On December 27, 2022, the so-called Third Regulation Amending the Regulation on the Supervision of Shareholdings (Regulation on Notifications Pursuant to Section 2c of the German Banking Act and Section 17 of the German Insurance Act (Inhaberkontrollverordnung – InhKontrollV)) of the German Federal Financial Supervisory Authority (BaFin) was promulgated in Federal Law Gazette No. 55. The Regulation entered into force on December 28, 2022.
This article presents the main effects of the changes.
1. Background and purpose
The background to the amendments to the InhKontrollV is, on the one hand, the adaptation to editorial changes to the German Banking Act (Kreditwesengesetz – KWG) and the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG) and, on the other hand, the consideration of the “Joint Guidelines for the prudential assessment of acquisitions of qualifying holdings” of the three European Supervisory Authorities (ESAs); the latter reflect the expectations of the ESAs for the supervisory assessment of significant or “qualifying interests” in companies in the financial sector (including credit institutions, investments firms, payment institutions and insurance companies).
Adjustments were also necessary because responsibility for licensing procedures and the decision on the acquisition of significant holdings in CRR credit institutions had in the meantime been transferred to the European Central Bank as part of the Single Supervisory Mechanism (SSM), which was not yet taken into account in the former version of the InhKontrollV.
The declared aim of the amended Regulation is also to facilitate owner control proceedings, particularly in the case of repeated proceedings relating to the same acquirer (for example, due to an increase in a shareholding or restructuring within the acquirer structure). On the other hand, however, complications have also been created in the form of extended notification and disclosure requirements for certain notifying parties. The Annexes to the InhKontrollV, which contain standard forms to be used for notifications, have also been amended.
Accordingly, a central relief was created for persons subject to notification who have already been inspected in the past within the scope of a owner control procedure.
Facilitations for the declarations and documents on reliability
The revision of Section 9 (1) Sentence 2 InhKontrollV now states that information on the reliability of the person required to notify, a manager or a personally liable partner only has to relate to the last ten years. The indefinite “previously” in the old version is thus made more specific. If the person required to file a notification is a legal entity, information is now only required for companies that are currently controlled.
Extended validity for past submissions
Pursuant to Section 16 (1) Sentence 1 of the InhKontrollV, documents and declarations submitted within the last two years prior to the current notification no longer have to be submitted again if the information has not changed. Previously, this period was one year.
Of course, this form of “privileging” for the experienced applicant also represents a de facto disadvantage for the first and/or occasional bidder in competitive bidding processes. It cannot be assumed that this de facto effect was intended.
Unlimited validity of submissions in special cases
It now also follows from the new Section 16 (1) sentence 3 InhKontrollV that past filings remain valid without time limitation and consequently do not have to be filed subsequently, provided that the acquisition merely turns an existing indirect significant shareholding into a direct significant shareholding.
In almost mirror-image fashion, Section 16 (10) sentence 4 InhKontrollV specifies that, in the case of acquisitions within a group, documents and declarations need only be submitted if they contain information on persons, companies and the group structure that is not yet available to the authorities from earlier notifications.
As a result, such constellations are privileged. The new exemption clarifies a dispute that had been ongoing for some years now between the investment practice and the financial supervisory authorities (ECB, BaFin and ESA) about this classification. The authorities argued prior to the amendments, the latter required a new owner control for every acquisition, while the practice tried to counter this with the argument that the conversion of an indirect investment into a direct investment as a result of an intra-group restructuring did not result in a change in the amount of the investment and that Section 2c (1) sentence 6 KWG and Section 2c (3) sentence 1 KWG do not know any other reasons for the occurrence of a notification obligation. By now granting unlimited validity to the filings in these two cases, BaFin finally eases the requirements in these constellations. Effectively, the duty to notify is thus limited to changes that have taken place since the last owner control procedure.
Facilitation for factoring and finance leasing institutions
The revised Section 16 (12) InhKontrollV again facilitates the participation in financial services institutions if these offer exclusively factoring or finance leasing as services. Participating group members can now waive documents and declarations pursuant to sections 8 to 15 (including IDs, CVs, annual financial statements) as part of notifications of intent in owner control proceedings if they are only indirectly involved and are not at the head of the group, or if the acquisition transaction takes place exclusively within the group.
