US Fund Managers Marketing A Fund In The EU: Notification, Disclosure, And Asset Stripping Rules For EU Targets – New York Office Snippet – Fund Management/ REITs

Loyens & Loeff New York regularly posts ‘Snippets’
on a range of EU tax and legal topics. This Snippet focuses on the
notification, disclosure, and asset stripping rules for EU targets
when US fund managers market a fund in the EU.

If an alternative investment fund (AIF) is managed by a
Luxembourg authorized alternative investment fund manager (Lux
AIFM) or registered for marketing under the private placement rules
of an EU country (NPPR), notification, disclosure and asset
stripping rules may apply if voting rights in an EU target are
obtained. Exceptions apply for SMEs and certain real estate
companies.

A notification on voting rights with the Luxembourg regulator
(CSSF) is required if the AIF (in)directly obtains at least 10%
voting rights of an EU target. Any subsequent increases or
decreases of the voting rights must also be notified, namely each
time the rights exceed or fall below a threshold of 10%, 20%, 30%,
50%, or 75%. If the AIF acquires at least 50% of the (in)direct
voting rights of an EU target, additional notification, disclosure
and asset stripping rules apply. Voting rights notifications should
be made to the relevant counterparty within 10 business days.

To assess the 50% control threshold, voting rights held by
different AIFs managed by the same Lux AIFM in the context of the
same fund should be aggregated. If the AIF managed by the Lux AIFM
is a sleeve of a wider fund, the voting rights held through other
fund sleeves should also be aggregated.

In case control is acquired, the information to be disclosed to
the EU target and its shareholders consists of the Lux AIFM’s
identity, certain policies, its intentions about the future
business, and its likely impact on employment. Disclosures to the
CSSF encompass the first two matters and information on the
acquisition funding. The latter disclosure is also to be shared
with the investors in the AIF.

The AIFM should endeavor to ensure that what is shared with the
EU target is also shared by the EU target with the employee(s)
(representative body), both of which are subject to confidentiality
rules.

Asset stripping rules apply for 24 months post-acquisition. The
Lux AIFM is not allowed to accommodate or use its best efforts to
prevent certain net asset value (NAV) reductions through certain
distributions. The rules ensure that the buyer cannot erode
subscribed capital, share premium, and non-distributable reserves
below their value at the acquisition date. Dividend distributions
sourced from accumulated profit reserves are not prohibited.
So-called “recap” transactions (taking up new debt to
fund a distribution) may well be problematic. On the other hand,
debt repayments do not infringe the asset stripping rules since the
repayment of debt has no impact on NAV.

Compliance with the rules above vests with the Lux AIFM. If the
fund entity that is marketed in the EU is managed by a US AIFM,
under the NPPR framework, compliance vests with the US AIFM. The
rules are generally not perceived as overly burdensome, but it
should be ensured that they do not come as a surprise for US fund
managers. Awareness is key.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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