On Target

Welcome to MJ Hudson’s monthly On Target, where you’ll find useful tips and insights to ease you through your M&A transactions. This month we focus on a key regulatory issue to consider when acquiring a UK regulated business.

Acquiring a Regulated Business – Change in Control Regime

Financial services businesses remain hot targets in the UK, but as the purview of the UK financial services regulators creeps ever wider and deeper (see recent focus on consumer credit businesses) it is imperative to identify at an early stage whether a target is FCA regulated, or is carrying out activities that mean it should be regulated.   If the business is regulated, ‘change in control’ should be at the front of a buyer’s mind, but it may be surprised to discover that ‘control’ doesn’t necessarily equate to a 50% plus threshold, and that the process for obtaining the required approval(s) can be a significant hurdle in terms of effort, cost and timing.  Below is a handy summary of the key characteristics and process of the UK’s change in control regime.

 

What is the change in control regime?

Under Part 12 of the UK’s Financial Services and Markets Act 2000 (‘FSMA’), controllers and prospective controllers of a regulated business (terms explained below) must seek approval from the FCA before acquiring, increasing or decreasing control over a firm that is authorised by the Financial Conduct Authority (‘FCA’) and/or Prudential Regulation Authority (‘PRA’).

Failure to gain such prior approval is a criminal offence.

Remember, there is also an obligation on authorised firms to inform the FCA / PRA of any proposed or effected changes in control.

Firms regulated by both the FCA and PRA will need to obtain approval from both regulators.

 

Who are controllers?

Under FSMA, a person, or persons acting in concert are controllers (i.e. exercise ‘control’) if they:

  • hold 10% or more of the shares in a UK authorised firm or parent of that firm;
  • hold 10% or more of the voting power in a UK authorised form or parent of that firm; or
  • hold shares or voting power as a result of which they are able to exercise significant influence over the management of a UK authorised firm.

Note that the 10% threshold is varied for ‘non-directive’ firms, as explained and detailed below.

Identifying all controllers can be complex, and can also involve an analysis of indirect influence and contractual rights (not just shareholdings), so it is important to consider the definitions carefully when assessing who is ceasing to be, and who might become, a controller.

 

When does a person acquire or ‘change’ control?

Controller ‘thresholds’ or ‘bands’ are used to determine when and whether an application for approval will need to be made.  There are different requirements for ‘directive’ and ‘non-directive’ firms.

Directive firms include credit institutions, MiFID investment firms, certain insurance and reinsurance firms and e-money firms. The relevant controller bands for these types of firms are:

  • 10% or more but less than 20%;
  • 20% or more but less than 30%;
  • 30% or more but less than 50%; and
  • 50% or more

If a person is increasing control within a control band then a notification will not need to be made to the relevant regulator(s).

‘Non-directive firms’ are those which do not fall under the definition of a directive firm. This will include all full scope AIFMs unless they are also authorised under MiFID. These firms have a single threshold of 20% or more, i.e. a person need only seek regulatory approval if acquiring control of, or ceasing to control, 20% or more of a non-directive firm (or if significant influence is acquired through a smaller stake).

Limited permission consumer credit firms also have a single threshold of 33%, as do payment services firms for whom the threshold is 10%.

It is important to note that it is irrelevant where the controller is based. All acquisitions and disposals are subject to the regime where a UK authorised firm is involved. There is also no automatic exemption from the regime for a buyer that is an approved person.

 

Who has the obligation to seek authorisation?

Where a person decides to acquire control of a UK authorised firm, the proposed buyer of the controlling interest will need to send a full application which must be approved by the regulator before the interest is acquired. The seller(s) of the controlling interest and the target will need to send a notification only.

Where an existing controller decides to increase or decrease its control of a UK authorised firm, a controller moving to a higher band (where applicable) will need to send a full application which must be approved by the regulator before the interest is acquired. A controller moving to a lower band of the controlling interest and the target will only need to send a notification to the regulator.

