Political and media debate about the merits of private
equity have reached a fever pitch not just in Europe,
but in the US and elsewhere around the world. Many of the
industry's critics have been calling for greater
Much of the debate has been misinformed, and it is clear
that the buyout industry has to communicate more effectively
with the wider public. But the private equity community has
responded positively to criticism, and has acknowledged that
some calls for greater openness and disclosure have merit. In
particular, the national private equity and venture capital
associations of the UK (BVCA), Sweden (SVCA) and Denmark (DVCA)
have all now published guidelines to promote increased
transparency and openness in their national private equity
industries. In addition, the AFIC in France (Association
Francaise des Investisseurs en Capital) has issued a
voluntary charter which sets out several basic values and
responsibilities for private equity firms.
The early success of Sir David Walker's pragmatic,
principles-based recommendations in the UK helped to stave off
calls for more black letter law: 32 buyout groups and 55
portfolio companies have so far signed up, despite some not
falling within Walker's scope. It also provided the model for
the Danish and Swedish reports.
Although purporting to do very similar things, the different
recommendations vary considerably in the way they go about
achieving their goals.
Framed against a backdrop of less comprehensive private
company law than in some other European countries, Walker's UK
guidelines perhaps had to be more prescriptive than their
Scandinavian counterparts. They are weighty and comprehensive.
Whereas the Swedish recommendations seem intended as much to
educate as to tie firms into rigid reporting requirements. For
instance there is one page of recommendations, and seven pages
explaining what private equity is.
The Danish guidelines occupy the middle ground: a softer
focus than Walker's guidelines but a more prescriptive form
than the Swedish equivalent. However, in various ways both the
Swedish and the Danish rules go further than Walker. All three
envisage a streamed approach to reporting requirements
at firm level, at fund level and at industry level.
To whom do they apply?
The UK guidelines apply specifically to UK, FSA-authorised
private equity houses that are managing or advising funds that
either own or control one or more UK companies (or who have a
designated capability to engage in such investment activity),
but only if the companies are covered by the enhanced reporting
guidelines for portfolio companies. This two-limbed approach
singles out those at the top end of the buy-out market (those
that were the focus of the most criticism) and attempts to
prevent the onerous reporting requirements being imposed on
smaller firms for whom the cost and administrative burden would
be disproportionately large.
The SVCA has a wider and more generic entry threshold. The
private equity firm must be a member of the SVCA and either
invest equity capital into portfolio companies in which they
hold a majority or minority stake, or act as investment
advisors to funds which undertake such investments. This is far
wider than the scope of the UK or Danish guidelines and covers
all members of the SVCA. The Walker guidelines apply to no more
than 15% of the BVCA membership, while the Danish regulations
only apply to DVCA members with committed capital of at least
DKr500 million ($142 million). Private equity
houses whose ultimate parent company is registered in a country
other than Denmark fall outside the full scope of the
The same themes are repeated for portfolio companies. Sweden
applies its guidelines to any companies headquartered in
Sweden, while the Danish guidelines have a de minimis
threshold based on Danish company-law size classifications:
Class C (large) companies, which are categorised as those with
revenue in excess of 32 million, assets in excess of
16 million and more than 250 employees. Unlike the UK
criteria, the portfolio company does not have to be owned by a
private equity fund that falls under the Danish guidelines.
Instead, it is sufficient that a fund has a decisive influence
over the company, and that fund may be Danish or foreign.
Walker's guidelines take a more targeted approach and apply
to public-to-private transactions where the equity value of the
company on acquisition was £300 million ($562.4 million)
or more, or other acquisitions where the enterprise value was
at least £500 million. These values are intended to be
roughly equivalent; one referring to equity value and the other
to enterprise value. They were designed to catch companies of
equivalent size to those in the FTSE 350. The UK guidelines
also only apply to companies that have 50% or more of their
revenue generated in the UK, and employ over 1000 UK full-time
employees or equivalent. The UK thresholds are therefore much
higher than those in Denmark, perhaps reflecting the different
average sizes of deals.
The reporting obligations
The SVCA offers a more thematic set of recommendations,
suggesting topics to be covered, rather than formally
specifying disclosure requirements. In many ways this mirrors
the approach taken in the UK for reporting by private equity
houses, highlighting those areas and themes that should be
covered. It then leaves it to the private equity house and the
portfolio company to decide how this information is to be
presented. The difference stems from the fact that the Swedish
recommendations sit within a more stringent statutory company
reporting regime than in the UK or Denmark, with greater
emphasis on employee participation. As the SVCA report states,
Sweden and the Nordic region differ from other parts of the
world in those respects.
Given the lack of a statutory role for trade unions or
similarly strict reporting requirements for UK private
companies, the Walker guidelines offer more detailed
recommendations for the content of portfolio companies'
reports. The focus is on substance over form and on economic
reality rather than legal structure. The guidelines require
portfolio companies to produce an annual report which
identifies the ownership and board structures, and includes a
business review substantially similar to that required by
section 417 of the Companies Act 2006 for quoted companies. In
particular, this requires firms to produce a report which
details: the main factors affecting the future development of
the business; information on employees, environmental and
social and community issues; and information on those persons
with whom the company has essential business arrangements.
