An analysis of reverse cross-border mergers in the financial services sector

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Master Thesis

An analysis of reverse cross-border mergers in the financial services sector.

“

Under which circumstances would a reverse cross-border merger be an effective alternative for UK financial services companies to retain Single Passporting rights in light of Brexit?”

L.L.M. Law & Finance Iason Gkenidis

Academic Year: 2018-2019 12452548

Supervisor: Prof. mr. dr. R. Smits Iason.gkenidis@gmail.com Date: 26-07-2019

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Abstract

This research will focus on the reverse cross-border merger as a reorganising method in order to retain single passporting rights. With the Brexit date coming closer, financial services firms will want to keep their passporting rights, as this enables them to provide financial services

throughout the EU. Tremendous losses have been forecasted for financial services if they do not prepare for Brexit, so firms will want the most effective mechanism to preserve their business. This presents the firms with numerous methods to reorganize. The mechanism of the reverse cross-border merger is underexposed and deserves special attention. Originally this method was designed as a backdoor IPO route with low costs and a quick process involved but it can also be used to retain passporting rights. The research will analyse the mechanism for different sub sectors within financial services and compare these with other more known mechanisms. The purpose is thus to create an overview of reorganising methods and compare the reverse cross-border merger with the other methods. The reverse cross-border mergers turn out to be an effective mechanism for certain financial subsectors to relocate, even compared with other more known mechanisms. The sub sectors that benefit mostly are those that are deemed by the

supervisor to possess the biggest risk to the financial system (credit institutions and investment firms). Reverse cross-border mergers could lead to an arbitrage opportunity with current legislation ineffective to prevent this, potentially causing financial instability.

The first chapter will feature the most important mechanism for reorganising, whilst the second chapter introduces the reverse cross-border merger and its history. The third chapter will present the framework against which the mechanisms will be compared. Chapter four will feature the analysis of all mechanisms. In Chapter five the wider implications of the reverse cross-border mergers on regulatory supervision will be discussed.

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List of abbreviations and acronyms

AIF Alternative Investment Fund

AIFMD Alternative Investment Fund Managers Directive

CBM Cross-Border Merger

CBMD Cross-Border Merger Directive

CCP Central Counterparty Clearing

Court High Court of Justice (UK)

CRD IV/V Capital Requirements Directive

CRR Capital Requirements Regulation

EBA European Banking Authority

ECB European Central Bank

EC European Commission

ECJ European Court of Justice

EEA European Economic Area

EU European Union

EUMR EU Merger Regulation

EIOPA European Insurance and Occupational Pensions Authority

ESMA European Securities and Markets Authority

FCA Financial Conduct Authority (UK)

IOSCO International Organization of Securities Commissions

IPO Initial Public Offering

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IPU Intermediary Parent Undertaking

MiFID II Markets in Financial Instruments Directive MiFIR Markets in Financial Instruments Regulation

NCA National Competent Authority

PRA Prudential Regulation Authority (UK)

RCBM Reverse Cross-Border Merger

RTS Regulatory Technical Standards

SE Societas Europaea (European Company)

SEC Securities and Exchange Commission (US supervisor)

TEU Treaty on European Union

TFEU Treaty on the Functioning of the European Union

UCITS Undertakings for Collective Investment in Transferable Securities

UK United Kingdom

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Introduction

The current political landscape surrounding Brexit is chaotic, leading to uncertainty regarding the future of the industry. The financial services industry already contributed £119 billion in output for the UK in 2016 and represent a large share in its GDP . If no deal with the EU is 1 made, a so called “hard Brexit”, UK financial services companies could face business disruption. The “European Passport” they currently enjoy, would no longer be valid. This uncertainty poses business problems for worldwide operating financial institutions based in the UK. Post Brexit, there are several ways in which these third-country companies could provide financial services across the EU, but one of the most interesting is the concept of reverse cross border mergers. In a reverse cross-border merger the transferor is the parent company (UK company here) that is merged into the subsidiary (EEA company). Originally designed to avoid company liquidations (or as an alternative to IPOs), UK companies have initiated these mergers as a means of

relocation. In the literature there is ambiguity whether this practice is effective as compared to more traditional ways such as setting up a subsidiary. Nevertheless, reports show increases in reverse cross-border mergers, suggesting circumstances where the mechanism could be advantageous. Several authors even questioned current legislation which, according to them, does not contain enough safeguards when the mechanism is initiated with shell companies. This could then lead to regulatory problems. Considering this, the thesis seeks to answer the following question:

“Under which circumstances would a reverse cross-border merger be an effective alternative for UK financial services companies to retain Single Passporting rights in light of Brexit?”

The research will analyse whether the practice of a reverse cross border merger is sensible to commence for UK financial services companies. As Brexit developments are ongoing, the research will feature old and new developments that might have affected business strategies of UK firms. The dissertation will not consider and investigate Brexit scenarios, since the research

1_{House of Commons Library, Briefing Paper 6193 (2018), p.5.}

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is focused on the availabilities for UK registered companies to reorganise prior to Brexit. The research will analyse four well-known mechanisms (based on the publication of several authors including N. Moloney) that have been used as relocating mechanisms: subsidiary establishment, equivalence decisions, reverse solicitation rules, and tailored agreements. It will discuss most extensively the characteristics of cross-border mergers, the legal possibilities and wider implications. To see whether this is an effective mechanism, the research will focus on four “feasibility” criteria: legal assessment, employee/shareholder/ regulator position, timeframe, costs. Since research already has been done extensively on the other methods, this research will adopt findings of other publications for the other mechanisms. The criteria alongside each mechanism ideally will be presented in an overview (Annex I), where the mechanisms are then compared under four important subsectors in the financial services industry (credit institutions, investment firms, asset management and insurance). It is then to be seen whether the results coincide with the observed increase of this method in the UK financial services sector. The current literature does not consider reverse cross-border mergers to be a lucrative means of obtaining the Passport. However, since the first UK High Court decision that allowed this practice , there is an increasing number of UK companies being taken over by their EEA 2 subsidiaries. It is necessary to investigate why despite criticism, business practice shows the opposite. Some authors even argued that legislation is not fully prepared for abuse of reverse cross-border mergers by using shell companies, which could lead to regulatory problems. We will analyse what the implications of these inventive set-ups would be from the perspective of the supervisor and the financial system. This research will focus on the uncertain Brexit period and could therefore lead to “extreme” circumstances as to why the mechanism may or may not prove to be sensible for companies. Under “normal” circumstances, outcomes could be different. However, given the current political landscape in the European Union, it is important to be prepared for these scenarios, especially if legislation comes short. Therefore, the importance of this research is profound.

