Guidelines on Applications for Bank Mergers and Acquisitions

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 REGISTRAR OF FINANCIAL INSTITUTIONS GUIDELINES ON APPLICATIONS FOR BANK MERGERS AND ACQUISITIONS

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 1 Table of Contents 1.0 INTRODUCTION 2 2.0 OBJECTIVES OF THE GUIDELINES 3 3.0 DEFINITION OF TERMS 2 4.0 OPERATIONS OF INSTITUTIONS UNDERGOING A MERGER/ ACQUISITION 4 5.0 TIMELINES FOR PROCESSING MERGERS/ACQUISITIONS 4 6.0 APPLICATION FORM AND PROCESSING FEE 5 7.0 INFORMATION REQUIRED FOR MERGERS AND ACQUISITIONS APPLICATIONS 5

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 2 GUIDELINES FOR PROCESSING APPLICATIONS FOR BANK MERGERS AND ACQUISITIONS 1.0 INTRODUCTION Section 25 (j) and (l) of the Banking Act, 2010, requires a bank to obtain prior written approval from the Registrar to arrange for the transfer, sale or disposal of its shares or business, as well as to amalgamate or merge with any other institution wherein the whole or a considerable part of the business or property of the bank will be transferred to that other institution. In addition, Section 25 (b), (d) and (k) of the Banking Act, 2010, requires a bank to obtain prior written consent of the Registrar to change its Articles of Association, open or close branches (or static or mobile agencies), or to enter into a management agreement with any party. Section 54 of the Financial Services Act, 2010 requires the Registrar to approve any step or intention by a person to become a controlling party of a bank. Section 67 of the Financial Services Act, 2010 provides that none of the business of a licensed bank may be transferred to another person or amalgamated with the business of another person except under a scheme for the transfer or amalgamation that has been approved by the Registrar. In order to effectively implement the foregoing provisions of the Banking Act and the Financial Services Act, the Registrar has issued the guidelines on mergers and acquisitions. 2.0 OBJECTIVES OF THE GUIDELINES Specifically, the objectives of the guidelines are as follows:- (a) to implement the provisions of the Banking Act, 2010, and the Financial Services Act 2010; (b) to provide requirements for bank mergers and acquisitions; and (c) to enhance transparency and objectivity in the process of assessing applications for mergers and acquisitions. 3.0 DEFINITION OF TERMS For purposes of these Guidelines, the following definitions shall apply: 3.1 Acquirer Is an existing bank or non-bank financial institution which proposes to acquire all or a considerable part (i.e. 10.0 per cent or more) of the assets or shares of a bank or a non-bank financial institution licensed under the Financial Services Act, 2010 in Malawi or in other jurisdictions.

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 3 3.2 Target institution Is the institution whose shares or assets are to be acquired through a merger, an acquisition, purchase and assumption agreement, or through any other legal agreement. 3.3 Successor Bank Is the bank resulting from a merger or acquisition approved by the Registrar in accordance with Section 25 of the Banking Act, 2010 and Section 67 of the Financial Services Act, 2010. 3.4 Merger Is the amalgamation or fusion of an existing bank with either an existing bank or non-bank financial institution into a single legal entity (hereinafter called ‘a successor bank”). The assets and liabilities of the merging institutions pass to the successor bank, unless otherwise provided by contract, and the merging institution(s) are simultaneously and legally dissolved. Shares for both institutions are surrendered and new shares are issued in their place. The new bank formed is a separate legal entity and the Registrar shall issue a new banking licence upon approval, where necessary. Before seeking approval, the merging institutions should: a) First inquire with the Registrar of Companies or any other relevant authority for the name under which they intend to use in cases where there is a planned change of name to ensure that the proposed new name is available and appropriately reserved for their use. This inquiry is also necessary for the purposes of avoiding the tort of passing off. b) Under certain circumstances, such as where the proposed name would contain the word “Malawi” or other protected names, approval from the Office of President and Cabinet is necessary. c) After the Registrar’s approval of the merger, the merging institutions shall also comply with the requirements of the Competition and Fair Trading Commission or any relevant authority.

