Act is a newly created legal mechanism that facilitates a transfer of assets from the originator to the securitization vehicle in a securitization transaction. Although some issues are still being debated by experts and have yet to be clarified by the Supreme Court, the new transaction method will in most cases facilitate the transfer of a portfolio consisting of a large number of agreements, particularly with regard to the third-party consent required for such a transfer. The new method removes the need for various rather vague structures relating to the transfer of agreements as part of the asset transfer. This update reviews the issues involved in a transfer of agreements as part of a transfer of assets in a securitization transaction and suggests possible solutions.

The transfer of assets from the originator to the securitization vehicle is crucial for a number of reasons. The true sale of the assets is often referred to as the core of a securitization transaction. In general, true sale issues relate to questions such as bankruptcy remoteness and accounting issues, which can usually be addressed by structuring the transfer carefully. However, third-party consent (where required) can be a significant obstacle to a transfer of agreements in a securitization, particularly in the case of a portfolio consisting of a large number of agreements which must be transferred to the securitization vehicle.

A traditional asset deal consisting of a transfer of agreements generally requires the consent of all parties involved (ie, the transferor, the transferee and the third party). The relatively new act, which has been in force since July 1 2004, provides a new legal mechanism for a more efficient transfer of assets.(1) This also applies to a transfer of agreements under such a transfer of assets, as third-party consent will no longer be required in this case.

Transfer of Claims and Transfer of Agreements

Swiss law provides that either the claims arising out of agreements or the agreements themselves can be securitized. Claims must be assigned from the originator to the securitization vehicle in the former case, whereas the entire agreement must be transferred in the latter case. From a Swiss law perspective, future claims can be assigned without difficulty, provided that they are specified in a way which makes them easily definable and identifiable when they arise - this requirement is usually satisfied by a reference to certain agreements or a pool of agreements under which the claims will arise. The securitization of claims and the securitization of agreements in their entirety are both possible financially.

However, when securitizing claims (including future claims) rather than entire agreements, it must be borne in mind that future claims which are subject to an assignment are deemed to come into existence with the assignor for what is termed a 'theoretical second' before they are assigned to the assignee (ie, the securitization vehicle). Therefore, the bankruptcy risk of the originator - being the assignor of the claims - is a serious concern. All claims accruing with the originator after the opening of bankruptcy proceedings are no longer assignable to the securitization vehicle and instead form part of the originator's estate. Thus, the originator's creditworthiness and bankruptcy risk may influence the generation of future claims. A bankruptcy-remote transfer of both exiting and future claims from a Swiss originator to a securitization vehicle can be achieved only by transferring the respective agreements as a whole, rather than by merely assigning the claims which arise thereunder.

Third-Party Consent

Third-party consent is not always an issue. For instance, in a commercial mortgage-backed securitization (CMBS) the borrower's consent under the mortgage loan is sought before the mortgage loan is transferred from the originator to the securitization vehicle. There are various reasons for seeking the borrower's consent. Although consent is usually not required for the transfer of the loan itself, provided that the mortgage loan is properly structured and the transfer language is appropriately drafted, a borrower may be approached in order to confirm that it will comply with the fiscal representations and warranties given under the mortgage loan agreement, even after the securitization has been finalized.

In practice, seeking a borrower's consent in a CMBS transaction generally presents no problems, as in most transactions only a few borrowers need be approached, depending on the number of mortgage loans to be securitized. However, this is not the case when securitizing portfolios consisting of thousands of agreements (eg, car lease agreements and credit card agreements). Obtaining third-party consent is not merely costly and burdensome, but in most cases unfeasible. It will be difficult to close the securitization transaction, as it will be impossible to determine with certainty how many agreements can be transferred at each stage. Structural solutions must be found to overcome the problem.

Requirement of Consent to Transfer of Agreements

In the framework of a traditional asset deal under Swiss law, the consent of all parties involved is usually required in order to transfer an agreement. However, there are exceptions to this requirement, most significantly where the agreement in question contains language that provides for a transfer without consent. Alternatively, the transfer of an agreement may be perfected on the basis of the deemed consent of the third party. Provided that the third party is notified of the transfer, a lack of objection, particularly when taken together with other indications (eg, payment of the next instalment to the account indicated in the transfer notification), will be considered to indicate deemed consent.

Two further aspects of the agreements should also be considered.

First, if the agreements state that they may be amended only in writing, consent to transfer should be obtained in writing, as a change of parties to the agreement qualifies as an amendment. It is well established in Swiss contract law that a waiver of rights need not take a particular form, even if requirements of form must be observed when entering into an agreement or complying with a related provision. On this basis, a third party could be deemed to have waived the amendment clause requiring written consent. However, the uncertainties involved in this interpretation might negatively affect the securitization.

Second, if the agreements contain an explicit non-transfer clause, such agreements must allow for transfer.

