Why LSE investors’ votes may be wasted

LSE investors are expected to back the deal on Monday, while German investors don’t vote until July 12.

But last week’s Brexit referendum threatens to crack the common regulatory ground in Europe and derail the merger entirely. It has already led a group of small German investors to demand the deal be canceled.

French President François Hollande has said all euro-based financial transactions should be cleared on the continent instead of London if the UK is going to leave the Union, while some German politicians and the country’s top financial regulator, which doesn’t have direct influence over the deal, have opposed the merged group having its headquarters in London and thus outside the European Union.

For now this may be so much political noise, but there are very real problems with both objections.

First on the headquarters, the deal terms committed to a London headquarters in part because the combined group’s CEO will be current Deutsche Börse head, Carsten Kengeter.

The two groups reaffirmed those binding terms the day after the Brexit vote. There seems little flexibility in there, though one person close to the deal said it might not need a second shareholder vote to change them.

Secondly, the location of where trading in euro-denominated derivatives and securities should be cleared is a real problem, especially given that one benefit of the deal for customers was meant to be that they could post less margin collateral when the two groups became owned by one entity. That looks much less likely if the clearing business is fragmented by Brexit.

This battle has been had before and earlier this year London won. The European Central Bank proposed four years ago that all euro clearing should be done within the eurozone because the ECB would be responsible for backstopping such activity in times of crisis.

The UK beat back this policy in the EU’s courts by arguing that it went against the single market provisions on the free movement of capital, goods, services and people. With the UK likely quitting the single market, these grounds will be lost.

The deal still needs regulatory approval from the local financial regulator in Hessen, the German state where Frankfurt is located, and in the UK. The difficulty for regulators, the companies and investors is that it will likely take years to settle the details of the UK’s relationship with the EU.

This deal has a lot in its way however shareholders cast their votes.

Write to Paul J. Davies at paul.davies@wsj.com

This article was published by The Wall Street Journal

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