I OVERVIEW OF M&A ACTIVITY

In comparison with its size (316 square kilometres and a population of 437,418),2 M&A activity involving Maltese assets, buyers and sellers is by no means insignificant. Apart from an increasingly healthy M&A market, the trend continues in the listing of shares of Maltese public companies on exchanges both within and outside Malta. Following the launch by the Malta Stock Exchange in 2016 of Prospects, a multilateral trading facility intended to appeal to small and medium-sized enterprises (SMEs) seeking alternative sources for finance, a number of fully subscribed bond and rights issues have been brought to the market successfully through the Prospects platform. The Prospects market targets SMEs incorporated as public companies that employ fewer than 250 persons and have an annual turnover not exceeding €50 million or an annual balance sheet total not exceeding €43 million.

Malta continues to gain momentum as a centre for doing business for persons seeking an efficient entry point into Europe, for holding structures to hold assets globally, and for businesses engaged in activities such as payment processing, electronic money issuance, blockchain and distributed ledger technologies, gaming, gambling, insurance, aviation and yachting. Sensible regulators with in-depth knowledge of the industries they are responsible for and a willingness to engage with the businesses they regulate, sound regulation and a reasonable fiscal environment have significantly contributed to Malta showing remarkable resilience in the face of the global financial crisis. As at the end of June 2017, foreign direct investment in Malta was estimated by the National Statistics Office at €165.5 billion, with 97.1 per cent being attributable to financial and insurance activities. In May 2018, the European Commission (Commission) reported that the trend for growth in Malta's economy remained robust, bolstered in part by a strong performance in the services sector, particularly in areas such as tourism, remote gaming and professional services.3 The Commission has also commented that Malta's economy is 'among the fastest growing economies in the EU', observing that a large part of this is due to 'exceptional investments in the aviation and energy sectors in previous years' and 'several projects in the health, technology and telecommunication sectors'. It is in this context that M&A activity has significantly picked up during the past decade, progressing from a situation in which M&A activity was minimal to one that reflects the buoyant state of the Maltese economy, in particular that of the export-driven services sector.

Most M&A activity goes unreported when it relates to private companies, but an insight into the extent of M&A activity may be gained through the Malta Financial Services Authority's (MFSA) annual figures, which report that, in 2016, 218 company mergers were carried out, 5,297 new companies were registered and 106 companies transferred their company domicile to Malta.4

The transactions involving Maltese companies, buyers or sellers that receive the highest press coverage relate to the remote gaming and banking industries. The acquisition in 2016 of an 80 per cent stake in Malta-based Tipico Group companies by private equity firm CVC Capital Partners for a valuation of Tipico of €1.3 billion is of particular note, serving as a clear marker of a wave of mega deals in the online gaming and betting industry that remains clearly discernible into mid 2018.

II THE LEGAL FRAMEWORK FOR M&A

There is an important interplay between a number of key pieces of local legislation that an M&A practitioner must keep in mind when advising on a transaction under Maltese law, some of which have been shaped by European Union law, others that are centuries old. Many laws are shaped by traditional civil law principles, others borrow heavily from statutes of common law jurisdictions, primarily those of England and Wales, and other statutes are the result of the local transposition of European Union law.

The Civil Code5 governs the law of obligations, including rules for the validity of contracts, rules on suspensive and resolutive conditions and joint and several liability, as well as specific contracts such as contracts of sale and deposit. Most rules set out in the Civil Code have their origin in Roman law as developed locally, in France and Italy over the centuries, and are often still very much in line with the Napoleonic Code.

The Companies Act6 is the lex specialis that, inter alia, governs the formation and functioning of companies, their merger, dissolution and winding up, and the taking of security over their shares. This statute, with the subsidiary legislation made under it, is the piece of legislation most frequently referred to by Maltese M&A practitioners. As regards subsidiary legislation made under the Companies Act, the Companies Act (The Prospectus) Regulations7 and the Cross-Border Mergers of Limited Liability Companies Regulations8 are probably most often referred to in a transactional context. The latter transposes Directive 2005/56/EC9 almost word for word.

The Commercial Code10 governs several basic acts of trade, such as agency and brokerage, and is often indispensable when considering the business of the target asset and, at times, deal-specific terms. Most importantly, it also contains rules on the perfection of commercial contracts.