2_{(Easynet) 2016 EWHC 2681., (Portman Insurance) 2016 EWHC 2994.}

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Chapter 1 What are the current mechanisms in place for retainment of

Passporting rights across the EU?

1.1 Background: Freedom to provide (financial) services, (passporting)

When the European Single market was established in 1993, EU bodies were granted more power than before by the Member States. The two main treaties in which the power is conferred are the TEU and the Treaty on the Functioning of the EU (TFEU). This provides the legal basis for the EU and its bodies to act on policies which concern the EU, such as the Single Market and Economic and Monetary Union.

EU treaties now cover four well developed freedoms (freedom of goods, persons, capital, services), the pillars of the single market . The Single Market is focused on supporting the 3

internal market of the EU. This includes the replacement of national rules with EU harmonised provisions and the mutual recognition principle, where different jurisdictions deem each other as equivalent in order to relieve burdens. For businesses this grants the advantage of not having to register in each country (albeit notifying is necessary ), thereby offering cross-border services 4

and to be supervised by the Member State in which the business is authorised. The mechanisms covered in this research aim to imitate as much of these rights as possible to preserve business activity. The freedom to provide financial services is a cornerstone principle featured under article 56 and 57 TFEU. Article 57 stipulates that services are to be understood broadly, whilst article 56 states that any restriction on the freedom to provide services is prohibited. An important implication of this for the (aspiring) Member States is that they should align their national law in a way that the EU law can be incorporated successfully. This approximation of laws, article 114 TFEU, is the obligation that enables the freedom to provide services across the EU along with article 28 which allows Council decisions if operational action in the Union is necessary.

Closely connected is the freedom of establishment . Under the freedom of establishment (art. 49 5

TFEU), two important features exist: the establishment of branches and subsidiaries. The branch

3_{A. Cuyvers, ‘Freedom of Establishment and the Freedom to Provide Services in the EU’, (2017).} 4_{See Chapter 3.1.1}

5_{Articles 49- 55 TFEU}

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has no legal personality and exists as part of the EU company, but can offer its services in the host country. The second feature is the establishment of a subsidiary ,a separate legal entity owned by a parent company. The parent company itself, if registered in a third country, does not enjoy these freedoms: therefore the subsidiary needs to obtain the licenses. Setting up a

subsidiary requires the approval of the national competent authority in the host country or for 6

credit institutions: the designated EU authority (ECB) . This license grants single passporting 7 rights which gives the financial institution the right to establish branches or provide

cross-services directly everywhere in the EEA. The crisis of 2008 led to the insight that a reform of financial markets was necessary given shortcomings in regulation and supervision. It

demonstrated that capital requirements for banks were insufficient to prevent a collapse and Member States were required to bail out banks that were deemed too big to fail or too

interconnected within the financial system . As a result, the regime for supervising, authorising 8 and market practice has been altered and became more complex, introducing new legislation for financial stability and a more harmonized approach to third country access to the EU Single 9 Market . 10

1.2 Background: The financial sector

1.2.1 Credit institutions and investment firms

Broadly speaking, two flavours in “banking” exist: wholesale banking and investment banking. Wholesale banking is covered by CRD IV and CRR , together the CRD IV package ) and 11 12 investment banking by MiFID II and MiFIR. A wholesale bank is known as a credit institution. Article 3(1)(1) CRD IV refers to CRR article 4(1) which states a credit institution takes deposits from the public and grants credit for its own account. The definition of investment firm is found

6_{For UCITS, Art. 5 (2) UCITS Directive, AIFM art. 7, MiFID II article 5, article 14 Solvency II} 7_{According to Art. 4 (1) (a) SSM regulation.}

8_{See Basel III: Stronger Banks and a More Resilient Financial System,}_{Speech by S.Walter for a summary.} 9_{C. Brummer, ‘Soft Law and the Global Financial System: Rule Making in the 21st Century’, (2015).}

10_{See especially 3.6 in Commission Communication “The Single Market in a changing world”, C}_{OM 2018 772 and}

predominantly chapter 19 of Armour et al. 2016. Examples include: article 4 (1) (a) SSM regulation (ECB as leading in

authorisation), article 39-44 MiFID II where a shared responsibility was chosen, but third-country access was limited to what has been prescribed under MiFID II/MIFIR, Art. 33 AIFMD.

11_{Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for}

credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRR).

12_{Council Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions}

and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD IV). Recently the CRD IV package was amended, to be effective in December 2020. It is succeeded by the CRD V package: COM/2016/0850 final.

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under MiFID II in article 4(1): the regular occupation or business of providing of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis. The applicable services and activities (2) are found under Section A and C in Annex I of MiFID II.

1.2.2 Asset Management

Investment funds perform an important role in the financial sector of the EU. The EU

distinguishes between several types of funds, with the two most frequent used being UCITS and AIF. Both types are regulated by their respective directives, the UCITS directive and the AIFMD

. According to the UCITS directive, a UCITS is an undertaking which has been formed to

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invest in transferable securities or other liquid financial assets with capital raised from the public . The key distinction between the UCITS and AIF is that closed-end funds cannot be UCITS .

14 ₁₅

Essentially, every fund that is not a UCITS, is an AIF.

1.2.3 Insurance undertakings

Insurance is another important sector in the financial services area. For the definition of what constitutes an insurance undertaking we refer to article 13 (1) of the Solvency II directive . Life 16 insurance covers insurance services that relate to a certain state of the policyholder, whilst non-life insurance covers damages or losses relating to either the policyholder himself or property or products. It should be noted that a majority of insurance services is currently provided via subsidiaries, which is different from the other three sectors considered . It is 17 necessary to keep in mind that the impact of losing passporting rights is less material for insurance companies since they seldom perform cross border insurance services . However, 18

13_{Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers}

and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010.

14_{Directive 2009/65/EC of the European Parliament and the Council of 13 July 2009 on the coordination of laws, regulations and}

administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)

15_{Art. 3a UCITS.}

16_{Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of}

the business of Insurance and Reinsurance (Solvency II).

17_{V. Scarpetta, S. Booth, 2016 , p6. : 87% of insurers operate via subsidiaries across the EU.}

18_{S. Booth, V. Scarpetta, 2016. The authors have noted that only 28% of insurance exports went to the EU, compared to the 44%}

of financial services in general.

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given recent market changes , it can be expected that insurance companies are increasing their 19 footprint across the EU.

