The Acquisitions Directive was adopted in September 2007 and is due to be implemented in member states by 21 March 2009. It was negotiated against a background of perceived abuse of the requirement for supervisory consent for financial sector acquisitions. In particular, there were suspicions that some supervisors were using their discretionary powers to defend the interests of their own nationals against foreign competition. The Directive is intended to improve the clarity and transparency of the supervisory consent process for acquisitions in the financial services sector across the EEA.
The Directive amends the main single market directives covering the banking, investment and insurance sectors1 to establish identical supervisory consent rules for all of them. The main elements of the new regime are: changes to the circumstances in which consent is required; an exhaustive list of assessment criteria; a shorter assessment period; greater transparency; and ‘maximum harmonisation’. The Level 3 Committees2 have recently consulted on guidelines for common application of the Directive, and HM Treasury and the Financial Services Authority (FSA) are consulting on implementing the Directive in the UK.
When must consent be sought?
Under the Directive, the consent of the target firm’s supervisor must be sought when a person has taken a decision to acquire, directly or indirectly, 10 per cent or more of the target’s shares or voting rights or to increase its holding to or above 20, 303 or 50 per cent or so that the target firm would become its subsidiary.
The holdings of all persons ‘acting in concert’ must be aggregated when calculating whether a threshold has been reached. This is a new requirement at the EEA level, although some jurisdictions already impose similar requirements. The Directive itself does not define what is meant by ‘acting in concert’. But the draft guidelines published by the Level 3 Committees do attempt a definition, the essence of which is that 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’. There are real issues concerning the lack of clarity and the potential for retroactive effect of this proposed definition and it is hoped that representations made in the consultation process will result in an improved final version.
Any proposed disposal that would take a holding below one of the thresholds must also be notified.
An exhaustive list of assessment criteria
At present the criteria against which a supervisor must assess a proposed acquisition are defined in very general terms: it must take into account the need to ensure sound and prudent management of the target firm and the suitability of the proposed acquirer and its shareholders. The Directive now establishes an exhaustive list of five assessment criteria that are closely tied to prudential concerns:
- the proposed acquirer’s reputation;
- the reputation and experience of any person who will direct the target firm’s business as a result of the proposed acquisition;
- the proposed acquirer’s financial soundness, in particular in relation to the type of business pursued and envisaged in the target firm;
- the target firm’s ability to comply on an ongoing basis with applicable prudential requirements and, in particular, whether the group of which it will become a part has a structure that makes it possible to exercise effective supervision, effectively exchange information among supervisors and determine the allocation of responsibilities among them; 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.
There is an express statement that the supervisor must not assess the proposal in terms of the market’s economic needs. The target firm’s supervisor must also take fully into account the opinion of the acquirer’s supervisor (if there is one), particularly as regards the assessment criteria directly related to the proposed acquirer.
A shorter assessment period
The target firm’s supervisor normally has 60 working days4 in which to give or refuse permission for the acquisition. But the supervisor may stop the clock5 once, for not more than 20 working days6 , to require the proposed acquirer to provide additional information. 4 Following its acknowledgment of receipt of the application. 5 No later than the 50th working day of the assessment period. 6 Or 30 working days if the acquirer is situated or regulated outside the EEA or is not subject to supervision in the EEA.
If the supervisor does not object within the permitted assessment period, the proposal is deemed to be approved. The 60-working-day assessment period is in fact only marginally shorter than the current threemonth period.
If a proposed acquisition involves a group of companies containing more than one regulated firm, consent must be sought in relation to each such firm. If the target firms are incorporated in more than one jurisdiction this may require the consent of more than one supervisor. The Level 3 Committees’ draft guidelines say that the target firm supervisors should co-operate closely and take each other’s opinions fully into account. There is perhaps a missed opportunity here to provide that one of these supervisors should take a lead role in co-ordinating the decision-making so that the acquirer would have to deal with only one supervisor.
Various aspects of the Directive are aimed at making the consent process more transparent.
Supervisors must publish a list of the information they require from intending acquirers. The Level 3 Committees’ draft guidelines set out an exhaustive and harmonised list of this information. It includes information to be provided in all cases and further information that will vary depending on whether the acquisition would result in a change of control of the target firm. Although the draft guidelines expressly acknowledge the principle that information requirements should be proportional to the nature of the acquisition, this principle does not seem to be fully reflected in the requirements. Some of these requirements seem excessive. The industry has made representations about this in the consultation and it is hoped that the final guidelines will be more pragmatic.
If a supervisor objects to a proposed acquisition it must immediately give written reasons for doing so.
A recital to the Directive reminds member states of their obligation to co-operate with the European Commission by providing it with information to enable it to determine whether the Directive is being complied with. This is a milder form of the Commission’s original proposal (which does not appear in the final form of the Directive) that it should have express power to ask supervisors to provide the documentation on which their decisions are based.
The Directive is a ‘maximum harmonisation’ directive: member states may not impose additional requirements going beyond those of the Directive. This is of course essential if the Directive is to achieve its objectives.
Implementation in the UK
The joint HM Treasury and FSA consultation document sets out the authorities’ proposals for UK implementation of the Directive. The consultation period ends on 12 December 2008.
The authorities propose a ‘copy out’ approach to amending the relevant provisions of the Financial Services and Markets Act 2000. As the Directive is ‘maximum harmonisation’, the UK does not have a lot of discretion in implementation. The consultation document is therefore relatively thin in this area. There will also be consequential changes to the FSA’s rules.
The consultation also includes related issues, not covered by the Directive, that had previously been the subjects of consultation in 2006 – these address regulated firms that are not covered by the Directive and penalties for noncompliance.
Taking into account both the Directive and the other issues covered in the consultation, the main effects on the UK regulatory regime are likely to be as follows.
- Much will remain the same. The changes are not revolutionary.
- The biggest change will concern the calculation of consent requirement thresholds. In future, a person’s holdings will need to be aggregated with those of anyone with whom he is ‘acting in concert’ instead of (as at present) those of his ‘associates’. ‘Acting in concert’ is a narrower concept than the current extremely broad ‘associate’ definition. Provided ‘acting in concert’ is given a workable meaning, this will be a major improvement to the UK regime.
- The new regime may require more information to be provided with an application for consent than is currently the case. This depends on whether amendments are made to the draft Level 3 Committee guidelines before they are finalised and on how the guidelines are interpreted by the FSA.
- A single 20 per cent threshold will apply to all FSA-authorised firms not covered by the Directive (eg general insurance intermediaries, mortgage intermediaries, some commodities brokers and dealers, and advisers who do not hold client money). This will simplify the regime considerably for this type of firm.
- It is possible that the level of fine available for noncompliance will increase and that it will be made clear that restrictions on shares may apply to the whole holding.