United States: Control Over UK Authorised Persons: What To Consider As An Acquirer

Summary

There is an obligation when acquiring or increasing "control" over a UK authorised person, e.g. an investment firm, a credit institution, a fund manager or a payment services provider, to notify and obtain prior approval from the appropriate UK regulator(s) before "control" is obtained or increased.

In summary, the key points to consider to avoid delays and issues in a transaction include:

  • Acquirers should be mindful of the broad definition of "controller", which can capture persons with indirect shareholdings or voting rights in, or those with significant influence over, a UK authorised person.
  • Acquirers should plan deal timetables appropriately to ensure that all the relevant information is prepared and full advantage is taken of the pre-submission period to seek any clarification from the appropriate regulator(s) and minimise any potential issues before the application is submitted.
  • Transaction documentation will need to be carefully drafted to ensure that the proposed controller does not accidentally obtain control prior to approval.

This client alert is intended to serve as a practical guide to the relevant approval obligations and the regulatory application and assessment process and is not designed to be an exhaustive list of the applicable rules and regulations.

Definition of a UK Authorised Person

An "authorised person" for the purpose of the change in control regime discussed herein means (i) any person who has a permission to undertake regulated services from the UK Prudential Conduct Authority and/or the UK Financial Conduct Authority; (ii) a firm authorised to undertake regulated activities in an EEA country operating in the UK on the basis of an EEA passport; (iii) certain firms authorised under the UCITS Directive; (iv) firms authorised under the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228); (v) the Society of Lloyd's; (vi) an "authorised payment institution".

Background

The relevant regulatory regime is set out in Part XII of the Financial Services and Markets Act 2000 (FSMA), which implements the Acquisition Directive (2007/44/EC). FSMA places an obligation on any person (whether an individual, partnership, a limited company or a trustee) who decides to acquire or increase "control" in a UK authorised person (the "proposed controller") to notify, and obtain prior approval from, the appropriate UK regulator(s), before control is obtained or increased. The appropriate UK regulator(s) assessing the application will be concerned with the suitability of a proposed controller to "control" a UK authorised person. Failure to comply with these requirements is a criminal offence in the UK.

From January 2018, the FSMA change in control regime also applies to "authorised payment institutions" under the revised Payment Services Directive (PSD2).

Will You Be a Controller?

The definition of "controller" under FSMA is broad and, indeed, broader than one might expect or have previously come across. Any person looking to acquire, directly or indirectly, "control" in an UK authorised person will need to carefully evaluate whether they will become a "controller" within the meaning of applicable regulatory rules.

Acquiring Control

Under FSMA, a "controller" is someone who holds:

  • 10% or more of the shares in a UK authorised person ("A") or a "parent undertaking" of a UK authorised person ("P");
  • 10% or more of the voting rights in A or P; or
  • shares or voting power in A or P which allows the "controller" to exercise significant influence over the management of either entity.

The definitions of "shares" includes non-voting shares in a company as well as interests in legal vehicles, such as a partnership, and of a "parent undertaking", which can include individuals in addition to corporate entities.

The last limb of the definition means that the shareholding or voting power need not be 10%, as the test will be met as long as a holding would enable a proposed controller to exercise significant influence over a UK regulated firm, regardless of whether such influence is actually exercised or not.

The holding of shares or voting power by A includes any shares or voting power held by another ("B"), if A and B are acting in concert. The inclusion of "acting in concert" in the definition is designed to ensure that any legal or natural persons who decide to acquire or increase control in accordance with an explicit or implicit agreement between them will be captured. Parties to a share purchase agreement may be deemed to be acting in concert if the agreement contains provisions governing or otherwise regulating the exercise of the rights attaching to certain of the shares.

Parent undertakings of minority shareholders are also considered to be controllers due to the extended definition of "voting power" under FSMA.

Increasing Control

A proposed controller will have to notify the appropriate regulator(s) if the percentage of its shares or voting power increases so as to move into a different control band.

For the "directive firms", the control bands are:

  • 10% or more but less than 20%
  • 20% or more but less than 30%
  • 30% or more but less than 50%
  • 50% or more.

These thresholds are also relevant to e-money firms.

A "directive firm" is one of the following:

  • a credit institution as defined in the Banking Consolidation Directive;
  • a Markets in Financial Instruments Directive (MiFID) investment firm;
  • an insurance firm under the Consolidated Life Directive or the First Non-Life Directive;
  • a firm carrying on reinsurance under the Reinsurance Directive.

A single threshold of 10% applies to authorised payment institutions authorised under PSD2.

For "non-directive firms", i.e., UK authorised persons other than a "directive firm", a single notification threshold of 20% applies.

A single notification threshold of 33% applies to limited permission consumer credit firms.

The Application Process & Additional Documents

A proposed controller will most likely notify, and seek approval from, the appropriate regulator(s) by submitting an application form referred to in FSMA as a "section 178 notice" (the "section 178 notice"). Where there are numerous controllers, a section 178 notice form for each controller should be submitted. The regulators also require additional information to be provided, including appropriate structure charts, CVs for proposed individual controllers and directors of the proposed corporate controllers, financial statements, a proof of funding and in certain instances, a regulatory business plan.

When assessing the application, the criteria that the appropriate regulator(s) must consider include the reputation of the proposed controller; the reputation and experience of any person who will direct the relevant UK regulated firm's business post-completion; the financial soundness of the proposed controller and particularly how this relates to the intended regulatory business plan of the relevant UK authorised person; whether the UK authorised person will be able to comply with the applicable prudential requirements to all of the regulated activities for which it has or will have permission; and whether there are reasonable grounds to suspect that any money laundering or terrorist financing is being committed (or attempted) or the risk that such activity could increase.