1.3 Mechanisms

1.3.1 The first main route: setting up subsidiaries

A subsidiary is a separate legal entity. By establishing a subsidiary in an EEA country and obtaining a license, firms can benefit from passporting rights and can enjoy the Four Freedoms. Most importantly, firms can provide cross-border services throughout the EU without

establishing separate entities (which is cost-effective). This thus means that by establishing a subsidiary, complying with the authorisation requirements (licensing ), a firm can provide 20

cross-border services directly to clients or do so via a branch in a Member State (the passporting rights). Supervision of these firms ensures ongoing compliance and aims to protect the stability of the financial sector. The framework covers risks associated with interconnectedness of the firms and the threat this poses to the financial system. This framework therefore becomes an important part of the subsidiary establishment, because subsidiaries are taken into account . The 21 framework is complex and is dealt with differently for the subsectors. The financial system of supervision consists of three European Supervision Authorities (EBA, EIOPA, ESMA). The actual supervision is dealt with differently. For credit institutions, the ECB is the designated supervisor under the Single Supervisory Mechanism, whilst EBA is primarily a regulatory body22 . Currently, for investment firms the home Member State in which the firm is established is primarily responsible for supervision. However a new proposal will change this . Table 1 23 provides a summary of the applicable provisions that will be further discussed in chapter 4.2.

19_{Special Report EIOPA NO29 2018, 25 confirms this.} 20_{E.g. for credit institutions, see art. 33 CRD IV.}

21_{Examples include art 84 MiFID II, 6 (4) SSM regulation, 26 Solvency II, 8 UCITS directive, 8 (2) AIFMD.} 22_{See for this division: article 4 (1) SSM regulation and (3).}

23_{Proposal for a Regulation of the European Parliament and of the Council on the prudential requirements of investment firms}

and amending Regulations (EU) No 575/2013, (EU) No 600/2014 and (EU) No

1093/2010, 2017/0359(COD), (32-33). It is argued that investment firms contribute to financial instability but are not held to the same standards as credit institutions. It aims to introduce classes and appropriate supervision by the ECB.

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1.3.2 Equivalence decisions

The crisis made obvious that even without direct offers to investors in the EU, risks would be transferred. Financial regulation therefore needed to address third country involvement. The legislator broadened the scope of market access and offered better access for third countries with equivalent regulatory laws . The European Commission can reach these decisions with advice 24 from European bodies such as EBA, ESMA and EIOPA. The equivalence decision applies to the whole country or selected authorities, with the process taking considerable time: between two and four years . After the decision has been made, firms still need to apply with European 25 authorities for recognition of their services, taking on average twelve months. This grants them rights which show similarities to passporting. However, equivalence decisions are not

necessarily an alternative to passporting rights because it only is available for 15 EU acts. For the subsectors focused on in this research, only four acts feature equivalence provisions, found in Table 2. Equivalence is thus based on a sectoral approach and excludes certain activities, such as deposit taking, lending, payment services, insurance distribution and services for retail clients. A recent topic of discussion is whether the EC would grant an equivalence decisions for the UK . 26

1.3.3 Reverse solicitation

A less known mechanism for providing financial services is reverse solicitation. Reverse solicitation is allowed when an investor on its own initiative requires the service provided by a financial services firm registered in a third country. Although it is not applicable to the services of credit institutions listed in the CRD IV, it is often used by investment funds, specifically AIFs. The burden of proof lies with the AIF to provide a statement of consent and demonstrate own initiative of the investor. Table 3 provides a summary. It suffices for now to say that this method leaves room for interpretation. In 2019, the EP adopted a proposal to amend the AIFMD

including reverse solicitation provisions . Third-country companies will face more burdens 27

24_{EP in depth analysis, J. Deslandes, C. Dias and M. Magnus, PE 614.495,}

Third country equivalence in EU banking and

financial regulation, March 2019.

25_{The negotiation between the US and the European Commission on the equivalence of central counterparties took over four}

years. See for more information: IP/16/807. The negotiations between Switzerland are ongoing and take over four years (IP/18/6801).

26_{See for a discussion Chapter 4.3 and: part VI and further of J. Armour,}_{Brexit and Financial services, 2017.}

27_{For the rest of the procedure: COD2018/0041, which has resulted in Directive (EU) 2019/1160 of the European Parliament and}

of the Council of 20 June 2019 amending Directives 2009/65/EC and 2011/61/EU with regard to cross-border distribution of collective investment undertakings.

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when they start assessing if a fund could have widespread EU investor attention (known as pre-marketing) . Whilst this does not directly amend reverse solicitation, it does limit what is 28

allowed under reverse solicitation, since even an assessment of a potential market will preclude reverse solicitation. Another proposal for amending reverse solicitation under MiFID II has been put forward by ESMA in a letter to the Commission, opting for more stringent review . 29

1.3.4 Tailored agreements

At the time of writing, the UK is still part of the EU, therefore tailored agreements are not yet applicable until after Brexit. However, tailored agreements are not separate agreements to be reached between large firms and the EU. The agreement depends on the Brexit negotiations between the UK government and the EU. Ideally these result in Single Market access and retainment of the Single Passporting rights. In turn, the UK would have to make concessions. Theresa May explicitly confirmed in January 2017 that she would not give concessions, thereby effectively ruling an overarching agreement out. However, for some sectors in the financial services industry, separate agreements could be reached. The tailored agreement is thus an outcome of the Brexit negotiation and not a mechanism available to a financial services company to preserve Passporting “like” rights. Discussing deal scenarios goes beyond the scope of this dissertation. Given the fact that a large amount of financial services companies already prepared for the worst scenario (no-deal Brexit) and relocated , it seems that they fear a no deal outcome. 30

28_{This “pre-marketing” requires notifications of the home country if the new fund starts to assess interest of EU investors. Any}

investment into the fund within 18 months after notification shall automatically be deemed to result from marketing (and therefore excludes reverse solicitation).

29_{On page 4 of ESMA letter: MiFID II / MiFIR third country regimes, provision of investment services and activities at the}

exclusive initiative of the client and outsourcing of functions to third country entities, Sept. 26 2018.

30_{EY Financial Services Brexit Tracker, Jan 2019: 30% of all UK financial services companies have already relocated.}

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Chapter 2 What are the characteristics and benefits of reverse

cross-border mergers and how does it work around the world?

