ECB consults on guide to qualifying holding procedures
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The publication of the ECB’s draft guide on qualifying holding procedures (the QLF Guide) is part of the ECB’s push towards greater transparency of its supervisory approach.
The ECB explicitly positioned the QLF Guide as complementing the ECB’s 2020 guidance on consolidation in the banking sector. Despite stated neutrality to banks’ organisational structure, the ECB has repeatedly called for more consolidation in the European banking sector. The ECB sees such consolidation as key for increased profitability. The proposed QLF Guide will be embedded in Joint Guidelines from the supervisory authorities EBA, ESMA and EIOPA.
The stated intention of the ECB is for the QLF Guide to operate as a “user-friendly handbook”. It may be that the ECB hopes that greater clarity for banks and their advisors as to the burdensome process of the qualifying holding procedure may pave the way to more consolidation.
The qualifying holding procedure
A ‘qualifying holding’ is broadly defined as a direct or indirect holding in a credit institution representing 10% or more of the shares or voting rights. Acquiring such a stake or crossing certain thresholds requires notification to the supervisor and authorisation of the increased participation. Direct as well as indirect participants up to ultimate beneficial owners will be assessed as part of this process.
In the Single Supervisory Mechanism the qualifying holding procedure is an ECB competence even for less significant institutions not directly supervised by the ECB.
Any breach of the notification requirement can lead to the application of supervisory measures and/or sanctions. This may, depending on applicable national law, include the suspension of voting rights prior to the authorisation of the qualifying holding.
Structure of the QLF Guide
The QLF Guide runs through the five key areas of assessment but also seeks to provide additional pointers in areas that tend to cause most issues, such as complex acquisition structures and the application of proportionality to simplify the submission in individual cases.
Guidance on each of the assessment criteria
Reputation of the proposed acquirer
The QLF Guide gives details as to the ECB’s approach to the assessment of the integrity and professional competence of the proposed acquirer(s).
Of particular interest is the clarification of the key documentation, in particular criminal records that often cause problems in practice, especially where non-EU jurisdictions are involved and/or acquirers have resided in multiple jurisdictions in the relevant timeframe (usually the past 12 months):
- General rule: Official criminal records are the minimum proof requirement for the assessment of reputation and are always required subject to very narrow exceptions.
- Jurisdiction with multiple levels of criminal systems: In jurisdictions where multiple levels of criminal systems exist (eg federal and local), official records must be submitted from all levels unless there is a cumulative certification system.
- Exception: Only in exceptional cases will alternatives to criminal records be discussed, namely where it is impossible or illegal to obtain criminal records or to share them with a third party.
Despite the importance of criminal records, the ECB also warns that an acquirer’s reputation may be in doubt (and thus, an acquisition barred) even without a criminal conviction for the conduct at issue. Even where an executive is not criminally liable, supervisors may conclude from facts that emerge in proceedings that they lack the requisite integrity or professional competence.
Reputation, knowledge, skills and experience of newly appointed board members
- The acquirer already identified at least one individual that is to be appointed as a board member in consequence of the acquisition.
- No decision as to a new appointment has been made or the potential new member has not be identified.
- The acquirer does not intend to make any new board appointments.
Financial soundness of the proposed acquirer
- Credit institutions: Supervisors will consider in particular the latest assessment of the overall risk profile.
- Other legal persons: Supervisors will analyse the financial documentation to form an overall judgement of the proposed acquirer’s financial soundness.
- Natural person: The assessment will be based on an overview of the proposed acquirer’s financial situation plus additional documentary evidence such as tax declarations, depending on national law.
Compliance with prudential requirements of the target
- Qualitative and quantitative assessment: The QLF Guide provides more detail on the factors and indicators taken into account in assessing the business plan, including an assessment of the acquirer’s assumptions.
- Supervisory challenge scenario: The ECB uses an adjusted base case scenario to test the assumptions underlying the acquirer’s business plan, develop potential follow-up questions and ultimately form an overall view as to the viability of the business plan.
