Transcript: Reorganisations within the Financial Services sector

Transcript

Lisa Rasmusson: Great. Thank you, Monika. Hello, everyone. Welcome to our training session today. As Monika said, this is part of our Legal Business Solutions Academy, which is a really great initiative that we set up here at PwC to provide you with informal training sessions and really allow you to have time for questions and discussions with your peers in the sector. So we're really proud of the program, and I'm really glad to see so many of you join in today.

Today's session is going to be on reorganizations within the Financial Services sector. Before we get into some of the detail, I'm going to do some quick introductions for the speakers that we have today. I'm Lisa, I'm a Senior Manager in our corporate team. I'm a 14 PQE year qualified solicitor. On the corporate side of things, we advise clients on a range of corporate type transactions, international business reorganizations, pre and post deal integrations, corporate simplification, legal entity rationalizations, anything general corporate related like cash repatriation, share asset transfers, balance sheet tidy ups, etc,, things like DD. We do the whole host of corporate transactions. I'll pass over to my colleagues, Crystal and Trine to introduce themselves as well. Crystal, do you want to go next?

Trine Roenningen: I can go next while Crystal is reconnecting. Looks like she might have some struggle with her connection. Oh there, she's back.

Lisa Rasmusson: Oh, I think you might be a mute Crystal. We can't hear you, Crystal. Maybe if we go over to Trine.

Trine Roenningen: Sure, I'll go ahead. Good morning, everyone. My name is Trine. I'm a Senior Associate in our Regulatory team. So whilst Crystal and Lisa are supporting on the Corporate side, our team is looking at regulatory matters. This can include advice relating to regulatory perimeter - we often help with license applications with the FCA or PRA. In relation to reorganizations which we're discussing today, we normally support where there are regulated entities that are impacted by the reorganization and then determine what the regulatory impact is and what steps are required.

Crystal Park: Hi, everyone. Hopefully you would be able to hear me now and apologies for my tech issues this morning. But just introduce myself, my name is Crystal Park and I am a six-month qualified corporate solicitor in our FS legal team. So, I largely assist Lisa with all the corporate projects that Lisa very kindly listed earlier.

Lisa Rasmusson: Great. Thank you, Crystal and Trine. So yeah, as you would have heard from that, we worked very closely with our regulatory team to make sure that all of corporate transactions have the specific regulatory inputs required for financial services industries on the various transactions that we might be undertaking. Today we're going to be going through a quick case study, and we're hoping that throughout this session, we can use this case study to really illustrate the types of transactions that we might be undertaking, and hopefully it will try and bring it to life a bit more rather than having us just going through various corporate transactions.

So as you can see, here we have a corporate group has a UK Top Co and a number of European subsidiaries. Now, the client has come to us with a, I guess, fact question. They've said to us that they want to remove Sub 1, Regulated Sub 2 and Sub 3 from the group. They are no longer required and surplus to requirements, therefore, they want to just remove them completely via either strike off or liquidation. And when we look at these entities, we can see that Sub 1 has a high share capital and share premium on its accounts. Regulated Sub 2 is (1) regulated; and (2) has a number of profitable assets, and Sub 3 is just a dormant entity at the moment. The client has also said to us that UK Regulated Co is an entity that they would like to move under Spanish Co and, as you can see, there's also a regulated entity as well. So we wanted to ask you a couple of questions to get this session started. I would like to say that this is aimed to be an interactive session so if at any point in time, you have questions, please feel free to raise a hand and we will come to you. Or the chat function is also available if you'd rather message your question via chat. Either is totally fine and we very much welcome questions throughout, please do go ahead.

So questions for you now - looking at the group structure, we know that the client wants to remove Sub 1, Sub 2 and Sub 3, and they want to move the UK Regulated Co under Spanish Co. Can anyone think about what kind of corporate transactions we would need to do to be able to do this? For example, if we look at any of those entities, would anyone like to raise a hand as to what kind of corporate transactions we would be looking at? Okay. I think we've got one hand raise. How do I let you speak? Hang on. Let's see.

