Cross-border bank mergers are back in the headlines in the European Union, prompted by the supervisors themselves. In this third and last article in the series we turn to the approvals system, the probably unstoppable nature of the process, and one or two possible suggestions for moving towards a merger, although in stages.
Oddly, European law on this subject in the so-called Capital Requirements Directive, now on version four (CRD IV), fails to specify which authority has to approve a merger between two banks from different member states. There is legislation in CRD IV which will often make the transaction subject to the prudential supervisor of each bank (foreseeably, in view of the size of the organizations concerned, the European Central Bank -ECB-).
These rules in CRD IV do not however refer to the approval as such of a merger but rather to bank creation, on the one hand, and to the acquisition of interests in credit institutions above certain thresholds on the other. These rules will come into play in scenarios where the merger gives rise to the creation of a new entity, which is not always the case, or in others where an entity first assumes control over another, which is not necessarily the case either, or any shareholder of either of them ultimately owns, directly or indirectly, a significant interest in the new bank, which may occur or not.
This means that it is the law of each bank’s member state that will determine which authority must approve the merger of the bank or whether or not that approval will be necessary. In practice, therefore, in addition to getting the green light from the ECB, the cross-border merger may have to be approved by another authority in any of the countries involved which is on top of the clearance required from the competition authorities. In Spain that authority is the Ministry of Economic Affairs and Digital Transformation, on which this power has been conferred by law.
This multiple approval scenario has an effect on timing and perhaps also on the execution risk in these transactions. It is not, however, an extreme problem because the scenario is characteristic of a federal or confederal state in which mergers in regulated sectors often require the approval of both federal agencies and the individual states’ agencies, which is what happens in the U.S.
The movement may be unstoppable anyway
Despite everything, pan-European mergers will probably end up happening anyway and legal hurdles will not stop them. European banks are facing too many threats to turn down any opportunities to increase their size and, if the transaction is right for them and is performed correctly, competitivity.
In our experience, many legal problems have a solution if advisors are willing and able to do what it takes to find it, and, assuming that the transaction is supported by the authorities, those authorities can adopt a flexible interpretation or exercise their legislative power and remove or adapt any one rule or another swiftly if the solution lies in a change to the legislation.
Any banks that can play an active role and prefer to sit on their hands will miss out on the chance to set the pace and can only expect to be carried along by the circumstances.
Chance to do things in steps: Alliances and “cold” mergers
We would like to share this last thought, a product of many years’ experience of the Spanish market. We remember when the cajas de ahorros, Spanish savings banks, had to join forces to become stronger. Many of their mergers started off with all kinds of alliances and “cold mergers” (often through so-called “institutional protection schemes”, which are also used in other European countries). Pure mergers came to Spanish savings banks in the end although it must be said that not all of them stemmed from prior alliances and associations.
The truth is the history of Spanish savings banks, or rather the tale of their demise, has not always been very edifying. The precedent is still a useful one though because many savings banks managed to increase in size, survive, and, now that they have operated as banks for many years, prosper, thanks to mergers that were preceded by alliances and associations. A number of them have survived (many of the existing Spanish banks started out in this way).
And we have seen how the differences and sometimes difficulties to understand each other experienced by banks from different regions of Spain were no smaller than any that might arise between some European countries.
Therefore, it is conceivable to consider prior agreements, exchanges of shareholder stakes or other processes to join forces across borders. They definitely may involve strategic risks so this mechanism is a long way from being a miracle remedy. That said, if these alliances are well designed and executed they can achieve results, add value in themselves, and, additionally, make the future merger easier, when the time comes.
Rafael González-Gallarza and Álvaro López-Jorrín, partners at Garrigues Corporate Department