There is also a requirement to produce a mid-year update.
The DVCA also emphasises the more rigorous Danish
requirements for company's annual reports. Under the Danish
Financial Statements Act, companies must include a detailed
management report in their annual report and so the guidelines
aim only to supplement these legislative provisions. The Danish
guidelines go further than Walker's in several respects. Most
notably, a statement on employee turnover (including
terminations, recruitment and the like), company constitution
and related matters (among other things; responsibilities and
duties, board member remuneration and shareholdings).
Interestingly, in public-to-private transactions the guidelines
require that portfolio companies continue to make interim and
financial reports in accordance with OMX Nordic Exchange
Copenhagen's rules for the first year of business as a delisted
entity. Thereafter, an interim report is to be prepared that
describes whether the company is pursuing the general aims
published in the annual report for the previous year.
The role of national associations
All three provide for an increase in the role of the various
national private equity and venture capital associations. Their
role evolves from simple industry body to data collector and
disseminator, and in the case of the British and Danish bodies,
quasi-regulators. The associations are required to take
responsibility for collecting and consolidating the information
reported to it under the relevant guideline provisions.
That data will be aggregated on an industry-wide level with
a view to providing a general account of the trends in the
industry. The DVCA guidelines specifically state that to ensure
consistency, their analysis will be developed in close
collaboration with the Walker Working Group and the BVCA.
In taking the role of quasi-regulator, the BVCA and DVCA
have set up committees to review and adapt the guidelines as
they are implemented by the industry. The committees'
membership structures vary slightly, but a common thread of
informed independence runs through both. The Walker Guideline
Monitoring Group is composed of an independent chairman and two
other independents along with two private equity
representatives. The DVCA committee is composed of the DVCA
chairman, a state authorised accountant and an independent
April 2008 saw the publication of two draft reports by the
European Parliament relating to private equity, one of which
was subsequently finalised and published as an official opinion
at the end of May. These include some alarming and dangerous
proposals and also urge the Commission to provide a legislative
response. They will increase pressure for a co-ordinated
pan-European response to the industry's critics.
The industry must resist the urge for knee-jerk blanket
regulation, and it will have to do that even more strongly when
a new European Commission is appointed in 2009. But, as the
BVCA, DVCA and SVCA guidelines all demonstrate, that must be
done without losing sight of the fact that each country has its
own legal and political framework, which would make one-size
fits all guidelines inappropriate.
If external regulation runs the risk of hampering an
industry that contributes tens of billions of euros to the EU
annually, then these voluntary guidelines have an important job
to do. But policy makers have to give the guidelines time to
work. At least one business cycle will be required before
judgements can be made. And the industry must embrace both the
letter and the spirit of the guidelines enthusiastically. The
early signs are good, but sustained effort is essential.
three private equity codes in detail
equity houses are covered?
||- UK based;
- authorised by FSA; and
- managing or advising funds that either own or control
one (or more) UK companies which meet the size criteria
|- DVCA members with
total commitments in excess of DK 500 million.
members; and either
invest equity in companies in which they hold a
majority or minority share; or
act as investment advisor to funds which undertake
- Any company headquartered in Sweden.
companies are covered?
- acquired in a public to private transaction for more
than £300 million (approx. ?380 million); or
- acquired in a secondary or other non-market transaction
with an enterprise value of in excess of £500
million; and which have,
- at least 50% of its revenues generated in the UK;
- at least 1,000 fulltime UK employees.
- revenue in excess of DK238 million (32
- assets greater than DK119 million (16 million);
- over 250 employees.
|What are they
required to do:
Private equity houses
|- Publish in an annual
review or on their website information about:
how the FSA authorised entity fits into the
its history and investment strategy;
key executives and procedures to deal with
conflicts of interest;
a description of the UK portfolio companies it
a description of investors including breakdowns by
type and geographic location.
- supply relevant data to the BVCA;
- communicate actively with
|- Publish on their
information about themselves, their funds and
strategies, and their investors and origins;
a link to the management companys
where the carried interest programme for general
partners departs significantly from the market standard,
a general description of the programme is to be
their policy on corporate social
information on assets and companies under
- Provide data to the DVCA
|- Publish on their
website information to include:
the general fund and its structure;
the key executives;
information about each portfolio company;
applicable guidelines for portfolio valuation and
reporting to investors;
policies regarding the handling of potential
conflicts of interest;
policies regarding CSR and environmental
- Participate in data gathering by SVCA.
||- Publish enhanced
annual reports and accounts on their website within six
months, which give:
the identity of the private equity house(s) which
owns the company, along with the executives that oversee
the board composition and identity of those
members who are representatives of the private equity
a business review which substantially conforms to
that required by section 417 of the Companies Act 2006,
including those provisions relating to quoted
- publish a mid-year update; and
- contribute data to the BVCA.
|- Publish an annual
report to supplement the statutory one, which is to
operational and financial developments;
financial and other risks; and
- Provide data to the DVCA
|- Publish on their
website information about:
their operations and turnover;
some financial reporting and data;
information about significant events, ownership
changes, changes in management and board composition or
other events of substantial financial importance;
policies regarding CSR and environmental
By Simon Witney and James Bromley of SJ Berwin
On January 1 2009 some changes to the German Foreign Trade
and Payments Act (Außenwirtschaftsgesetz,
AWG) will come into effect that are likely to have a
significant impact on foreign investors wishing to invest in
German target companies. Under the new regime, any such
acquisition by foreign investors may trigger the right of the
German Federal Ministry of Economics to investigate and even
prohibit the transaction.