Participant A: Well, I think you can already hear me.

Lisa Rasmusson: Yeah, I can go for it.

Participant A: Good morning. When I look at this schedule, I don't think I would necessarily do a strike off or liquidation. Maybe with Sub 3, but I would also see if I could merge within each other or possibly even in the UK Co.

Lisa Rasmusson: Yeah. Yeah, very very interesting point. And yeah, it depends, I guess, where these subs are based. So it's a good question. In the UK, we don't really have the concept of a merger itself, but in lots of our European jurisdictions, we do. So yes, that's definitely a good point and one to look out for. In certain European jurisdictions, you can undertake mergers within countries or within the EA if you're using things like the Cross Border Merger Regulations, which can make things much simpler because you have automatic transfer of assets and liabilities via a universal succession. Thank you for that. Really good question. Any other points coming up? Or should we get into some of the detail? Okay, let's kick off.

So looking at Sub 1 - so we've assumed for this purpose that Sub 1 is a UK entity, and because it has a large share premium and nominal value of its shares, we know that the client wants to remove the entity from the group, and therefore, a capital reduction is likely to be the best way to reduce the capital and then go ahead and distribute the assets to UK Co as its parent. So for this entity, we're assuming that it's a private limited company, and therefore, a capital reduction could be effected via the solvency statement route. Obviously, I'm keen to point out that the solvency statement procedure can only be used for private companies; it cannot be used for public companies, which requires the court approved process. That's just one point to bear in mind. Where we carry out a capital reduction, we can either cancel the share premium, which is likely to be required in this case because we know they want to remove the entity from the group, or we could reduce the nominal value of the shares. Whether that be reducing shares in issue or reducing the nominal value itself. The reserves that are created upon the reduction of capital can either be returned to the members as a capital return or return to the profit and loss accounts of the company to allow it to make a distribution to its shareholders as income. Whether either of those options are chosen really is generally a tax-driven point. We often look to our tax colleagues to provide us with the information as to how best to do that from a tax perspective.

We've set out in the comments box a few points to look out for and, I guess, issues to be aware of. The first being that the company must have, post the capital reduction, at least 1 non-redeemable share in issue and it's also important to check the company's articles for prohibitions or restrictions. It's important to note that the articles do not need to provide a positive authorization, but there must not be a prohibition or restriction of any kind. Also important to check if you have any agreements or arrangements in place which might prevent or restrict a capital reduction. For example, this might be in shareholders agreements, commercial agreements; it might be in security agreements, which detail this. It's really important that you check arrangements before you go ahead and put in place any of these kinds of corporate transactions.

There is also a regulatory aspect to this. If, for example, Sub 1 were regulated, there would be other consents that might be required. I'm just going to pass over to Trine on that aspect of it.

Trine Roenningen: Thank you, Lisa. As Lisa already mentioned, this isn’t a regulated entity. In theory, there should not be any regulatory impact. But it is a point that often must be considered because depending on what kind of permissions you have, there might be FCA permission required. For instance, for certain investment firms where you need FCA permission at least 20 days prior to the capital reduction taking place. There are also minimum capital requirements that regulated entities will need to hold at all times. Definitely an important thing to factor in if the sub is regulated.

Lisa Rasmusson: Thank you, Trine. Just some things to point out, the solvency statement is a document that is prepared as part of the process, and it must be signed by all the directors. There are certain non-statutory reserves, for example, the merger reserve, which cannot be canceled. I guess the key point here is that we need to make sure that the directors are in a position to be able to assess the financial position of the company and really think about whether the company is in a position to be able to undertake the capital reduction. In doing so, they should look at the last set of annual accounts. If the annual accounts are either out of date, or there's been a large transaction which has happened since the date of those accounts, generally speaking, we require interim management accounts to be prepared. These provide the directors with the supporting evidence that they need to make the solvency statement. The solvency statement states that every director is of the opinion that there is no ground upon which the company could be found unable to pay its debts as they fall due over the next year. In terms of documentation that we would prepare, we would prepare the board approval for the company itself, a special resolution to be signed by UK Co as the sole shareholder, a solvency statement, as we discussed, a confirmation statement, an updated share certificate for UK Co. What then happens is we file certain documents at Companies House with a Companies House form. And upon those documents being registered at Companies House, the reduction becomes effective. So just to note there that the reduction is only effective from the date of registration at Companies House rather than the approval from the company or the shareholders themselves.