Transactions involving public companies whose shares are traded on the Malta Stock Exchange are subject, apart from the Companies Act (The Prospectus) Regulations, to the Listing Rules published by the MFSA in its capacity as the Maltese listing authority.

Merger control and antitrust regulation operates under the legal framework set out under the Competition Act11 and the Control of Concentrations Regulations.12 The national competition authority is the Office for Competition within the Malta Consumer and Competition Affairs Authority, operating pursuant to the Malta Competition and Consumer Affairs Authority Act.13 Mergers and acquisitions that satisfy the jurisdictional threshold requirements of the European Union Merger Regulation will be subject to review by the European Commission.

Several other pieces of subsidiary legislation made under the Companies Act deal with specific types of companies and, depending on the area being dealt with, may need to be referred to by an M&A practitioner; for example, the Companies Act (SICAV Incorporated Cell Companies) Regulations14 and the Companies Act (Recognised Incorporated Cell Companies) Regulations15 contain the rules governing, respectively, the formation of, continuation as or transformation of an investment company with variable share capital (SICAV) or a limited liability company into an incorporated cell company.

M&A activity in particular industries, such as gaming and gambling, and financial services is also largely dependent on regulatory clearance being required under other statutes or regulations. This is the case with the transfer of entities licensed under the Lotteries and Other Games Act,16 the Investment Services Act,17 the Banking Act18 and the Insurance Business Act.19

The merger of undertakings for collective investment in transferable securities (UCITS) is harmonised under the EU's UCITS Directive20 and transposed into Maltese legislation via the Investment Services Act (UCITS Merger) Regulations,21 so when dealing with a merger of UCITS, it is these regulations that set out the specific and more cumbersome rules to be followed.

Other statutes and regulations that have a key role in the structuring and progress of a transaction are the Competition Act22 and the Control of Concentrations Regulations,23 the Employment and Industrial Relations Act (EIRA),24 the Transfer of Business (Protection of Employment) Regulations25 and the Employee Involvement (Cross-Border Mergers of Limited Liability Companies) Regulations,26 the Prevention of Financial Markets Abuse Act27 and, last but not least, tax legislation, most notably the Income Tax Act28 and the Mergers, Divisions, Transfer of Assets and Exchange of Shares Regulations made under it, as well as the Duty on Documents and Transfers Act.29 Some of these are dealt with in more detail below.

Malta's double tax treaties, all 70-plus of them currently in force, also very often play an important part in the structuring of an M&A transaction.

III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT

There have been a number of recent changes to company law that are intended to make Malta more attractive as a financial centre in Europe, some of which are the result of the transposition of EU law. Below we give only a high-level overview of some of the principal changes. Other than the UCITS Merger Regulations, there have been no recent changes to the law governing M&A.

i UCITS Merger Regulations

There have been no significant changes in the past few years to the law on the merger or amalgamation of companies other than the better transposition of the UCITS Directive. The UCITS Directive was amended by Directive 2014/91/EU,30 and amendments to the Investment Services Act (UCITS Merger) Regulations were published in the Government Gazette on 19 September 2014.31 These amendments came into force immediately, with a view to the better transposition of the amended UCITS Directive on the coordination of laws, regulations and administrative provisions relating to UCITS in relation to cross-border mergers of UCITS. UCITS involved in a merger are required to adhere to specific standards of disclosure and notification rather than the 'standard' procedure provided for under the Companies Act or under the Cross-Border Mergers of Limited Liability Companies Regulations. This is a process that the UCITS Directive has harmonised across the European Union with the intention of facilitating, if not simplifying, the organisation or reorganisation of UCITS in Europe.

ii Limited liability partnership – with or without shares

An important change to company law was made through the adoption of Legal Notice 478 of 2014 (LN 478/2014) relating to limited liability partnerships (LLPs). The basic provisions regulating LLPs have not changed significantly over the years, but just over a decade ago, specific regulations were adopted allowing the use of this type of partnership for collective investment schemes. As the LLP structure grew in popularity with fund managers, further changes to the law were made, first through Act XX of 2013 and more recently through LN 478/2014. A key feature introduced through this regulation is the ability for an LLP's capital to be divided into shares, or not. In this type of structure, a general partner is responsible for the management of the LLP, while a limited partner contributes to its capital but is not involved in management. A general partner is jointly and severally unlimitedly liable for the LLP's debts but a limited partner is liable only to the extent of the unpaid contribution to the LLP.

