BaFin Owner Control Procedures for Acquisitions

What owner control procedures are

Owner control procedures (Inhaberkontrollverfahren) are the supervisory reviews that anyone must pass before acquiring a qualifying holding in a German bank, investment firm, insurer, payment or e-money institution or fund manager. The acquirer notifies BaFin and, for banks and investment firms, the Deutsche Bundesbank of its intention; the supervisor then has a fixed assessment period in which it can prohibit the acquisition. For credit institutions under the Single Supervisory Mechanism, the European Central Bank (ECB) takes the decision on a draft prepared by BaFin. In any M&A deal involving a regulated entity, owner control procedures determine the timetable between signing and closing.

The banking rules are in § 2c of the Banking Act (KWG). Parallel provisions apply to insurers (§§ 16 to 18 of the Insurance Supervision Act, VAG), investment firms (§§ 24 to 27 of the Investment Firm Act, WpIG), payment and e-money institutions (§ 14 of the Payment Services Supervision Act, ZAG, which applies § 2c KWG accordingly) and external UCITS management companies (§ 19 KAGB). All of them implement harmonised EU rules, so the assessment criteria and periods are broadly the same across the financial sector.

When a notification is required

A qualifying holding (bedeutende Beteiligung) under the KWG is defined by reference to Article 4(1)(36) of the Capital Requirements Regulation: a direct or indirect holding of at least 10 per cent of the capital or voting rights, or a holding that allows significant influence over management (§ 1(9) KWG).

Anyone who intends, alone or acting in concert with others, to acquire such a holding directly or indirectly must notify BaFin and the Bundesbank without undue delay (§ 2c(1) sentence 1 KWG). Holders must also notify if they intend to increase their holding so that it reaches or exceeds 20, 30 or 50 per cent or the institution becomes a subsidiary.

Indirect acquisitions are the trap. A buyer of a group that contains a German bank, payment institution or insurer, even several levels down, acquires an indirect qualifying holding and must notify. So must each intermediate holding company and, depending on the structure, the ultimate controlling persons. In private equity deals, the fund, its general partner, the manager and sometimes the principals of the sponsor can all be notifying parties.

The assessment period and timetable

BaFin must confirm receipt of a complete notification in writing or electronically within ten working days and inform the acquirer of the date on which the assessment period ends (§ 2c(1), (1a) KWG).

The assessment period is 60 working days from the date of that confirmation. Up to the 50th working day, BaFin may request further information needed to complete the assessment; the period is suspended from the request until the answers arrive, but in total it may not exceed 80 working days, or 90 working days where the acquirer is based or supervised outside the EEA or is not supervised under the EU financial sector directives. Requests for clarifications do not suspend the period again.

In practice, the clock starts only when BaFin regards the notification as complete, and completeness reviews can take weeks. Experienced deal teams therefore contact BaFin before signing, ideally with a short presentation of the acquirer, the structure and the plans for the institution, share a draft notification, agree the list of notifying parties and prepare the documents required by the Owner Control Regulation (Inhaberkontrollverordnung) in parallel with the share purchase agreement.

For significant credit institutions and for all acquisitions of qualifying holdings in CRR credit institutions, BaFin submits a draft decision to the ECB, which decides under the SSM Regulation; the timetable must allow for coordination between the authorities.

Closing before clearance

Closing during the assessment period is not void under civil law, but it has severe supervisory consequences. BaFin can prohibit the exercise of voting rights and order that the shares may only be disposed of with its consent if the holder completed the acquisition within the assessment period, failed to notify, or acquired despite a prohibition (§ 2c(2) KWG). A court then appoints a trustee to exercise the voting rights.

Unauthorised acquisitions can also lead to administrative fines, and the institution itself may face questions about its governance if it knew of the closing. Sellers have an interest in a clean process too, because a buyer that cannot exercise voting rights may seek to unwind or renegotiate the deal. Share purchase agreements therefore make owner control clearance, or the expiry of the assessment period without prohibition, a condition precedent to closing.

