In any regulated business, compliance matters should always be given due importance in the course of a merger or an acquisition. Gaming business is not an exception. Given the maturing of the online gaming industry and the resulting increase in the number of merger & acquisition transactions, it is opportune to look into some compliance considerations relevant to the Malta-based LGA-licensed companies.
LGA approval of the new shareholding structure
When a Malta-licensed remote gaming operator is involved in a merger or an acquisition, whether as a seller or purchaser, one has to ensure that the entity that will continue remote gaming operation post-transaction has necessary approvals of the LGA. The law requires prior approval of the LGA for any sale of business of a remote gaming licensee and for every merger, reconstruction or similar transaction. Every new equity holder of at least 5% of the post-transaction operational company must be approved by the LGA before the transaction is completed. While the law explicitly only mentions the approval of the direct shareholders, in our view, the above approval requirement applies also to those who will hold shares via other entities, so that every ultimate beneficial owner of at least 5% of the operational company must be approved in advance. The LGA carries due diligence on the acquiring beneficial owners in the same way as probity checks are done in the course of the licensing process. All relevant documents on the acquiring entities should be therefore provided to the LGA, clearly showing the connection, post-transaction, of each such entity to the operating gaming company.
Continuance of the remote gaming licence
In cases where the transaction is structured as a sale of business assets or sale of a going concern (rather than sale of shares), in addition to the prior approval of all new shareholders of the post-transaction operational company, one must ensure the continuance of the remote gaming licence. Under the Remote Gaming Regulations (Reg.11), the licence is not assignable or transferrable without the prior written consent of the LGA. Accordingly, the parties to the transaction should obtain such consent, which may be in the form of be either a transfer of the licence or a grant of a new licence to the post-transaction operational company. Violating or overlooking the requirement of obtaining the said consent from the LGA would expose the acquirer to the risk of closure of the operation and cancellation of the licence.
LGA approvals and consents as a condition precedent
A merger or an acquisition may be quite a complex transaction usually accomplished in a number of stages, which is finalised on a pre-agreed date of completion, after all prerequisites for the completion are fulfilled. It is clear that the transaction agreement between the parties should necessarily include, in the list of conditions precedent to completion, the necessary LGA approvals. One should also bear in mind that a copy of the sale and purchase agreement normally needs to be submitted to the LGA.
Complete systems’ coverage by the licence
It is vital for the acquirer of a remote gaming operation to ensure that the remote gaming licence(s), which will be relied upon by the operational company post-transaction, covers the complete gaming operation. Unfortunately, the licence document itself does not give sufficient comfort to the acquirer, as it does not provide any detail of the approved operation, systems, games, policies and procedures. Accordingly, the seller’s disclosures and the warranties related to the licence should be considered an important part of the transaction agreement. The disclosures should ideally include a detailed description of the approved operation and/or contain all submissions made to and approved by the LGA; while the warranties should include a warranty that the complete de facto gaming operation is covered by the licence, and, in particular, that all games, all employees and all business partners have been approved by the LGA. It is these contractual disclosures and warranties that the acquirer will rely upon in case any licence or regulatory deficiency transpires post-transaction.
Notification to the Office of Fair Competition
One should also evaluate whether notifications to the Malta’s or another jurisdiction’s competition (anti-trust) authorities are required under applicable merger control regulations. In Malta, any transaction which involves either a merger of two or more undertakings that were previously independent from each other or an acquisition by one or more undertakings (whether by purchase of securities or assets) of direct or indirect control of the whole or parts of another one or more undertakings (within Malta or outside Malta) is considered as a ‘concentration’ and has to be notified under the Control of Concentrations Regulations if (a) the aggregate turnover in Malta of all the undertakings concerned in the preceding financial year exceeded €2,329,373.40 and (b) each of the undertakings in the preceding financial year had in Malta at least 10% of the combined aggregate turnover of all the undertakings concerned.
If the above two criteria are satisfied, then the parties must notify the proposed transaction to the Office of Fair Competition (OFC) prior to its implementation. It will be up to the OFC to determine whether the proposed transaction is prohibited. While in most instances for remote gaming companies based in Malta the above will not be the case and, therefore, the transaction will not be prohibited, one has to keep in mind that a prior notification to OFC is still required if the above-mentioned two criteria are satisfied. It is recommended that competition law notification/clearance is also included, where relevant, in the condition precedent of the transaction agreement.
Since specific steps, approvals or measures that may be required, depend on the facts of the particular transaction, it is always advisable to seek legal assistance to ensure that all compliance issues are properly dealt with, so as not to prejudice the commercial value of the transaction.
First Published in:
LGA(Lotteries and Gaming Auhority) Remote Gaming Update 2010