What We Think
September 29, 2020
Regulatory consent for Mergers and Acquisitions
Last month Seed Consultancy was a proud contributor to a chapter dedicated to the Maltese framework in a publication by Wolters Kluwer entitled ‘Corporate Acquisitions and Mergers’. In focusing on a specific element of this important publication, this article will explore the broader implications associated with the regulatory consent required for acquisitions in local credit institutions.
Prior to the transposition of the Acquisitions Directive (Directive 2007/44/EC) in November of 2009, various other directives relating to the banking, insurance and securities sectors governed distinct processes for seeking regulatory consent when acquiring a holding or a measure of control in a bank, insurer or securities firm. However, each Member State had considerable scope to interpret the regulatory requirements in their own way. As a result, the European Commission proposed that the supervisory approval requirements in the relevant directives should be fully harmonized and on September 2006, the Commission published a proposal for the Acquisitions Directive, which was intended to improve the procedures that Member States’ supervisory authorities should follow when assessing proposed M&As.
Since then, various developments have taken place which have subjected financial services operators to more stringent regulatory requirements which have gradually increased in scope and reach over the years. More specifically, and in the hope of ensuring a cross-sectorial level playing field, effective efforts have been particularly focused on the harmonization of the legal frameworks governing the regulation and supervision of European financial services operators. From a local perspective, the Directive has proven to be very effective in the execution of numerous M&A transactions. However, the law wasn’t as airtight as originally planned, with ad hoc and supplemental regulatory action being required from time to time. A few prominent lessons learned have prompted regulators, including the MFSA, to take a stand on certain critical aspects, with increased standards governing the ownership and control of licensed entities being perhaps the prime example in this respect. These past years, and more recently in a policy paper published last June, the MFSA earmarked the banking and insurance sectors as being particularly vulnerable to limited shareholding structures, aligning its risk assessment to reflect this reality.
In its assessment, the Authority considered that the overall governance structure, soundness and resilience of an institution may be undermined if the shareholding structure of the relevant institution is not sufficiently diversified. This may result in the precipitation of key risks such as owner dominance by a single beneficial owner/shareholder, and/or increased possible dependence on one/few shareholder/s in case of any requirement for capital injections.
Therefore, the Authority expects that the proposed shareholding structure of such entities is reasonably diversified and well balanced. On this aspect, regulators remain focused on
the substance of such diversification and will not tolerate any Machiavellian attempts to bypass such requirement. This approach, whilst coming directly from the MFSA should not be taken in isolation as it reflects the thinking of other European Institutions such as the European Central Bank (‘ECB’). Since the establishment of the Single Supervisory Mechanism (‘SSM’) Regulatory Framework in 2014, the ECB has been vested with the power to grant authorisations, impose withdrawals, and approve changes to qualifying shareholding structures of credit institutions. This is done jointly with the MFSA as the National Competent Authority, with such assessments carried out in compliance with the applicable European frameworks such as the “Joint Guidelines on the prudential assessment of acquisitions and increase of qualifying holdings in the financial sector” and the “Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU” . In case of the latter, regulators are guided to review other criteria such as the reputation of the proposed acquirers, the fitness and propriety of the board members to be appointed by the proposed acquirer, financial soundness, ability of the target to continue to comply with prudential requirements following the acquisition; and whether the transaction involves, or increases the risk of money laundering or the financing of terrorism.
M&As remain an effective strategy for boosting the bottom-line, however psychological preparedness remains key in this regard – knowing the regulatory requirements is just the starting point!
This article first appeared in the Sunday Times