Executive Summary The German banking market is on the move. This presents opportunities for foreign investors who would like to enter the German financial market. However, in order to acquire an interest in a German financial institution, i.e. credit or financial services institution, an investor has to comply with a couple of specific regulatory requirements.

Credit institutions are companies which carry out banking business, as defined in Section 1 of the German Banking Act (Kreditwesengesetz, KWG), such as, for example, granting loans or taking deposits. Financial services institutions offer financial services without being credit institutions. They provide services such as investment placement, investment consulting or the business of providing multilateral trading systems. Larger banks and financial institutions are often stock corporations (Aktiengesellschaft), smaller ones are usually run as limited liability companies or limited liability partnerships (Gesellschaft mit beschränkter Haftung or GmbH & Co. KG).

Transaction structure Usually the purchaser acquires an interest in a financial institution by way of a share deal. The advantage of this is that the banking permit granted to an institution is not affected by the change in ownership; the banking permit remains with the institution and, in effect, the purchaser acquires the permit at the same time it acquires the institution (however, see the paragraph below regarding the question of control of the purchaser according to the KWG). A further advantage of a share deal is that the institution’s contractual partners do not have to agree to the sale. In some cases, the new shareholder’s entry can trigger termination or other third party rights (e.g. through change-of-control clauses). Transfers of individual assets and obligations are unnecessary in a share deal.

It is also legally permissible for the purchaser to acquire the institution’s assets and obligations by way of an asset deal. In this case the purchaser will generally also require a new banking permit to continue the business of the institution. The sale and transfer of individual assets to the purchaser is generally more burdensome and expensive than affecting a share deal. The approval of contractual partners and creditors is required for the transfer of contractual relations and obligations. As a result, purchasers generally prefer to acquire financial institutions by way of a share deal.

Control of purchaser according to the KWG/SSM Regulation

European supervisory Since 4 November 2014, the Single Supervisory Mechanism (SSM) places significant banks in participating countries under the direct supervision of the European Central Bank (ECB).

According to the principles of an effective banking supervision, the regulatory authorities have to monitor every transfer and prohibit it where necessary.

Investors who intend to acquire ‘qualified participation’(i.e. at least 10 percent of the capital or voting rights of the respective institution) must disclose their interest with the competent supervisory authority and communicate all the important information to the supervisory authority. The authority has to investigate afterwards within 60 days, if the acquirer meets the demands regarding professional competence, solidity and integrity. The supervisory authority must also examine the suitability for supervision concerning the group and the legal harmlessness with regard to inter alia money laundering.

If there are no objections within the time limit, the acquisition shall be deemed approved.

Current owners also have a duty to notify when participations in a credit institution are being sold. This disclosure requirement applies even if the owner of an investment has decided to reduce their holding to 20, 30 or 50 percent of the voting rights or capital.

As a result, the ECB is now responsible for “assessing" the acquisition or disposal of qualifying holdings in banks in euro member states. According to the preamble of the SSM Regulation, the assessment of the suitability of a new owner in advance of acquiring a significant shareholding in a credit institution is an indispensable means to continuously ensure the suitability and financial soundness of the owners of credit institutions.

The SSM’s common procedures are governed by the following key principles:

  • Applications for notifications of an acquisition of a qualifying holding are always sent by the applicant entity to the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin). With regards to notification of an intention to acquire a qualifying holding, BaFin notifies the ECB of such notification no later than five working days following its acknowledgement of receipt to the applicant. A common procedure cannot be finalised until the required information has been submitted. Applicants should therefore ensure that their applications are complete and well structured. If the first review of an application reveals omissions or inconsistencies, BaFin immediately asks the applicant to make the necessary amendments.
  • Once the application has been submitted and its completeness verified, the applicant is subject to a complementary assessment by BaFin and the ECB. The assessment seeks to ensure that all relevant parties gain a thorough understanding of the business model and its viability. To this end, the assessment covers all the criteria set out in relevant national and EU laws. With regards to qualifying holdings, BaFin proposes a draft decision to the ECB to oppose or not to oppose the acquisition. The final decision rests thereafter with the ECB following the usual decision-making procedure. If an application is to be rejected or additional conditions need to be imposed, it will be subject to a hearing. Once a final decision has been reached, the applicant is notified by the ECB.

National supervisory Although the ECB has supervisory authority for the acquisition of interests in German banks, BaFin is still responsible for the approval of acquisitions of financial service institutions.

Particular issues arising in due diligence Certain issues arise in due diligence regarding institutions due to their special regulatory regime.

Banking permit The written authorisation of both BaFin and the ECB is required for anyone who wants to carry on bank business or provide financial services. Therefore, as part of the due diligence, the institution’s authorisation must be checked. Often credit institutions and financial service institutions do not possess a full banking permit (that is, a permit which encompasses all permissible bank business and financial services) but rather a permit which is restricted to specific types of bank business and financial services. It is an offence to carry on bank business or provide financial services without a permit. This also applies if a banking permit has been obtained but it does not cover the type of bank business or financial service being provided.

It is, however, possible to change an existing permit after acquisition. This is achieved by requesting either an extension to or amendment of the permit. The relevant applications have to be filed with BaFin and the Deutsche Bundesbank or the ECB respectively. In practice, this can lead to delay in practice.

Equity requirements The availability of equity is important for every financial institution. On the one hand it serves as a basis for rating agencies to asess the financial institution’s substance. On the other hand the costs, which are related to the individual equity, can determine the financial institution’s competitiveness.

Both aspects are of fundamental importance to a purchaser. Institutions are legally obliged to have available equity in sufficient amounts and consist of liable equity and net profits, together with deferred floating liabilities (Drittrangmittel). Liable equity is the sum of equity and supplementary capital minus certain items. The appropriateness of the capital requirement is not set out in the KWG, but rather the solvency regulation. In addition to the obligation to disclose and the duty of presentation, the institutions have far-reaching information duties vis-à-vis BaFin (e.g. supervisory meetings and special audits). Notes regarding supervisory meetings and reports of special audits can contain valuable information for the purchaser.

Liquidity requirements Financial institutions must invest their funds in such a manner that sufficient liquidity can be ensured at any time. BaFin and the Deutsche Bundesbank are responsible for this supervision. Correspondence with the supervisory authorities can in turn be useful in identifying critical issues.

Financing the acquisition Usually the acquisition of a larger interest in an institution is funded with outside capital. Therefore, a structure must be found that provides sufficient security for the funder, as well as observing the supervisory regulatory standards of availability of security by the financial institution. If the institution grants security without observing the required regulations, the financial institution’s managers and members of its supervisory body may be liable for any loss arising.

A pledge of the target institution’s shares can be used as security, without the pledgee needing to go through the control procedure required for an actual acquisition. Disclosure to BaFin and the Deutsche Bundesbank or the ECB of the accompanying acquisition only becomes necessary before the potential realisation of the financial institution’s pledged shares.