The last few years have seen an uptick in number’s of Part VII business transfer schemes, often effecting transfers within the same corporate group. In many cases, these internal transfers are the product of a group’s need to restructure to realise potential capital efficiencies in the run-up to the implementation of Solvency II on the 1 January 2016.
On 21 January, 2015 Chris Moulder and Andrew Bulley of the PRA wrote to firms noting that a significant number of firms are seeking to complete Part VIIs before the Solvency II implementation date (1 January 2016), but commenting tartly that the PRA has limited resources and that “we have a number of other material priorities”.
The PRA explains that it will progress Part VIIs where the fee has been paid, the firm intends to complete the transfer in 2015 and is on track to do so. All relevant documents, including the independent expert’s report, will need to be in “final draft” form at least six weeks prior to the directions hearing date. As usual, the PRA will seek to agree a timetable with the firms concerned but warns firms that the timetable should be “credible and realistic”.
What does this mean in practice?
In our experience, all but the most simple Part VII transfers are taking between six months and 12 months to complete, particularly where EEA regulatory consents are required (because the transfer includes non-UK EEA policies). The PRA has clearly sign posted the potential difficulties in completing Part VII schemes by 1 January 2016 if the firm is not already on track.
The PRA does not state that, where a fee has not been paid, it is too late to complete by this date; instead they will consider on a case by case basis. However, if a firm has not yet approached the PRA in relation to a Part VII which it intends to complete by that date, it may face an uphill struggle to convince the PRA to agree to such a timetable.
Why is the PRA taking this approach?
The PRA says its views on timing will be coloured by the “constraints on our resource” as a result of other Part VIIs and of course, the massive amount of Solvency II work going on. Part VIIs are also being examined with more intensity and in a more granular way than they were 10 years ago (the era before the FSA started preparing formal reports on Part VIIs). For example, the regulators may expect to review detailed statistical information on policyholder feedback on the proposed scheme and they have become much tougher on requests for policyholder notification waivers (which can impose material costs on the parties).
The potential need to reconcile Solvency I/ICAS numbers with Solvency II numbers, plus updating year end financials, can be a major and time-consuming exercise, although the work already being done on Solvency II should assist to a degree.
Does this mean that Part VII schemes are no longer attractive?
Part VIIs are mandatory for insurance business transfers which meet the statutory conditions (for example, a transfer of UK and EEA business from one UK authorised insurer to another). Yet, in my view, a similar result can be achieved through a share sale of the company itself to a third party (albeit the tax consequences may be different).
The main advantages of a Part VII scheme are as follows:
- Firstly, the courts have the flexibility to override contractual restrictions on assignment in non-policyholder contracts (such as reinsurance agreements and leases), whereas on a share sale, a contractual change of control clause (if properly drafted) will give the counterparty.
- Secondly, the right to terminate - in an M&A deal, the buyer will usually be expected to take on the whole company, lock, stock and barrel. In other words, it cannot cherry pick the assets and avoid liabilities. The buyer can seek to protect itself through warranties, indemnities and price adjustment provisions in the sale contract, but in some cases, buyers would prefer to take on part of a business only and to leave behind potential liabilities that it does not know about and potentially cannot assess accordingly. The dissolution of the transferor can be effected through the same process (albeit, in my experience, this sometimes this involves a separate court hearing).
By contrast, in a share sale the seller will need to liquidate the company (unless the company has become dormant, in which case a striking off procedure is available).Nevertheless, many will still prefer to go down the share sale route for a third party transaction because, at the moment, it is likely to be much speedier. A share sale to a third party buyer will still require regulatory approval for a change in control and this is also taking longer nowadays because the regulators are exercising greater scrutiny over the new owner’s business plan.
However, no independent expert’s report is required, no court hearings are necessary and the regulators are subject to a statutory 60 working day timetable for change of control approval once the application is complete. As always, thorough preparation and early engagement with the regulators is key.