iii Protected and incorporated cell companies

Malta regulates and offers the possibility to incorporate protected and incorporated cell companies. This type of entity is often used in the insurance business, investment fund and securitisation sector. The first Maltese legislation to provide for such structures was enacted to allow the incorporation of structures created for the purpose of assuming risks and issuing insurance-linked securities as a reinsurance special purpose vehicle.32 Legal Notice 411 of 2014 extended this concept to allow the incorporation of securitisation cell companies. This type of company allows for multiple series of debt issues to be issued by the same company, but through individual cells constituted through resolutions of the company's board of directors, while the entire patrimony of each cell within the company remains separate from that of the other cells and of the company itself as a whole.33

iv Listing Rules

The Listing Rules were last amended in April 2018, but the changes had no effect on the rules governing takeovers.

IV FOREIGN INVOLVEMENT IN M&A and SIGNIFICANT M&A TRANSACTIONS

The majority of deals by volume and value have some element of foreign involvement, whether on the buy side or sell side. Often the target business has been structured through Maltese entities because of the favourable local business environment. At other times, Maltese structures are used as acquisition special purpose vehicles and, in this sense, several acquisitions have been made by Maltese companies in the past few years. There remains healthy local M&A activity in the area of corporate services and software development, but more often than not these deals are not publicised.

The most significant deal by value during the past year was probably the £4 billion takeover by Isle of Man-based online gaming company GVC Holdings plc of UK bookmaker Ladbrokes Coral, both of which retain ties with the Maltese market through an online presence and a number of gaming licences issued by the Maltese Gaming Authority. The increased interest of private equity firms in the gambling industry is very noticeable, and since Malta is a centre of excellence for remote gambling, it is inevitable that it would see a fair share of private equity deals relating to the gambling industry. The 2016 acquisition by CVC Capital Partners, a private equity firm, of a majority stake in Tipico Group was perhaps but one marker of this heightened interest. Strong online gambling market players continue to line up in the international field for deal-making, and the April 2018 announcement by The Stars Group Inc, a Canada-based online gaming operator, of its C$4.7 billion acquisition of Sky Betting & Gaming plc, a UK bookmaking heavyweight, evidences the strategic tactic for scale through M&A transactions that frequently call in Maltese elements through the presence of corporate vehicles and Maltese gaming licences.

Further stimuli to M&A activity has concerned Maltese targets, such as the recently completed acquisition of a Malta-licensed online betting operation ComeOn Malta Limited for a total consideration of €280 million based on a multiple figure of the company's estimated operating profits for 2016.

The dynamism driving the information and communications technology forming the foundations of the online gambling industry has also prompted investment activity in technology-focused companies. Although the financial terms of the deal were not disclosed, Intralot, a Greece-based integrated gaming solutions operator announced late in 2017 the completion of a strategic acquisition deal of Bit8 Ltd, a Malta-grown developer and provider of an intelligent online casino and sportsbook platform. Increasing market demand for acquisitions of companies developing innovative technologies is further evidenced by the acquisition by Norway's biggest traffic technology supplier, Q-Free ASA, of Malta-based Traffiko, a traffic management solutions company. In this same vein, 2017 brought notable investment activity in Minely Ltd, a Big Data business analytics provider.

Malta's local economy and high consumer confidence, identified in the Commission's spring forecast for Malta, is also visible in M&A activity in the consumer retail sector. The strength of the retail market can be traced in the acquisition by Camilleri Holdings Limited, a legacy retail chain operator, of CYKA Limited, an apparel franchise retail operator.

It is probably fair to say that the principal sources of M&A activity are Europe, North America and Asia. Cross-border mega-deals, such as the landmark acquisition announced in April 2018 by The Stars Group Inc (TSGI.TO), a Toronto listed online gaming operator, of Sky Betting & Gaming from owners CVC Capital Partners and Sky Plc in a deal worth US$4.7 billion, have had an impact locally because of the parties' respective presence in Malta. The foregoing deal and other mid-sized M&A activity, such as the acqusition by 500.com Limited (NYSE: WBAI) of a 93 per cent stake in The Multi Group, a Malta-headquartered multi-channel online gaming provider, indicate that there is a strong appetite for M&A in Malta originating from major listed entities across the globe.

