In September 2021, the Financial Supervision Authority twice fined undertakings who failed to notify the supervisory authority of their intention to acquire an indirect qualifying holding in an Estonian investment firm. The undertakings violated the requirements of subsection 73 (1) of the Securities Market Act. Unlike the control of concentrations under the Competition Act, the planners of mergers and acquisitions in the financial sector do overlook the fact that in the field of regulated financial services, prior authorisation of the supervisory authorities is required for the acquisition of a larger holding. A potential criminal sanction is by no means the only or the most severe consequence of ignoring the approval requirement. Today, financing, payment and investment services are predominantly subject to state regulation under the principles harmonised by the European Union. It provides, among others, for supervision of the background and skills of the owners or persons with actual control over the financial undertaking. The acquisition of a qualifying holding in creditors and credit intermediaries, payment institutions, e-money institutions, insurance undertakings, investment firms, fund managers, banks and, in the future, crowdfunding service providers is subject to supervision by the Financial Supervision Authority (FSA). But that’s not all. According to the Money Laundering and Terrorist Financing Prevention Act (MLTFPA) and the General Part of the Economic Activities Code Act (GPEACA), the compliance of other financing institutions, providers of trust and company services, pawnbrokers, providers of a virtual currency service and persons engaged in the wholesale or buying-in of precious metals or precious stones subject to the authorisation obligation is verified by the Financial Intelligence Unit (FIU). Unfortunately, the grounds for supervision and procedural matters in the acquisition and sale of a financial corporation are not harmonised in the sector-specific legal acts, and, depending on the specifics of the financing business, the supervision procedure involves quite a number of details. When it comes down to actually proceeding with the acquisition deal, one needs to take due notice of the regulatory details.

What is a qualifying holding in a financing and what the authorities will look at?

One must keep in mind that the prior approval for the purchase of a financial corporation does not only concern the acquisition of a controlling interest! The threshold for “qualifying holding” is significantly lower. For the financial service providers operating under the activity licence of the FSA, a qualifying holding is generally considered to be as little as a 10% holding in the company’s share capital, but this is by no means the only criterion. Significant influence over the corporate management can also be regarded as a qualifying holding. Both the direct holding (direct qualifying holding in a financial corporation) and indirect holding (e.g., control of a qualifying holding in coordination with someone) will count. This is particularly relevant for fintechs who have just started out by implementing the development or investor option schemes common in the start-up world. As the latter can easily and unexpectedly surpass the 10%, 20% or other threshold set as primary indicator for a qualifying holding, there is a risk that notifying the FSA completely slips the mind. Once we’ve established that the transaction involves qualified holdings, the matter which the authorities will evaluate and verify involves the generally impeccable business reputation, strong financial position and reliability and, in the case of managers personally, their skills and experience to manage the company in a way that complies with the specific sectoral requirements.

The authorisation of the supervisory authority must be sought before, not after the transaction

The acquisition of a qualifying holding in a financial services provider requires prior notification proceedings to be completed at either the FSA or the FIU, depending on the activity licence under which the company is operating. In the case of companies supervised by the FSA, the same requirement applies to increasing the qualifying holding above the threshold set out in the law (e.g. 20, 30 or 50 percent of the company’s share capital) as well as in the cases where, as a result of the transaction, the company will fall under the control of the acquirer. In addition to the notification of the FSA, a considerable number of data and documents must be submitted to the FSA, among others, concerning the acquirer of the holding, their activities, persons related to them, etc. as well as several confirmations. The FSA may request additional data. The FSA decides on approving or prohibiting the acquisition of the holding within 60 business days. The FSA may also set a deadline for the completion of the acquisition transaction or impose additional terms and conditions. The FSA must be notified both when the transaction is closed as well as in the case when, regardless of the reason, it is ultimately not consummated. The FSA may motivate its refusal by the non-compliance of the acquisition, incl. the acquirer, with the requirements of the law, and also by omissions in the notification on part of the transaction parties. Further, one must note that the law requires the FSA to be notified also of an intention to transfer or reduce a qualifying holding in a financial service provider below the thresholds or to waive control. The procedures for the notifying of the FIU is provided separately and differently by the MLFTPA, but here, too, it should be considered that obtaining an authorisation will take time. The FIU has the right to authorise or prohibit the acquisition of a holding within 60 to 120 days.

Ignoring the prior approval requirements for the acquisition of a qualifying holding leads to material adverse consequences

Failure to notify the supervisory authority of the acquisition of a qualifying holding in advance or violating a precept prohibiting the acquisition leads to various adverse legal consequences. Loss of voting rights. The first consequence is the lack of voting rights that come with a holding in a financial service provider. In other words, it may no longer be possible to be involved in the management of the company. Misdemeanour punishment. The law provides for a misdemeanour punishment for the acquirer – a fine of up to 32,000 euros – for a breach of the requirements for the acquisition and transfer of a qualifying holding, failure to notify and activities contrary to the FSA decisions. In the case of companies supervised by the FIU, a misdemeanour fine may amount to 400,000 euros. The person (member of the management board) who specifically committed the breach in the interests of the company may also be punished. Loss of the activity licence. The supervisory authority has the power to issue precepts as a result of or to prevent an offence as well as to warn a market participant, but also to protect clients or the financial sector more broadly. Eventually, a failure to comply with regulations for the financial service will result in the imposition of non-compliance levies or application of other regulative remedies (e.g., revocation of the activity licence). The latter is, of course, an ultimate measure, which implementation presumes a material breach on part of the company or its management or employees. If you are planning to acquire a 10%, 20%, 30%, 50% holding or control in a financial service provider, you may want to consider already at early phases the timing and activities involved with the potential prior approval required from the FSA or FIU. The actual speed of decision-making on part of FIU or the FSA also depends on the quality of the information submitted and their current workload. It is critical to provide the information and documents required by the applicable law in a systematic manner and correct format so that the procedural errors will not cause the undue delay or failure to obtain the approval. Otherwise, you may find it impossible to exercise all the rights arising from the acquisition of a holding in a regulated financial provider. From the viewpoint of practical day-to-day work, involvement in a the supervision and misdemeanour proceedings, which are caused by a non-compliance error also means, that you will have less time for the company’s main activity. The negative attention of a supervisory authority is also not at all helpful in future where you may be seeking for cooperation with them. The Banking & Financial Law team of TRINITI law firm has a mission to ensure that your transaction for the acquisition of a qualifying holding in a financial service provider does not lead to reputational damage in the eyes of a supervisory authority or to an administrative or criminal sanction or risk of loss of the activity licence. Sten Veidebaum and Risto Käbi Attorneys-at-law of TRINITI law firm