Developments in Financial Services M&A in 2024

There have been a number of recent legislative and regulatory developments which will affect M&A transactions in the financial services sector in 2024. Our Corporate team considers the impact of these on future transactions, particularly those with a cross-border element.

Consolidation in the banking sector has been rife in recent years, with a number of financial institutions seeking to merge to improve cost-efficiencies, align business models to mobile customers, and to leverage larger customer bases. While the regulatory frameworks for businesses in the financial services sector have become gradually more harmonised across the European Union in recent years, several hurdles remain for businesses seeking to merge or acquire other businesses within the sector, particularly across borders. We highlight some of the key legislative and regulatory developments that will impact cross-border M&A activity in the financial services sector in Ireland in 2024.

Cross Border Mobility Directive

The European Union (Cross-Border Conversions, Mergers and Divisions) Regulations 2023 which entered into force in Ireland last year will continue to have a positive impact on M&A activity in the financial services sector.

The updated regulations offer a greater degree of flexibility for companies in the sector incorporated in other EEA countries. They allow entities to merge with companies in any other EEA country through a simplified procedure, They also allow companies to convert into an Irish company without the need to enter liquidation. In addition, there is now a further option for limited companies in EEA member states to transfer their assets and liabilities into two or more companies, either as a full division, partial division, or a division by separation.

The use of the new framework is likely to be an attractive option for financial services companies from across the EEA who wish to establish a presence in Ireland either by way of:

• A merger with an existing player in the Irish market, or
• Converting their existing EEA company into an Irish limited company

However, it should be noted that where a merging company is regulated by the Central Bank of Ireland (CBI), there is an additional requirement to notify the CBI at least 90 days before the general meeting to approve the merger, conversion or division, as the case may be.

Please see the detailed summary of the changes introduced by the Cross Border Mobility Directive from our Corporate Governance team here.

Foreign direct investment screening regime

The Screening of Third Country Transactions Act 2023 is currently anticipated to come into force in Q2 2024. It will be a relevant consideration in transactions which involve an undertaking from a ‘third country’ (any country outside the EEA and Switzerland) acquiring:

• Control of Irish assets or an Irish company, or
• More than a 25% stake in an Irish company, where the asset or company relates to, or impacts on, one or more of a number of critical industry sectors

This will likely be particularly relevant for US and UK-based financial services businesses seeking to acquire an Irish company in the sector. This is because the financial threshold for the transaction value has been set relatively low at €2 million, and “financial infrastructure” is one of the critical sectors listed within the scope of the legislation.

Parties involved in these deals that are due to close in or after Q2 2024 should be aware of the implications of the new legislation. They will need to assess as to whether:

• The Irish target entity is within scope if the buyer is from a third country, or
• The transaction is ‘notifiable’

If the transaction falls within either of these categories, it will be necessary to make a notification to, and obtain clearance from, the Minister for Enterprise, Trade and Employment before completion.

A decision from the Minister must generally be made within 90 days. However, the review period may be further extended, so a notification is likely to have a significant impact on the deal timeline.

Merger control notifications

A further legislative development which will be of relevance to M&A activity in the financial services sphere is the recent commencement of the Competition (Amendment) Act 2022. In short, the Competition and Consumer Protection Commission (CCPC) may now require notification of mergers that are otherwise “below threshold” if “in the opinion of the Commission, [the merger] will have an effect on competition in markets for goods or services in the State”.

Given the high level of consolidation that already exists for certain kinds of financial services in Ireland, and the high public profile of the sector, it is most likely that the CCPC will closely scrutinise mergers in the sector.

In essence, this gives the CCPC a greater deal of latitude to ‘call in’ transactions and it remains to be seen to what extent the Commission will seek to use this new power. It is already clear that the changes are having an impact on deal timelines where voluntary notifications are being made to the CCPC. Therefore engagement with competition law specialists is strongly recommended from the outset of any transaction.

Comment

While the Cross Border Mobility Directive offers more flexibility and additional structuring options to regulated businesses in the financial services sector, it is likely that many transactions where there is a US or UK-based buyer will fall within the new screening regime for foreign direct investment. Coupled with additional new requirements to consider whether a “below thresholds” transaction is notifiable to the CCPC for merger control approval, deal timetables for acquisitions of financial services businesses may be impacted considerably. Buyers seeking to acquire in the Irish market should engage with specialist lawyers at the earliest opportunity to assess their exposure to these new requirements and prepare for any necessary submissions at the earliest opportunity; this will help minimise delays and ensure there is no risk of penalties for non-compliance.

For more information and expert advice, contact a member of our Corporate or Competition & Antitrust teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.