2.1 Introduction on the Reverse Cross-Border Merger: mechanism & forms

The Reverse Cross-Border merger (RCBM) is a variety of the broader concept of

Reverse-Takeovers. In an RCBM the cross-border aspect refers to two or more companies from different countries merging, whilst the reverse aspect relates to their size or position within a group structure. Normally in a merger, the smaller company or the subsidiary ends up being dissolved, however in an RCBM this happens to the larger company or the parent company. The Cross-Border Merger Directive (CBMD) explains under which situations mergers are allowed and which different versions exist . The RCBM is in fact a merger by absorption, where the 31 parent company merges into the subsidiary. Problems could arise if the RCBM structure violates provisions that prevent the company from acquiring shares in itself or if it is used in bad faith as a method to obtain a favourable business position . The RCBM can have three distinguished 32 forms. First, the subsidiary in an EEA country can merge with the relocated UK company in a merger by absorption. By operation of law the assets and liabilities of the UK company will then become those of the subsidiary company, where the UK company will be dissolved or will exist as a branch . This is known as the direct reverse merger. The second method is that the relocated 33 company will be merged with the subsidiary, but both companies will be dissolved to create a new EEA company (or SE company). Third, a variation is known as the reverse triangular merger where a new subsidiary (Newco) is added in this process which merges with the relocated company. After the merger is completed and the relocated company dissolved, the shares of the relocated company are converted into shares of Newco, which leads to the original subsidiary owning the relocated company (more specifically its assets) . Often a third-country 34 parent (think of US banks) is the owner of the UK and EEA subsidiary, but this is simply added here for completeness and will not be involved in the scheme. A simplified explanation visually:

31_{Art. 2, Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of}

company law.

32_{Thereby harming other parties, A. Mucha, A. Radwan,}_{Cross-Border Mergers:Experiences From Poland, p.10, 2018.} 33_{A. Ostoa , S. Brusco,}_{Understanding reverse mergers, a first approach, 2002, Part 1.2}

34_{D. Feldman, Reverse Mergers:}_{Taking a company public without an IPO, 2006, p. 36-42.}

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RCBM option 1:

RCBM option 2:

RCBM option 3:

Note that there are more possibilities available for RCBMs than just these three, these serve as an illustration. † = dissolved.

Although depending on the existing group structure, the main route for Brexit is the following. Our First EEA subsidiary creates a new subsidiary, Newco London, based in any EEA country, with the First subsidiary as sole owner. The new company would then enter into a merger with the relocated company (another subsidiary and owner of the First subsidiary). After the merger has been completed, the relocated company is dissolved (merger by absorption). Effectively the first subsidiary will take over its assets, liabilities, licenses, rights and obligations under existing contracts being the owner of Newco London. The result is that the UK company has relocated and can continue to provide cross-border services from its new Home state (or effectively via the UK if preserved as a branch). Wider implications will be discussed in chapter 5.

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2.2 The RCBM around the world

2.2.1 The RCBM in the US, Canada and China

Initially, the RCBM became common practice in the US to transfer state law. The reason for the foreign company to consider such transactions can vary, but the general attractiveness of certain state law (Delaware comes to mind) might appeal . According to Siegel & Wang two 35 36

motivations exist for RCBMs: a relocated company seeking access to better institutions, to prevent moral hazard of the managers and have better regulated court procedures. Contrary, it can be used to escape tax charges in its home country. US studies have shown that most RCBMs are conducted by firms with Chinese origins in order to become listed . Reverse mergers of 37 Chinese firms have become scrutinized in recent years because of fraud allegations and warnings of the SEC about inflated earnings . This is confirmed by the study of Jindra which shows that 38 Chinese firms conducting reverse mergers are smaller, highly leveraged, have lower analyst ratings and face higher probability lawsuits . This suggests that lower quality Chinese firms 39

conduct a reverse merger to become publicly listed if they could benefit from information asymmetry . Other research results focus more on the combination of financial and law 40

considerations , arguing that the quality of institutions lead to economic growth which relocated 41 companies want to benefit from. Others combine this modern view with a more economic

traditional view where the main drivers are economic benefits and tax advantages. This derives the following determinants for considering RCBMs : the institutional and regulatory status of 42 the host country, accounting and tax, economic performance, market development cycle, investor protection, political environment, cultural factors.

35_{L.S. Black Jr.,}_{Why Corporations Choose Delaware, 2007 , p.10.,}

36_{J. Siegel, Y. Wang}_{, Cross-Border Reverse Mergers: Causes and Consequences, 2013, p.8} 37_{Id, p. 5.}

38_{SEC investor bulletin 2011-123,}_{Reverse mergers.} 39_{J. Jindra, et al., 2016.}

40_{D. Givoly et al}_{, Importing accounting quality: the case of foreign reverse merger, 2014.}

41_{The research of Siegel and Wang uses considerations of finance and law based on Kaufmann, Kraay, & Mastruzzi, 2009 and}

La Porta et al., 2000.

42_{The following research provides very comprehensive results on the determinants: K.S. Reddy,}

Determinants of Cross-border

Mergers and Acquisitions: A Comprehensive Review and Future Direction, 2015.

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2.2.2 The RCBM in the EU

In the EU this mechanism is most often used as a corporate reorganization method . 43

Reorganization within a group is one of the most important tools for multinational companies to gain access to the single market of the EEA, it can also be used to avoid company liquidations. Research on RCBM in the UK showed that the main benefits include higher valuation, more liquidity, less share dilution and relatively quick completion of the process . Further academic 44 research showed that wealth effects and reasons for RCBMs to take place differ significantly from the US due to regulatory framework and corporate governance standards being lower in Europe than in the US . This means that the motives of RCBMs in the EU differ significantly 45 from the US. However, it should be noted that the general perception of RBCMs in the EU is negative due to its reputation in the US . 46

2.3 Potential benefits and disadvantages of the RCBM

Ostoa47 concludes time is the most significant factor for companies to undertake RCBMs. Besides time, by completing a reverse merger the transfer of all contractual rights and assets is secured. From a regulatory perspective RCBMs do not alter obligations between the original company and its stakeholders, which will have stakeholders less opposed .For large group48 companies in the banking sector it might be more worthwhile to consider a RCBM as opposed to setting up completely new subsidiary, since this will lead to increased capital requirements . 49 Given the small time frame associated costs could be lower. Another cost reduction could arise hypothetically for the group if the smaller company has incurred losses during a few years. The financially healthy company could offset profits with losses of the smaller company for tax advantage. Further benefits for groups structures included risk diversification, reduced auditing costs and reduced group expenses.

43_{Study on application of CBMD by Bech-Bruun/ lexidale, sept 2013, p. 53}

44_{L. Zhu, S. Moeller,}_{An Analysis of Short-Term Performance of UK Cross-Border Mergers and Acquisitions by Chinese Listed}

Companies, _2016.

45_{Shown by the findings of L. Porta, et al. (1998).}_{Law and finance, p. 1113–55.} 46_{L. Zhu, S. Moeller, 2016, p.12.}

47_{A. Ostoa, S. Brusco, 2002, p. 10.}

48_{J. Armour,}_{Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law, 63 The MLR Modern Law}

Review) (2000) p. 355 and onwards.