So for Sub 1, we have undertaken a capital reduction. We now have a large amount showing on its accounts which are distributable reserves. And in this case, Sub 1 will undertake a cash distribution of that amount to its parent company, UK Co. Just looking at what we need to have in mind when we're undertaking a distribution of this kind, a company must have profits available for distribution in order to make a distribution, and these are accumulated realized profits less its accumulated realized losses. We often say that our accounting team should be involved at this stage so that they can really get into the nitty gritty of the details and make sure that we have sufficient distributable reserves to cover the amount of the distribution. We can distribute cash or non-cash assets that could be shares, receivables of property. So in this case, we're obviously looking at a cash distribution. If a distribution is paid in breach of the statutory requirements and the shareholder has knowledge or reasonable grounds for belief of this, the shareholder may be liable to repay the distribution to the company. A director who is party to a decision approving an unlawful distribution could be personally liable to repay that amount and be in breach of their and statutory duties owed to the company. So it's really key for us that we make sure that we have sufficient reserves in the accounts, and that is confirmed by our accounting team and the clients to make sure that we are not undertaking any kind of unlawful distribution of any kind. What do we need to have? We need to make sure that the directors have the required financial information to enable them to support their decision to make a distribution. These are generally the latest annual accounts. Or, if they do not show sufficient distributable reserves, they will need up to date interim management accounts. Obviously, because we've just undertaken the capital reduction in this case, we would need to make sure that we have up to date management accounts which reflect the capital reduction having taken place. Directors should generally be provided with forward looking projections as well - things like cash flow, current perspective, contingent liability statements, anything that will provide them with sufficient evidence that they need to make a decision. And obviously, a key point is to check your company's articles for any prohibitions or restrictions, which might in any way restrict the distribution to the parent company.

What documents do we need to prepare for this? We would be preparing a board approval for the distribution entity being Sub 1, and the recipient entity being UK Co. If you're distributing shares or receivables or any other kind of assets, certain additional documentation may be required (things like stock transfer forms, distribution deeds, share certificates, notices of assignment of any kind of debts that we're distributing up). The articles may also require shareholder resolution to approve the distribution itself.

The next one that we're going to look at now is in relation to Regulated Sub 2. We saw on the initial side that Regulated Sub 2 is one regulated and two has a number of profitable assets. Really, what we would like to do is move those assets over to UK Regulated Co, which is another regulated entity within the group, and how are we going to do that? Crystal is going to take us through a business transfer.

Crystal Park: Thank you, Lisa. So as mentioned, this is going to be the business transfer for Sub 2. So a business transfer is when there's a change of ownership or a transfer of all or the material portion of the business to another entity. So that could be in the form of the reorganization, asset acquisition or a transfer. A business transfer can also be a mechanism to carve out separate lines of businesses within a group to a third party buyer. In the process of a business transfer, we would typically undergo a due diligence exercise. And this is to build a picture of the business and identify…

Lisa Rasmusson: Crystal, we're struggling to hear you again. Crystal, if you could go on mute and I'll pick up. Thank you. So, as Crystal was saying, we effectively undertake a DD exercise to build a full picture of the business. So identifying the assets and liabilities, any employees, any issues that might be relevant, any claims, litigation, IP, any regulatory considerations, anything like that. We also check for things like, are there any prohibitions or restrictions that might be contained within the company's articles? Are there any agreements or arrangements which might prevent or restrict the transfer of the assets or the assumption of liabilities? It's important to think about what key agreements you have in place. Do these need to be assigned or novated to the new buyer? And whether you have employees - what is the effect of the transfer on them? Will TUPE apply? It's also to think about what kind of assets are being transferred. For example, do you have real estate? If so, that will require additional documentation to perfect the transfer itself. There's also a regulatory aspect to this, considering we're transferring from one regulated sub to another. I'll just pass over to Trine on that as well.

