Acquiring 10% or more in European credit institutions requires an in-depth ex-ante assessment by national competent authorities (NCA) and the ECB. These "qualifying holding procedures" are subject to an amalgamation of national and European law, administrative guidance and practice as well as the individual situation and particularities of the acquirer and acquisition structure. This renders a careful and timely preparation of the filings and early communication with the NCA indispensable for an acquisition’s timely closing.
The primary and – practically often exclusive – contact of the proposed acquirer is with the NCA, while the ECB submit their queries through the NCA, often at a later stage in the process. So far, the ECB have not disclosed their specific views on the timing and the scope of filings and the administrative standards they apply when assessing applications. This uncertainty at times made it difficult for proposed acquirers to anticipate regulatory expectations and resulted in some back and forth with the NCAs/ECB.
The now published draft Guide on qualifying holding procedures (the ECB Draft Guide) sheds some light on the ECB’s understanding of core terms such as “acting in concert” or “decision to acquire”. It also provides further guidance for private equity firms, sovereign wealth funds and conglomerates, which the ECB refers to as “specific acquirers”, which strongly indicates that their applications will be reviewed with special scrutiny. However, some of the ECB’s (so far: undisclosed) positions add further complexity to procedures which already require significant resources.
I. Core ECB proposals
1. “Decision to acquire” in M&A transactions
Pursuant to Article 22(1) CRD5, any proposed acquirer who has taken a decision to acquire a qualifying holding, must notify the NCA of its intent to acquire. The precise timing of a notification is essential in practice, because a delayed notification may in some member states result in a sanction, while premature engagement with the regulator results in unnecessary efforts and disclosure. The ECB Draft Guide now sets out that it can be presumed that the proposed acquirer has taken the decision to acquire a qualifying holding “at the very latest once it makes an unconditional offer to the current shareholder(s) to enter into a legally binding transfer agreement”. The ECB conclude that the “submission of a final bid to the seller by the proposed acquirer is therefore the latest point at which the decision to acquire materialises and triggers the obligation to notify”.
- Unlike ECB assume, a “final bid” generally does not constitute an “unconditional offer”, and a different view would deviate from prevailing market practice: At the time of submission of the “final bid”, the essential parameters of a transaction typically have not been agreed upon between the parties.
- Typically, a “final bid” is a unilateral statement of intent which only reflects the bidder’s valuation of the target and a resulting purchase price, but rarely the final purchase price. Subsequent changes to the purchase price following the submission of the final bid are not uncommon during further negotiations.
- Often “final bids” will indicate specific areas of additional due diligence required by the bidder to make an informed decision whether to acquire the target, at what price and how to seek protection from the sellers in the purchase agreement.
- Generally, “final bids” are intended not to be binding on the bidder and will contain specific wording noting this non-binding character. This applies in particular to transactions, in which the purchase agreement is subject to notarisation requirements, e.g. where the target is a German Limited Liability Company (GmbH).
- Moreover, if the bidder is required to submit a mark-up of the purchase agreement to the seller together with the “final bid”, the decision to acquire the target will be contingent on the – at least implicit – condition that the seller accepts the terms proposed by the bidder. This condition is rarely fulfilled, and we have seen instances where acquisitions do not materialise, because the parties could not agree on the terms of the purchase agreement, long after the “final bid” had been submitted.
The ECB’s legal position would therefore regularly result in the need to engage with the ECB, while neither the transaction as such nor essential parameters are definitive or at least likely. While the bid is referred to as “final”, bidders will often not have made their “decision to acquire” the target in any case at this point in time.
The ECB’s “final bid” trigger criterion also falls short in bidding processes with a number of bidders, all of which submit a final bid to the seller. In cases with four bidders, for example, it seems overly burdensome for bidders, that all bidders submit a notification to the NCA, although only one bidder can be successful and actually acquire the qualifying holding. Further, the early notification requirement may lead to bidders not submitting “final bids” in an auction process to avoid spending recourses at a time where it is unclear whether they will be selected in the next stage of the process and eventually sign the purchase agreement. This would leave sellers with fewer bids to choose from and result in a less competitive M&A environment for banks.
