LSE and Deutsche Boerse may go Dutch to win over regulators

London Stock Exchange Group Plc shareholders approved Deutsche Boerse AG's acquisition of the 300-year-old exchange on Monday in a near-unanimous vote. That was the easy part.

About 99.9 percent of shareholders voted in favor of the deal, according to a statement from the company. Still, the deal, thrown into doubt by the United Kingdom's decision to leave the European Union, has been getting push back from German regulators who don't want the combined exchange to be based in London. A compromise may mean moving the new company's location outside of the UK to obtain approval for the merger, people familiar with the matter said.

Options could include moving the holding company from London to a different location within the EU, such as the Netherlands, said the people, who asked not to be named citing confidentiality. Such a move would only come after LSE shareholders approve the existing merger plan, Deutsche Boerse's tender offer succeeds and the deal is completed, they said.

Under the current plan, the exchanges will keep separate operating headquarters in London and Frankfurt, and the holding company would be based in the UK capital.

While LSE investors approved the deal at Monday's meeting, one shareholder in attendance asked executives for assurances that the headquarters would not be moved to Frankfurt. Management didn't directly respond, instead highlighting the global nature of the company.

The headquarters "is important," said Hugh Marsden, another LSE investor at the meeting. "London is the premier financial capital, and it will continue to be－cannot move to Paris or Frankfurt."

The $14.3 billion deal still makes sense to major LSE shareholders even after Britain's shock decision to leave the EU, according to people familiar with the discussions. The deal would create a European mega-exchange that can better compete with giants in the United States and Asia.

Deutsche Boerse investors have until July 12 to tender their shares. The terms of the deal are binding and remain unchanged, representatives from both companies said.

The tie-up could be even more important with Britain leaving the EU, as the union between London- and Frankfurt-based firms may lubricate capital flows between the region's financial centers. The companies' boards have maintained that the takeover makes sense regardless of the Brexit decision.

Brexit also threatens the companies' clearinghouses－firewalls that hold collateral from buyers and sellers in case one of them defaults. French President Francois Hollande has said euro clearing should come back to the common-currency area. German officials have also said it makes the most sense for clearing, a core component of the merger, to be based in Frankfurt.

Much of London's euro clearing for derivatives happen at LCH. The company is majority owned by LSE and has cleared $346 trillion of swaps derivatives this year. About $112 trillion is denominated in euros. Deutsche Boerse's Eurex division clears about 17 trillion euros ($18.9 trillion) every month.

This is at least the third time that the German exchange group has sought to buy LSE since the turn of the century. Antitrust concerns have killed previous industry merger attempts, which are yet to be surmounted in this effort.