In September 2007, the European Parliament and the European Council adopted the Acquisitions Directive, which sets out procedural rules and evaluation criteria for the prudential assessment of acquisitions and increases in shareholdings in the financial sector. The Directive must be implemented into national law in European Union member states before March 21, 2009. HM Treasury and the Financial Services Authority (FSA) have recently published a joint consultation paper on implementing the Directive in the United Kingdom.
It was perceived that the extent of cross-border acquisitions in some financial services sectors in the European Union was relatively low, compared to those purely within national boundaries, and that one factor explaining the low level of consolidation across borders could be the regulatory framework for supervisory approvals of acquisitions. There was concern that the criteria for assessment of the suitability of the acquirer and the procedure for assessment of acquisitions was insufficiently clear and applied inconsistently in different member states of the European Union.
The rationale for the adoption of the Directive was to increase the level of cross-border merger activity in the financial services sector, to prevent member states from inhibiting acquisitions of financial services firms for protectionist reasons and to create a common consent and approval process across the European Union. The Directive aims to ensure absolute consistency in the approval of acquisitions in the following three financial sectors: credit institutions, insurance and securities. The Directive is a maximum harmonization measure (this means that member states cannot superimpose additional or more stringent criteria when implementing it).
It is envisaged that the Directive should benefit financial institutions of all sizes wishing to move into other member states’ markets. It has been welcomed as good news for EU-authorized financial institutions and their controllers, by providing legal certainty, clarity and predictability.
Key Components of the Directive
- It sets out the procedure to be applied by supervisory authorities in every member state of the European Union when assessing acquisitions on prudential grounds.
- It contains an exhaustive list of prudential criteria to be applied.
- It sets deadlines within which supervisory authorities must make their decisions. Key Changes to the UK Rules
The primary differences from the existing UK controllers regime under the Financial Services & Markets Act 2000 (FSMA) are threefold.
Who Is a “Proposed Acquirer?”
There will be greater clarity as to who is regarded as a “proposed acquirer” (therefore having an obligation to notify the FSA). This will include any person or persons acting in concert who have taken a decision either to acquire or increase, directly or indirectly, a holding in a certain type of financial services firm (credit institutions, insurance, assurance and reinsurance undertakings, investment firms and undertakings for collective investment in transferable securities management companies).
The use of the term “acting in concert” replaces the existing UK concept of an “associate” (which was defined by reference to connected persons). Thus, going forward, any concert relationship will arise, and be determined, by reference to the actions of the acquirer rather than his or her connections.
It should be noted that the interpretation of the words “acting in concert” in this context is a matter of EU law rather than English law (and so, is not necessarily to be interpreted in the same manner as in the UK Takeover Code). Guidance on its meaning has been proposed in draft guidelines on the Directive produced by the EU Lamfalussy Level 3 Committees as follows:
Persons are ‘acting in concert’ when each of them decides to exercise his rights linked to the shares he intends to acquire in accordance with an explicit or implicit agreement made among them. It makes no difference whether this agreement is made in writing or verbally, or whether it becomes apparent only ‘de facto’, or whether the persons acting in concert are otherwise linked with each other. Notification of the voting rights held collectively by these persons will have to be made to the competent authorities by each of the parties concerned or by one of these parties on behalf of the group of persons acting in concert.
When Does the Notification Obligation Arise?
Greater clarity also will be achieved in assessing when the obligation to notify arises. Currently it is triggered when a person “proposes to take a step” that would result in that individual acquiring control. It was often unclear whether this criteria had been triggered. This will be replaced with the clearer requirement that the person has “taken a decision” to acquire control.
Alteration to UK Thresholds
Increases in a shareholding will be relevant for notification purposes if the proportion of the voting rights or the capital held would reach or exceed 10 percent, 20 percent, 30 percent or 50 percent, or if the voting rights result in the ability to exercise significant influence over management or if the acquired firm would become its subsidiary. In the United Kingdom, this will involve a reduction of one of the existing thresholds of 33 percent to 30 percent.
The New Rules Governing the Assessment Process
Changes of note to the assessment process include the following:
- An exhaustive list of prudential criteria for the assessment is provided.
- The time period in which the supervisory authority must make its assessment is shortened from 90 calendar days to 60 working days. A decision to object to an acquisition or to approve it subject to conditions must be notified to the proposed acquirer within two working days of the decision having been made.
- The “clock” may only be stopped once by a request for further information, no later than the 50th working day and for no longer than 20 days. Other requests for information may be made, but without stopping the clock.
- The maximum interruption period can extend to 30 working days if the proposed acquirer is situated or regulated outside the European Union or is a person not authorized under the EU single market directives.
New Exhaustive List of Prudential Criteria
Supervisory authorities will be required to assess the financial soundness of a proposed acquisition and the suitability of a proposed acquirer by reference to the following criteria:
- The proposed acquirer’s reputation
- The reputation and experience of any person who will direct the business of the financial institution as a result of the proposed acquisition
- The financial soundness of the proposed acquirer, in particular in relation to the type of business pursued and envisaged in the financial institution in which the acquisition is proposed
- The ability of the financial institution to comply on an ongoing basis with applicable prudential requirements
- Whether the group of which it will become part has a structure that renders it possible to exercise effective supervision, effectively exchange information among supervisory authorities and determine the allocation of responsibilities among them
- Whether there are reasonable grounds to suspect that in connection with the proposed acquisition, money laundering or terrorist financing is being or has been committed or attempted, or the acquisition could increase the risk of this happening
Presently, permission to acquire can be refused on both prudential and consumer-interest grounds. In the future, only prudential criteria can be considered, but as these include the reputation of the proposed acquired, the change is unlikely to affect detrimentally the FSA’s power to prevent unsuitable acquisitions.
The following voting rights are exempt from the scope of the Directive:
- Voting rights held by a firm acting in a custodial capacity (provided that the custodian can only exercise voting rights pursuant to written or electronic instructions) or acquired for the sole purpose of clearing and settling within a short settlement cycle
- Voting rights held by an investment firm or credit institution in connection with underwriting services or placing of securities on a firm commitment basis
In addition, the UK government has recognized the likelihood that fund managers will regularly cross the 10 percent threshold, which would impede their ability to respond to market movements and jeopardize their positions and balance between funds. Accordingly, the UK government intends to continue to allow fund managers to pre-notify proposed acquisitions, by providing the FSA with a statement of what they plan to acquire in the course of their investment activities and the FSA may grant approval of such changes for a period lasting up to a year.
Proposed Ancillary Simplifications in the United Kingdom for Businesses Not Covered by the Directive
In the United Kingdom, certain other business sectors are currently subject to the full existing FSMA controllers notification regime, but not by virtue of any European directives. These include mortgage intermediaries, pre-paid funeral providers, occupational pension scheme firms, home reversion and home purchase plan providers and intermediaries, credit unions, some authorized professional firms, some commodity brokers and dealers, non-UCITS scheme operators and some investment advisers, receivers and transmitters who do not hold client assets (non-Directive firms). The UK government proposes to apply a single 20 percent threshold to all such non-Directive firms (with the exception of holdings in an investment exchange, which will continue to be subject to two primary thresholds—20 percent and 50 percent).
It is envisaged that these proposals will reduce costs for non-Directive firms, in moving from a four threshold regime to a single threshold regime of 20 percent.
Another advantageous change includes the UK government’s proposal to apply the new assessment deadlines, criteria and other provisions of the Directive to non-Directive and insurance mediation directive firms, so that firms engaged in both Directive and non-Directive business will not be subjected to two different processes.