Who is affected?
Under the Foreign Trade and Payments Act, investors from
non-EC countries that do not belong to the European Free Trade
Association (EC plus Switzerland, Norway, Iceland and
Liechtenstein) and that acquire shares representing 25% or more
of the voting stock of a German company may have their
acquisition investigated by the Federal Ministry of Economics.
Shares held by companies controlled by the acquirer (by holding
at least 25% of the voting stock) are treated as if they were
held by the acquirer itself. Shares that are subject to voting
agreements are also assigned to the acquirer.
If the Ministry comes to the conclusion that Germany's
public order or national security are threatened by a
transaction, it may prohibit the acquisition. Unfortunately,
the Act does not contain any definition of public order or
national security, so the Act brings a certain degree of
uncertainty about which transactions fall within its scope. If
the Ministry decides that a transaction falls within the scope
of the Act, it may order that the acquisition (which may
already be consummated) be reversed. The Ministry may also
choose only to prohibit the exertion of voting rights of shares
held by the foreign investor, thus restricting the investor's
influence on the German target.
How long does it take to reach a decision?
Foreign investors are under no obligation to file their
transaction with the Federal Ministry of Economics. However,
they may do so after signing and will, in that case, receive a
final decision on whether the transaction will be prohibited
within one month. If the transaction is not filed with the
Ministry, it may start an investigation on its own account
within three months after the consummation of the transaction,
with the effect that the transaction is put under the condition
precedent of the Ministry's approval. The Ministry will
immediately inform the investor of its decision to investigate
the acquisition, which triggers the acquirer's obligation to
provide the Ministry with data. The acquirer will be informed
about the specific data required by the Ministry through an
announcement in the Federal Gazette (Bundesanzeiger).
The investigation must be completed within two months of
receipt of the transaction data.
Aims and criticism
The reform seeks to protect sensitive branches of German
industry such as the energy, telecom and military sectors.
Potential threats are perceived to come from state-controlled
funds (in particular from China, the Emirates and Russia) that
may be used to influence German politics via investments in
German key enterprises. State-controlled foreign corporations
have also been classified as potentially dangerous.
The reforms have attracted much criticism. For example, the
new powers granted to the Ministry of Economics are suspected
of infringing the freedom of capital movement as guaranteed by
Article 56 of the EC Treaty. The European Commission is
planning to examine the Act for its reconcilability with
Article 56 and the freedom of establishment (Article 49). Also,
the scope of the Act is considered to be unreasonable because
it not only restricts investment from foreign countries,
state-owned funds or state-controlled corporations but foreign
investors in general. Any private equity investor wishing to
invest in Germany may find his transaction being investigated
by the Federal Ministry of Economics.
The problem for foreign investors
The main problem is the legal uncertainty for foreign
investors. If an investor has successfully completed a
transaction, it may still be subject to investigation for a
period of three months after the closing date. A further two
months may pass until the Ministry has completed its
investigation. The result may be that the transaction is
prohibited and the acquisition must be reversed. This
uncertainty is unacceptable for the seller, buyer, target,
financing banks and employees of the target company.
Recommended course of action
Foreign investors wishing to acquire 25% or more of the
voting stock of a German company should therefore adhere to the
Informal enquiry before signing
A foreign investor can contact the Federal Ministry of
Economics before he signs a share purchase agreement on a
confidential and informal basis in order to find out if the
Ministry will investigate the transaction. A similar approach
is generally taken if a bidder wishes to know the position of
the German Financial Supervisory Authority (Bundesanstalt
für Finanzdienstleistungsaufsicht, BaFin) on a
takeover process. There are no guidelines on how such an
informal approach should be made, though any informal contact
bears the risk that information may be leaked. A seller is
therefore unlikely to agree to such contact.
Filing for investigation after signing
Therefore, a foreign investor should voluntarily file the
transaction with the Federal Ministry of Economics immediately
after signing a share purchase agreement. He should refrain
from filing only if he and the seller are in no doubt that the
transaction does not qualify for an investigation by the
Ministry. If the investor intends to file the transaction, the
share purchase agreement should contain a clause that makes the
clearance of the acquisition by the Ministry a condition
precedent for the obligation of the parties to consummate the
transaction. After the Ministry has received all relevant data,
it has one month to decide whether it will prohibit the
consummation. In order to speed up the process, the investor
should agree with the Ministry on which information it needs in
order to come to a decision as quickly as possible. It appears
likely that an investor will, in most cases, be able to get a
decision before the German Federal Cartel Authority
(Bundeskartellamt) has cleared the transaction.
Therefore, the filing of the acquisition should not lead to
delay in most cases.
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