Bank takeovers – the regulatory perspective

The takeover of Commerzbank shares by the Italian Unicredit has surprised the German federal government, to say the least. The situation requires a revision of the structure and procedure of the process of supervising the ownership control of banks, which is required for the acquisition of qualifying holdings in credit institutions.

This process was introduced in Europe as early as 1989 through the Second Banking Directive, and was, with some delay, nationally implemented in Germany in 1992 as part of the Fourth Amendment to the Banking Act (KWG) under the former Section 2b KWG. At the time, this provision was often referred to as the ‘mafia paragraph’. This term did not arise randomly; Under the former Soviet Union, large sums of money were transferred to Europe from obscure sources, and their owners occasionally attempted to acquire stakes in European credit institutions. Since then, the provision has moved further down the KWG: it is now found in section 2c KWG and was recently revised through legislation over the Christmas period of 2022 by the Property Control Regulation, which regulates the procedural details. Initially, the Ministry of Finance (BMF) was responsible for providing the facility, but since 2022 this role has been taken over by the Federal Financial Supervisory Authority (BaFin).

It is occasionally stated that a planned acquisition of a qualifying holding in a credit institution is “subject to approval by the relevant authorities”. To clarify, the procedure is not legally structured as an “approval process”, but rather as a notification procedure. However, in all respects, this type of procedure can be seen as very close to an approval process, as the regulator has the power to prohibit an already completed takeover and order its reversal. It may be fairer and more appropriate to formally redesign the ownership review process – which essentially functions as an approval under the guise of non-prohibition – as a licensing procedure. The historic European decision taken at the time to follow the notification route can be explained by the fact that the process introduced in 1992 had few substantive economic requirements and focused instead on the background of the interested parties and the origin of the funds . This has since changed, with significant substantive notice requirements being incorporated into the process over many years.

According to article 2c KWG, any intention to acquire a qualified holding company, from which it follows that such an intention goes further than just ‘considering a takeover’. However, it is not explicitly provided for when mere ‘consideration’ becomes a concrete intention to acquire. Be that as it may, the acquisition of call options is generally considered an ‘intent to acquire’. The German consulting practice tends to define the intent point quite early, often well before the due diligence phase, in order to initiate the evaluation period by the authorities and thus shorten the overall lead time. Once a complete report has been submitted, the authority has 60 working days to review it. A recent change in the law has further clarified the problem of incomplete notifications: no later than the 50th working day after the notification, the authority must request additional information necessary to complete the assessment. The assessment period will be paused until the requested information is received. In total, the process, including these breaks, may not take longer than 80 working days. In exceptional cases, the evaluation period can be extended to 90 working days. Because the authority can request virtually unlimited additional information, it controls the process effectively.

The intention to acquire a “Qualified Holding Company” is subject to notification, regardless of whether there is a direct or indirect acquisition. A ‘sneak-up approach’ is therefore hardly conceivable and would be contrary to legal requirements. A “qualified holding company” is defined by law as 10% or more of the shares. Follow-up notifications are required when thresholds of 20%, 30% or 50% are exceeded, or if the takeover leads to control over the company. The documents required for a complete notification are very extensive and are intended to provide regulators with comprehensive information about the reliability and financial soundness of the acquirer, as well as to allow an assessment of the continued operation of the business. In terms of the effort required, the ownership review process is now comparable to a licensing process.

An interesting aspect is the powers of the authorities involved in the process. Although for significant institutions such as Commerzbank AG, the European Central Bank (ECB) is primarily responsible for ongoing supervision, notifications of the intention to acquire a qualifying holding must be submitted to the authorities in the country where the credit institution is established. for banks with headquarters in Germany this is BaFin. BaFin assesses the planned acquisition in cooperation with the Bundesbank. Whether the Ministry of Finance can issue instructions to BaFin under technical supervision is regulated in Article 2 of the Financial Services Supervision Act (FinDAG). According to a 2022 administrative agreement (the “Principles of Cooperation between BMF and BaFin”), there is “in principle” no ex-ante review of supervisory actions. In politically important cases, such as the takeover of Commerzbank, this principle could potentially be set aside. BaFin forwards the notification, together with a recommendation, to the ECB, which then decides whether to reject the takeover “based on the assessment criteria of EU law”. The acquirer will be informed of the decision and, if rejected, has the right to appeal to the Administrative Board of Review (ABoR) of the ECB and to the European Court of Justice (ECJ), in the latter case through a “claim for annulment”. to use ECJ terminology.

Interestingly, the involvement of the statutory deposit guarantee scheme in the ownership verification process is not required, unlike in a licensing procedure. That said, the significance of this requirement (or of its absence) is somewhat diminished when it comes to qualifying holdings acquired in institutions participating in the privately organized Deposit Protection Fund (ESF) of the Association of German Banks. In such cases, the ESF’s statutes, a civil law arrangement, require that the ESF be informed of the takeover intention in much the same way as the supervisory authorities. The evaluation of the ESF, carried out by the association’s accounting association, can be described as intense as that of the supervisory authorities, although it focuses more on the economic than on the regulatory consequences of a takeover. If continued participation in the Deposit Protection Fund is envisaged after the takeover, this audit should also be included in the planning process in terms of the time and effort required.

When it comes to material aspects, the ECB has a wide discretion, as the relevant prohibition standard uses vague legal terms such as ‘necessary financial soundness’. However, the authorities may not base their decision – in accordance with Article 2c, paragraph 1b, sentence 4 KWG – on the ‘economic needs of the market’. The question of whether it is politically desirable for Commerzbank AG to come under the control of Unicredit should therefore not be a subject of the ownership review process.

Published: October 2024