Portfolio Company Disclosure
Portfolio Company Disclosure
Articles 27 to 29 of the Directive require notifications and disclosures by an AIFM managing an AIF which acquires certain holdings/control of portfolio companies which have their registered office in the EU. Some competent authorities also apply these provisions where the target company is registered in an EEA country (i.e. the EU plus the three EEA states of Iceland, Liechtenstein and Norway). The UK has implemented these rules through Regulations 38 to 40 and 42 of the UK Regulations.
For the purposes of these rules, control is defined in Article 26 of the Directive as follows:
Definition of control - test
Broadly, control occurs when an AIF holds the requisite percentage of voting rights either:
- jointly with one or more other AIFs managed by the same AIFM, on the basis of an agreement aimed at acquiring control; or
- jointly with one or more other AIFs managed by two or more AIFMs, on the basis of an agreement aimed at acquiring control.
Voting rights held by an undertaking controlled by the AIF or persons acting on behalf of the AIF or such an undertaking are treated as being held by the AIF for these purposes.
For a Non-Listed Company (an EU-incorporated company that does not have its shares admitted to trading on a regulated market) control means holding more than 50% of the voting rights of the Company.
For an Issuer (an EU-incorporated company that has its shares admitted to trading on a regulated market), this threshold is defined with reference to the Takeover Directive, which provides that the percentage of voting rights to give control is determined by the rules of the Member State in which the Issuer has its registered office. In many Member States (including the UK) this is set at around 30%, although it is lower or higher in some other Member States.
Regulation 34 of the UK Regulations states references to AIFMs in Part 5 of the UK Regulations are to (a) full-scope UK AIFMs and (b) third country AIFMs in relation to AIFs marketed by them in the UK under Regulation 59. Part 5 of the UK Regulations (Regulations 34 to 44) captures the disclosures rules and the asset stripping restrictions. Therefore, on a literal reading of the UK Regulations, the UK regime may not apply to a joint acquisition of control by two or more AIFs managed by a UK AIFM and an EU AIFM (where the fund managed by the UK AIFM does not acquire control on an individual basis). This appears to be an anomalous result and is potentially inconsistent with Article 26 of the Directive. As such we would propose being cautious about concluding the restrictions do not apply in this situation.
Notification of the acquisition of major holdings and control of Non-Listed Companies
The AIFM must notify the competent authority of the voting rights of the Non-Listed Company held by the AIF it manages when the AIF acquires, disposes of or holds voting rights of a Non-Listed Company. The relevant trigger points are 10%, 20%, 30%, 50% and 75% and the notification must be made within 10 working days of the trigger event.
The AIFM is also required to provide the following information to the Non-Listed Company, its shareholders and the competent authority within 10 working days of acquiring control of a Non-Listed Company:
- the resulting situation in terms of voting rights;
- the conditions subject to which control was acquired, 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 the chain of undertakings through which voting rights are effectively held); and
- the date on which control was acquired.
In its notification to the Non-Listed Company, the AIFM must request that the board of directors inform the employee representatives (or where none, the employees) of the acquisition of control and the above- mentioned information. The AIFM must use its best efforts to ensure the directors do inform the employee reps/employees.
Disclosure in case of acquisition of control of an Issuer or Non-Listed Company
- the identity of the AIFM(s) which manage the AIF(s) that have acquired control;
- the policy for preventing and managing conflicts of interest, in particular between the AIFM, the AIF and the company;
- its policy for external and internal communication relating to the company, in particular as regards employees; and
- for acquisitions of Non-Listed Companies only, the AIF’s intentions with regard to the future business of the Non-Listed Company and the likely repercussions on employment (including material changes to employment conditions). This information does not need to be provided to the competent authority.
Again, in its notification to the company, the AIFM must request that the board of directors inform the employee representatives (or where none, the employees) of the above mentioned information. The AIFM must use its best efforts to ensure the directors do inform the employee reps/employees.
There is no specified time period within which this information must be made available. Some competent authorities only require AIFMs to provide this information on request and not as part of the standard notification procedure. There are no corresponding obligations on AIFMs or AIFs to put in place policies relating to conflicts of interest or communication, although many will have these in place as part of their general fund compliance manuals.
When an AIF acquires control of a Non-Listed Company, the AIFM must also disclose to the competent authority and the AIF’s investors information on the financing of the acquisition. Financing is not defined and there is no time limit on the provision of the information. In practice, AIFMs are providing high level information on the type of financing used as part of their general reporting to investors.
Additional information to be included in annual reports
When an AIF has control of a Non-Listed Company, its AIFM must:
- either request and use its best efforts to make sure that the annual report of the Non-Listed Company includes the additional information noted below and the board of the company provides it to all employee representatives or, where there are no representatives, to the employees - within the period permitted by national law for drawing up such annual reports; or
- for each AIF, include in the annual report provided for in Article 22 (see the section on Disclosure and Reporting) the following additional information relating to the relevant unlisted company:
Notification/disclosure is not required in respect of acquisitions or disposals of voting rights in the following Non-Listed Companies:
- special purchase vehicles used to purchase or administer real estate; or
The Directive states that the disclosure provisions apply subject to the restrictions on confidential information in Article 6 of the Information and Consultation of Employees Directive (2002/14/EC). This means that employee representatives are not authorised to reveal to employees or third parties any information that an undertaking has, in the legitimate interest of the undertaking or establishment, expressly provided to them in confidence. It also enables Member States to provide that an employer is not obliged to communicate information when the nature of that information is such that it would seriously harm the functioning of the undertaking, or would be prejudicial to it. However, note that although this gives Member States the option to include such a proviso, they are not obliged to do so.
Level playing field review
The recitals of the Directive acknowledge that the portfolio company disclosure and asset stripping provisions (see further the Asset Stripping section) create an unlevel playing field between European private equity funds and other types of owner of EU companies and invite the Commission to consider whether to extend the provisions “on a more general level” – i.e. to all companies of a similar size, regardless of the identity of their shareholders.
The Directive also requires the Commission to conduct a review of relevant legislation within four years after the Directive comes into force to asses the impact of the transparency and reporting requirements on the assessment of systemic risk.