Private equity - Spring 2015 newsletter

20 minute read
28 April 2015

Budget 2015: Back to school for changes to EIS and VCTs

Wearing your cap

The maximum amount a company can receive from Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments as an aggregate of all its funding rounds will be capped at £15 million. This limit increases to £20 million for knowledge-intensive companies.

The gross assets test already prevents companies from qualifying for VCT or EIS relief where their gross assets exceed £15 million immediately before the investment and £16 million thereafter. This existing rule will limit the impact of the new cap.

However, the cap will be important where additional support is needed to develop the qualifying business activity and the majority of funds raised in early rounds have already been spent, for example on R&D. That expenditure may not yet be reflected on the balance sheet through the development of a recognisable asset such as a registered patent.

The number of employees an investee company may have immediately before a qualifying investment is currently capped at 250. For knowledge-intensive companies, this limit will be raised to 499 employees.

Watching teenage behaviour

The tax advantages provided by the EIS and VCT regimes will no longer be generally available for investments in companies that are more than 12 years old.

There are two key exceptions to this new restriction.

  • First, qualifying investments can still be made in older companies where the total amount raised exceeds 50% of the average annual turnover of the company during over the last five years.
  • Second, the exception is available where the investment will result in a substantial change to the activity of the company, such as the development of a significant innovation.

Does this really matter? Most EIS and VCT investments are made in companies that are far less than 12 years old. Indeed, in the majority of cases the investee company is a start-up. It is relatively rare to see an EIS or VCT investment in a company more than seven years old.

We don't expect this change to be very significant but it is important to bear in mind. After all, old dogs can still learn new tricks. For the purposes of EIS and VCT relief, those tricks will need to be very convincing.

Looking after the first years

Start-up companies that have raised funds through Seed EIS investment are currently required to spend at least 70% of their SEIS money before they can graduate to a full EIS funding round. This requirement will fall away, simplifying the interaction between the two classes of relief.

Helping the wider community

Following the successful introduction of Social Investment Tax Relief (SITR) in the Finance Act 2014, the Government now plans to introduce social VCTs. These are expected to attract income tax relief at 30%, as announced in the 2014 Autumn Statement.

At the same time, the scope of SITR is to be widened. Draft legislation has not yet been published and will be included in a future Finance Bill. It is very likely that at least one further Finance Bill will be prepared and debated in late spring or early summer 2015, following the General Election on 7 May. The nature of the new Government and its priorities will determine whether we see opportunities for social VCTs opening up later this year.

Checking the timetable

The new restrictions were included in the first Finance Act of 2015, which received Royal Assent on 26 March. Even so, their introduction is dependent on the grant of state aid clearance. The measures will not take effect until the ongoing state aid review has been completed.

Although we currently expect the results of the clearance application to be published in the summer, there is no fixed announcement date and it may take longer. Until clearance is granted, the new rules do not take effect. Current investments, including those taking place before the implementation date, will not be affected.

Put up your hand

If you would like to find out more about the proposed changes to EIS, VCT or SITR or to discuss tax structuring or implementation for a proposed investment, the Wragge Lawrence Graham & Co Tax team are here to help.

Investment managers - a stark reminder of your liabilities and duties

In a judgment dealing with the collapse of the Arch Cru Funds (the Funds), the High Court has re-examined and clarified the law applying to investment managers.

In awarding over £22 million in damages against the investment manager and its Chief Executive in SPL Private Finance (PF1) IC Ltd and others v Arch Financial Products LLP and others, the court found that the investment manager acted in breach of fiduciary duty, in breach of contract and in breach of its duty to act with reasonable skill and care in managing assets for the Funds.

Although fact specific, the case acts as a useful reminder to investment managers of the duties they owe and the circumstances in which they can be held liable for the management of a client's investment portfolio.

The facts

Arch Financial Products LLP was the investment manager (the Investment Manager) for the Funds, which constituted a number of Guernsey incorporated companies (the Investors). Each of the Investors had entered into investment management agreements (IMAs) on the same terms with the Investment Manager. A number of the Investors subsequently brought claims against the Investment Manager arising out of real estate investments made on their behalf.

The claims concerned investments made in a student housing business called Club Easy. The basis of the allegations made was that the acquisitions made by the Investment Manager:

"...were driven by [the Investment Manager's] financial interest in obtaining illegitimate payments rather than proper consideration of the investments' merits and the interests of the [Investors], and that in this regard [the Investment Manager] acted in breach of fiduciary duty, in breach of contract and negligently".

