In our last M&A newsletter (The meaning of preferential rights embedded in preferred shares and empirical evidence in Switzerland) we introduced the nature and economic meaning of different preferential rights embedded in preferred shares.
In addition, we have conducted an empirical study on the use of preferred rights in the life science industry in Switzerland. The results show the importance and widely use of preferential rights in the life sciences industry in Switzerland.
The data basis for our study are 300 companies in the life sciences industry based in Switzerland. Looking at the companies which are located in cantons, which have a public and digital commercial registers, we have identified 21 companies, which have published data regarding at least one financing round involving preferred shares. The Hoffmann & Partner M&A team has analysed these financing transactions and their potential impact on corporate finance actions. Below you find a high level summary of some of these results.

52% of the analysed life sciences companies issued preferred shares with fully participating rights. Under these terms, preferred shareholders receive their liquidation preference back in all cases, before the common shareholders receive any potential proceeds. Thereafter, the remaining proceeds are distributed pro-rata among preferred shareholders and common shareholders.

Another 14% have participating rights with a cap. The cap limits the return of the preferred shareholder. For example a cap at three times means, that the preferred shareholder receives his initial investment plus a maximum twice that amount back before other shareholders participate in the proceeds. However, the preferred shareholder has usually the possibility to convert his shares to common shares. The caps published are between three and five times. Caps are crucial in long(er than expected) periods until an exit is realised.

33% of the companies issued preferred shares with non-participating rights. With a non-participating liquidation preference, the preferred shareholder has to choose between either his liquidation preference (e.g. 1x initial investment + dividends) or the amount he would receive if he converts the preferred shares to common shares.

Looking at the dividend payouts, the majority of the sample indicates that preferred shareholders are entitled to accruing dividends (increasing the preferred investment amounts). Of those companies, 29% have published the yearly dividend in percent. The median of the yearly preferred dividends is 7.5% of the invested capital.

It is essential for founders and all type of investors to understand the tools of preferrential rights in a financing round and the impact they have on the payoff structure in potential exit scenarios. These may be completely different in an M&A or licensing transaction as compared to an IPO.
Hoffmann & Partner’s approach is based on a thorough understanding and assessment of the likelyhood of exit cases, type of most obvious buyers and future valuation scenarios, in order to define preferential and other terms in a financing round, which are in the best interest of our clients.
Our  M&A team advises life sciences and high tech companies as well as investors in such transactions. Contact us for more details on such topics or other corporate finance and transaction / M&A related issues.

Find the article as a PDF here.