The price UBS paid for taking over Credit Suisse is being debated in court. History shows such actions in bank takeovers have had success elsewhere. In Switzerland, plaintiffs are bumping up against emergency law.

Two class action suits relating to the price UBS paid for its March 19 takeover of Credit Suisse are running concurrently. Last weekend, the Swiss Investor Protection Association announced its lawsuit, with nearly 1,000 shareholders joining it.

Yesterday Lausanne-based legal services startup Legalpass announced it was filing a suit on behalf of 3,000 former owners of Credit Suisse shares.

Massive Losses

The subject of the lawsuits is the massive loss in value imposed on shareholders with the forced takeover. UBS paid about three billion Swiss francs for Credit Suisse in treasury shares, with shareholders receiving one UBS share for every 22.48 Credit Suisse shares held corresponding to a valuation of 76 centimes per share.

Credit Suisse's share price closed at 1.86 Swiss francs ($2.12) on March 17, leaving a market capitalization of around 7.4 billion francs.

The lawsuits seek to initiate a review of the exchange ratio based on Switzerland's Merger Act to obtain appropriate compensation and compensatory payment for the shareholders.

Reaching into the Grab Bag

In the merger effected through an emergency law, UBS hedged against unpleasant surprises at Credit Suisse in several ways. At that time, it was impossible to assess the balance sheet risk and was more akin to buying a mystery goodie bag. The better the price, the greater the probability of being pleasantly surprised in the end.

The first and weightiest line of defense is likely to be the value of Credit Suisse's AT1 bonds. Then there's the question of the three billion francs acquisition price, a nearly 60 percent discount on the market valuation, and thirdly the loss and liquidity protection provided by the Swiss government and the Swiss National Bank.

The lawsuits will now focus, among other things, on whether the infringement of shareholder rights through the application of emergency law was justified. They didn't have a say through a vote at an extraordinary general meeting.

Memories of Bear Stearns

The UBS/Credit Suisse deal isn't the first emergency bank merger in history, nor the first in an acute crisis. One of the biggest was certainly the takeover of American investment bank Bear Stearns by its larger rival JPMorgan at the start of the financial crisis in March 2008 when Bear Stearns fell victim to a liquidity crisis.

At the time of the sale, an exchange ratio was agreed upon that corresponded to $2 per share, about 7 percent of the previous market value. After a shareholder class action lawsuit was filed a few days later, JPMorgan raised the valuation to $10 per share the same day.

Revolt of Holcim Shareholders

That valuation changes occur over time in regular mergers is quite common and can be regulated accordingly in the contracts by «earn-out» clauses. This wasn't the case with the merger of Swiss cement giant Holcim with its French competitor Lafarge in 2014. Holcim shareholders successfully revolted before a general meeting and achieved a significant price reduction in the purchase price.

A possible retrospective valuation of the UBS/Credit Suisse deal didn't come into consideration at the time of the takeover. Whether this was forgotten or would not have been accepted by UBS remains to be seen.

Canceling Emergency Law

While the lawsuit organizers are optimistic about the chances of success, legal experts are skeptical. To be successful, the emergency law of the Federal Council would have to be lifted as business lawyer Peter Kunz told Swiss television «SRF» (in German). He estimates the chances of success are well below 50 percent.

The two founders of Legalpass, founded in 2022 by Philippe Grivat and Alexandre Osti, assess the chances of success differently. The very fact they were able to gather so many shareholders is seen as a success, and Osti is convinced the case will go down as one of the most important lawsuits in Swiss legal history.

No Quick Decisions

With the filing of the complaint on Monday, both organizers have complied with the appeal deadline applicable under merger law. This two-month deadline didn't start on March 19 but with the publication of the takeover in the Swiss Official Gazette of Commerce (SHAB) on June 14.

Quick decisions are not to be expected in these cases, nor with regard to the AT1 bonds, with Kunz expecting it may take three to four years.