The Investment Manager arranged the purchase of a student housing business in the sum of £13 million, in return for which it received "structuring fees" of £3 million, which the Investment Manager claimed had been agreed with the Funds. The initial investment was then followed by a further injection of additional sums to cover operating costs of the business.

Only two years after making the investment, the value of the investment was written down to zero.

The judgment

Mr Justice Walker found that the Investment Manager and its Chief Executive Officer, Robin Farrell, had hatched a plan to purchase the student housing business as a way of extracting money from the Investors. The so called "structuring fees" did not in fact in any way pay for the mechanics of the acquisition, nor were they found to have been agreed to by the Funds as the Investment Manager had claimed.

The relationship between the Investors and the Investment Manager gave rise to fiduciary duties which should have fairly managed any potential conflict between the interests of the Investors and the Investment Manager. Instead, the Investment Manager breached its fiduciary duties in advising upon an investment which was not in the best interests of the Investors.

The Investment Manager negligently relied upon property valuations based on the premise that the student housing business was a viable investment, whereas it should have taken into account the need for ongoing substantial capital investment. In not conducting a risk/reward analysis of the merits of the investment, which were plainly unjustifiable on the facts, the Investment Manager was found to have been negligent.

The Investment Manager's Chief Executive Officer was also found liable to pay compensation for dishonestly assisting the Investment Manager in its breach of fiduciary duty.


The case acts as a stark reminder of the duties of an investment manager, which the court will uphold. The key principles for investment managers to bear in mind are:

A fiduciary duty arises from the relationship of trust and confidence between the investor(s) and the investment manager.

There is a duty upon the investment manager to put the interests of the investor(s) ahead of its own financial and commercial interests.

An investment manager must always be transparent with investors about the fees it proposes to charge on an acquisition and is under a duty not to make a secret profit from arranging a transaction.

The acts of an individual, in this case the Chief Executive Officer of the Investment Manager, can result in a liability for the individual if he/she is found to have induced a breach of contract or a breach of fiduciary duty on the part of the investment manager.

Wragge Lawrence Graham & Co LLP's Investment Funds team is a specialist team comprising tax, corporate, finance, regulatory and dispute resolution experts advising on every aspect of a funds lifecycle. The team is involved in a mix of domestic and international fund structures. It provides advice to fund and investment managers, the fund vehicles, sponsors and operators and investors (including pension schemes).

Back to basics - signing your documents correctly

1 Who needs to sign?

Only those parties to a document that have obligations under the document generally need to sign it. For example, only the warrantor needs to sign a collateral warranty (where there are no step-in rights) and only the party allowing reliance needs to sign a letter of reliance.

2 What type of 'entity' is signing the document?

The type of 'entity' signing the document will dictate who should sign it. The most common forms of 'entity' are:

  • individuals, often trading under a particular name;
  • companies formed under the Companies Act 2006;
  • partnerships; and
  • limited liability partnerships (LLPs).

3 Is it a deed or a simple contract?

The document is likely to be either a deed or a 'simple' contract. Generally, claims for breach of a 'simple' contract can be brought up until six years from the date of the breach. Claims for breach of a deed, however, can be brought up until twelve years from the date of the breach.

Whether it is a deed or a 'simple' contract will dictate how the document should be signed in order for it to take effect as a 'simple' contract or deed. The table below summarises what is generally required for the different entities listed above to validly execute a simple contract and a deed.

  Individual Company formed under Companies Act 2006 Partnership LLP
Simple contract Signed by the individual or an authorised agent.

Affixing common seal; or

signed on behalf of the company by a person with express or implied authority; or

signed by two Directors or one Director and the Company Secretary or

signed by one Director and witnessed.

Signed by a partner.

Affixing common seal; or

signed on behalf of the LLP by a person with express or implied authority; or

signed by two Members; or

signed by one Member and witnessed.

Deed Signed by the individual and witnessed.

Affixing common seal and signed by two Directors or one Director and the Company Secretary; or

signed by two Directors or one Director and the Company Secretary; or

signed by one Director and witnessed.

Signed by all the partners and witnessed; or

signed by one or more partners who have been granted authority by deed to execute on behalf of the partnership and witnessed.

Affixing common seal and signed by two Members; or

signed by two Members; or

signed by one Member and witnessed.

The above table is subject to any particular execution formalities of the contracting entity (such as may be contained in a company's articles of association). For example, where a company uses its common seal (now a rarity), its articles will usually specify that directors or other officers must sign to attest the sealing. There may also be other specific circumstances where a particular form of execution is required in order to form a binding agreement.

