Private equity update - First edition 2014

06 February 2014

In our first update of 2014, our private equity specialists comment on key issues and developments affecting the sector.

AIFMD application deadline extended - compliance deadline remains the same

When the Alternative Investment Fund Managers Regulations 2013 were first published, transitional managers (ie those managers who managed AIFs immediately before 22 July 2013 and who are still doing so today) had to submit their authorisation/registration applications to the Financial Conduct Authority (FCA) in sufficient time to allow the FCA to determine them before 22 July 2014

The Treasury has recognised that many fund managers will not be in a position to submit their application that far in advance of the 22 July 2014 deadline.  The Treasury has issued an announcement stating that it intends "to amend the Alternative Investment Fund Managers Regulations 2013 to provide that, if a transitional manager's application for authorisation or registration is submitted without sufficient time for the Financial Conduct Authority to determine the application by 22 July 2014 (the end of the transitional year), that manager will be able to continue managing AIFs until the FCA has determined the application. The requirement to submit an application before 22 July 2014 will remain in place and all managers will, in any event, be required to comply with all relevant AIFMD requirements from 22 July 2014, even if their application has not yet been determined".

While this extended deadline, if it goes through, will be welcome in many quarters, managers must guard against complacency.  In particular, as the Treasury has made clear, AIFMD will still come fully into force on 22 July 2014 and all those managers who fall within its scope will have to comply with it from that date.  This includes those managers who applied before 22 July 2014 but who are waiting for a determination.  A delay in making the application would not lead to a delay in having to comply.

Managers may also wish to consider how the regulator, clients and others in the market will perceive managers who do not meet the original application deadline.  All managers who come within AIFMD's scope should feel encourage to get their applications in as soon as possible and to contact the FCA if they think that they are likely to miss the applicable deadline.

Please contact Sharon Ayres, Penny Sanders or your usual Wragge & Co contact if you have any questions regarding AIFMD.

Restrictive covenants and penalty clauses: an update from the Court of Appeal

Buyers of businesses are often anxious about what the sellers will do after completion of a deal. Where proprietors have already built up a successful business (particularly one based largely on personal contacts) and sold it, it is clearly possible that they may want to repeat the success. This would mean competition for the original business, possibly reducing its value.

Public policy dictates that competition is a good thing, as it means choice and competitive pricing for customers. However, those paying substantial sums to acquire businesses sometimes, understandably, take a different view.

There is a long line of cases covering the extent to which buyers can legitimately keep sellers out of the same market following a sale. This is usually done by contractual covenants, whereby the seller agrees not to take certain actions for a defined period. These restrictions may be backed up by provisions entitling the buyer to payment of specified amounts if the seller later breaches the covenants.

Sellers who are alleged to be in breach of these kinds of restrictive covenant have traditionally attacked their validity on two separate grounds:

  • that the restriction is an unlawful restraint of trade, going further than is required (either in time or in geographical scope) to protect the legitimate interests of the buyer; and
  • that any payment required for alleged breach of the restrictions is a penalty clause (i.e. the amount payable grossly exceeds the loss that could actually flow from the breach of contract, so the restriction is there purely to deter the seller from contemplating any such breach ).

In our earlier alert, we reported on the High Court decision in Cavendish Square Holdings BV and Team Y&R Holdings Hong Kong Ltd v Talal El Makdessi [2012] EWHC 3582 (Comm). That judgment gave support to buyers who are prepared to pay a premium for protection from competition after the sale completes.

However, the Court of Appeal has now partially overturned that decision.

Why clear drafting matters: a case lost by both sides?

"It is unfortunate that a great deal of cost will have been expended in the dispute and that it will have generated bad feeling and distrust between the two sides. It is, regrettably, a consequence of not sorting out the fine print of the agreement sufficiently in the commercial haste that gave rise to it. That is a lesson to be learned."

(Mr Justice Foskett in Alegro Capital LLP v AllProperty Media Pte Limited [EWHC] 3376 QB)

This is certainly not the first time that a judge has found that, in the rush to sign binding agreements, the parties have failed to record clearly what they had (or thought they had) agreed. Nor is it likely to be the last. However, this recent case is a stark illustration of how lack of clarity can leave both sides of a dispute hundreds of thousands of pounds out of pocket.

The BAA Case: VAT on company acquisition costs

Back in April 2013, we reported on the Court of Appeal judgment in BAA Ltd v HMRC [2013] EWCA Civ 112.

In this case, the Court of Appeal rejected an appeal against the decisions of the Upper Tier Tribunal and the First Tier Tribunal not to allow an acquisition vehicle, Airport Development and Investments Limited (ADIL), to recover VAT on certain advisory fees incurred in connection with the takeover of the airports operator BAA plc.

The application for leave to appeal to the Supreme Court by ADIL has been refused. This means that the Court of Appeal's decision against ADIL stands as the final outcome in the case.

Taxpayers with disputes with HMRC over the treatment of input VAT incurred in the context of corporate acquisitions may now need to consider their position. The facts of the BAA case were, however, unusual. This should make it more difficult for HMRC to use the BAA case as a precedent to deny input VAT recovery in other cases where the fact pattern is different.

Paris Private Equity team listed as top French law firm

French private equity and venture capital magazine Option Finance has named Wragge & Co's Paris Private Equity team one of the best in France.

The firm features in the top 15 listing for three different categories:

  • Private Equity Mid Cap (€50-200 million)
  • Capital Innovation & Venture
  • Private Equity Management Packages

Some of the team's 2013 highlights include advising LBO France on the sale of a €1 billion real estate portfolio, advising on a €140 million leveraged buy-out of Cyrillus Vertbaudet by Alpha funds and advising Eurazeo PME in connection with the €70 million acquisition of Groupe Cap Vert Finance.


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