Transfer of Engagements – Is it the answer?
The current state of the economy has forced a number of Friendly Societies (FS) who are struggling on the edge of solvency to reassess the best way forward for their members and to consider whether consolidation with another FS or main-stream insurer is the answer to their problems.
To assist in that debate this article attempts to set out the common reasons for consolidation/transfer, the chronology of a typical transfer of engagements, the roles of the professional advisors and importantly, the “big brother” role played by the Financial Services Authority (FSA).
What leads FS to transfer its business?
Financial pressure in the life industry, reduced consumer confidence, increasing longevity and rising costs have impacted on FSs in the same way as they have on the insurance industry as a whole. Smaller FSs, with a limited product range, are particularly vulnerable due to their limited ability to acquire new business and/or expand their offering. This financial pressure is not set to decrease in the foreseeable future and, as a consequence, approaching a bigger player in the market to discuss the option of a transfer of business is becoming increasingly attractive.
Striking the deal…
The transferring and the transferee FS will need to enter into a confidentiality and/or and exclusivity agreement before they enter into any further negotiation or binding agreement. It is important to protect sensitive information and to ensure that the commitment and expense involved in such a process is backed up with a guarantee that negotiations are between the anticipated parties only.
Heads of terms follow, setting out the main agreed terms and principles (Heads). Although the Heads should be non-legally binding (subject to contract, due diligence etc.), they should set out the terms of the proposed transactions to allow advisors to commence detailed investigations and drafting.
More often than not, the legal, accountancy and actuarial advisors are heavily involved from the outset. Their early role is to provide an objective view on timescales and anticipated hurdles (the transfer process usually takes at least six months from start to finish) and to ensure the Heads properly reflect the parties’ agreement and intent. At the very least, legal advisors should review Heads before they are signed to ensure they do indeed reflect the expectations of the parties and to suggest any amendments which might make the process more achievable.
Getting to know you…
Both the transferring and the transferee FS will want (and are obliged) to ensure the transfer will be in the best interests of their members and so a thorough due diligence process (both legal and financial) should be undertaken by each party in relation to the other.
Each of the FS’s professional advisors should be consulted, and, although a party, due to monetary constraints, might want to carry out all or part of the investigations itself, it is imperative to seek advice as to which areas can be dealt with adequately “in-house”. A FS may also want to appoint a project manager from amongst its Board members, to oversee the due diligence process, in order to ensure there is no overlap between the professional advisors’ scopes of investigation (i.e. financial and legal) and that timetables are adhered to.
The main areas of legal due diligence are employees (the Transfer of Undertakings (Protection of Employment) Regulations 2006 apply), premises and investment properties, general insurances, intellectual property rights and long-term contracts.
The outcome of due diligence depends very much on what is discovered. If no “show stoppers“ appear, the transfer should continue relatively smoothly. Often however, some further provisions may need to be drafted into the legal documentation by way of protection against certain existing, or newly discovered, risks.
The transfer documentation…
The principal legal documents are an agreement to transfer, a circular to the transferring FS’s members (including a special general meeting (SGM) to pass the necessary special resolution approving the transfer) and the Statement required by Schedule 15 to the Friendly Societies Act 1992 (the 1992 Act) (the Schedule 15 Statement), a form of proxy for use at the SGM and an Instrument of Transfer.
A number of ancillary documents sit outside those documents listed above that may be needed to deal with, for example, property issues and proposed amendments to the Rules of the enlarged FS.
Do the transferee members have a say?
The FSA may or may not require the transferee FS to call an SGM.
At what stages during the process does the FSA get involved?
At the Heads stage, representatives of both parties will meet with the FSA, prior to meeting with their relevant Boards/Committees of Management, in order for the FSA to give the green light in principle.
Once the first draft agreement to transfer is settled, it must be submitted to the FSA for approval together with business reasons for the transfer. From this point on, it is to be borne in mind that the FSA will adhere to the timetable set and so it acts as a sort of timekeeper in that regard.
Once the terms have been given the go ahead, the FSA must review and approve the Schedule 15 Statement, the circular to members and the actuaries’ reports (confirming the transfer is in the best interests of members).
On sight of the SGM Chairman’s report on votes (providing the resolution to transfer has been passed!) the FSA can formally approve the transfer.
An application is then made to the FSA for the cancellation of the transferring FS’s Part IV Permission and the registration of amendments to the Rules of the transferee FS, from the effective date of transfer.
Announcements will be made in the national and local press (local to the transferring society), and the London, Edinburgh and Belfast Gazettes. Following these announcements, a certain period of time will be allowed for representations (from anyone who considers they may be adversely affected by the transfer) to be made to the FSA and any oral representations heard, before the FSA can, finally, declare the transfer confirmed.
From Hill Dickinson LLP’s experience of transfers it has advised upon, the thorough and highly regulated process set out above has proved beneficial to the on-going success of the consolidated FS.
Hopefully, this article will lay to rest the fears of those AFM members who, in the light of economic stress, may be considering consolidation, and that a good home can be found for its policy holders and a positive outcome reached for its employees.
Alexandra Mason is a Solicitor in the Corporate Department of Hill Dickinson LLP. She can be contacted on 0151 600 8000 or alternatively, please e-mail any queries to email@example.com.
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