Assessment criteria in owner control procedures

The supervisor can prohibit the acquisition only within the assessment period and only if facts justify the assumption that one of the statutory grounds applies (§ 2c(1b) KWG). The main grounds are:

• the acquirer, or its legal representatives or partners, is not reliable or otherwise does not meet the standards required for sound and prudent management of the institution;
• the institution will not be able to comply with prudential requirements after the acquisition, or will be integrated into a group whose structure or lack of transparency prevents effective supervision;
• the acquirer lacks the financial soundness for the acquisition, in particular in view of the planned business and the institution's capital needs;
• there are grounds to suspect money laundering or terrorist financing in connection with the acquisition, or the acquisition increases that risk;
• the institution would become the subsidiary of a third-country institution that is not effectively supervised, or whose supervisor will not cooperate satisfactorily;
• a proposed new manager is not reliable or not professionally qualified.

Doubts about reliability also arise where facts suggest that the funds for the acquisition were obtained through conduct that objectively constitutes a criminal offence. Sources of funds and the acquirer's financing structure therefore receive close attention, especially for leveraged acquisitions and acquirers from outside the EEA.

Three further features of the statute matter in practice. First, the supervisor may also prohibit the acquisition if the information provided in the notification, or supplied on request, is incomplete or incorrect, which makes the quality of the filing a substantive issue.

Second, instead of prohibiting the acquisition, the supervisor may impose orders on the acquirer within the assessment period that are suitable and necessary to rule out the statutory grounds for prohibition, for example commitments on capital support, governance or the separation of certain business.

Third, the supervisor may neither impose prior conditions on the size of the holding to be acquired nor examine the acquisition in terms of the economic needs of the market. Owner control procedures are therefore a test of the acquirer and its plans, not a review of the commercial merits of the deal or of competition, which are matters for the competition authorities.

Contents of the notification

The Owner Control Regulation sets out the required forms and documents. They differ depending on whether the acquirer is a natural person, a company, a fund or a supervised entity, and on the size of the holding. Typical contents include:

• information on the acquirer, its group structure up to the ultimate beneficial owners and persons acting in concert;
• evidence of reliability for the acquirer and its managers, including criminal record certificates and declarations on pending proceedings;
• financial statements and information on the acquirer's financial position;
• the planned holding, the seller and the transaction documents;
• details of the funds used for the acquisition and their origin;
• for controlling acquisitions, a business plan for the institution covering strategy, financial projections and planned changes to governance, organisation and risk management.

Supervised acquirers from the EEA benefit from simplified requirements and consultation between the home and host supervisors. Where several entities in a chain must notify, a coordinated filing with a lead notifying party is usual, and the other parties confirm and adopt the relevant parts by reference. Translations of foreign documents, apostilles for certificates and the collection of personal information from individuals in the chain often take longer than drafting the notification itself.

Insurers, investment firms and other institutions

For insurers, the notification goes to BaFin under § 17 VAG, and the thresholds of 20, 30 and 50 per cent of voting rights or nominal capital apply in the same way; the prohibition grounds are in § 18 VAG. Investment firms licensed under the WpIG follow §§ 24 to 27 WpIG. Payment institutions and e-money institutions are covered by § 14 ZAG, which applies § 2c KWG accordingly. Acquirers of capital management companies must observe the KAGB provisions. In group transactions, one deal can trigger several owner control procedures for different regulated subsidiaries, sometimes in several EU member states, each with its own assessment period.

Owner control procedures are separate from merger control and foreign investment screening. A transaction involving a German bank or insurer may need clearance from BaFin or the ECB, the Federal Cartel Office or the European Commission and the Federal Ministry for Economic Affairs and Energy. See our pages on German and EU merger control and foreign investment control for the other approvals and our insight on banking supervision by the ECB and BaFin for the supervisory architecture.

How TRW & Co helps

We advise acquirers, sellers, investors and regulated institutions on owner control procedures in Germany. We map the notifying parties in a structure, prepare notifications and supporting documents under the KWG, VAG, WpIG, ZAG and KAGB, coordinate with BaFin, the Bundesbank and, where relevant, the ECB, and respond to information requests. We align owner control clearance with merger control and investment screening in the transaction timetable and draft the corresponding conditions in share purchase agreements, working with our financial regulation and M&A teams. This page is general information, not legal advice. To discuss a transaction, please contact us.