49_{Bech Bruun/Lexidale 2013, p. 42}

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RCBMs also have disadvantages. If due diligence has not been conducted properly on a non- affiliated company, liabilities of the acquirer could damage profits, or reputation of the acquired company and the company could even face lawsuits. In fact, the mere notification of a RCBM could also raise eyebrows among stakeholders and lead to reputational damage, since the mechanism has been criticised in the US because of fraud allegations. Finally the main disadvantage from a regulatory perspective is that the RCBM offers an arbitrage opportunity for UK companies in light of Brexit, which harms the supervisory framework. This will be discussed in chapter 5.

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Chapter 3 Which criteria determine whether a mechanism for obtaining

a financial services Passport is “effective”?

3.1.1 Legal assessment

Since the EU created the Single Market, the legal assessment of mergers has become both more complex and less burdensome. As an example, it is no longer required to register separately in each Member State to provide cross-border services but still notification requirements exist to provide cross-border services (under the freedom to provide services) or by branching out . 50 Legal assessments are arguably one of the most important factors when considering Brexit relocation. It helps us to understand the differences between subsectors and why these exist, or whether they even should exist. Each sector within the financial services features different sets of legislation as a lex specialis. Depending on the route chosen, the legal framework influences time, costs and stakeholder involvement.

3.1.2 Shareholder & Employee position

The second criterion is the shareholder and employee position: if opposition can be expected via mechanisms, this can increase the time of the process. Besides, it can also involve additional settlements. It is thus important to consider the position of both shareholders and employees and their involvement in the process.

3.1.3 Timeframe

Timeframe is influenced by the first and second criteria, and can differ significantly. Especially for UK companies awaiting Brexit, time is of essence. Any mechanism that takes considerable amounts of time to complete, will deteriorate its attractiveness. Lengthy procedures can furthermore increase uncertainty and impact the business operations negatively. Finally, time directly influences costs involved, which firms obviously would want to keep at a minimum.

50_{The company must provide at minimum information on the Member State in which it will operate and the activities to be}

employed. This has to be submitted to the host Member State via the original supervisor. We see these notification procedures in articles 35-36 CRD IV, 34 MiFID II, 16-17 UCITS, 33 AIFMD, 147-148 Solvency II.

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3.1.4 Costs

Direct and indirect costs within reorganization are often considered separately. Whilst process costs might be relatively small, indirect costs (relating to stakeholders) could vary. It has been estimated by EY that direct reorganization costs for financial services companies average around €15-18 million since the announcement of Brexit. The total costs will be much higher, but this 51 is hard to estimate without accurate disclosed information and thus prone to errors . This 52 discussion on cost estimation errors illustrates that it is impossible to assess what the exact costs would be under these reorganisation mechanisms, since the costs for companies change

significantly based on size, employees, activities. However, it can be stated that a legal process of three months without asset transfer costs less than twelve months with. We will determine the effectiveness of a mechanism based on the combination of the legal obstacles, the timeframe and involvement of other stakeholders resulting in a relative cost position.

3.2 How many companies in the UK since the announcement of Brexit

completed a reverse cross-border merger?

The author wanted to investigate the claim in the _{Formenta case that RCBMs are a popular route} for relocation of UK financial services companies. However, no official data could be found, since the RCBM is a subset of a merger and is simply listed as a “merger” under the database of Zephyr . This means that whilst there are examples available of RCBMs (UBS ), most of these 53 54 mergers are not labelled as such. According to Bloomberg in June 2018, 475 EU companies merged with UK firms since the Brexit announcement in June 2016 . It goes beyond the scope 55

of this research to analyse all these mergers and see if it was an RCBM.

51_{EY Financial Services Brexit Tracker (most recent: may 31, 2019). The tracker addresses 222 financial services companies. As}

noted by EY, only a small part of the 222 target group disclosed their costs. The total costs for companies that actually disclosed their Brexit reorganization costs show > €100 million.

52_{Illustratively: in Reuters of February 13, 2019, Barclays made public that its}

relocation costs were somewhere between

100-200 million pounds.

53_{Zephyr → Deal type: Merger → time period 23/06/2016-23/06-2019 → target: United Kingdom → Sector: Banking, Insurance}

and Financial Services. This result shows over 100 completed mergers, however the exact group structure cannot be extracted. If chosen: restructuring purpose instead of merger, we see 67 results however these results include other restructuring methods.

54_{UBS conducted a RCBM with its German Subsidiary along with a Part VII transfer in March 2019. It did not mention the}

RCBM itself but the more generic “cross-border merger” terminology. More information on the RCBM of UBS, can be found in the _{UBS Part VII and Cross-Border Merger FAQs.}

55_{Bloomberg News, A. Atkinson, “}

Foreign Purchases of U.K. Firms Have Soared Since Brexit Vote”.

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Chapter 4: Assessment of the mechanisms

4.1 Assessment of the RCBM

4.1.1.1 Legal background: merger as a method of establishment

Cross-border mergers within the EU were considered impossible unless specific legal provisions allowed this under company law . The CBMD introduced the possibility of conducting an 56 RCBM . European company law was reshaped, and companies found two main methods to 57 engage in cross-border mergers. This scope was subsequently widened (a recurring tendence as we will see) by two main events in European company law: the possibility of creating a Societas Europaea (SE) and the ruling in the Sevic case . 58 59

Box 1 - Sevic: a German company was prevented from completing a cross-border merger, since German legislation did not provide for registration of mergers between firms of different Member States. The question was if this frustrated freedom of establishment. The ECJ linked admittance of cross-border mergers to the freedom of establishment and equal treatment. What this made clear is that _allcross-border mergers (including the merger by absorption under which the RCBM falls) are protected by the freedom of establishment and equal treatment found in Articles 49 and 54 TFEU. The result is that Member States must treat _any cross-border merger the same as any national merger . Sevic is thus in essence a case in which the equal treatment between national 60 and other Member States companies is firmly established. Finally the ECJ stressed the importance of mergers to maintain a proper functioning market within the EU . 61

This ruling is critical in understanding the ECJs view of these mergers, as it is the first of a series of cases that develop the freedom of establishment in conjunction with these mergers. The most important takeaways for us from the Sevic case are the importance that mergers could exist as a reorganization method and the equal treatment of cross-border mergers should be ensured . 62

Sevics’ ruling also changed the way in which seat transfers were dealt with as a result of the

56_{A. Dorresteijn et al,}_{EU Corporate Law, 2017.}

57_{Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited}

liability companies.

58_{Since 2004, based on Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE).} 59_{(Sevic), 2005 C-411/03.}

60_{(Sevic), 2005, point 18.} 61_{(Sevic), 2005, point 19.} 62_Id.

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Daily Mail case , which is important for the RCBM to be effective. The transfer of seat could 63 now be achieved where a smaller company in a Member State carries out an RCBM and absorbs the larger company. A more recent landmark case, not involving CBMs but nevertheless

interesting to show parallels, was the Polbud judgement which led to a proposed amendment of 64 EU directive 2017/1132.

