Today, more than ever, the insurance industry is acutely aware of the opportunities and the need to move operations and capital quickly and effectively when dictated by economic forces. The European Union objective of creating a single insurance market requires promotion of the principles of freedom of movement of capital, people and services. This article summarises recent EU directives relevant to insurance mergers and acquisitions (M&A) transactions: the Cross-Border Mergers Directive, the Acquisitions Directive and the Takeovers Directive.
Cross-Border Mergers Directive
UK M&A transactions are usually effected by acquisition and occasionally through a scheme of arrangement (in essence, a compromise between the companies involved and their members), but mergers have not been possible under English law. However, since 2004, cross-border mergers have been achievable through the creation of a European company, known as Societas Europaea, but very few have been registered. The EU Directive on Cross-Border Mergers (2005/56/EC) (the Mergers Directive) became English law on 15 December 2007. The Mergers Directive lays down a new framework of rules facilitating cross-border mergers between companies in the EU and requires the removal of obstacles in national laws to such mergers. It applies to public and private companies with limited liability, and to mergers involving at least two companies from different member states.
The steps for a cross-border merger are very similar to those set out in Part 27 of the Companies Act 2006 (which applies to UK domestic mergers). At the pre-merger stage, each company will circulate to its shareholders details of the merger, including a directors’ report and an independent expert’s report. The merger must then be approved by a majority in number of shareholders (and of creditors, if creditors apply for a meeting of creditors), representing at least 75% in value. Each merging company then applies to its relevant competent authority (in the UK, the High Court) for an order certifying completion of the pre-merger requirements.
The final step, upon the joint application of all the merging companies, is for the competent authority of the country where the newly merged company will be registered to approve completion. An order approving completion will only be given once any employee participation arrangements (in some European countries employees have the right to board level representation) of the company have been determined, and these can take up to 12 months to agree. The merger will be effective from the date stated in the court order.
Supporting a Business Transfer
One potential use by the insurance industry of the Mergers Directive is to implement a European (re)insurance business transfer where a company’s entire business is to be transferred. Part VII of the Financial Services and Markets Act 2000 (FSMA) in the UK and equivalent legislation in other EU members enable the transfer of (re)insurance books of business to other companies within the EU. However, reinsurance protections may not be transferred with the inwards book in some countries and a merger would overcome this problem. Under the insurance directives, it may nevertheless be necessary to carry out a business transfer at the same time as the merger.
There are also questions over whether a European (re)insurance business transfer would be recognised in non-EU jurisdictions, particularly in the US, and therefore may be unenforceable against policyholders in those jurisdictions. The Mergers Directive might offer a solution to these problems, since jurisdictions such as the US, which have their own mergers legislation, would be likely to recognise the effectiveness of the merger. Of course non-technical assets and liabilities will transfer too; due diligence will therefore be of significantly more importance if using the Mergers Directive. It will not be of assistance if only part of the business is being transferred.
The Mergers Directive may also enable companies that are incorporated in different member states to access different exit strategies that may not be available in one country. If, for example, German and UK companies merge, with the UK company becoming the surviving entity, the UK exit strategy of a solvent scheme of arrangement can then be used.
The Acquisitions Directive (2007/44/EC), sometimes called the ‘Change of Control Directive’, must be implemented by member states by 21 March 2009. In the UK it is currently at a consultation stage: HM Treasury published a consultation document on 22 September 2008 setting out the Government’s and the Financial Services Authority’s (FSA’s) implementation plans. Responses are requested by 12 December 2008. In fact, the Government has little room to manoeuvre in its adoption as it is a maximum harmonisation directive, meaning that member states are not allowed to impose further measures than are in the directive.
The Acquisitions Directive is intended to improve the supervisory approval process for M&A in the banking, insurance and securities sectors in order to reduce regulatory barriers. It sets out the prudential criteria for assessment to be used by competent authorities, shortens the decision-making process and harmonises provisions across member states relating to the approvals process. In the UK, the directive will be implemented through changes to the controller regime under Part XII of FSMA. The main proposed changes are:
- Definition of acquirer. When deciding who is a controller of a company, for the purposes of clarity the concept of “associate” is being replaced by “acting in concert” with another person (although a shortcoming is that there is no official guidance on the meaning of this term in the directive).
- Thresholds at which a controller needs specific approval. At present, the control thresholds are 10%, 20%, 33% and 50%, except for insurance intermediaries where there is a single threshold of 20%. The changes will mean all (re)insurers are also now subject to the single 20% threshold unless they are regulated under MiFID (Markets in Financial Instruments Directive).
- Time period for assessment. The FSA will have 60 working days (instead of the present 90 calendar days under FSMA) to make a decision on whether to approve an acquirer. It will only be able to stop the clock once, for up to 20 days (or 30 days if the acquirer is outside the EU), during this period to request further information.
- Pre-approval requirement. The current trigger for when FSA pre-approval is needed is when “a person proposes to take a step” that would result in his becoming a controller. This will be replaced with when “a person has decided to acquire”. It is arguable whether this makes the test any clearer as it has an even greater degree of subjectivity.
- Acquisition assessment criteria. Supervisory authorities must only consider the following criteria when judging the suitability of a proposed acquirer:
- reputation of the proposed acquirer;
- reputation and experience of any person who will direct the business of the financial institution as a result of the acquisition;
- financial soundness of the proposed acquirer;
- ability of the financial institution to comply on an ongoing basis with the applicable prudential requirements; and
- 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 that the proposed acquisition could increase the risk of this occurring.
- Exemptions: voting rights or shares held by firms as a result of securities underwriting services (or the placing of securities on a firm commitment basis) would be exempt from the controller assessments provided the holding is for no longer than one year and voting rights are not exercised.
The impact of the Acquisitions Directive on UK (re)insurers as targets is unlikely to be great; the assessment criteria in particular are very similar to those already used by the FSA. However, it will assist when (re)insurers are making acquisitions by limiting the criteria to be considered. The other changes should serve as further steps towards levelling the M&A playing field and the directive’s effect in harmonising conditions across the EU will be useful.
The Mergers Directive and the Acquisitions Directive should not be confused with the Directive on Takeover Bids (the ‘Takeovers Directive’), which was implemented in the UK on 20 May 2006. That directive harmonised rules across EU member states that govern takeovers of companies whose shares are admitted to trading on a regulated market. It had a limited impact in the UK because the City Code on Takeovers and Mergers (generally referred to as the Takeover Code) already covered the general principles of commercial behaviour set out in the Takeovers Directive; its main effect was to give the regulator, the Panel on Takeovers and Mergers, a statutory footing.
In light of recent dramatic events in global financial markets increased capital requirements are likely to lead to restructuring disposals and consolidation. This should be viewed against the backdrop of Solvency II (for a recent update, see the September 2008 issue of the Insurance & Reinsurance Review) which focuses attention on capital requirements for insurance companies, and may constitute an additional trigger for restructurings and capital rationalisations. It will be important to be aware of the tools available in Europe to effect this and the EU regulatory approvals that will be required.