Trine Roenningen: Thank you, Lisa. As Lisa has already touched on, it really depends on what regulated business we're talking about and also the nature of the assets that are being transferred. And based on that, it could be required that FCA or the PRA get involved. Also, if you intend to transfer any regulated business, it might be that you need to do variations of the permissions for both the transferring entity and here, the UK Regulated Co, which would be the business that you transfer to. For certain investment firms, for instance, you would need to consider if you're transferring client agreements - there are certain mechanisms that need to be followed. And if we're talking about banking and insurance business, there is a specific mechanism under FISMA called a Part 7 Transfer that would be required to follow. Lisa, we'll get back to you on that in just a minute.

Lisa Rasmusson: Thank you, Trine. So as Tuna mentioned there, if Regulated Sub 2 were either a bank or insurer and the business which we're transferring to UK Regulated Co is either insurance or banking related, we would need to use Part 7 of the Financial Services and Markets Act 2000 in order to transfer that insurance or banking related assets and liabilities. So just to note, it is a mandatory process for insurance transfers. It isn't mandatory for banking transfers, but we often find that it's used because it means that the transfer doesn't need to obtain the consent of third parties. So if you have hundreds of thousands of banking customers, it can be very difficult practically to obtain the consent and can be incredibly time consuming. So it avoids the need to do that, which is why it's often used even though it's not a mandatory process of banking business. It is a relatively long process. It can take around 6 to 12 months to implement, and as Trine mentioned, the PRA and FCA are very much involved in that process, and there are certain formal bits of the transaction that you need to undertake with them. It is a formal court process, so scheme documentation is required. The scheme document sets out the detailed terms upon which the business is to be transferred and includes any obligations of the future operation of the business, which might be required from a PRA or FCA regulatory perspective. Legal effect is given to the scheme through the court's order.

So what documents are we likely to prepare when you have a business transfer of this kind? So considering if this were non-banking/insurance business, we would be preparing board approval for the transferee, being Regulated Sub 2 - sorry, UK Regulated Co, and the transferor, being Regulated Sub 2. We would prepare a due diligence questionnaire to really understand what the assets are that we're transferring and any impact of those transferring assets. We would prepare a business transfer agreement which sets out the assets themselves and any other documents which might be required, for example, if we're transferring certain types of other assets, whether that be employees, IP, property, and perfecting those transfers. Obviously for Part 7, there are multiple other documents which are required as part of the court process and which would also need to be prepared.

So share transfer. I'm not sure if Crystal, your sound is ready?

Crystal Park: Is everyone able to hear me okay?

Lisa Rasmusson: Yes. We can hear you now.

Crystal Park: Perfect. Apologies for that earlier. And thank you Lisa for taking over. So I will explain share transfers.

So, for the purposes of our case study, UK Regulated Co is to be moved under Spanish Co for cash consideration at fair market value. The share transfer required in this case with the transfor being the UK company and the transferee being the Spanish company. So, as mentioned in that description, the consideration is rather important when it comes to share transfers. So it's important to determine if the transfer is for a cash or a non-cash consideration. Sometimes it can also be a gift consideration. And the importance of this is because if consideration exceeds a certain threshold, stamp duty can be payable. So, for example, the rate of not 0.5% for anything over £1,000 consideration. Similarly to a business transfer, when it comes to share transfers, this is the transfer of ownership of shares from one entity to another as opposed to any assets or liabilities. So in our comments box, we've also listed out a few key considerations. So there's no requirement for a formal valuation of the shares, and the transfer itself doesn't have to be supported by financial statements. Having said that, having such financial statements may be required where there is a transfer at or below book value for certain group companies. And in any case, having the financial information can also be very helpful when it comes to verifying the transfer, having a bit of background to what's being transferred.