Box 2 - Polbud: Polbud transferred to Luxembourg and became a company under Luxembourg law. After the registration in Luxembourg, the company applied for removal from the register in Poland, which was refused. The question involved was whether the freedom of establishment applied to cases in which a transfer of the registered office was sought without intention to change the head office or conduct economic activity in this state. In this case the ECJ stated that the freedom of establishment includes the right for companies to convert into a company governed by law of another Member State in order to achieve the most commercial attention. To deal with the regulatory burdens, the Commissionission introduced a simpler and less burdensome procedure for companies that seek to move cross-border by standardizing procedures and updating existing cross-border merger rules.

What is interesting about the Polbud case is the way in which the ECJ allowed the transfer of seat without maintaining economic links to the host Member State. In my opinion this judgement shows that the Internal Market and the freedom of establishment are important pillars which the EU seeks to preserve, particularly after Brexit. Whilst a transfer of registered seat or RCBMs differ in their approach, they show similarities in what they want to achieve: the most

commercial attention under the freedom of establishment. Given this, RCBMs for reorganization purposes should be held to a similar standard which will make the process less material since no questions will be asked about the intention to merge.

Given justified criticism of RCBMs in the United States, questions were raised on how to prevent harmful practices against employees and shareholders . Facing less regulatory burdens, 65

companies could in theory use mergers to move minority shareholders across the group , reduce 66

63_{(Daily Mail), 198: In this heavily disputed case, the court ruled that a transfer of office was only allowed if national law}

provided the legal basis.

64_{(Polbud), 2017, C-106/16.}

65_{G. Raaijmakers, T Olthoff,}_{Creditor protection in cross-border mergers; unfinished business, 2008, p.34.} 66_{M. Wyckaert, K. Geens,}_{Cross-border mergers and minority protection: An open-ended harmonization, 2008.}

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the number of (employee) members in the supervisory board, change legal forms and thereby reduce corporate governance. However, despite the criticism, the CBMD has not seen many substantial amendments, perhaps because the criticism did not fully consider the already present safeguarding provisions within the CBMD . The question is if these provisions are still 67

sufficient in dealing with the increasingly complex financial industry today.

4.1.1.2 Recent changes: company law package

On April 25, 2018 the EC proposed the Company Law Package . The key function is to make 68 already established rules for company law less burdensome. The proposal itself does not significantly alter existing provision on RCBMs. However, it does add reporting duties for employee information and gives non-conforming shareholders the right to exit the company. These changes reflect the remainder of criticism on RCBMs and the way the current system allows to circumvent important stakeholders in the process.

4.1.2 Legal Application of the RCBM: UK financial services companies

4.1.2.1 Legal assessment for credit institutions and investment firms

The UK implemented the CBMD by adopting the Companies Regulations 2007 .69_{The process} starts with pre-merger requirements (part one), in which each company publishes the intention of the merger in a draft term proposal, which consists primarily of the proposed legal form,

implications for employees the share exchange ratio, the director report and an independent report to inform the shareholders . If the Court does not waive the need for meetings, the 70

subsequent publishing act in the Registry must mention the time schedule of meetings with shareholders and creditors. Interesting is that UK law does not require employee involvement in these negotiations, unless the parties agree otherwise . This will significantly decrease the time 71 of the process, since the average involvement takes six to twelve months . After the meetings, 72 the shareholders of the UK based company need to approve of the merger , unless creditor 73

67_{Examples include: article 16 of the original 2005/56 Directive and articles 98, 99 of Amended Directive 2017/1132.} 68_{COM/2018/241 final - 2018/0114 (COD)}

69_{The Companies (Cross-Border Mergers) Regulations 2007, SI 2007/2974, art. 2} 70_{The Companies regulation, Art. 6.}

71_{The Companies regulation, 22.}

72_{Mostly because a lack of organisation and multiple hearings. R. Miles, R. Hildyard, N. Boardman, Annotated Companies}

Legislation, 27.0.18.

73_{A majority of each shareholder class must approve of the merger, representing 75% in value of the shareholding. If creditor}

approval has been deemed necessary, equivalent approval applies.

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approval is required by the Court. The NCAs (or ECB) of the merged company must then verify if all requirements have been met in order to obtain the pre-merger certificate. In the event both companies have no employees, the certificate can be obtained after one month from the

publication of the proposal ; other companies must wait at least two months after publishing . 74 75 The Final review of the merger (with regard to stakeholder involvement) by the Court must be made within six months, where the Court will determine the date on which the effects of the merger will place . The total process will therefore take between four and six months. The 76 intensity of the Courts’ final review was questioned in the Livanova case , where a narrow 77 approach was suggested by the Court.

Box 3 - Livanova: The merger between Livanova and Sorin raised questions about the courts’ scrutiny in assessing pre-merger requirements. In previous cases78_{the view proposed by the Court was in favour of a broad} assessment of the court. The Livanova case took the opposite view, repeated in M2 Property Invest . These cases 79 show that a definitive position has not been given, however further suggestions in other cases indicate the Court should not review the involvement of shareholders and creditors in the pre-merger stage , even stating that “the 80 Court should not, at the stage of approval hearing, concern itself with the interests of creditors of either

company”.

Given the ongoing uncertainty surrounding this review, firms are advised to involve both shareholders and creditors in the pre-merger procedure. Second, these cases reflect that the pre-merger requirements are heavily dependent on assessment by NCAs (or the ECB) and not the Court. However, reasonably it can be expected that both NCAs and the ECB will not frustrate the process, since this would mean that host Member States could lose out on increased business activity. Second, it has been decided that EU directive 2017/1132 should pose no limitations to the right of UK companies to merge based. In this Easynet case it was ruled that a company 81 may benefit from the EU cross-border provisions for corporate reorganization, even if a foreign

74_{The Companies Regulation, 10.2.}

75_{Mostly to give employees the opportunity to read relevant documents, Id. 12.2.} 76_{Id. 16.}

77_{(Re Livanova Plc and Sorin SpA), 2015.}

78_{Most notably: (Re Diamond Resorts (Europe) Limited) [2013]} 79_{M2 Property Invest Limited}

80_{(M2 Property Invest Limited), 2017 and (Re Diamond Resorts Europe), 2013.} 81_{(Easynet), 2016, 10.}

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entity was _{solely used to benefit from a different regulatory framework. This case reaffirms the} view that the freedom of establishment is of tremendous importance for the functioning of the single market. The Court has even expanded this to situations in which a new company mergers with a UK company for reorganization purposes. However, until the 82 _{Formenta and the}

Companies case, _{an actual RCBM had not been concluded. The main argument was that}

irrespective of the merger being “forward” or reverse, it is a matter of reorganization if mergers involve subsidiaries. This argument reduced the need for protective measures. These cases actually result in the situation that RCBMs with the aim to relocate can be concluded without much interference, even if new (shell) companies are formed. This means that RCBMs will benefit from the freedom of establishment, making it an effective way to relocate for credit institutions and investment firms.