Some of the more significant recent transactions have been the acquisition by Betsson AB, a Swedish gaming and betting operator having sizeable Maltese operations, of Racebets, a German horse betting operator for a consideration of up to €40 million in 2017, and of the Malta-based Oranje and Kroon businesses through a combined share and assets deal for an initial purchase price of €100 million, of which €40 million was payable in cash. There was also the acquisition of the entire issued share capital of Dumarca Holdings Limited, the Malta-based parent company of the Vera&John group, by Intertain Group Limited (TSX: IT) for an initial payment of €44.5 million in cash and €36.5 million in shares. These are good examples of the trend for the consolidation of the remote gambling business in Europe, a process in which Malta is a major player given the presence on the island of some of the world's leading remote gambling operators.

Turning to the corporate services and advisory sector, KPMG's acquisition and de-listing of Maltese company Crimsonwing resulted in the consolidation of KPMG's Microsoft Dynamics teams in the United Kingdom and the Netherlands. Crimsonwing is to create an overall team of approximately 350 people in Malta, allegedly making KPMG the largest 'Big 4' provider of Microsoft Dynamics consulting and implementation services in Europe, and the largest professional services firm in Malta. KPMG's UK, Netherlands and Malta partnerships reportedly acquired Crimsonwing for €26 million. Other notable local transactions in the corporate and professional services space were, respectively, the acquisition of Quaestum Corporate Management Limited, an independent corporate management firm, by Zedra, a global independent specialist in trust, corporate and fund services, and the merger of Grant Thornton Malta with EMCS, an independent advisory and tax services firm.

There were at least three notable transactions in the local banking sector. One of these was the acquisition of FCM Bank Limited, a Malta-licensed bank, by the SAB Group, a Czech-based financial services group. The second was the acquisition by FIMBank, a trade finance market player, of Egypt Factors, a factoring business based within one of Egypt's most important growth industries. Last, MFC Industrial Ltd, a Canadian company listed on the New York Stock Exchange, successfully concluded its acquisition of Maltese bank Bawag Malta Bank Ltd for a sum of €91 million.

In the insurance industry, Argus Insurance Agencies Limited announced in 2016 the acquisition of the Island Insurance Brokers Limited for an undisclosed sum. The thriving Maltese insurance sector also prompted a sale of business agreement in July 2015, through which MAPFRE Middlesea plc acquired the entire economic activity of Allcare Insurance Ltd.

There was also notable M&A activity in the hotel industry during 2015 with International Hotel Investments plc (IHI), the largest Maltese hotel group, announcing in January 2016 the acquisition of Island Hotels Group Holdings plc (IHGH), which brought with it a number of hotels in Malta, the target's catering business and a 50 per cent shareholding in the company that runs the Costa Coffee franchise in Malta and Spain. M&A activity with a Malta connection in the hotel and catering sector remains primarily driven by IHI, which, after acquiring a landmark property in London and developing it into a luxury hotel launched in 2013, showed that it had more appetite for growth through acquisitions when it announced in May 2016 that it had completed the acquisition of a prominent hotel on Rue Royale in Brussels.

The trend in the corporate services area of global providers of corporate services seeking entry to the Maltese market by acquiring local firms continues. At the same time, increased consolidation is happening locally. The other clearly continuing trend is consolidation in the remote gambling industry, a trend that continues to accelerate, driven by the tightening of regulations in several European jurisdictions and the need for larger resources and compliance capabilities.

V FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS

The principal source of funding for M&A transactions with a Malta connection is private equity. Local banks typically impose strict requirements when it comes to financing M&A activity, and interest rates are not all that favourable. In general, local banks tend to seek to limit their exposure to sectors that they know well, primarily local real estate.

A favoured method of raising liquidity by Maltese businesses, including for M&A transactions, is through debt securities. A notable local corporate bond issue in 2015 was IHI's €45 million issue, redeemable in 2025 with a coupon of 5.75, which was heavily oversubscribed on opening and closed on the same day. The bond served in large part to redeem an existing €35 million 6.25 per cent bond, with preference given on the new bond to existing bondholders wishing to surrender their bonds for new bonds. The bond issue was announced at the beginning of April 2015, three months after IHI's announcement of its intended acquisition of IHGH, and opened and closed at the beginning of May with IHI's general meeting voting in favour of the completion of the acquisition on 20 May 2015. Bond finance remains a firm favourite within the Maltese market for real estate M&A, and the flurry of oversubscribed retail and non-retail multimillion bond issues within the Maltese debt capital markets augurs well for this source of traditional debt finance.

