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November 2012 New disclosure rules and asset-stripping rules for private-equity funds acquiring private or public companies The Alternative Investment Fund Managers Directive will lead to the regulation of private-equity and hedge funds throughout Europe. Private-equity funds and hedge funds acquiring portfolio companies will soon become subject to specific disclosure and assetstripping rules. Introduction On 22 July 2013, new rules will enter into force for investment managers of investment funds pursuant to the Alternative Investment Fund Managers Directive ("AIFMD") which will be implemented into the Dutch Financial Supervision Act (Wet op het financieel toezicht) and delegated legislation. In addition to the AIFMD, it is expected that the European Commission will adopt by the end of the year a Regulation. Further technical standards will be set by the European Securities and Markets Authority (“ESMA”). To date certain investment funds that offer participation interests (deelnemingsrechten) to professional investors only, such as private-equity funds and non-public real estate funds, are exempted from the rules regulating investment funds. However, under the new rules, these funds will become subject to supervision by the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten or "AFM") and the Dutch central bank, De Nederlandsche Bank ("DNB"). This will have material consequences for an investment fund of this type and its day-to-day operations. Under the AIFMD, any manager of an investment fund shall need to apply for a license with the competent authority, being in the Netherlands the AFM. Managers of investment funds that currently benefit from an exemption from licensing will need to apply for a licence under the AIFMD regime prior to 22 July 2014 at the latest. However, they will be able to continue to benefit from the current exemption until the AFM makes its decision on the request for a licence. Managers of investment funds that already have a licence will be deemed to have a licence under the AIFMD regime as from 22 July 2014 and will not need to apply for a new licence. The AIFMD provides that investment managers must already use their best efforts (inspanningsverplichting) to comply with the new rules as per 22 July 2013. In this newsletter, we identify the new rules that will apply when a private-equity fund or any other fund regulated by the AIFMD, acquires control over a new portfolio company. Exemption for small investment funds The AIFMD will not apply to the manager of a “small investment fund”, which is a fund that meets both of the following two criteria: 1. the total assets under management do not exceed €100 million or, if the investment fund does not use leverage, €500 million, provided in the latter case that the investors do not have any redemption rights for a period of 5 years; and 2. the units in the investment fund (a) are offered to professional investors only or (b) are offered to less than 150 investors, for a consideration of at least €100,000 per investor or have a denomination of at least €100,000. If an investment manager manages more than one investment fund, the total assets of all these funds will be aggregated to determine whether the investment manager is exempt from obtaining a license. In addition the assets managed by other investment managers which are, directly or indirectly, linked by common management or control, or by a qualified direct or indirect holding, to the investment manager should also be taken into account. Consequences for private-equity funds active in the M&A market Private-equity funds becoming subject to the AIFMD will have to comply with certain disclosure rules and rules on asset stripping when acquiring a new portfolio company. Dutch private-equity investment managers will be subject to the Dutch AIFMD rules. A private-equity manager located in another member state of the This information is intended to highlight issues for general reference only. It is not comprehensive nor does it constitute legal, tax or financial advice. Any information contained herein is subject to change without notice. This information should not be relied upon in any specific factual or legal situation and does not cover all laws or regulations that may be applicable in all circumstances. You should seek professional advice before making use of any of the information. Houthoff Buruma further gives no warranty as to the accuracy or completeness of this information. No liability whatsoever is accepted by Houthoff Buruma. European Economic Area ("EEA") will be bound by the rules of its home Member State. It appears that private-equity managers outside the EEA will not be subject to the new disclosure rules and asset-stripping prohibitions unless they have raised funds in the EEA as a result of which they are bound to the AIFMD. Under the new Dutch rules, a Dutch investment manager who, alone or together with other investment managers, acquires “control” over a private or public company, irrespective of its country of incorporation, must comply with certain disclosure obligations and certain restrictions on asset stripping. “Control” is defined as directly or indirectly acquiring more than 50% of the voting rights in a “private company” or, in the case of a “public company”, directly or indirectly acquiring the number of voting rights that triggers a mandatory bid under the EC Takeover Directive (30% of the voting rights in the Netherlands). Any add-on acquisition by a portfolio company also fall under the definition of acquiring 'control'. A “private company” is defined as a company whose corporate seat is in a Member State and whose shares or depositary receipts for shares are not admitted to trading on a regulated market (gereglementeerde markt). A “public company” is defined as a company whose corporate seat is in a Member State and whose shares or depositary receipts for shares are admitted to trading on a regulated market. This means that a “private company” includes a company whose shares are traded on a multilateral trading facility (MTF) or are admitted to trading on a stock exchange located or operated outside the EEA. The disclosure requirements and restrictions on asset stripping do not apply if control is acquired over a small private or public company, i.e. a company that (i) employs less than 250 persons and has an annual turnover of less than €50 million or an balance sheet total of less than €43 million or (ii) is incorporated for the specific purpose of buying, holding and maintaining property. Disclosure requirements The following disclosure requirements will apply to investment funds acquiring control of a private company. A. The investment manager must inform the AFM, the private company and its shareholders on the acquisition of control by its private equity fund within 10 working days following the acquisition. B. Within 10 working days after the acquisition, the investment manager must also inform the AFM of the investment funds voting interest when this interest reaches, exceeds or falls below the following thresholds: 10%, 20%, 30%, 50% and 75%, even if no control is acquired. C. The investment manager will make available to the AFM, the private company and its shareholders the following information: a. the identity of the manager; b. the policy for preventing and managing conflicts of interest; and c. the communication policy relating to the private company, particularly in relation to the employees. D. The investment manager must also inform the shareholders of the private company as to the intentions regarding the future of the company and the likely impact of these intentions on the employees and directors, including their employment conditions. E. The investment manager must share information referred to above under (A), (C) and (D) with the representatives of employees or, in the absence thereof, with employees themselves. F. The investment manager must inform the participants in the private-equity fund and the AFM how the transaction was financed. G. The annual report of the private company and the investment fund must include certain disclosures and the report must be provided to the representatives of the employees of the private company or (in the absence thereof) to the employees themselves. H. The annual report of the private company must be made available to all investors of the investment fund within six months after the end of a financial year. the (B) the the In the event of acquiring control of a public company, the disclosure requirements listed above under point (C) apply mutatis mutandis. In addition, the representatives of the public company’s employees or (in the absence thereof) the employees themselves must be informed of the acquisition of control by the private equity fund. Asset stripping For 24 months following the completion of a transaction whereby control is acquired over a private or public company, the investment manager will be prohibited from voting in favour of, or otherwise cooperating with, any of the following actions: 1. any distribution of profits or other freely 1 distributable reserves , if (i) the net equity of the company is lower than the minimum issued share capital including the reserves, or (ii) the amount of the distribution is more than the amount of profit distributed in relation to the latest financial year; 2. capital reduction, except in the event of offsetting the losses by reducing the issued share capital or conversion of share capital into a nondistributable reserve; 3. any repayment of shares; or 4. repurchase of shares. There are certain situations in which these restrictions do not apply, including that of a portfolio company acquiring its own shares by universal succession (algemene titel), or in the event of a merger. These restrictions will also need to be taken into account when refinancing the portfolio company. 1 The Dutch act transposing the AIFMD only refers to distribution of profits. However, the explanatory notes and the AIFMD also refer to distributions of other distributable reserves. Contact: Matthijs van den Broek E. [email protected] T. +31 (0)20 605 6105 Ronald Schulten E. [email protected] T. +31 (0)20 605 6991