Section 2 of Chapter V of the Directive (Articles 26 to 30 inclusive) sets out additional restrictions on AIFM managing AIF which acquire control of non-listed companies and issuers (namely, private equity and similar types of fund structures). The restrictions imposed include requirements: to notify the relevant competent authorities on the acquisition of key trigger control levels of non-listed companies; to disclose key information on the acquisition of control of a non-listed company; to include particular information in the annual report of non-listed companies that an AIF acquires; and to prevent "asset stripping".
Limited application of Section 2 Chapter V requirements
The relatively onerous requirements set out in Section 2 of Chapter V of the Directive have some significant restrictions. In particular, the requirements do not apply to the acquisition of:
- any small or medium sized enterprise (as defined in Article 2(1) of the Annex to Commission Recommendation 2003/361/EC1); or
- any special purpose vehicle with the purpose of holding, purchasing or administering real estate.
Please note that Information on the venture capital initiative which focuses on the acquisition of small and medium sized enterprises by venture capital funds can be found here.
Notification on acquisition of significant interest
The Directive creates a disclosure regime for AIFM acquiring significant or controlling influences in non-listed companies (and so is likely to be of particular relevance to private equity and other buy-out funds). Disclosure to the AIFM's competent authorities is required when the proportion of voting rights in a non-listed company held by an AIF reaches, exceeds or falls below the thresholds of 10, 20, 30, 50 or 75%.
That notification must contain the following additional information:
- the resulting voting rights;
- the conditions under which control has been reached, including information about the identity of the different shareholders involved, any natural person or legal entity entitled to exercise voting rights on their behalf and, if applicable, the structures through which voting rights are effectively held; and
- the date on which control was reached.
These notifications must be made as soon as possible, but in any event not later than ten working days after the date on which the relevant threshold was reached.
These notification requirements only apply to acquisitions of control over non-listed companies. In the event of control being taken over listed companies, the Transparency Directive and other legislative provisions will continue to apply to the AIFM.
Notification on acquisition of control
If an AIF acquires 50% of the voting rights of a non-listed company (either individually or in concert with other persons), the AIFM must make additional notifications over and above those described here to:
- the non-listed company;
- the shareholders of the non-listed company; and
- the AIFM's Competent Authorities.
These additional notifications include:
- the identity of the AIFM(s) that has (or have) obtained control;
- details of the policy for preventing and managing conflicts of interests, in particular between the AIFM, the AIF and the company;
- details of the policy for external and internal communication relating to the company, particularly with regard to its employees; and
- details of its intentions as to the future business of the company and the likely effect upon employees and their terms of employment.
Annual reports of investee companies
The Directive requires AIFM to procure that the AIF it manages and which have acquired control of non-listed companies use their best efforts to ensure that those investee companies include certain information in their annual reports for two years following the acquisition. This required information includes: important events that have occurred since the end of the financial year; details of the company's likely future development; and information concerning the company's acquisition of its own shares.
The AIF must also use its best efforts to ensure that the annual report is made available to the investee company's employee representatives or, in the event that there are no representatives, to the employees themselves. It must also make available to them the information relating to the company that is contained in the AIF's own accounts.
Whilst these restrictions are stringent (and may become more so following implementation of the Level 2 measures), a small amount of consolation can be found in that they are not as restrictive as had originally been proposed in the first draft of the Directive in April 2009. Had those measures been implemented, AIFM would have been required to procure that where it acquired and took private a listed company it was required to continue to prepare accounts in accordance with the rules that applied to it as a listed entity for two years following the company being delisted.
The restriction in this section of the Directive that is likely to have the most impact on private equity and similar funds is that relating to asset stripping set out in Article 30. Article 30 provides, in short, that an AIFM may not permit the AIF to take any action that may enable the investee company to reduce its net assets by an amount in excess of its distributable profits and reserves. This restriction will apply not only to a distribution, but also to a redemption of shares, capital reduction or own share acquisition. This restriction is in place for 24 months from he date of acquisition of control of the investee company by the AIF.
These rules will place AIF at a considerable competitive disadvantage against any other person who may acquire a controlling interest in non-listed companies, including AIF of non-EU AIFM, individuals or corporates, banks and insurers.This restriction could, therefore, have a devastating impact on private equity funds with European managers.
Footnotes: 1. See: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:124:0036:0041:en:PDF. In summary, a small and medium sized enterprise is one which employs fewer than 250 persons and which have an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million.