Some additional important things to bear in mind is to check the company's articles of association for any prohibitions or restrictions, such as pre-emptive rights. So pre-emption rights give the existing shareholders kind of priority when it comes to taking the shares, but this will be dictated by the articles, so it's always important to check those first. It's also important to have a look at any agreements which may prevent or restrict the transfer of shares. So these can sometimes be contained in the shareholders agreement, any securities agreements or other commercial agreements. It's also important to check whether any FCA or PRA regulatory consents are required. So just on this point, I'm going to pass over to Trine to flesh out on this a little bit more.

Trine Roenningen: Thanks, Crystal. This is a classic scenario that would be captured by the change in control regime. This is a regime that relates to who are the controllers of entities that are subject to supervision by the FCA or the PRA. Ultimately, when there are changes being made to either the current controllers or new controllers are coming in, there would either be approval or notification required depending on the nature of this. In this instance, you will see that the transfer of the shares will result in the UK Regulated Co being moved under the Spanish Co, which will then become the new controller of the UK Regulated Co. At the same time, the UK Co as the current controller, will cease to be controller.

What we would need to do in the first place here is to obtain FCA or PRA approval for the transfer prior to this taking place. This is a process that can take a long time. FISMA imposes a 60 working day period for the regulator to make a decision of whether the transfer is going to be approved. They can also delay this slightly because the time doesn't start to clock until all the information they need to finalize the application is received. It might take up to about 3 months, but it might also be quicker. This is a thing that is really important to get right in the first place to make it go as smoothly as possible with the regulators. Not getting approval for this is considered a criminal offense under FSMA, so it's really important to get this straight. Then for the UK Co ceasing to be controller, this is also something that needs to be notified, but it doesn't require approval.

Crystal Park: Well, thanks very much, Trine. So just to go back to the key considerations for the share transfer, it's also really important to check the register of members to ensure that the shares being transferred are accurately listed in the register. And it's really crucial to ensure that the register of members is always kept updated so that we can see which shareholders are holding how many shares so that when it comes to a transfer, these be done lawfully and accurately. So similarly to the register of members, we also want to check whether the PSC register needs to be updated. So, in this instance, for our case study, UK Co would have been the PSC, but following the transfer, consideration will be required as to whether UK Top Co will be the new PSC. Moving on to which documents will need to be provided for the share transfer - we would need the board approvals for the transferee, the transferor and the target entity. And, in particular, we would need the share purchase agreement, so this would dictate how the share would be transferred, identify the parties and any risks involved as well. Another important consideration for the share purchase agreement is whether we should include the price adjustment clause. This can also allow for some flexibility. The stock transfer form would also need to be prepared. So that's the instrument of transfer. Again, it's really crucial this is accurately reflective of how many shares, the nominal value, and what the consideration will be for the transfer. There will need to be new share certificates that are issued to the transferee. Again, we would just need to make sure that these are all in line, timing wise, with the stock transfer form and the share purchase agreements being executed.

As Trine mentioned, we would need to also ensure that the PRA or FCA regulatory change of control forms, notifications and approvals are all in place at the right time. As mentioned, any PSC forms at Company's House will need to be filed. So typically speaking, these would be PSC02 or PSC07 forms, which notify Companies House of new PSCs being added and previous PSCs ceasing to be PSCs.

Lisa Rasmusson: Sorry, Crystal - I was just going to say one point to add to this is that we've assumed in this case that it will be a transfer from UK Co to Spanish Co at fair market value. If it were the case, the transfer would be at below market value but higher than book value, we would need to make sure that there are sufficient distributable reserves, at least a positive number. Obviously, if it were below book value, you would need to have sufficient distributable reserves to cover the difference in value between the amount that you're transferring it for and the book value of the entity itself.

So just looking at entity elimination. So we're now in a position in our case study where we have taken everything out of Sub 1, Sub 2 and Sub 3was already a dormant entity in any event. We know that the client wants to either strike off or liquidate these entities, and that can be for any number of reasons. It might be that they have acquired too many subsidiaries in a given jurisdiction. It might be that they want to simplify the group structure, reduce admin costs, prevent the need for multiple boards of directors, anything of that nature. What kind of process will they look to undertake?

