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22 April 2020
Regulatory scrutiny is an increasingly important area of focus for buyers and sellers in M&A transactions.(1) From the outset of a deal, the parties will be keen to understand whether regulatory approval is required or recommended to be obtained prior to closing, how long it will take to obtain approval and the ability of the relevant regulator to block the deal or otherwise impose conditions to closing that may change the commercial terms of the deal (as well as the likelihood of the same). This article looks at the Financial Services and Markets Act 2000 (FSMA) change in control regime.
One area of scrutiny that frequently arises on the acquisition of UK businesses – particularly on deals involving a target in the banking, financial services, insurance and related-technology sectors – is the requirement to seek the consent of the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA) to become a controller. A person who decides to acquire control over a UK-incorporated firm that is authorised to carry on its business by the FCA or the PRA must give the appropriate regulator notice and receive prior approval for the acquisition of control.
As a member of the European Union, the United Kingdom was required to implement the EU Acquisitions Directive (2007/44/EC), which provides for a harmonised regime in the European Union for the acquisition of control in certain financial firms (including broker-dealers, banks and insurers). In short, the EU Acquisitions Directive requires persons wishing to acquire control in such firms to seek prior regulatory approval before completion. Part 12 of the FSMA (as amended) implements the requirements of the EU Acquisitions Directive into UK law. It is not currently anticipated that there will be significant changes to the change in control regime as a result of the United Kingdom leaving the European Union or at the end of transition period.
While the EU Acquisitions Directive applies only to some financial services firms (referred to as 'Directive firms', broadly banks, investment firms and insurers), a policy decision was taken in the United Kingdom to impose change in control requirements on all UK-incorporated firms authorised by either the FCA or the PRA. However, for firms falling outside the scope of the EU Acquisitions Directive ('non-Directive firms'), the UK regime is less prescriptive. The financial services register maintained by the FCA provides an online search function for firms that are or have been authorised by the FCA or the PRA.
The definition of a 'controller' includes any person who holds:
When calculating whether a person (X) will reach 10% or more of the shares or voting power in a UK-incorporated authorised firm or its parent undertaking as a result of an acquisition, the shareholdings and voting power of certain other persons will need to be taken into account in either of these cases:
There are further control thresholds applicable to Directive firms for increases in control requiring prior regulatory approval at the level of 20%, 30% and 50%. If the target firm is a non-Directive firm, there is a single controller threshold of 20%, with a separate threshold for consumer credit firms of 33%.
An application for prior approval must be submitted to the appropriate regulator by the proposed controller(s) when they have decided to acquire control of a UK-incorporated authorised firm. This is usually shortly after the signing of the transaction agreement.
The FCA has 60 working days (plus a further period of up to 30 working days if it requires further information) from the point at which it acknowledges the receipt of a completed change in control application to decide whether to grant its approval. The FCA may utilise a significant proportion if not all of its available assessment period, and/or may delay acknowledging an application as complete in order to postpone the formal commencement of its assessment period.
In considering whether to grant approval to a potential new controller, or in respect of an increase in control through one of the relevant thresholds, the appropriate regulator must consider, among other things:
The seller of the controlling interest (ie, the pre-acquisition controller) and the target firm need to send notifications to the appropriate regulator, although prior approval is not necessary.
Failure to notify the appropriate regulator of a proposed change in control, or to obtain prior approval of a proposed acquisition or increase in control, is a criminal offence under the FSMA. It is therefore critical to consider at an early stage in the transaction whether prior regulatory approval is required.
Where a transaction involves an acquisition of control over a UK-incorporated authorised firm, regulatory approval should be included as a condition precedent to closing in the transaction agreement. As the FSMA requires the proposed controller (rather than the existing controller) to seek approval of the acquisition of control, typically the transaction agreement will provide for the buyer to be responsible for ensuring the satisfaction of this regulatory condition, with the seller under an obligation to assist with this process (including providing necessary information to the buyer to apply for such approval).
Depending on the relative bargaining power of the parties and the risk of obtaining approval, a seller may seek to require a buyer to agree to and comply with any conditions imposed by the relevant regulator (a 'hell or high water' clause). A buyer would usually resist this, as it would not want to bear the risk of not obtaining the regulatory approval; as a compromise, in certain circumstances a buyer may accept the provision subject to agreed carve-outs, such that it would not be in breach if it does not accept certain conditions imposed by the regulator that would significantly undermine the commercial rationale for the deal.
For further information on this topic please contact Will Pearce, William Tong or Mark Chalmers at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (will.pearce@davispolk, email@example.com or firstname.lastname@example.org). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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