Non-traditional or alternative sources of finance have played a considerable part in the Commission's efforts to build a Capital Markets Union and to create a real and meaningful Digital Single Market, and constituted the focal point of its Fintech Action Plan, published in March 2018. Alternative sources of finance have continued to develop over the years, perhaps most notably within the Maltese market for securitisation transactions, an alternative and viable source of M&A financing, which has been earmarked for considerable growth in the near future. This funding mechanism allows businesses to raise funds efficiently through the issue of debt securities on the capital markets by exploiting illiquid but income-producing assets that are pooled and removed from the business balance sheet through a transfer to a specially incorporated independent entity, which will then act as the issuer. Although securitisation issuances have seen a turbulent few years in the aftermath of the financial crisis, the use of securitisation in M&A financing transactions is expected to witness a resurgence following increasing market confidence and high-profile promotion of this structured financing technique by the Commission. Indeed, the new Securitisation Regulation will apply to all securitisation transactions entered into on or after 1 January 2019, subject to certain transitional arrangements. The market has generally welcomed the new regulation, which has been presented with the stated aim of increasing availability of funding opportunities for businesses seeking opportunities for growth through increased certainty and transparency in securitisation transactions.

Malta's current government has publicly promoted a policy stance that favours the development of a legal and regulatory environment that is beneficial and useful to blockchain technology business, going as far as to promote the description of Malta as a 'blockchain island'. Blockchain-based currencies and the propensity for decentralisation and increased accessibility of new sources of venture capital through initial coin and cryptocurrency offerings (commonly referred to as ICOs) herald a new era in access to alternative finance for businesses and start-ups. Three Bills that were announced by the Maltese government early in 2018 were published in May 2018; they hold the strong promise of creating a unique regulatory framework to govern blockchain and cryptocurrency businesses and services. Quite possibly the most highly anticipated of the three 'blockchain Bills', as the new laws have come to be known, is the Virtual Financial Assets Bill, which enshrines investor protection, market stability and ICO credibility. The proposed laws have been welcomed by the industry and are expected to serve as a significant stimulus to growth finance and venture capital, with the likely consequence that M&A activity will continue to increase down the line in Malta, particularly in the information technology sector.

VI EMPLOYMENT LAW

The basic principle involved in the acquisition of a going concern is embedded in the generic legislation on employment law, the EIRA,34 which regulates conditions of employment.

The EIRA stipulates that when the transferee (the person who takes over the business) acquires 'a business or other undertaking' from the transferor (the person who sells the business), the former takes on full responsibility for the employees who, at that particular moment, are deemed to be in the employment of the transferor. Broadly speaking, the relevant employees would be those persons who are registered as employees of the transferor with the Employment and Training Corporation (ETC), which is the government agency that oversees the engagement and termination of employment of all persons working in Malta. Thus, it is incumbent on the transferee during the due diligence process to ascertain that the employment list on the books of the transferor is identical to the undertaking's employment list with the ETC prior to the purchase being concluded.

The transferee is also bound by law to take on all the officially registered employees on the same terms and conditions either 'agreed in any collective agreement [...] until the date of termination or expiry of the collective agreement or the entry into force or application of another collective agreement' or, in the absence of a collective agreement, with 'all the rights and obligations which the transferor had towards the employee'.

The EIRA also stipulates that both transferor and transferee shall inform the representatives of the employees affected by the transfer of the date of transfer, the reasons of the transfer, the implications of the transfer for the employees (namely, any legal, economic or social implications) and of any measures that may affect the employees in future.

The above obligations do not apply to any business that is being transferred as a result of bankruptcy or insolvency proceedings, which may be under the supervision of a court-appointed liquidator, or to seamen employed on ships, who are regulated under the Merchant Shipping Act.35

Further details about the transfer of business are found in the Transfer of Business (Protection of Employment) (TUPE) Regulations36 (TUPE Regulations). An important clarification in these Regulations is the definition of 'service provision change', which incorporates a function that had first been carried out by the employer and was subsequently outsourced to a contractor. This includes a function transferred from one contractor to another, or from a contractor back to the employer. The function transferred must retain 'its identity as an organised group of resources' carrying out the same economic activity. Good examples of such functions are, inter alia, cleaning and security of premises, reception duties and payroll processes.