Obviously, when we look at regulated Sub 2, because it was a regulated entity, we would need to undertake the PRA or FCA cancellation of permissions process. And that would basically mean that we would need to ensure that it has either transferred or wound down all its accounts, policies, client contracts. It might also need to obtain audit and legal opinions in relation to that to be provided to the PRA and or the FCA. And so that's definitely another process which needs to be undertaken from a regulatory perspective before you can go ahead and remove the entity from the group. But in terms of whether you would look at a strike off or liquidation, we have prepared over the next two sides a comparison, shall we say, of the two various options available to you.

Looking at the strike off itself, it's a more cost and time efficient process. What you do is file certain documents with Companies House and that starts a two month waiting period. If no objections in that time period are received, then the entity will be removed from the register. It must be dormant for at least 3 months prior to strike off, and that means that it hasn't traded, hasn't changed its name, and hasn't sold any property or rights in the last 3 months. All assets and liabilities must be dealt with beforehand because any assets which remain in the entity post strike off will be automatically given to the Crown. Creditors can come forward within 6 years of the date of the strike off and request the entity be reinstated. The trouble with that is that if the entity is reinstated, the directors are put back into office which were in place at the time of the dissolution. So we often find that this strike off procedure, whilst being cheaper and more timely, it's not very useful where you have entities which have either a trading history, had employees, had lots of assets, contracted with third parties, where potentially you have purchased the entity from another group. So we really tried to use a strike of procedure only for those entities which have either no or minimum historic trade in. They haven't contracted with third parties, they have minimal assets, likely to not have had employees and are generally seen for intents and purposes as dormant.

Looking at the liquidation side. It is a longer, more costly procedure, but it does offer certain protections which the strike off does not. That is that you appoint an official liquidator as part of the process and that liquidator pays any debts and ensures that any cash that is left is distributed to the shareholders. The process can take around 3 to 5 months to complete, and that really depends on the complexity of the balance sheet. But it does, I guess, give the client more comfort that if, for example, any debtor came forward at some stage in the future and reinstated the company, it would be the liquidator that would be put back into place, and it would be their responsibility rather than the company or the directors themselves. So it does provide greater assurance from that perspective. I won't go through all of the detail on here, but we have it on the size in case it's of interest later.

So looking at our case study - our final position here is that we have removed Sub 1, Sub 2, Sub 3 and UK Regulated Co now sits under Spanish Co. We have, I guess, achieved all of the clients objectives for this project - we've removed all of the entities, we've transferred the various assets and liabilities to the right entities and we now have our final group structure. So I guess a lot of these were just a way of illustrating the various corporate transactions to you and the types of things that we look at when we undertake these transactions.

One of the key points is really to understand that if there are any regulated entities within the group, there are certain extra formalities that we must go through for them, whether that be via the PRA or FCA. It might be notifications or approvals in certain cases, and the timelines can be quite lengthy so it is important to factor that into your timetable in advance. Now that I've bamboozled you with lots of facts about various transactions, does anyone have any questions that they would like to ask? You can either do so by raising a hand or by using the chat function and obviously more than welcome to send us questions post the session. Either Crystal, Trine or I would be more than happy to take any questions that you might have.

Okay. Great. Potentially, I'll pass over to Monika then to wrap up the session. I just wanted to say thank you to everyone for attending today. Like I said at the outset, these sessions are really meant to be a way of providing you with informal training, and we hope that they are useful in your day to day activities back in the office. Thank you.

Monika Gorska: Thank you, Lisa and the team for your time today. We hope you find it interesting. We've popped a quick link to a feedback form in the chat, if you could spare a couple of minutes as we do value your feedback and we will all see you in October for our next session. Please keep an eye on your inboxes and we'll be sharing some further details on the upcoming session in due course. Thanks, everyone.