In the course of the amendment of the InhKontrollV, there have also been tightenings.
Extension of the obligation to notify
The newly inserted Section 7 (2) sentence 2 InhKontrollV extends the acquirer’s duty of notification to the period after the assessment period but before the completion of the acquisition, if the notifying party changes its intention to hold a significant interest in the target company. Sentence 3 also specifies that the participation thresholds only have to be “reached” in order to trigger a renewed duty to notify. The amendments to Section 7 InhKontrollV are aimed at further tightening the notification requirement and covering more circumstances so that the supervisory authority can revise its decision if necessary.
Intensified notification requirements
In addition, the scope of the notifications was increased in some cases. In cases where the ECB was responsible for the decision, the scope had already been expanded under the old legal situation via the wording of the InhKontrollV. This is because the ESA guidelines were already applied by the ECB. This is now reflected – for all procedures – in the InhKontrollV (see, inter alia, Section 9 (2) of the Regulation on the Control of Holders).
Specifically, the changes affect the following disclosures:
- additional documents and declarations of certain notifying parties
- intensification of the control density
- disclosure obligation for groups of companies
- involvement of a broader group of people on the part of the target company
The newly inserted Section 8a InhKontrollV concerns notifying parties domiciled in a third country (Para. 1). In this case, a clearance certificate from a public body and financial supervisory authority of the third country (nos. 1 and 2) as well as a summary of the supervisory regulations for the notifying party in the third country must be enclosed (no. 3). If the notifying party is a private equity fund or hedge fund (para. 2), it is required to disclose the investment policy, strategy and history at institutions within the meaning of the KWG (nos. 1 to 3). Decision-making structures (No. 4) within the fund and anti-money laundering procedures (No. 5) must also be included.
These tightenings result from the increased risk that these two potential acquirer groups bring to the financial market through significant participation. The increased risk results, on the one hand, from the more difficult access of the German financial supervisory authorities to persons subject to notification in third countries and, on the other hand, from possible speculative tendencies of the funds.
The information on the reliability of the notifying party (Section 9 InhKontrollV) has also been expanded. Section 9 (1) sentence 2 of the InhKontrollV now stipulates that ‘shareholders who can exercise a significant influence on the party required to notify‘ must also provide information in accordance with Section 9 of the InhKontrollV.
As a third measure, the newly inserted Section 11a InhKontrollV postulates a special notification requirement for legal entities that are part of a group of companies. Due to the associated complexity for the financial supervisory authority, such a notifying party is required to attach to the notification an analysis describing the scope of supervision on a consolidated basis. This analysis must also indicate which entities of the group would fall within the scope of supervision after the acquisition or increase and at which levels within the group supervision would take place. In this context, sentence 3 also requires that an analysis be included as to whether the acquisition or increase would have an impact on the target company’s ability to continue to provide accurate information to the supervisory authority in a timely manner. These measures are intended to ensure that there are no unexpected effects on financial supervision in the event of an investment. Such information was previously only required for Owner Control Procedures of (MiFID) Investment Firms. For Investment Firms, the acquisition procedure is governed by a Delegated Regulation to MiFID II (cf. Delegated Regulation (EU) 2017/1946). The InhKontrollV therefore did not apply in these cases.
The fourth and last extension was included in Section 12 (6), (7) InhKontrollV. Accordingly, the notifying party is obliged to disclose all interests and business relationships of the persons named in Section 8 No. 7 InhKontrollV (new or additional managing directors after completion of the acquisition of the shares) and their family members with persons in key positions of the target company, the parent company, the subsidiary and with holders of at least 5% of the capital or voting rights of the target company, so that possible interrelationships and unexpected arrangements can be uncovered at an early stage of the Owner Control Procedure.
Some changes to the InhKontrollV are quite positive, such as the extended possibility of referring to past proceedings or the clarification that proceedings are not necessary in the case of changes resulting from reorganizations under company law. Significantly tightened are the (not uncommon) proceedings in which a private equity or hedge fund is involved. Especially the disclosure of information on the investment policy and information on the performance of investments in regulated companies mean a significant tightening of the disclosures.
It is difficult to understand why BaFin and BMF have not taken the opportunity to simplify the submission procedure. It is not clear why documents that do not have to be submitted as originals still have to be submitted in writing.