4.1.2.2 RCBM assessment for asset management

The Collective Investments Sourcebook (COLL) chapter 7.7 implements the UCITS IV directive for mergers and does not significantly differ . UCITS are explicitly excluded under the CBMD83 84 . According to the EC the CBMs could better be covered under the UCITS directive, mainly because Member States impose restrictions on funds merging . This is questionable, since the 85 UCITS IV directive simply restates the three types of CBMD mergers and restricts other types of mergers (and allows restrictive national practices as we will see) . The UCITS IV directive 86 reads as a reflection of the CBMD directive, but with some differences . In order not to frustrate 87 the process too much, the directive requires informing fund investors (not necessarily seeking their _{approval ), a fundamental difference from the CBMD where such a provision is entirely}88 absent. Informing can be done via any method that allows unit-holders to make an informed judgement . In case national law does require approval, this is allowed under article 44, 45, 47 89

82_{(Re Itau BBA International ltd), 2013.}

83_{As noted by K. Baillie in “Merger of UCITS under UCITS IV”, the practices of the UK prior to UCITS IV did not materially}

diverge from the EU. However, further changes have been implemented in Coll 7.7 UCITS Mergers for harmonization purposes.

84_{Merger Directive, art. 120 (3).} 85_{Id, Rec. 27.}

86_{Id, See Art. 2 (p).}

87_{We see this in Articles 37-48. An obvious difference included is the need for an updated version of the Prospectus and Key}

Investor Document (KID) (39). More unique is the focus on informing the Unit-holders (43) and the approval rates (44).

88_{Id, Chapter 6 section 2 and recital 32 and article 44.} 89_{See article 43.}

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and contains rights regarding redemption of the units. The maximum approval rate is set at 75%. The UK does in fact require unitholder approval of 75% for these mergers . This makes the 90

RCBM of UCITS significantly less attractive than it is for credit institutions and investment firms. Apart from reaching the high approval threshold, it might be time consuming to gather every fundholder to vote. The legislator correctly weighed stakeholders’ interests for these mergers, since it is obvious that the (public) investors in the fund bear the highest costs if a merger was concluded in bad faith.

The AIFMD refrains from adopting a merger regime. This raises questions regarding completing an RCBM and if the directive covers mergers in general. The reason for this is that the exception of article 120(3) CBMD covers both the definitions of UCITS and AIF. However, the AIFMD does not contain cross-border mergers provisions or any guidance. Adding to this, AIF’s are excluded under article 4(1) of the AIFMD from benefiting from the UCITS regime. As of the date of writing, no case comes to mind that deals with a cross-border merger for an AIF, making RCBMs for AIFs not advisable. Therefore, it remains to be seen what will happen if an AIF starts a RCBM as it could possibly be excluded under both the CBMD and national law.

4.1.2.3 RCBM assessment for insurance undertakings

The insurance sector is not harmonized . In the UK these transfers have seen clarification in the 91

form of case law , where the exact process to be followed becomes clear. This process in the 92 UK involves a combination of a part VII transfer and cross-border merger , which was invented 93

due to high administration costs and barriers associated with setting up insurance subsidiaries. In these cases, both the Financial Conduct Authority (FCA) and the Prudential Regulation

Authority (PRA) refrained from raising objections. However, it is important to note that both regulators will need to approve of the pending scheme, weighing the impact on competition, market integrity, implications for policyholders and the suitability of independent review experts

. First, there is thus a review of the independent expert, followed by a detailed review of the

94

90_{Collective Investment Schemes Sourcebook (COLL) 7.7.4. (2) (a) & 7.7.5 (1).}

91_{Member States themselves are arguably better in addressing their own demographics and layers of protection that should be}

given to insurance takers.

92_{Examples include the VII transfers of AIG Europe and Lloyds Insurance.}

93_{A legal transfer that transfers certain policies from one Member State to another, including existing contracts. However, it is}

not recognised by each Member State, which is why it was combined. Governed by FSA Act 2000.

94_{Clyde & Co,}_{Insurance Transfers in Europe, P. 73 and onwards.}

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scheme by this IE. Ultimately the FCA and the PRA will accept or reject the review. After this, the NCA of the transferor also has to review the scheme. This means that the part VII process, the legal transfer, is completed, however the merger conditions also need to be satisfied with in order to prevent certain assets being “stuck” and not transferred. This is immediately a downside of the RCBM for the insurance sector. The process involves a review of every business aspect by numerous parties who can object or require amendments, which involves time. Insurance

companies should “overdue” preparations in order not to end up in a bureaucratic nightmare. However, given the clarity as an outcome this could outweigh lengthy procedures.

4.1.2.4 Position of the legislator

The position of the EC, ECB, ESMA and EIOPA on RCBMs another factor which could

determine whether a certain mechanism is more effective. In mergers the main objection voiced is that the proposed concentration could harm the public interest. The EU Merger Control Regulation gives the EC the jurisdiction to review these concentrations . The system does only 95 apply if the proposed concentration has a Union Dimension, meaning it fulfils the minimum thresholds set under article 1 (2) or (3) of the EUMR . According to legal research this threshold 96 excludes many mergers from the strict regime . As an addition to this, it is important to note that 97 the ECJ and EC have repeatedly stated that mergers are important to the freedom of

establishment. Even if a merger would be subject to additional EUMR review, it is expected that the Commission would not raise objections if the merger is primarily a reorganisation scheme to retain rights. In fact, the Commission reaffirmed this on April 25, 2018 in its considerations for the new company law package . For both credit institutions and investments firms it thus seems 98 clear that the legislator does not object to the idea of CBMs, which helps speeding up the

process. For the asset management sector, it suffices to state that the EC is cooperative for UCITS mergers, on the condition that rules have been fully satisfied with. The insurance sector is still largely unharmonized and has no direct or indirect statement regarding its position.

95_{EU Merger Control Regulation, Art. 21 (2).}

96_{The cumulative minimums include a 5000 million euro combined aggregate worldwide turnover, 250 million euro of each}

undertaking. 1(3) is a back-up.

97_{M. Corradi and J. Nowag, (2019),}_{The Relationship between Article 4 (1)(b) Cross-Border Merger Directive and the European}

Merger Regulation, p. 10.

