M&A in the financial sector seminar 2023: key takeaways

Given the expected M&A activity in the financial sector, ensure that your organisation is duly prepared for the next transaction. Take into account the new national and European regulation that may impact the timing of your transaction (such as the Dutch Vifo Act and European Foreign Subsidies Regulation) and/or the due diligence investigation (such as the EU Corporate Sustainability Due Diligence Directive) as well as the specific attention points for a transaction in this sector (such as data migration, stakeholder management and early identification of specific sector risks). In case of a valuation gap, the earn-out can be an excellent tool to bridge that gap, but ensure that the parties are comfortable with the base price, use a sliding scale, clearly define the terms and conditions and consider the dispute resolution mechanism.

M&A transactions involving financial institutions often require prior approval from the AFM, DNB and/or the ECB. A declaration of no objection can be required for an acquisition or for specific activities of banks, such as a reorganisation. For the acquisition of a consumer lender or insurance intermediary, shareholder screening by the AFM is required. There are also sector specific procedures, such as portfolio transfers for insurances and collective value transfers for pension obligations. Obtaining regulatory approvals is often a condition precedent for completion of a transaction. A well-prepared application and knowledge of the regulator are key for a smooth process.

In recent years, enforcement of anti-money laundering regulations has been increasing, with wide ranges when it comes to penalties. Implementing AML within organisations is challenging, with compliance policies and procedures often diverging from practical execution. Post-acquisition, companies are urged not only to cover legal risks but to actively address and remediate any non-compliance. Remediating AML deficiencies proves costly and complicated, compounded by staff shortage issues. The risks extend beyond fines, encompassing potential prosecution of (former) companies and executives and strained supervisory relationships, such as challenges in reappointing specific board members. Vigilance during the due diligence, properly assessing risks and potential thorough remediation post-closing are essential in navigating this complex landscape.

Greenwashing may cover sustainability claims made both on product and policy level. There is an increased scrutiny by supervisors (e.g. ACM, AFM) and expanding reporting requirements (e.g. CSRD) may increase litigation activity. There is an increased level of attention for responsibility of directors in the ESG field. Reputational risks can in themselves already serve as weapon for interested parties. There is also an increased liability risk in connection with greenwashing claims (i.e. annual report), whilst investors, NGO’s and supervisors may turn to directors for recovery of environmental and social damages as well.

There is increasing demand for ESG Due Diligence to scan targets for ESG readiness from investors that are looking for sustainable investments. ESG is gaining priority on the M&A agenda from the early deal phase throughout the post-deal phase. As such ESG factors are becoming part of standard DD questionnaires. ESG related warranties/covenants will follow over time. The CSDDD brings another dimension to ESG due diligence. Companies need to operationalise ESG due diligence within their own organisation to be able to act on negative environmental and human rights impacts within their value chain. This will increase legal exposure.

Having a (properly balanced and well executed) Transitional Service Agreement (TSA) in place can both ensure business continuity and a smooth separation of the business. However, a TSA can be complex, depending on the level of integration and the overall transaction structure. During our workshop, we discussed that when negotiating a TSA, the following aspects should be taken into account: (i) the type and duration of the services that need to be provided; (ii) whether third party consents are necessary; (iii) retention of key staff resources; (iv) the costs involved; (v) governance and change management; (vi) regulatory impact; and (viii) processing and migrating (personal) data. From an operational side, key takeaways are to start preparing on time (do not wait until after signing), be realistic and collaborate.