Unless transfer without third-party consent is expressly provided for in the agreements, it is advisable to obtain such consent. All other legal structures based on consent by implication may be jeopardized and such risks may negatively affect the rating agencies' assessment.

Transfer of Assets under the Swiss Merger Act

The act governs mergers, demergers, corporate reorganizations and transfers of assets. According to the relevant provisions of the act, a company or private firm which is registered in the Commercial Register may transfer all or part of its assets and liabilities to another legal entity in a single act - this concept is known as 'universal succession' and derives from merger law. All of the entity's assets and liabilities are transferred to the surviving entity, which becomes the universal successor. The act applies this principle to the transfer of assets under the act by creating a framework of rules whereby assets such as a business unit (or part thereof), as well as single assets, may be transferred from one entity to another. The rules of universal succession apply to the assets thus transferred. The transfer of assets provided for in the act is a new and efficient way of resolving most of the problems arising from a transfer of arrangements.

Form and content of a transfer agreement

A transfer of assets requires the transferor and transferee to enter into a written transfer agreement. Swiss law is commonly held to require that a transfer agreement include in writing:

• the contractual provisions relating to the parties;
• a description of the assets to be transferred (ie, the identification of the agreements);
• the part of the consideration that relates to the transferred portfolio; and
• all other provisions that may be relevant to the transfer of assets (ie, the agreements thus transferred).

Inventory of assets to be transferred

The transfer agreement must contain an inventory which specifies the assets and liabilities to be transferred between the parties. The inventory must be as precise as possible. However, it may refer to a bundle of assets, such as a business unit, provided that such assets are easily identifiable. The inventory may contain only assets that influence the asset position in the balance sheet; thus, items such as goodwill cannot be included. This condition is particularly relevant in light of the statutory requirement that a transfer of assets and liabilities is permissible only if the inventory shows a surplus of assets, as the inventory thus established must show a net surplus as a whole.

Prerequisites for concluding a transfer agreement

The conclusion of a transfer agreement does not require a prior resolution from the shareholders or partners of the transferring company; shareholders or partners need only be informed of the transfer at the next general meeting or in an appendix to the annual financial statements and reports.

The transfer of the assets must be executed by the overall management or the highest executive bodies of the entities involved - in the case of corporations, this means the boards of directors of both companies. In addition, the management or executive body of the transferring company must apply to register the transfer in the Commercial Register. If the transfer agreement has not been signed by all board members, the application must be accompanied by the transfer agreement and the resolutions passed by the boards.

Date of effectiveness of the asset transfer

The transfer of all assets that are evidenced in the inventory as part of the transfer agreement becomes legally valid once the transfer is registered. No further action is required.

Third-party consent to a transfer of agreements under the transfer of asset rules in the act

Unfortunately, the act itself does not elaborate on the question of whether a transfer of agreements by means of a transfer of assets under the act requires third-party consent. As the act is still relatively new, no rulings by the Swiss Supreme Court or any cantonal supreme court offer precedent on the issue.

Disputed Issues

Most legal experts in Switzerland consider that agreements can be transferred without third-party consent. Some rely on the concept of partial universal succession, arguing that if third-party consent were required, the newly established notion of universal succession of the transfer of assets under the act would be pointless, and that to interpret the act as requiring third-party consent would be contrary to its spirit. They claim that its aim is to facilitate the transfer of assets, allowing parties to transfer a pool of assets and liabilities freely and easily; as partial universal succession did not exist before the act came into force, it is considered central to the transfer of assets under the act. Despite this majority view, a number of points must be considered.

Disadvantage for the third party

A party may freely choose the parties with which it wishes to do business and enter into agreements; it will often choose such parties on the basis of their professional skills, services or creditworthiness. A party may not be substituted if this would be to the other contracting party's disadvantage. However, this is irrelevant in a securitization context, as the creditworthiness of the securitization vehicle is guaranteed - vehicles and/or the securities they issue are often more highly rated by agencies than the originator and/or its securities - and the services provided by the originator under the transferred agreements are unchanged in nature; the originator will generally act as the servicer of the portfolio in any case. Third parties tend to be much less relevant if the transfer relates to car lease agreements or credit card agreements; the average third-party customer is highly unlikely to know the identity of the counterparty, although this information must be clearly stated in the agreement - it may be the car manufacturer, a related leasing company, the bank in whose name the card was issued, a related customer financing vehicle or another party.

