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 some of the key legal and structuring flashpoints encountered in UK financial services M&A. Financial services has long been a popular sector for private equity and corporates alike, but in the last two to three years the rise of Fintech companies, particularly in the personal finance and payments sub-sector, has boosted activity levels. Combine this with continued consolidation of financial brokers and asset managers, and the outlook for FS M&A looks healthy.
While the principal parties to any FS M&A transaction are still buyer and seller, there is arguably a third party whose interests need to be borne in mind at each stage of the transaction – the regulator (in the UK context the Financial Conduct Authority, or FCA).
Any business that offers or promotes financial products or services to consumers or businesses will likely fall within the UK regulatory framework, overseen and enforced by the FCA. Banking, insurance and large investment firms may fall within the regulatory purview of the PRA (Prudential Regulation Authority) instead, or as in addition to being regulated by the FCA. The regulatory framework applicable to the business can impact on transaction structure, financing and timetable. For the purposes of this article we will assume the FCA is the sole relevant regulator.
Assuming the business is regulated by the FCA (see also due diligence section below), any acquisition of a significant stake in a financial services business will require prior FCA consent. This is not an approval of the transaction as such (so is unlike competition/anti-trust clearance), but is an approval of those persons who will become ‘controllers’ of the regulated business after the transaction completes.
Applying for this approval requires considerable work and advance planning, and the FCA has up to 60 working days to assess the application (starting from the date on which the regulator considers the application is complete). This can have a significant impact on transaction timing and, if any difficulties are encountered obtaining this approval, on the viability of the transaction itself. Further details are provided in our earlier article “Acquiring a Regulated Business – Change in Control Regime”
Potential impacts of the regulatory regime on transaction structuring can include:
Buyers often have three key concerns when agreeing a purchase price for financial services companies:
We typically see the following mechanisms employed to address these concerns:
As with any M&A deal, the focus of due diligence will depend on the transaction structure – whether a share or asset sale, or a public or private process. Where access to the relevant data is reasonable, due diligence is likely to target the following areas:
Financial services and asset management businesses often rely on the skills of a few key individuals, along with their business relationships and reputation. As a result the value of the target business is often linked to those key individuals, and a buyer will want to ensure their continued involvement following the acquisition.
In addition, a regulated business will need to have individuals who are approved to carry out relevant ‘controlled functions’; in brief, roles critical to ensuring the business complies with its regulatory obligations, such as acting as the director of a regulated firm or overseeing the firm’s compliance processes. If those approved persons leave the business, they will have to be replaced without interruption in order to ensure continued compliance with the applicable regulations.
Typical mechanisms used to ‘lock in’ key individuals include:
Is this brief too brief? Do you need any help with your next acquisition? Are you considering selling or buying a financial services business? Expert legal advice is on hand from MJ Hudson’s M&A team. Just contact any of the On Target team (details below) or your usual MJ Hudson M&A contact, and we’ll gladly help.
In April MJ Hudson advised Phenna Group, an international testing, inspection, certification and compliance group, on a management buyout under which the Phenna Group acquired Hansen Aerospace and the First Scottish Group from an international US group, and – within six weeks of completing the MBO – on the subsequent acquisitions of Professional Soils Laboratory Limited and Building Envelope Technologies Limited (Republic of Ireland).
OVERVIEW: 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.
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