 

Making an application to the regulator

An application in respect of the acquisition (or disposal) can be submitted jointly by the buyer and the target. Typically, the buyer’s lawyers will be responsible for submitting the application and co-ordinating any joint submission.

An application will need to be made as soon as a decision has been made to acquire control in an authorised firm. The FCA handbook provides some guidance on when they deem a decision to have been made. In respect of an SPA, the guidance suggests that an application will not normally be required before the buyer enters into the agreement, provided that the regulatory approval under the change in control regime is a condition precedent to completing the acquisition.

The application will need to be sent to the FCA for an FCA authorised firm, or to the FCA and PRA for a dual authorised firm. The notice is accompanied by certain supporting documents, including:

  • Post-transaction structure charts – showing the position of the target after the proposed change in control;
  • CVs – for individual controllers and directors or members of corporate controllers, but approved persons will not need to send CVs to the regulator;
  • Proof of funding – such as accounts, bank statements, accountant statements and loan agreements;
  • Accounts – for any potential corporate controllers for the last three financial periods, approved, where possible, by an auditing firm; and
  • Business Plan – when the controller is an individual, partnership, corporate or will become a parent undertaking of a target.

 

What to expect from the regulator

The FCA (and, if applicable, PRA) will have 60 working days to assess a change in control case, which will run from the date the regulator(s) acknowledge receipt of a complete notice (and including all supporting documents).

The regulator can interrupt the assessment period once only, and before the 50th working day of the assessment period, to request further information. This will have the effect of pausing the assessment period for a period up to a maximum of 20 working days.

Once the regulator has made a decision it will provide either:

  • unconditional approval of the proposed acquisition;
  • approval of the acquisition subject to conditions; or
  • rejection of the proposed acquisition.

If the acquisition (or disposal) is approved then the transaction can complete within the approval period specified by the regulator. The buyer should then notify the regulator once the acquisition is complete. If the acquisition is rejected then the only recourse that the buyer has is to refer the decision to the UK government’s Upper Tribunal.

 

Conclusion – 5 key things to consider

  • Is the target a UK authorised firm? – this information can be found by checking the Financial Services Register.
  • Be prepared, open and prompt – the regulator will require a significant amount of information, including information that is likely to be considered sensitive by the buyer. Confidentiality, commercial sensitivity or unavailability of the relevant information will not be accepted as a reason for denying disclosure – so speak to your advisers about what information the regulator will need, and be ready to answer their queries comprehensively.
  • Allow for the change in control process in the deal timetable, and the deal documents – the information gathering process, application and response from the regulator could take up to 80 working days. Build the relevant conditionality into early drafts of the SPA, scheme document or takeover terms and conditions.
  • No gun jumping – ensure control is not inadvertently obtained between exchange and completion by thoroughly checking the transaction documents for any transfer of voting rights or influence over decisions that could equate to control.
  • Think budget – allow for the costs of drafting and submitting the applications, liaising with all parties on the relevant documents and with the regulator post-submission.

 

With special thanks to Chris Dearie and Funke Omisore from the MJH Regulatory team who provided expert input for this article.

Is this brief too brief? Want to know more about the FCA’s Change in Control regime? (of course you do) Expert legal advice is on hand from MJ Hudson’s M&A and Regulatory teams. Just contact any of the On Target team (details below) or your usual MJ Hudson M&A contact, and we’ll gladly help.

DEAL OF THE MONTH

 

MJ Hudson’s M&A and Private Equity transactions team advised Alpina Partners on its acquisition of Virtalis, a world-leading virtual reality company. Virtalis is headquartered in the UK, with offices in the US, Germany, Finland and Malaysia, as well as partners and resellers worldwide. Alpina’s portfolio is centred on small and mid-sized businesses in Europe with strong technical USPs.

On Target is produced by MJ Hudson’s M&A and Private Equity transactions team. We provide expert legal advice to sponsors, managers and investee/target companies on domestic and cross-border M&A transactions. We work across the full spectrum of private market investments, from venture and growth investments to buyouts. Clients praise our entrepreneurial approach, commercial outlook and dedication to getting the deal over the line, regardless of the obstacles.