Lastly, the often-preliminary information and documentation available for a notification at this stage of a process would make submission of a complete filing challenging and be of little help to assess the transaction by the NCAs/ECB.
While it appears that the ECB Draft Guide aims at reflecting the market practice in auction processes (an indicative bid, followed by a final bid), many NCAs have traditionally regarded the signing of the purchase agreement to be the decisive trigger point for the obligation to notify, but not the submission of any of the bid letters. In general, this should remain the correct trigger point, particularly in auctions.
2. “Decision to acquire” in temporary and optional acquisitions
Acquisitions, but also group-internal restructurings, are sometimes consummated in multiple steps. As a result, shareholders sometimes acquire qualifying holdings just for a few hours or minutes. Requiring approval for this short time period would be disproportionate. A pragmatic approach is, therefore, to only consider the final shareholding structure.
The ECB have now offered guidance under which three cumulative circumstances they will not consider a temporary acquisition to trigger a notification requirement:
- The final shareholding structure is not affected by the temporary acquisition.
- The temporary acquirer has formally agreed or committed to immediately transfer the shares. Such agreement must be provided to the NCA/ECB and the timing of the transfer is explained to the competent authority.
- A formal agreement or commitment from the temporary acquirer is provided to the NCA/ECB confirming that the temporary acquirer has no ability to exercise any kind of rights over the capital or voting rights or other de facto influence that could have an impact on the target’s organisation, governance, financial soundness and governance ratios.
These requirements can be summarized as (i) conditionality between the transaction steps and (ii) a lack of time and ability of the temporary acquirer to exert any influence over the target. While ensuring the conditionality of the steps will be a matter of proper transaction structuring, the guidance does not answer what holding period would fall within the realms of “immediately” – can this only be seconds or would a longer holding period, e.g., where different steps require subsequent notarisation or a minimum holding period for tax reasons, still satisfy the condition of an immediate transfer? Further, it remains unclear what level of agreement or commitment the temporary acquirer must provide to comply with the third criterium – does this, e.g., require an actual suspension of voting rights, which may not be achievable for all types of legal entities?
Some arrangements, in particular put and call options, provide for a contractual right for one or both parties to acquire or sell the shares following a unilateral declaration of the respective party. The ECB guide aims to clarify that “the proposed acquirer should notify the competent authorities as soon as it becomes aware or can expect that the proposed acquisition will take place”. This is insofar helpful as the conclusion of these arrangements does not in itself trigger a qualifying holding procedure. However, whether a notification will be required (i) when the proposed acquirer has decided to exercise such right or (ii) when the proposed acquirer has actually exercised such right is still not clear. Furthermore, there is no distinction made between arrangements, under which the immediate result of a declaration is a binding obligation to sell/purchase the shares or the transfer of the shares itself with immediate “in rem” effect. The latter may be treated similar to contingent convertible bonds, in relation to which the ECB state that “a notification in advance is not possible” due to the automatic conversion. However, these details are not explicitly set out in the ECB Draft Guide and should be further clarified in the final ECB Guide.
3. “Acting in concert”
The ECB Draft Guide further adds to the multitude of issues that practitioners must consider in determining whether shareholders are "acting in concert." This assessment is already complex due to many overlapping layers of regulation from the Transparency Directive, the Takeover Directive, their national implementation laws, case law, including from the ECJ and the Joint Guidelines.
The ECB Draft Guide states that “group structures comprising multiple holdings, layers and investment vehicles steered by the same ultimate indirect owners” must be analysed on whether they act in concert. The ECB Draft Guide avoids explaining what exactly triggers acting in concert, besides having common ultimate owners. In any case, there is no reason why different holdings or investment vehicles, that have the same owners or, for instance, general partners, would automatically result in “acting in concert”. Establishing “acting in concert” between mid-level holding companies and/or investment vehicles in complex structures has the potential to bring micro-shareholder into the scope of the filing requirement. This does not seem to be justified in particular for indirect shareholders with little or no actual influence over or economic interest in the target. Also, the ultimate indirect owners will, as the ECB agree, usually be within the scope of a notification requirement.