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 4 3.5 Acquisition (also referred to as a Takeover or Buyout) Is the purchase of one bank or a non-bank financial institution by an existing bank for cash, exchange of shares or a combination of both. An acquisition takes place when an Acquirer takes over the controlling shareholder interests of another existing institution. At the end of the process, there exist two separate companies: the Acquirer and the Successor Bank. From a legal point of view, the Target institution ceases to exist as the buyer assumes its business. 1 3.6 Registrar Means the Registrar of Financial Institutions as defined under Section 8 of the Financial Services Act, 2010.

4.0 OPERATIONS OF INSTITUTIONS UNDERGOING A MERGER/ACQUISITION (a) Institutions that are undergoing a merger or acquisition process shall continue to transact business under their old names and licences. (b) However, these institutions shall not conduct the following activities unless the Registrar’s approval is granted to effect the merger or acquisition: (i) Embark on further branch expansion; (ii) Embark on new capital projects such as banking system or accounting software purchases; or (iii) Enter into strategic or legal agreements with other parties other than those pertaining to normal business operations, except with the approval of the Registrar. 5.0 TIMELINES FOR PROCESSING MERGER AND ACQUISITION APPLICATIONS The Banking Act, 2010 and the Financial Services Act 2010, do not specify the timelines for processing applications for mergers or acquisitions. However, the law provides that applications for a bank licence should be disposed of by the

1 Where the acquired bank changes name, the Registrar shall issue a new banking licence, but where it maintains the same name, only pertinent details such as shareholding structure, Board composition, executive management details, articles of association etc shall be amended. No new licence shall be issued.

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 5 Registrar within 90 days. Consistent with this, applications for mergers and acquisitions shall be processed within 90 days after the Registrar receives a complete merger or acquisition application. This time period may be extended for two additional periods of up to 30 days each if the complexity of the application or precedential issues raised by an applicant require additional processing time. The Registrar shall communicate the final decision to the applicant within five business days of the decision. 6.0APPLICATION FORM AND PROCESSING FEE (a) Application for mergers or acquisitions shall be accompanied by all the information stipulated in section 7.0 below. (b) The Registrar may require any additional information or documents he deems necessary for his review. (c) The application should be submitted together with a non-refundable processing fee amounting to Malawi Kwacha equivalent of USD5,000 (five thousand United States Dollars) payable to the Reserve Bank of Malawi. No application shall be processed without a processing fee unless specifically exempted by the Registrar. 7.0 INFORMATION REQUIRED FOR MERGERS AND ACQUISITION APPLICATIONS There shall be two stages of approval for those types of mergers and acquisitions that have not been initiated by the Registrar. 7.1 Merger 7.1.1 Pre-Merger Consent Pre-merger consent represents the Registrar’s preliminary consent to the institutions wishing to merge to the effect that he has no objection in concept to the proposed merger. This approval is solely to enable the merging institutions proceed with negotiations and enter into agreements on key aspects of the transaction. However, no merger of banks may be consummated without the final approval of the Registrar as specified in Section 7.1.2.

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 6 All agreements, appointments, transactions and legal documents, entered into or drawn or executed with, by or in favour of any of the banks, financial institutions or other legal entities involved in a proposed merger which are in force immediately prior to the merger, shall remain in force and effect and be construed for all purposes as if they had been entered into, made, drawn or executed with, or in favour of, the Successor Bank. The following documents/information should be submitted at the pre-merger consent stage: a) A formal letter co-signed by representatives of the merging institutions addressed to the Registrar; b) A statement of the nature and objectives of the merger; and c) Resolutions by each of the Boards of the merging banks authorising management to proceed with merger negotiations. 7.1.2 Final Approval This stage represents the Registrar’s ultimate approval for the merger transaction to take effect having reviewed the information specified below. The Registrar may, if deemed necessary, grant final approval of the merger with conditions. The following information/documents should be submitted to obtain final approval: a) A formal letter application co-signed by representatives of the merging institutions addressed to the Registrar; b) Proposed Memorandum and Articles of Association of the Successor Bank; c) Signed merger agreement between the merging institutions; d) Certificate of Incorporation of the Successor Bank; e) Certified Board Resolutions from each of the merging banks approving the merger; f) Certified Shareholders Resolutions of each of the merging banks approving the merger; g) List of principal shareholders (i.e shareholding of 10% and above) of the Successor Bank, showing their business and residential addresses (not just postal addresses); h) Shareholding structure for the Successor Bank; i) List of Directors, designation, curriculum vitae and interests they represent in the Successor Bank;