There is, however, a (non-rebuttable) presumption of due execution by a company (or LLP) which executes documents broadly in line with the above table. This presumption exists to protect innocent third parties from a failure by the company to comply with its own internal execution provisions. It applies broadly in favour of those buying property, goods or services, including tenants and mortgage lenders.

In addition to valid execution, in order to take effect as a deed, a document:

  • must be in writing;
  • must be clear 'on the face' that it is intended to take effect as a deed; and
  • must be delivered as a deed.

Also, the wording required in the signature blocks in the document will depend on whether the document is being signed by or on behalf of the relevant entity.

Note also that there is a rebuttable statutory presumption that a document executed as a deed by a company or LLP is delivered on execution, unless a contrary intention is proved.

The presumption can be rebutted by the use of specific wording in the deed such as "this deed is delivered on the date written at the start of this deed" or by making it clear in writing that the intention is that the document may only be treated as having been executed and delivered as a deed if it has been dated. Given that a deed is irrevocable following delivery, the statutory presumption of delivery could have important practical implications.

4 Does the individual signing the document have authority?

This should usually be a straightforward question to answer but be careful as, for example, the title "director" does not necessarily mean the individual is a director authorised to act on behalf of the company. The term "director" in the context of signing documents generally means a statutorydirector. Whether or not an individual is a statutory director can be checked via the Companies House website.

Where another entity is signing a document on behalf of another party you need to be sure that the other entity has the requisite authority to so act. Where a deed is being signed, the authority must be granted by way of a deed, for example, powers of attorney are often used. It is best practice to obtain a copy of the document authorising the other entity to act and to keep a copy with the document being executed.

Also, the entity granted authority should sign in accordance with the requirements applicable to it and not the party that they are acting on behalf of e.g. if the authorised entity is an individual and they are signing a deed, their signature would require a witness.

5 Foreign company

Where a foreign company is entering into the document, in order to be valid under the law of England and Wales, the company can execute:

  • utilising its common seal; or
  • in a manner permitted by the local law applicable to the territory in which the company is incorporated; or
  • by an authorised person, provided that the authorisation is granted in accordance with that local law.

In some cases a legal opinion as to whether the document is being validly executed by the foreign company may be necessary, for example, if it is a land transaction. Where it is not essential, it may still be sensible to obtain such an opinion, particularly where validity in other jurisdictions may be required (e.g. for enforcing the decision of the English courts).

6 Incorporation of contract documents

Where these are not securely bound into the document, it is best practice for the front page of each contract document (but not necessarily every page) and each drawing to be initialled on behalf of each party by an individual that has signed the document on behalf of the relevant party.

Where contract documents and/or drawings are included on, for example, a CD-Rom, the CD should be initialled and a copy of the contents page prepared, printed out and initialled.

7 Counterparts

In order to speed up the process of signing a document, the document may be signed 'in counterpart'. This is where a copy of the document is produced for each party signing. The parties then each sign one of the copies rather than all of them, which, when brought together, form a complete executed document.

The document does not need to include a counterpart clause in order for it to be signed in counterpart. The inclusion of a counterpart clause however reduces the risk of one of the parties arguing that, for example, as not all of the parties have signed the document, the document is not binding.

8 Changes to documents executed but not dated

In some instances, changes need to be made to a document after it has been executed but before it has been dated. Such changes can be evidenced by appending to the document clear evidence that such changes have been agreed and made by a person authorised by the parties, for example, their legal representatives.

9 Is there a contract?

Just because a document has not yet been dated and/or signed by the parties does not mean there is no contract in place. The basic requirements for a contract are:

  • offer;
  • acceptance;
  • consideration;
  • intention to create legal relations; and
  • certainty of terms.

The absence of a properly signed document does not necessarily mean that the above elements have not been satisfied.

10 Deeds of variation

Once a document has been signed and dated, it may be the case that the document needs to be varied. A deed of variation must be used where the document is a deed or where a debt, liability or obligation is being released. In all other cases, but subject to the terms of the document (which may contain an express clause detailing how variations can be made), a simple agreement in writing signed by all parties could be used, provided that it includes some form of consideration e.g. the payment of £1.

Special rules apply where a third party has the right to enforce a term or terms of a document. Also, varying a document may affect the protection provided by any guarantee entered into in relation to the document. It will be necessary to check whether a third party's consent is needed before a document can be amended, for example, the surety guaranteeing performance of the document, the beneficiary of any collateral warranty relating to the document.


So when it comes to signing documents, ask yourself the following questions:

  1. What is the document intended to be: a deed or simple contract?
  2. What entity is signing?
  3. Who needs to sign the document and how do they sign?
  4. Are the requisite authorities in place?

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.