Key considerations for customer-owned bank mergers

By Chris Blane, Kylie Brown, Patrick McGregor
Banking & Finance Mergers & Acquisitions

Consolidation continues for customer-owned banks 6 min read

Consolidation in the mutual banking sector in Australia continues in response to competitive pressures and the need to scale technology, funding and compliance costs, as evidenced by recent mergers involving four of the country's largest customer-owned banks.

These transactions are complex and involve specific legal considerations that set them apart from traditional financial services M&A. It is crucial that parties considering a merger have a firm understanding of the legal issues and structuring considerations that arise in these transactions.

In this Insight, we explore some features unique to mergers of customer-owned banks.

Key takeaways 

  • Mutual mergers can enable customer-owned banks to improve their service offering, meet compliance demands more efficiently, enhance investment in technological infrastructure and provide a better customer experience.
  • Customer-owned banks can structure merger transactions in a way that maintains alignment with their strategic, customer offering and community objectives.
  • The Financial Sector (Transfer and Restructure) Act 1999 (Cth) (the Transfer Act) can assist in facilitating the transfer of large and complex operating businesses.
  • Understanding these matters and the legal issues and specific structuring considerations that arise in mutual bank mergers is vital for the successful implementation of a merger in the mutual banking sector.

The Transfer Act merger regime

The Transfer Act merger regime enables the full consolidation of two authorised deposit‑taking institutions (ADIs) by way of a transfer of all the members, officers, employees, assets and liabilities of one ADI (the 'transferring entity') to the other (the 'receiving entity').

Upon completion of the transfer, the receiving entity assumes ownership of all assets and liabilities of both entities, while the transferring entity is left without any assets or liabilities. Typically, the transferring entity is wound up shortly after the merger. The transfer is usually effected without any consideration passing between the entities or their respective members and can be considered a true 'merger' of two businesses.

Features of mutual bank mergers

Merger statements

Mergers under the Transfer Act occur by way of statutory transfer, and the Act has a number of important elements that facilitate the transfer of large, complex operating businesses. The Transfer Act gives APRA broad power to determine certain things that are to happen, or that are taken to be the case, in relation to the transfer in a formal statement approved in connection with the transfer.

Typically, the statement will contain a number of standard provisions to facilitate the merger, as well as provisions to reflect issues specific to the entities or address issues identified through the diligence process. The statement can be used, for example, to:

  • override restrictions on assignment and change of control;
  • override or modify any requirements to give notice of the merger to third parties;
  • specify that members of the transferring entity are deemed to be members of the receiving entity from the date they joined the transferring entity rather than on the date of transfer; and
  • provide that certain corporate actions, eg adoption of a new constitution or a change of name, are deemed to occur when the merger takes effect.

Merger of equals

When two ADIs intend to merge, they are free to choose which entity is designated the 'receiving entity' and which is the 'transferring entity' for the purposes of the Transfer Act. In the case of merger transactions between mutual banks of broadly equivalent size, it is often key to the parties and to their respective members that the transaction terms reflect principles consistent with a merger of equals and preserve important attributes of each organisation.

Transaction terms will often be crafted to maintain operational balance between the two merging businesses after completion to manage this concern. Examples of such terms include:

  • requirements to maintain two head offices;
  • requirements for each merging entity to have representation on the board and senior management team ;
  • that the brands of the merging businesses will be maintained; and
  • commitments regarding the preservation of branches and geographical presence.

Importantly, these commitments need to be balanced against the synergies motivating the transaction, and factors that will drive the success of the merged entity, including increased investment in technology and compliance.

Member and community engagement

The Transfer Act requires mergers to be approved by the members of each mutual bank. Typically, for a merger to be approved, 75% of the members of each mutual bank need to approve the merger.

Mutual bank mergers have particular characteristics that distinguish them from other banking institutions. In particular, they often have strong associations with certain communities or regions, commitments to joint banking principles, and support and deal with their customers, employees and other stakeholders in a certain way.

As noted above, members, employees and other stakeholders will often be keen to ensure these characteristics are preserved in a merger, and consultation around these aspects will often be critically important to a successful transaction. An extended and detailed consultation period with members and employees to communicate the benefits and expected impacts of the merger may be necessary.

Each party to the merger must issue a member information booklet prior to the meeting of its members, which—among other things—sets out details of the proposed merger. These booklets must be approved by APRA prior to issue and will comprise a key part of member and community engagement.

Regulatory engagement

APRA is the authority empowered to oversee, and ultimately approve, mergers under the Transfer Act. APRA will expect both ADIs to engage with it early in any process, in an open, detailed and cooperative manner. Parties should expect a lengthy and detailed engagement regarding the merger terms, the member information booklets, the nature of approvals sought and detailed governance plans for the merged entity.

The Transfer Rules prescribe the key formal information and documents that must be submitted to APRA in connection with any Transfer Act merger process, including the particulars that must be included in a series of letters to APRA.

Due diligence investigations

The considerations that inform a diligence exercise in respect of a merger of mutual entities differ from traditional transaction due diligence in important ways.

It may be necessary and appropriate for a party to a merger to conduct detailed investigations in respect of both itself and a merger counterparty from a legal, tax, financial and operational perspective. Consideration of legal matters should include regulatory approvals that may be required and the impact of the merger on employees, products and services, material supplier contracts, customer products and documentation, funding arrangements and IT systems.

However, unlike in a traditional M&A context, there is generally no capacity to seek to address issues identified in diligence through an adjustment of transaction value or terms (noting that consideration will not pass between the entities). Due diligence findings will instead inform the parties' willingness to proceed with a merger, assist in settling the transaction structure and the terms of approval sought from APRA, and otherwise support views on transaction planning and appropriate remedial steps to address identified issues.

Next steps

  • Before progressing detailed consideration of a mutual merger, parties need to give careful thought to the benefits they are seeking to realise through a potential merger and the critical attributes of their organisation that should be preserved.
  • It is critical that parties are well advised on structural considerations and the mechanics that are available under the Transfer Act to assist in achieving their objectives.
  • Early and continuous engagement with APRA and other key regulators is critical to the transaction process, including engagement with the Australian Securities & Investments Commission (in relation to the treatment of Australian Financial Services Licences and Australian Credit Licences), the Reserve Bank of Australia and the Australian Taxation Office.

Allens recently supported Heritage Bank in its successful merger with People’s Choice Credit Union. Should you wish to discuss mutual mergers in more detail, please contact us below.