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 7 j) List of proposed Executive Officers and senior management officials, including designations and curriculum vitae for each person; k) Proposed organisational structure showing functional units, reporting lines and grades of the Successor Bank; l) Detailed Business Plan for the Successor Bank for the next 3-5 years, including the Successor Bank’s business development strategy, key products to be offered, future goals, etc; m) Due diligence report on each of the merging banks; n) Copies of Management Agreements in all areas (if applicable); o) Audited financial statements of each of the merging banks for the last three years; p) Audited financial statements of each principal shareholder of the Successor bank for the last three years; and q) Integration plan for the successor bank After final approval of a merger has been granted, the Registrar shall prepare a new banking licence for the Successor Bank, where necessary. Banking licences of both merging institutions must be surrendered to the Registrar and will be deemed null and void. 7.2 Acquisition 7.2.1 Pre Acquisition Consent Pre-acquisition consent represents the Registrar’s preliminary consent to the acquirer to the effect that he has no objection in concept to the proposed acquisition. This approval is solely to enable the acquirer to proceed with negotiations and enter into agreements on key aspects of the transaction. However, no acquisition may be consummated without the final approval of the Registrar as specified in Section 7.2.2. All agreements, appointments, transactions and legal documents, entered into or drawn or executed with, by or in favour of any of the banks, financial institutions or other legal entities involved in a proposed acquisition which are in force immediately prior to the acquisition, shall remain in force and effect and be construed for all purposes as if they had been entered into, made, drawn or executed with, or in favour of, the target institution. The following information/documents should be submitted at the pre￾acquisition stage:

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 8 a) A formal letter by the Acquirer addressed to the Registrar and signed by the Chairperson and Managing Director/Chief Executive Officer; b) A statement of the nature and objectives of the acquisition; c) Memorandum of Understanding (MoU) between the Target institution (seller) and Acquirer (buyer), if any. d) Certified Board Resolutions of the Acquirer and Target institution(s) approving the acquisition/take over. 7.2.2 Final Acquisition Approval The following information/documents should be submitted at final approval stage: a) A formal letter by the Acquirer addressed to the Registrar and signed by the Chairman and Managing Director/Chief Executive Officer of the Acquirer; b) Audited annual financial statements of the Acquirer for the past three years; c) Certified Board and Shareholder Resolutions of the Acquirer and Target institution(s) approving the acquisition/take over; d) Sale Agreement between shareholders of Acquirer and Target institution(s); e) An independent valuation and due diligence report on the Target institution(s); f) Memorandum and Articles of Association of the Acquirer and Successor Bank; g) Certificate of Incorporation of the Acquirer; h) List of principal shareholders of the Acquirer (i.e. shareholders owning 10% and above) including its related affiliates/subsidiaries and their business/residential addresses; i) Shareholding structure of the successor bank; j) Proposed organizational structure of the Successor Bank showing functional units and reporting relationships; k) List of proposed Directors, their curriculum vitae, designations and interests they will represent in the Successor Bank; l) List of proposed Executive Officers and other senior management officials of the Successor Bank, their titles and their curriculum vitae; m) Detailed Business Plan for the Successor Bank for the next 3-5 years including the Successor Bank’s business development strategy, key products to be offered, future goals, etc; n) Copies of Management Agreements in all areas (if applicable);

REGISTRAR OF FINANCIAL INSTITUTIONS July, 2018 Page 9 o) If one of the acquiring institutions is a foreign bank, written confirmation from its primary supervisory authority indicating approval or no objection to the acquisition; and p) Integration plan for the Successor Bank. If the Acquirer changes name, a new banking licence shall be issued. The previous banking licence bank must be surrendered to the Registrar within 180 (one hundred and eighty days) working days. For further enquiries please contact: The Director Financial Sector Regulation Reserve Bank of Malawi P.O. Box 565 Blantyre Tel: +265 (0) 820 299/444 Email: fsr@rbm.mw