Selling a bank: legal aspects of the transaction and obligations of the parties

A commercial bank is a serious asset with high liquidity. Such structures remain in demand and liquid at any time and in any conditions, regardless of the level of prices for fuel and energy resources. That is why many ambitious entrepreneurs and company managers understand the phrase “I’ll buy an existing business” when acquiring a commercial bank. Below, we will look at the features and main nuances of concluding this type of transaction and demonstrate ways to develop such organizations.

Our company is ready to provide highly qualified support in the licensing, acquiring, and selling business. We have an extensive list of ready-made banks for sale in Sweden, Germany, France, Latvia, and other countries. Our lawyers will provide you with full support when concluding a transaction.

Introduction: Overview of bank acquisition regulations

The banking sector is one of the most profitable and, therefore, most regulated. Opening a new bank becomes a real challenge. Months of approvals and vast amounts of funds are needed to undergo numerous checks and obtain the required approvals and permits. A more straightforward, practical, and profitable solution is buying a commercial bank and conducting financial and economic activities within a few days.

Today, creating a financial business from scratch is much more expensive and complicated than purchasing a ready-made one. When buying a ready-made banking structure, you will receive the next-mentioned.

1. License: By purchasing a ready-made business, you do not risk being rejected by the Central Bank, saving time.
2. An established management system in the bank – a business that generates income most often does not require global changes.
3. Qualified personnel: managers, managers, and other employees, as a rule, remain even after the sale of the business.
4. The client base is the main advantage when purchasing a ready-made bank.

However, it is worth remembering that not all banks recovered from the crisis. For some institutions, selling is a way to avoid bankruptcy. Therefore, the choice should be approached with full responsibility.

Selling bank obligations: Legal responsibilities of the selling party

Selling a bank is a complex and lengthy process. To insure yourself against various pitfalls, it makes sense to use the services of a consultant.

The first thing that needs to be done is to conduct an unscheduled audit and expert assessment of the business. Then, you should fix the current state of the bank in the contract and agree on the course of action if this condition worsens (price reduction, purchase of part of corporate rights, or other compensatory measures). The bank’s primary income-generating asset is money so these assets can be “drained” in days or even hours. Sometimes, it is necessary to restructure the problematic part of a banking institution’s loan portfolio. Next, essential negotiations are held regarding the terms of the deal, and bargaining is conducted.

An important aspect is working with irreconcilable shareholders to consolidate the package of corporate rights of the bank proposed for sale. Conflicts are expected if the parties conduct negotiations, even among friendly shareholders. It’s easier when this is done by a party uninterested in someone else’s position. In addition, the owners want to get all their money in the bank, plus the value of their intangible assets – a trademark, an established customer base, etc.

Here, you cannot do without a qualified appraiser. Sellers and buyers should not save on this so that the former does not overpay for the business they are buying and does not undercut when selling it. In bank mergers, the valuation is fundamental because it determines the size of shareholders’ stakes in the newly merged bank, which is a significant point of contention.

In addition, it is easier for an external consultant to examine the bank seller’s corporate rights and develop an optimal scheme for conducting the deal.

Buyer’s Obligations: bank acquisition legal requirements

There are several options for investors to become bank owners:

• create a bank from scratch by obtaining a license;
• become a shareholder of a small operating bank (partnership);
• purchase of a small bank (purchase of a banking license);
• purchase of a large bank (purchase of a ready-made business with a banking license and clients).

In the post-crisis period, a window of opportunity opens for potential investors, allowing them to buy their bank at a favorable price. Options for purchasing a bank are as follows.

1. Purchasing/creating a transition bank: lowest entry threshold and price, but many legislative difficulties exist. The option requires in-depth analysis;
2. Purchasing a bank that is in a mothballed state. The bank was not sold for various reasons, and its owners could not ensure its development.
3. Acquisition of a fully functioning bank with its client base, branch network, premises, business model, and others.

The easiest way to buy a bank is to purchase shares. The acquisition of shares must be notified within approximately 30 days after the transaction. The size of the bank’s share should not exceed about 20-30%, depending on the jurisdiction. Prior permission must be obtained to purchase a stake exceeding this percentage; otherwise, the purchase transaction will be considered illegal. The responsibility for obtaining prior consent lies with the acquirer.

The buyer should be aware that the central bank of a particular jurisdiction may refuse to authorize and decline bank transaction legality if it is determined that this person, legal or physical, has ever caused losses to another bank through its actions. The basis for refusal may be a court decision on causing losses, for example, once a potential buyer did not repay the loan, and another bank, unrelated to the transaction, had to collect its funds through the court.

Bank acquisition legal aspects: steps involved in the sale

One of the most critical stages of the legal process of bank acquisition, both when creating a bank and when purchasing it, is the preparation of documents and their legal verification. One of the common mistakes when presenting documents is the non-compliance of the board’s candidacy with the law’s requirements. A potential buyer of a bank should know that the future chairperson of the board should not be convicted of economic crimes.

Otherwise, the central bank will not approve the candidate proposed by the owner. Also, when choosing a bank chairperson for the position of chairman, it is worth considering the business reputation, that is, the professional and other qualities of the person. If the candidate’s qualifications are not up to par, he will not be allowed to occupy the corresponding position.

By purchasing a ready-made company, after the notarized transaction, you will receive the following:

Package of constituent documents (completeness depends on the year of registration and the number of owners):

• decision on the creation;
• certificate of registration with the tax authority;
• charter;
• seal;
• primary documentation (if available, contracts, acts, and invoices);
• accounting reports on paper or electronic media.

The process of concluding a transaction with the participation of our specialists is as follows.

1. Application to our company.
2. Evaluation of the budget and each case by lawyers.
3. Audit in cooperation between an accountant and a manager.
4. Preparation of the necessary package of documents.
5. Deal and meet with the participation of a notary.
6. Payment and final signing of bank acquisition contract.

So, it’s worth paying attention to why many entrepreneurs sell their banking business. Pressure from competitors, distraction from other business areas, or even personal circumstances – resulting from such situations is a complex but necessary decision to sell the bank. This way allows you to get rid of the expensive procedure of official liquidation, avoid unnecessary checks from regulatory authorities, and, in addition, receive a large sum of money. The funds received can be used to develop your other enterprises. Moreover, entrepreneurs often initially decide to create a promising startup and then sell the finished business. This approach is becoming an increasingly popular and effective solution for quickly accumulating capital.

Our company is ready to provide comprehensive support when concluding a transaction to acquire a bank in any jurisdiction worldwide. We know our business very well and aim to achieve the most effective results for our clients.

The article’s author is Denys Chernyshov – founder and CEO of the globally-famous organization Eternity Law International.