The TUPE Regulations make reference to the EIRA and open the parameters to include mergers and service-provision changes, in addition to an outright acquisition of a business. The TUPE Regulations also govern transfers of economic activities that are not 'operating for gain', thereby including voluntary organisations and non-government organisations. The Regulations are applicable to transfers taking place in Malta.

The TUPE Regulations go into such detail as reimbursement for the balance of vacation leave: the transferor is obliged to pay the transferee any balance of vacation leave that should have been taken by employees prior to the sale or transfer of an undertaking, and vice versa if more leave than the number of days awarded by law had been taken prior to the sale or transfer. This principle also applies to any wages, pro rata bonuses (including government bonuses) and weekly allowances due to employees registered in the company at the time of the transfer or merger.

Furthermore, the Regulations stipulate that the transferee is obliged to re-engage any employees who had been made redundant prior to the official sale or transfer, and whose role becomes available once more within one year of the date of redundancy. In practical terms, this means that making employees redundant prior to the sale (so as not to have those employees on the official ETC list at the time of the transfer or merger) will only oblige the transferee to take on these employees, under the same terms and conditions that they had enjoyed at the time of redundancy, if the company places adverts for these roles within one year of their redundancy.

The TUPE Regulations refer to the obligation of both transferor and transferee stipulated in the EIRA to inform employees' representatives of the date and reason of transfer, and any implications thereto, at least 15 days before the transfer is carried out. Both transferor and transferee are obliged to send a copy of the written statement given to the employees' representatives to the Director of Industrial Relations on the day that it is issued. If the transfer includes changes to the conditions of employment of the employees, consultations shall be held between the employees' representatives, the transferor and the transferee within seven days of the representatives being informed of the intended transfer. This means that consultations, and thus negotiations with the union, if applicable, are required to take place prior to the transfer. Unions having ongoing employee representation are recognised as such after the transfer is effected.

However, this formal information process is restricted to undertakings that have more than 20 employees, irrespective of whether they are full-time or part-time. In the absence of such a headcount, the transferor still has the obligation of giving the employees themselves all the information passed on to the transferee (namely, contract of employment or written statement in terms of the Information to Employees Regulations) by the date of transfer of the business.

The TUPE Regulations explain that the transfer itself, whether of the whole business or of part of the undertaking, shall not constitute 'sufficient grounds for dismissal' of existing employees either by the transferor or the transferee. On the other hand, this provision shall not stand in the way of reorganisation of the workforce, although the employer will be regarded as responsible if any such changes will result in termination of employment.

The above obligations are valid even in cases when the transfer is undertaken by an entity controlling the undertaking to be transferred, as long as the undertaking is located in Malta, irrespective of whether the undertaking itself is in control of the transfer.

Contravening the provisions in the TUPE Regulations carries a fine of not less than €1,164.69 per person affected by the transfer.

VII TAX LAW

Malta's corporate tax regime, which has been in place since 1948, was approved by the Commission when Malta joined the European Union in 2004. Malta also meets international tax standards and is included on the 'white list' set out by the OECD. The country operates a full imputation system in terms of which companies are taxed at a rate of 35 per cent. However, the shareholders of companies are entitled to a refund of the tax paid by the company. The tax refund may be five-sevenths, six-sevenths, two-thirds or 100 per cent of the Malta tax paid depending on the source and nature of the income. Malta's network of double tax treaties further strengthens the country's position as a key corporate location.

Malta adopted Directive 2005/19/EC37 in the Mergers, Divisions, Transfer of Assets and Exchange of Shares Regulations.38 The aim of this Directive is to eliminate obstacles in cross-border mergers between eligible entities situated in different EU Member States.

The Income Tax Act39 exempts from tax a transfer involving the exchange of shares on the restructuring of holdings through mergers, demergers, divisions, amalgamations and reorganisations. The Duty on Documents and Transfers Act40 also provides for an exemption from duty on the restructuring of holdings through mergers, demergers, amalgamations and reorganisations within a group of companies as defined.