4. Assessment of non-executive directors
A recurring and highly relevant question in qualifying holding procedures is whether (independent) non-executive board members of a one-tier board are required to undergo a regulatory assessment as part of the assessment of the proposed acquirer for which they are board members and submit documentation confirming their good repute, e.g. a CV or a criminal record check. Such requirement only applies to “persons who effectively direct the business” of the proposed acquirer.
The term “persons who effectively direct the business” has not been clearly defined so far.
The ECB suggest that persons who “effectively direct the business should be taken to mean the persons who jointly or individually can represent and legally bind the legal person. These usually comprise the members of the management board (in two-tier board systems) or the executive board (in one-tier board systems) of the proposed acquirer. In principle, the members of the supervisory board (in two-tier board systems) and non-executive members of the board of directors (in one-tier board systems) of the proposed acquirer are excluded, unless they are able to directly influence the day-to-day decision-making and/or represent and bind the legal person.”
While a clarification is welcome, the actual definition proposed by the ECB will not provide sufficient guidance and will create delimitation problems as regards non-executive board members – their powers, particularly in Anglo-Saxon jurisdictions, often is not a matter of legal regulations, but market practice. For instance, non-executive members of a board of directors of a UK Limited or a US corporation, may be able to represent and bind the legal person on whose board they are appointed. However, they typically do not directly influence the day-to-day decision-making but constructively challenge and help developing proposals on strategy. The definition does also not clarify if non-executive board members would be affected if they can represent and bind the legal person only in extraordinary circumstances, such as when the executive board members are not able capable of acting in good time.
Persons who “effectively direct the business” should therefore only consist of persons that are able to directly influence the day-to-day decision-making and represent and bind the legal person not limited to extraordinary circumstances.
5. Disclosure of 0.5% shareholder
The ECB further propose to request “specific acquirers”, i.e. private equity firms, sovereign wealth funds and conglomerates, to disclose the names, percentages of capital and/or voting rights or other interests held in the target by at least those layers that, directly or indirectly, solely or jointly, hold more than 0.5% of the capital or voting rights in the target. Disclosure of interests below this threshold can be requested if justified considering the circumstances of the specific case.
While it could be observed in practice that the ECB already ask for this information, a sound legal basis has been difficult to find (see also the EBA Peer Review – “the information is sometimes hard to retrieve, as the lawyers tend to consider that [N]CAs can only investigate what is explicitly requested in the [Guidelines].” The lack of a sound legal basis can also pose a challenge to specific acquirers if they are required to keep the identity of their investors confidential, unless there is a legal basis for disclosure. However, even if the ECB Guide would be adopted, it can be doubted whether the non-binding guide would provide a sound legal basis for such requests.
Whether tracing the origin of funds used for the financing of the acquisition always justifies requesting business secrets or personal information in the granularity of 0.5% seems disputable, in particular in cases where the potential acquirer in question is itself subject to AML requirements (e.g. an AIF). Requesting a generic overview of the investor basis (as per class of investors and jurisdiction) and the specific acquirer’s KYC policy should be sufficient in most situations and considerably more proportionate. Further, holding 0.5% of voting rights (but no capital) has no relevance for funds used for the transaction.
II. Next steps
The consultation period for the ECB Draft Guide is scheduled to end on 9 November 2022. ECB will, thereafter, review and publish the comments they have received along with a feedback statement and the final version of the guide. The ECB sets out on its website how comments are to be submitted. As part of the public consultation process, the ECB is also planning to organise a stakeholder meeting for a targeted audience consisting of experts handling qualifying holding procedures or other stakeholders being impacted by such.
Further to the actual content of the ECB Draft Guide, a pressing issue after adoption of the draft will be to what extent other European supervisory authorities will also apply the ECB Draft Guide as a whole or in parts, not only with respect to credit institutions, but also with respect to investment firms or payment service providers. While national legislation governing qualifying holding procedures will in most cases provide for minimum requirements and thereby allowing NCAs to apply additional requirements, any systematic and overarching reliance by the NCAs on the ECB Draft Guide in excess of these national requirements, should in our opinion not be permissible and would require amendments of the national requirements.