Bank Acquisitions – The Regulatory Perspective

The acquisition of Commerzbank shares by the Italian Unicredit has, to put it mildly, surprised the German federal government. The situation is prompting a review of the structure and procedure of the bank regulatory ownership control process required for acquisitions of Qualifying Holdings in credit institutions.

This process was established in Europe as early as 1989 through the Second Banking Directive, and was implemented nationally in Germany in 1992, with some delay, 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 didn’t arise haphazardly; under the former Soviet Union, large sums of money from unclear sources were being transferred to Europe, and their owners were occasionally attempting to acquire stakes in European credit institutions. Since then, the provision has moved further down in the KWG: it is now found in Section 2c KWG and was recently revised through legislation at Christmas time in 2022 by the Ownership Control Regulation, which governs the procedural details. Initially, the Ministry of Finance (BMF) was responsible for issuing the provision, but since 2022 this role has been assumed by the Federal Financial Supervisory Authority (BaFin).

It is occasionally mentioned 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, for all intents and purposes this type of procedure may be seen as is very close to an approval process since the regulator is empowered to prohibit an already completed acquisition and order its reversal. It might be more honest and appropriate to formally redesign the ownership control process – which in effect functions as an approval under the guise of non-prohibition – as a licensing procedure. The historic European decision made at the time to take the notification route can be explained by the fact that the process introduced in 1992 had few substantive economic requirements, focusing instead on the background of the interested parties and the origin of the funds. This has since changed, with significant substantive requirements for the notification having been legislated into the process over many years.

According to Section 2c KWG, any intention to acquire a Qualifying Holding, from which it follows that such intention goes beyond merely "considering an acquisition." However, it is not explicitly provided when mere "consideration" becomes a concrete intention to acquire. In any case, the acquisition of call options is commonly considered to constitute an "intention to acquire." German advisory practice tends to define the point of intent fairly early, often well before the due diligence stage, in order to initiate the evaluation period by the authorities and thus shorten the overall processing time. Once a complete notification is submitted, the authority has 60 working days to assess it. A recent legal amendment has further clarified the issue of incomplete notifications: by no later than the 50th working day after the notification, the authority must request additional information necessary to complete the assessment. The assessment period is paused until the requested information is received. In total, the process, including these pauses, must not exceed 80 working days. In exceptional cases, the evaluation period can be extended to 90 working days. Since the authority can request almost unlimited additional information, it effectively controls the process.

The intention to acquire a “Qualifying Holding” is subject to notification regardless of whether a direct or indirect acquisition is intended. A 'sneak-up approach' is therefore hardly conceivable and would violate regulatory requirements. A “Qualifying Holding” is defined by law as 10% or more of the shares. Follow-up notifications are necessary when thresholds of 20%, 30%, or 50% are exceeded, or if the acquisition results in control of the company. The documents required for a complete notification are extremely extensive and are intended to provide supervisory authorities 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 control process is now comparable to a licensing process.

One interesting aspect is the powers of the authorities involved in the process. Even though for significant institutions such as Commerzbank AG, the European Central Bank (ECB) has 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 based, which for banks headquartered in Germany is BaFin. BaFin reviews the planned acquisition in cooperation with the Bundesbank. Whether the Ministry of Finance can issue instructions to BaFin under its technical supervision is governed by Section 2 of the Financial Services Supervision Act (FinDAG). According to an administrative agreement from 2022 (the "Principles of Cooperation between BMF and BaFin"), there is "in principle" no ex-ante review of supervisory actions. In politically significant cases, such as the Commerzbank acquisition, this principle could potentially be overruled. BaFin forwards the notification, along with a recommendation, to the ECB, which then decides whether to reject the acquisition "based on the assessment criteria of EU law." The acquirer is informed of the decision, and if rejected, has the right to appeal to the ECB's Administrative Board of Review (ABoR) and to the European Court of Justice (ECJ), in the latter case via an “action for annulment”, to use ECJ’s terminology.

Interestingly, the involvement of the statutory deposit insurance scheme in the ownership control process is not required, unlike in a licensing procedure. That said, the significance of this requirement (or of its absence) is diminished somewhat when it comes to Qualifying Holdings acquired in institutions which participate in the privately organized Deposit Protection Fund (ESF) of the Association of German Banks. In such cases, the ESF’s statute, a civil law regulation, requires the ESF to be informed of the acquisition intention in much the same way as the supervisory authorities are. The ESF's review, conducted by the Association’s audit association, may be said to be every bit as intense as the one conducted by the supervisory authorities, though it focuses more on the economic rather than regulatory impact of an acquisition. If continued participation in the Deposit Protection Fund is intended after the acquisition, this audit must also be factored into the planning process in terms of the time and effort needed.

When it comes to material aspects, the ECB has broad discretion since the relevant prohibition standard uses vague legal terms such as "necessary financial soundness." However, the authorities may not base their decision – as per Section 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 Unicredit’s control should therefore not be a subject of the ownership control process.

Published: October 2024