- Internal governance: The ECB states that for credit institutions the focus is on interaction of internal control functions at group and target levels, and for other acquirers on management of intra-group conflicts of interest.
Money laundering/terrorist financing risks
The ECB elaborates on the assessment criterion of whether there are reasonable grounds for knowing or suspecting that the proposed acquirer is or has been involved in money laundering/terrorist financing (ML/TF) operations or attempts to do so, or that the proposed acquisition of the qualifying holding may increase the risk of such operations occurring.
The ECB provides the following helpful details:
- The ECB has no competence to supervise AML/CFT compliance, but made clear that AML/CFT considerations are relevant in several elements of supervision. It will rely on NCAs and/or national AML authorities to obtain the relevant information. This includes, for example, criminal convictions, final and pending administrative sanctions, investigations and findings.
- The two key aspects of the ML/TF criterion and each’s respective focus: (i) the source and chain of funds for the proposed acquisition, and (ii) the impact on the target business plan and the management and organisational structure of the target from an AML/CFT perspective.
Further key aspects addressed
Timing of the notification
In the QLF Guide and accompanying stakeholder meeting the ECB provided helpful guidance on the point in time when a transaction needs to be notified. As a rule of thumb, an acquirer needs to notify when they think to themselves “if only I could acquire, I would”. This point in time will generally be prior to the intended transaction. In an M&A context, it should be before a final offer at the very latest.
The QLF Guide gives further detail on three potentially difficult scenarios:
- Involuntary acquisitions: Passive or involuntary acquisitions (eg share repurchases) are still subject to notification and should be notified as soon as the acquirer becomes aware it has reached a threshold.
- Temporary acquisitions: Generally, even temporary acquisitions (eg a few business days) must be notified and assessed. The only exception to this is where ownership is acquired only for a “legal second” with immediate on-transfer. In such cases, the supervisors may on a case-by-case basis decide that no formal assessment is required.
- Conditional or optional acquisitions: Where transfer of ownership depends on a trigger event beyond the control of the acquirer, it is still the responsibility of the acquirer to notify as soon as possible and generally before the acquisition takes place. Whether the acquisition of a convertible instrument with an automatic conversion mechanism itself will be regarded as an “intention to acquire” will depend on the aim of the transaction.
The ECB reminded acquirers that even in these complex scenarios the notification needed to take place generally before the acquisition or at the earliest possible moment, and a breach of the requirements could result in supervisory measures or sanctions.
Complex acquisition structures
Throughout the QLF Guide the ECB gives specific guidance on complex acquisition structures (eg private equity groups). The guidance addresses specific questions arising in this context such as the analysis to determine whether parties are acting in concern, or the submission of criminal records and financial information.
Acting in concert
The ECB confirms it broad its broad interpretation of 'acting in concert'. While the Joint Guidelines provide a list of indicative factors to be considered, the ECB states that even the presence of one such indicator - eg the use of a common acquisition vehicle or a shareholder agreement - can lead to the determination that parties are 'acting in concert'.
Disclosure of information on limited partners
Additionally, the ECB introduces a requirement that acquirers organised as limited partnerships (LPs) must disclose information on investors that directly or indirectly hold 0.5% of capital and/or voting rights in the target. If the ECB deems it necessary in light of AML/CFT concerns or to verify if holdings need to be the added it may also require disclosure below that threshold.
The public consultation runs until 9 November 2022. After that, the ECB will consider the feedback and publish a final version of the guide. Based on the timelines for previous consultations, we would expect the final guide to be available in Q2/Q3 2023.
In general, the QLF Guide provides welcome clarity on the supervisory practices of the ECB and may well assist banks and their advisers to navigate the process and have it run more efficiently. Whether the QLF Guide will achieve this aim and address in particular the complaint from industry that it takes a very long time to complete a qualifying holding assessment (up to two years according to a 2021 ESA peer review) remains to be seen.