Abusive transfer of assets

Third-party consent may nevertheless be required if the decision to transfer assets under the act proves to have been chosen for invalid reasons. If the purpose of the act is not reflected in the transaction, this is a strong indication that the choice of this form of transaction will be found to have been abusive. For example, this might be the case if a transfer of assets is chosen for the sole purpose of circumventing the third-party consent requirement, or where there is no economic rationale for transferring an agreement under the act (eg, where only one agreement is transferred). However, a clear economic rationale exists in the context of a securitization of agreements - a pool of agreements (and probably other assets, such as cars or other leasing items) is to be transferred and the pool of assets to be refinanced is homogenous. The originator and the securitization vehicle will uphold all agreements originally concluded by the originator with the third party and will fulfil their respective obligations. The purpose of the transfer is not to escape from contractual obligations, but merely to refinance the assets. Therefore, the question of abusiveness does not arise.

Interest in transferring assets

Some experts claim that the transferor and transferee's interest in transferring assets under the act must be greater than the third party's interest in retaining the freedom to choose its contractual partners. This argument is hotly disputed. However, an analysis of the various interests involved reveals no particular discrepancy in the context of a securitization. Unless notified, the third party would not realize that the agreement had been transferred, as the servicing remains exactly the same. However, the originator and the securitization vehicle have a clear interest in the transfer.

Transfer of a business

Some experts claim that the third-party consent requirement may be disregarded only where all or part of a business unit (as opposed to one or more single assets) is transferred. They argue that unless the transfer involves a 'business', which implies a relatively large number of assets, there is no justification for not seeking third-party consent. This requirement is also debatable. However, in the context of a securitization of lease agreements or credit card receivables, both of which involve a large number of agreements and possibly other assets (eg, cars), the requirement is met, as the terms 'business' and 'business unit' are broadly interpreted in this context.

Although some of these issues may apply in general, they may be ignored in the context of a securitization which involves the sale and transfer of a large number of agreements from the originator to the securitization vehicle.

Change-of-Control Clauses and Non-assignability Clauses

Nearly all Swiss experts consider that the presence of a change-of-control clause in an agreement to be securitized is not an obstacle to the transfer of the agreement under the transfer of assets arrangement in the act. However, in certain circumstances the third party may be entitled to terminate the agreement thus transferred, probably with immediate effect; this is more likely to be the case if the transfer would put the third party at a disadvantage.

However, a party to an agreement containing a change-of-control clause is in any case likely to have a right to terminate in the event that the agreement is transferred under the act. Furthermore, there is hardly any disadvantage to the third party. Thus, the main argument for the third party being granted a termination right is usually invalid in a securitization context. Nevertheless, change-of-control clauses should be carefully considered.

Similar issues arise in connection with non-assignability clauses. Although an agreement may be transferred without the consent of the third party, the third party may have an extraordinary right to terminate the agreement. Again, the right to terminate is predicated on the idea of mitigating negative consequences, but there are no such consequences in a securitization context - a mere refinancing of the asset does not negatively affect the third party's position.

Solutions

Structuring the transfer of assets

Although the act provides a solution which facilitates the transfer of agreements, certain aspects outlined above have yet to be tested in court and or affirmed by statements of the Federal Supreme Court. Most Swiss experts believe that the court will consider the question from a liberal, economic perspective and rule that third-party consent is not required.

Until such a ruling confirms the position, it is advisable to take a cautious approach when transferring agreements through a transfer of assets under the act by:

• where feasible, obtaining third-party consent before the transaction closes (ie, before the transfer agreement is registered);
• notifying third parties of the transfer, even if obtaining their consent is impossible or impractical - non-objection is likely to qualify as deemed consent, particularly if supported by other tacit indications, such as payment to a different account in the name of the securitization vehicle; and
• individually listing key agreements in the inventory.

Structuring the portfolio before securitization

Some of the issues above will not arise if the portfolio is structured in a securitization-friendly manner. Where possible, the party which structures the portfolio should:

• avoid change-of-control clauses and non-assignability clauses;
• avoid 'in writing' requirements for amendments to the agreements; and
• insert securitization clauses allowing for the transfer of the agreement by the originator to any party without third-party consent.

Although the transfer of the agreements should be unproblematic if these points are followed, parties should not expect the agreements to be drafted in such a securitization-friendly manner, particularly if securitization was not discussed or even contemplated when the agreements were drafted.

Comment

The transfer of assets provision in the act may facilitate the securitization process considerably. The act allows for agreements to be transferred without obtaining third-party consent and without complying with the usual requirements for the transfer of agreements or with any transfer restrictions contained in the agreements themselves. With regard to timing, it is much easier to organize closure of the transfer of the agreements under the act. A transfer of agreements will become effective in law without further action once it is registered in the Commercial Register.

Uncertainties remain in respect of transfers of agreements under the transfer of assets rules. Judicial clarification may not arrive for some time and originators may be reluctant to test these questions in the absence of supporting case law. However, the risk of a transfer without third-party consent being deemed invalid is relatively remote and the advantages of such a transfer are significant. Moreover, depending on the structure of the portfolio, transferring the agreements by means of a transfer of assets under the act may be the only feasible approach, as other solutions may involve even greater uncertainty.

International Law Office