The appropriate regulator(s) will either:

  • approve the acquisition unconditionally: If approved, the appropriate regulator(s) will issue an approval notice to the proposed controller, who should ensure that the acquisition or increase in control is completed within the stipulated approval period; or
  • approve the acquisition subject to conditions: If the appropriate regulator(s) would otherwise object to the acquisition or increase in control or is/are required to do so at the direction of either the FCA or PRA, as applicable, the appropriate regulator(s) will issue a warning notice specifying any conditions imposed. Conditions that have been previously imposed include preventing the proposed controller (and connected persons) from taking up directorships and from exercising their voting powers, control or influence over certain matters, including strategy and financial crime controls, as well as requiring that the proposed controller maintains its capital management policies; or
  • object to the acquisition: The appropriate regulator(s) can only object to an acquisition or increase in control if there are reasonable grounds for doing so on the basis of the assessment criteria or if the section 178 notice is incomplete. The warning notice issued contains details of how to appeal such a decision.

It is a criminal offence to proceed with an acquisition or increase in control in contravention of a warning notice.

The FCA must consult the PRA before making the decision on the application if the UK authorised person to which the section 178 notice relates has as a member of its immediate group a PRA-authorised person, or the section 178 notice-giver is a PRA-authorised person.

Timeline

  • Pre-submission period: This period allows the proposed controller to better understand the process and gives it an opportunity to liaise with the appropriate regulator(s). The proposed controller will also be able to gather the relevant information for the section 178 notice and, particularly if the proposed acquisition is complex, have pre-application discussions and meetings with the appropriate regulator(s). The Acquisition Directive suggests that a proposed controller and appropriate regulator(s) may wish to maintain "regular contact", which may be useful if there is a particular deadline for the acquisition or the increase in control to complete. This period will be important to minimise the risk of the section 178 notice being considered "incomplete" when submitted.
  • Day 0: The obligation to submit the section 178 notice is triggered as soon as the proposed controller "decides to acquire or increase" control in a UK authorised person. While FSMA does not specifically define what "decides to acquire" means, the FCA has previously explained that, whether a person has decided to acquire/increase control over a UK authorised person will ultimately depend on the specific facts, and the FCA takes a case-by-case approach to considering whether a decision to acquire has been made depending on the relevant facts. Relevant matters in this regard can include (but are not limited to) whether the proposed controller was aware of the acquisition/increase in control and the transaction giving rise to it; the proposed controller's ability to influence, object to or prevent the proposed acquisition/increase in control; relevant changes in the authorised person's governance arrangements as a result of the transaction giving rise to the change in control; and the source of funding for the transaction giving rise to the change in control. A decision to acquire/increase control may be inferred from any (or any combination) of these factors together with (if any) other relevant matters.  A signing of a share purchase agreement would be an example of the "decision to acquire or increase control" in a UK authorised person.
  • Day 2: Once the section 178 notice is submitted, the appropriate regulator(s) will have two working days to review the section 178 notice and assess whether the information provided is 'complete'. If the appropriate regulator(s) consider(s) the section 178 notice to be incomplete, it/they must inform the proposed controller as soon as reasonably practical. Where a section 178 notice is deemed to be complete, the appropriate regulator(s) must send the proposed controller a written acknowledgment of receipt by the end of the working day following receipt. Only once the appropriate regulator(s) make(s) this acknowledgment does the assessment period begin.
  • Assessment period: FSMA stipulates the assessment period to be 60 working days. If the assessment period expires without the appropriate regulator(s) notifying the proposed controller about its/their decision, the section 178 notice is deemed to have been approved. The proposed controller should then proceed with the acquisition or increase in control within one year following the expiry of the assessment period.
  • Interruption period: The appropriate regulator(s) may extend (or "interrupt") the assessment period by requesting that the proposed controller provide any further necessary information. The appropriate regulator(s) may only interrupt the assessment period once and cannot do so after the 50th working day of the assessment period. The proposed controller will be informed in writing of what further information it needs to provide and of the new deadline for the assessment period. The interruption period can be up to 20 working days or, if the proposed controller is regulated or situated outside of the EU, up to 30 days from the date on which the appropriate regulator(s) make(s) the request for further information, but will end once the appropriate regulator(s) receive(s) the requested information. The appropriate regulator(s) must acknowledge receipt of such information within two working days following the end of an interruption period. The appropriate regulator(s) may request further information, however, this will not result in a further extension of the assessment period.

Points to Consider

The FCA reported that, in the period from April 2017 to May 2018, it made its decision within the 60-day assessment period for 100% of "complete" section 178 notices. It is therefore recommended that a proposed controller take full advantage of the pre-submission period to ensure that the correct and relevant information is gathered and the appropriate regulator(s) is/are contacted to resolve any potential gaps or issues before submission.

Close attention will need to be paid to the definition of "controller", as even if the target entity itself is not a UK authorised person, the proposed controller could still be caught by the broad definition under FSMA.

The proposed controller should be aware that preparing certain information such as business plans and structure charts could be time consuming, especially if the group structure is large and complex.

Acquiring relevant information will almost certainly require contact with and some reliance on the relevant UK authorised person, who may consider certain information to be sensitive or confidential.

Transaction documentation will need to take into account the delay between signing and closing and be carefully drafted to ensure that the proposed controller does not accidentally obtain control prior to approval.

Sampaquita Tarrant, a trainee solicitor in the firm's London office, contributed to the writing of this alert.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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