Asset Stripping
Article 30 of AIFMD imposes restrictions on distributions (which includes dividends and interest relating to shares), capital reductions, share redemptions or purchases of own shares by EU-incorporated portfolio companies during the first two years following acquisition of control by an AIF, individually or jointly together with other AIFs.
EU AIFMs are required to comply with these disclosure rules, as are non-EU AIFMs which market AIFs into any EU Member State under Article 42 of AIFMD (i.e. National Private Placement Regimes – please see the Marketing page for more information). Otherwise, competent authorities across the EU interpret the scope of the rules differently.
The asset stripping provisions apply following acquisitions of control of both Issuers (EU-incorporated companies with shares admitted to trading on a regulated market) and Non-Listed Companies (EU-incorporated companies without shares admitted to trading on a regulated market).
“Control” is defined as in the Portfolio Company Disclosure page. Therefore, for Non-Listed Companies, generally this means AIF(s) will have control if they hold more than 50% of the voting rights of the company. For Issuers, the level of control is defined by reference to the Takeover Directive and varies between Member States – however, for many Member States, control is at or more than 30%.
The obligations apply to the AIFM, rather than the portfolio company - the AIFM is not permitted to "facilitate, support or instruct" any of the actions mentioned above, nor can it vote in favour of them, and must use “best efforts” to prevent them.
The provisions do not apply in relation to special purpose vehicles used to purchase, hold or administer real estate or to SMEs and therefore exclude portfolio companies which employ fewer than 250 people in the EU and either have an annual net turnover not exceeding EUR 50 million, or have a balance sheet total not exceeding EUR 43 million.
The restrictions imposed do not prevent all payments to shareholders during the two-year period, but generally speaking they only allow “distributable profits” to be paid and then only provided the company’s net assets would remain at or above the level of the subscribed capital plus undistributable reserves.
These prohibitions may have an impact on exits and deal structuring. For example, special dividends being paid following a recapitalisation of the company would be restricted in the first two years following acquisition of control. Also, structuring which involves the AIF taking equity, for example, preference shares or other types of shares (e.g. alphabet stock), with the intention of redeeming/liquidating these shares within two years would be caught.
However, redemptions of shareholder debt (i.e. loan notes) are not restricted – the prohibition in AIFMD refers to share redemptions rather than redemption of loan notes.
The asset-stripping rules apply both where an AIF acquires control of an Issuer or Non-Listed Company individually, and where an AIF acquires such control jointly together with other AIFs. Interpretation can vary across Member States as to whether the interest of all AIFs in a consortium should be taken into account in determining whether the AIFs jointly have “control”, or whether some types of AIF should be disregarded (in particular, AIFs which are neither managed nor marketed in the EU).
Where an AIF acquires control of an Issuer or Non-Listed Company, individually or together with another AIF, the portfolio company disclosure rules set out in Articles 26 to 29 of AIFMD will also be relevant – please see the Portfolio Company Disclosure page for more information.
Luxembourg implementation
Article 30 of AIFMD has been implemented in Luxembourg through article 28 of the Luxembourg AIFM Law. These rules are applicable to Luxembourg AIFMs or non-EU AIFMs which manage or market one or more AIFs established in the EU or in a third country and where Luxembourg has been defined as the Member State of reference.
Please see the Portfolio Company Disclosure page for more information on the approach taken in Luxembourg to whether an AIF has acquired “control” over a company.
UK implementation
The UK asset stripping rules generally
The UK’s implementation of the asset stripping rules is set out in Regulation 43 of the UK Regulations. The UK rules generally apply in the same way as under AIFMD in the EU, but their scope is modified. In particular:
- The UK rules apply only in respect of UK issuers (i.e. a UK company whose shares are admitted to trading on a UK regulated market) and UK non-listed companies (i.e. a UK company whose shares are not admitted to trading on a UK regulated market).
- The UK rules apply only in respect of AIFs with full-scope UK AIFMs and AIFs with non-UK AIFMs (including EU AIFMs) that are marketed under the UK National Private Placement Regime.
Where an AIF managed by a UK AIFM acquires control of an EU-incorporated entity (which is outside the scope of the UK asset-stripping rules following the end of the Transition Period relating to the UK’s withdrawal from the EU) it will be necessary to consider whether the AIFM is subject to equivalent asset-stripping rules in the EU.
Definition of “Control” for purposes of the UK rules
Please see the Portfolio Company Disclosure page for more information on the approach taken by the UK rules to determining whether an AIF has acquired “control” over a company.