98_{IP/18/3508 (1): the EC stressed the need for easy operation within the Single Market and reorganization purposes.}

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4.2 Assessment of subsidiary establishment

4.2.1 Legal assessment for credit institutions

By establishing a subsidiary in an EEA country and obtaining the required license, companies can maintain passporting rights. This relocation will come at high costs since letterbox entities will not easily be accepted according to ESMA and even prohibited by Article 12 CRD IV. 99 Even if the relocation involves high costs, credit institutions might view the mechanism as most effective since it covers their core activities and is clear . The ECB is ultimately in charge of 100 the authorisation of credit institutions assisted by NCAs . The CRD IV merely provides 101 minimum harmonisation rules in articles 8-21, Member States can impose additional

requirements. The process itself is harmonised and involves the NCA as the starting point for applications, where it submits a draft decision to the ECB who assesses the application.

NCAs and ECB assess whether minimum requirements for capital are satisfied with. For initial capital, the minimum amount is 5 million (art. 12(4) CRD IV), but actual requirements depend on the business (Chapter 3 CRR). The capitals origin and quality is also identified. This seems logical for a credit institution, considering the stability objectives of the ECB. The application contains the proposed strategy and activities as prescribed by article 10 of the CRD. The authorities will combine this with the “general economic environment” and then assess. Interestingly, an assessment on “economic needs of the market” is outlawed . However, the 102 ECB explicitly has stated in its guidelines that supervisors should assess companies within the 103 macroeconomic context while taking into consideration the business environment . Whilst this 104 might seem conflicting, the purpose of article 11 is to prevent lowering authorisation

requirements if economic needs somehow ask for more credit institutions. The ECB guidelines’ use a similar wording but the purpose here is to evaluate the strategy of the business in a broader context, if the business strategy is viable altogether. This is therefore the applicable test. Given 99_{ESMA Opinion, 2017,}

General principles to support supervisory convergence in the context of the United Kingdom

withdrawing from the European Union

100_{This is supported by the findings of EY Financial Services Brexit Tracker of 7 January 2019: Since the EU Referendum, 36%}

(80/222) of UK financial services companies tracked have said they are considering or have confirmed relocating operations and/or staff to the EU-27 countries.

101_{SSM regulation art. 4 (1) (a) and art. 14 (1), (2) and the SSM Framework Regulation articles 73-79.} 102_{art. 11 CRD IV}

103_{Guide to assessments of licence applications for credit institutions (2019).}

104_{ibid, p. 21/22. This is a recent amendment which was not present in earlier versions in March 2018 and September 2017.}

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that both words seem closely related, it would be best if exact differences would be clarified by the regulator. After this viability test, a forecast of the financial statements will be made under realistic scenarios including liquidity and capital ratios implications. Aside from the operational aspect, the authorities will look at the organisational structure , including shareholder 105

negotiations.

With regard to the process several comments can be found. It could be argued that the assessment is too far-reaching. This could be true in cases where confidentiality is important (think of certain patents). However, one big advantage is the maximum period of authorisation being twelve months as prescribed by CRD IV in art. 15. If the disclosure proves not too demanding for a company, the mechanism could be very time-efficient for credit institutions. Whilst the capital requirement costs associated with the reorganization are substantial, the clarity and duration seem advantageous. The reason why the process itself is very cooperative and straightforward, can probably be found in the ECB preferring one or more EU countries as a banking hub as opposed to London after Brexit. This is entirely logical, as the supervision of credit institutions will be significantly affected if firms would create minimum presence in the EU27 and conduct meaningful activities in London. In fact, an arbitrage opportunity would exist for credit institutions based in a third country, where they could provide cross-border services via small subsidiaries, since no local authority would have the expertise to assess the full scope of activities and the risk associated. This problem has been acknowledged by the ECB but have 106 led some banks to feel _{pressured to move significant assets to EU27 countries . We will}107 consider further implications in chapter 5.

4.2.2 Legal assessment for investment firms

The authorisation is found in Mifid II, NCAs are responsible according to article 5, with national law responsible for requirements: therefore differences exist. In order to impose guidance for harmonization purposes, ESMA created regulatory technical standards (RTS) containing

105_{This includes, the management ( fit-proper test), the owners (art. 14 CRD IV), internal control and risk management. Primarily}

found in article 23, Articles 91-96 of the CRD IV.

106_{The speech of S. Lautenschlager addresses this problem.}

 A Supervisory perspective on 2019 and Beyond.

107_{As noted by the Financial Times in April 2019: ‘}

How London banks are trying to dodge Brexit”.

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necessary information that at minimum has to be submitted to NCAs to make proper assessments . Some investment firms also fall under the definition of a credit institution and therefore

108 109

have to comply with CRD capital requirements . ESMA requires in the information evidence 110 on the source of capital, access to capital sources, and expected use of borrowed funds . 111 However, if a firm only knows how capital will be raised, this will not necessarily result in refusal if during the application share capital evidence is provided . This may seem peculiar 112 given the capital requirements for credit institutions. Further, ESMA mentions shareholder and management information, including the fit-proper test we have seen. Operational aspects are dealt with under article 16 MiFID II and RTS , comparable to credit institutions, emphasis is 113 placed on business strategy and forecasting . For group structures, past financial statements 114 (last 3 years) will have to be submitted with projections. The rest of the requirements focus on risk management, client marketing and internal evaluation . Comparing these requirements with 115 credit institutions, advantages exist. Under MiFID II it might not be necessary to employ

subsidiaries with harsh capital requirements. Furthermore, authorisation relies with the NCAs, which allows investment firms to choose countries with fast or less substantial processes (this can involve a regulatory problem and is one of the reasons this process will be amended).

Finally, the process of authorisation is faster, with a maximum of six months according to article 7(3) MiFID II. Depending on the type of activities and services employed, it could be a relatively quick and inexpensive procedure, since it does allow for continuation of operations.

4.2.3 Legal assessment for asset management

Both UCITS V and AIFMD feature similar approaches to the MiFID II authorisation

requirements . The most notable difference is however, the policy objective in the authorisation 116

108_{Regulatory Technical Standards on authorisation, passporting, registration of third country firms and cooperation between}

competent authorities (RTS).

109_{Due to their activities, MiFID II: article 15.}

110_{Covered by a proposal of the European Commission in order to prevent risk. Proposal on prudential requirements of}

investment firms and amending Regulation (2017/0359(COD).

111_{RTS Cost-Benefit Analysis (p.110 - 112)} 112_{RTS 1: (4).}

113_{RTS 1: art. 5 and Annex VI.}

114_{See RTS 1 (5), Cost-Benefit Analysis (p.110), and MiFID II article 16.} 115_{RTS 1 (6).}

116_{D Zetsche, 2012,}_{The Alternative Investment Fund Managers Directive. It covers the similarities and some differences. For the}

purpose of this research, the policy objective is most important.

An analysis of reverse cross-border mergers in the financial services sector

Master Thesis