As from 2013, restructurings that qualify for tax relief in terms of the Income Tax Act and the Duty on Documents and Transfers Act are required to obtain a tax ruling and prior authorisation from the Commissioner for Revenue (Commissioner). Authorisation would generally be granted if the Commissioner is satisfied that the transaction or transactions are to be effected for bona fide reasons and do not form part of a scheme or arrangement in which the main purpose, or one of the main purposes, is the avoidance of liability to duty or tax.

In terms of the Income Tax Act, merging companies may benefit from what is commonly referred to as the 'step-up clause'. A company resulting from a merger that is registered in Malta as per the Cross-Border Mergers of Limited Liability Regulations, and acquires assets that on the day of the merger are situated outside Malta and owned by a company that is not domiciled or resident in Malta, may opt to have the assets acquired via the merger to be deemed acquired on the day of the merger at a cost that is proved to the satisfaction of the Commissioner to be the market value.

Tax on capital gains is levied on gains generated on the transfer of certain assets, including immovable property situated in Malta, rights over securities, business, goodwill patents, trademarks, trade names and beneficial interest in trust. Tax on capital gains is also subject to some exemptions, such as an exemption on the transfer of assets between a group of companies or an exemption from capital gains on a transfer of shares if the transferor is a person not resident in Malta.

There are no exit taxes in Malta.

From a VAT perspective, the transfer of a going concern may be exempt from VAT if certain conditions are satisfied on the part of the transferor and the transferee.

VIII COMPETITION LAW

The Control of Concentrations Regulations41 take an ex ante approach in aiming to avoid excessive market power being gained by undertakings through mergers, acquisitions or joint ventures that would lead to the substantial lessening of competition on any given market. M&A transactions that satisfy the jurisdictional thresholds set out in the Control of Concentrations Regulations are subject to mandatory notification to the Office for Competition in Malta. Generally, concentrations must be notified to the Office for Competition when the revenues generated by the concentration from customers located in Malta during the preceding financial year exceeds circa €2.329 million and each of the undertakings concerned in the concentration had a turnover in Malta equivalent to at least 10 per cent of the combined aggregate turnover of the undertakings concerned. The jurisdictional turnover threshold in Malta, although relatively low when compared to thresholds prevailing in other European merger control regimes, was purposely designed to require notification only of transactions that have a real presence and link to the market for Maltese consumers, and reflects the pragmatic approach adopted by the Office for Competition during its review of party submissions. Furthermore, notifiable concentrations might be subject to a European dimension, rendering them subject to review by the Commission under the European Union Merger Regulation or other national competition authorities within the European Union.

Where significant market power is held by an undertaking (enough for it to be considered 'dominant') and this is abused, or if anticompetitive agreements are entered into between two or more undertakings, competition rules are in place to provide sanctions for such behaviour once it has taken place (ex post). Although merger control regulation attempts to prohibit mergers that would afford undertakings significant market power (enough to substantially lessen competition), it is not market power itself that is prohibited and sanctioned by competition law but the anticompetitive behaviour of undertakings.

The Maltese Competition Act (the Competition Act) provides the national legislative framework for competition regulation. Articles 5 and 9 of the Competition Act are the substantive provisions that stipulate the competition law prohibitions, and closely mirror Articles 101 and 102 of the Treaty on the Functioning of the European Union under EU competition law. Article 5 prohibits anticompetitive agreements between two or more undertakings, while Article 9 prohibits the abuse of a dominant position by an undertaking.

Any agreement between undertakings, decisions by an association of undertakings or concerted practices between undertakings with the object or effect of hindering competition in line with the prohibition listed in Article 5(1) will be considered null and void in accordance with Article 5(2), unless one of the exceptions under Article 5(3) applies. Block exemption regulations are also in place (these may be referred to, although they are currently expired) that exempt certain types of agreements that are not considered to be anticompetitive. These broadly cover vertical agreements and concerted practices, horizontal agreements, technology transfer agreements, specialisation agreements, and research and development agreements.

Article 9 prohibits the abuse by an undertaking of a dominant position. Dominance is defined in the Competition Act as 'a position of economic strength held by one or more undertakings which enables it or them the power to prevent effective competition being maintained on the relevant market by affording it or them the power to behave, to an appreciable extent, independently of its or their competitors, suppliers or customers'. Article 9(2) lists examples of the types of behaviour that would be considered an abuse. These may be largely classified into exploitative abuses (in relation to one's customers) or exclusionary abuses (in relation to one's competitors).

