Road to CRD 6 – Even more red tape for FIG M&A?

CRD 6 will require credit institutions, Class 1 investment firms, approved and mixed financial holding companies to notify their competent authority in advance where they intend to acquire, directly or indirectly, a material holding. This acquisition will be subject to the competent authority’s approval. Such approval requirements have previously only existed in some Member States.

A holding is deemed “material” where it equals 15 % or more of the acquirer’s eligible capital, i.e. the sum of its CET1, AT1 and Tier 2 capital. In group contexts, the threshold can be exceeded at both the individual level of the acquirer and at the level of the consolidated situation of the EU parent institution. In practice, this threshold may prove to be a significant hurdle for FIG M&A in the EU, irrespective of the purchase price. Where the target of the transaction is a credit institution, the new approval requirement will overlap with the change of control filing. Both filings will have to be made in parallel. While not addressed in CRD 6, the same may apply for overlapping procedures with respect to the acquisition of other types of regulated targets, such as investment firms, insurance undertakings or payment service providers.  

The notification requirement is triggered by the intention to acquire the target. In the context of qualifying holding procedures, the timing of the submission of the notification has historically been a topic of great contention, especially with respect to bidding processes. At least for the purposes of the intention to acquisition a material holding, this question now seems to have been addressed explicitly in CRD 6, as Article 27a(6) CRD recognises that two or more potential acquirers can submit proposals to acquire a material holding in the same entity, thereby indicating that the request for approval may have to be submitted before the bidding process has closed.

The notification shall allow the competent authority to assess the sound and prudent management of the acquirer after the acquisition and in particular of the risks to which the acquirer is or might be exposed. The competent authority will assess, in particular, the following criteria:

• whether the acquirer will be able to comply and continue to comply with the prudential requirements set out in CRR and CRD and other acts of Union law;
• whether there are reasonable grounds to suspect that money laundering or terrorist financing is being or has been committed or attempted in connection with the proposed transaction;

The minimum information to be provided to the competent authority for the purposes of this assessment will be set out in a Regulatory Technical Standard; it seems plausible that at least some of the required information and documentation will be similar to what is provided in a change of control filing, such as a regulatory business plan or a prudential consolidation analysis, for example.  To carry out this assessment, the competent authorities shall have 60 working days. Under certain circumstances (for example if further information is requested) the assessment period will be suspended for, in general, up to 20 working days. 

The competent authorities may oppose a proposed acquisition only if there are reasonably grounds for doing so based on the criteria stated above, for example in case the competent authority considers that the acquirer’s capital situation would not be able to bear the acquisition.

New requirements will be established for material transfers of assets and liabilities. Material transfers of assets or liabilities executed through e.g. a sale shall become subject to a notification requirement. Both the transferor and the transferee may be required to notify its competent authority. The notification requirement will apply to credit institutions, Class 1 investment firms, approved and mixed financial holding companies. 

A transaction will be deemed material for an entity where it is at least equal to 10% of its total assets or liabilities. Where the transaction is performed between entities of the same group, the threshold is 15%. As such, new requirements under CRD 6 also apply to asset deals. However, CRD 6 will not provide for an approval requirement for asset deals.

For purposes of calculating the threshold, the following transfers of assets shall not be included:

• Transfers of non-performing assets;
• Assets for the purpose of being included in a cover pool for securing the payment obligations attached to covered bonds; 
• Assets that are to be securitised; and
• Transfers of assets or liabilities in the context of the use of resolution tools.

As such, these transfers will not be subject to the notification requirement under CRD 6.

The competent authorities will be able to take appropriate measures if the institutions fail to notify the intended operation in advance. 

Moreover, carrying out a merger or division shall also become subject to an approval requirement, which will apply to credit institutions, Class 1 investment firms, approved and mixed financial holding companies. The notification will be triggered by the adoption of the draft terms of the proposed operation. It requires the entities to notify the competent authority which will be responsible for the supervision of the entity resulting from such proposed operation. 

Where the proposed operation involves only financial stakeholders from the same group, the assessment period shall be generally limited to 60 working days. After the assessment period, the competent authority will issue a reasoned positive or negative opinion to the financial stakeholders. Before the issuance of a positive opinion, the proposed operations shall not be completed. In essence, mergers and divisions will, therefore, also be subject to a harmonised approval requirement, ending the current legal framework under which only certain jurisdictions require an approval.