The Malta Competition and Consumer Affairs Authority Act (the MCCAA Act) provides for the set-up of the Malta Competition Affairs Authority, which includes the Office for Competition, the authority responsible for the regulation of competition law and merger control in Maltese markets. Together with the Competition Act, it also provides the Office with the necessary enforcement powers to investigate and sanction any potential breaches of competition law. The MCCAA Act brought with it major amendments to the Competition Act and, most significantly, decriminalised competition law breaches and introduced an administrative fining system based on that used by the Commission for breaches of EU competition law.

Undertakings and consumers who have suffered damages as a result of behaviour by an undertaking in breach of Articles 5 or 9 of the Competition Act may seek to recover such damages. A legal basis for such actions was introduced into the Competition Act by the MCCAA Act in 2011.

The Collective Proceedings Act,42 which came into force in 2012, helps to create an incentive for consumers and undertakings to seek compensation, particularly where taking on an individual action would have been too burdensome and costly.

Draft leniency regulations were published by the Office for Competition in June 2013, followed by a consultation period. These regulations aim to encourage undertakings involved in anticompetitive agreements to act as whistle-blowers in order for their fine to be reduced, or even waived, thereby allowing such agreements to be uncovered by the Office for Competition.

IX OUTLOOK

It is anticipated that the current level of transactional activity will continue, especially in information technology sectors, and particularly given the effect of forthcoming regulation of the business of cryptocurrencies and distributed ledger technologies. A lot of this activity is driven by the desire to promote and develop an exciting and promising source of alternative finance for business, which has proven to be a significant market development alongside the Commission's own Fintech Action Plan, launched earlier in 2018. Moreover, considerable M&A activity is visibly motivated by a drive to consolidate and achieve economies of scale and a geographic reach that extends beyond Europe. Another factor is the restructuring of businesses with an increased focus on regulatory and tax efficiency with respect to operations in Europe.

In the next 12 months, we are also likely to see a number of Maltese companies involved in the development of niche software products, and a notable number of established remote gaming market players seeking admission to stock exchanges and multilateral trading facilities overseas, most likely outside the eurozone area.

Finally, proper stimulation of venture capital funding and the ease of access to regulated and reputable sources of alternative finance for distributed ledger technology businesses is very likely to lead to an increased number of businesses, particularly in the technology sector, developing more quickly than was previously possible and potentially becoming the targets of acquisition by larger local and international players in the near future.


Footnotes

1 James Scicluna is a co-founding partner, Ramona Azzopardi is a partner and Rachel Vella Baldacchino is an associate at WH Partners.

2 Based on data from the World Bank Group (2016).

3 European Commission, Spring 2018 Economic Forecast: Malta.

4 Malta Financial Services Authority, Annual Report, 2017.

5 Chapter 16, Laws of Malta.

6 Chapter 386, Laws of Malta.

7 SL 386.11.

8 SL 386.12.

9 Directive 2005/56/EC of the European Parliament and of the Council, 26 October 2005 on cross-border mergers of limited liability companies.

10 Chapter 13, Laws of Malta.

11 Chapter 379, Laws of Malta.

12 SL 379.08, Laws of Malta.

13 Chapter 510, Laws of Malta.

14 SL 386.14.

15 SL 386.15.

16 Chapter 438, Laws of Malta.

17 Chapter 370, Laws of Malta.

18 Chapter 371, Laws of Malta.

19 Chapter 403, Laws of Malta.

20 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009.

21 SL 370.19.

22 Chapter 379, Laws of Malta.

23 SL 379.08.

24 Chapter 452, Laws of Malta.

25 SL 452.85.

26 SL 452.103.

27 Chapter 476, Laws of Malta.

28 Chapter 123, Laws of Malta.

29 Chapter 364, Laws of Malta.

30 Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014.

31 Gazette No. 19.311 of 19 September 2014, Legal Notice 333 of 2014.

32 Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, SL 386.10.

33 SL 386.16.

34 See footnote 24.

35 Chapter 234, Laws of Malta.

36 SL 452.85.

37 Council Directive 2005/19/EC of 17 February 2005 amending Directive 90/434/EEC 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States.

38 SL 123.72.

39 See footnote 28.

40 See footnote 29.

41 SL 379.08.

42 Chapter 520, Laws of Malta.