Corporate / Private Equity / Financing
EDITORIAL
Best wishes for 2009 and good luck!
2008 started out with no small uncertainty on a number of issues closely affecting French Private Equity players: entry into force of the TEPA act and its ISF wealth tax deduction, transposition into internal law of the European regulation on state aid and the de minimis rules, understanding and getting to grips with the consequences of the transposition of MiFID into internal law.
Then little by little, during 2008, like a bright patch in an overcast sky, some aspects of these complex regulations began to come clear and further details emerged, to more or less felicitous effect.
In the end, the outcome of the spring 2008 wealth tax campaign by investment funds proved to be exceptional, in spite of the uncertainties and a curtailed timetable.
These good results augur well for our economy and our SMEs, especially in the turmoil caused by the financial crisis.
After that, 2008 ended with the usual procession of diverse and varied reform proposals, with all the manifold fresh uncertainties that go with that process.
The most symptomatic of these proposals would have been the reform of the tax treatment of carried interest. From a shaky start, this ended up with a regime that was unnecessarily rigid and in certain respects unfair, particularly on all those who, as part of their professional activities, not only contribute to the creation and development of our businesses, but also invest a significant part of their wealth in them, probably from their own inclinations, but above all for the purpose of assuring their principals - the investors - that they both share the same interests.
As a result, everybody has now ended up in the same boat without any real reflection of the different levels of financial risk taken by different people.
Worse still, particularly against a lackluster economic backdrop, these people are being required to run even greater risks than their principals the investors: from now on, repayment of the amounts they invested is subject to repayment of investors' capital. This puts us back where we were six years ago!
Private Equity fund managers are, from now on, "for tax purposes" required to bear a disproportionate share of any losses that they make on financial investments. Even the investors themselves didn't ask for all that! What is more, yet again, foreign investors may think of this "practice" as being specifically a French peculiarity: no foreign Private Investment fund places such a restriction on its managers, nor do any foreign regulations.
The other subject that would again have been in everyone's mind at the end of that year would have been the fate of the future of the ISF wealth tax deduction in the TEPA act, particularly the one allowing ISF holding companies to be set up. Exit holding companies offering investments to the public or those doing so with a constitution not allowing them the benefit of this tax treatment.
Finally, that year-end would see a few further details of the "contractual FCPR" regime emerge, after the AMF published FAQs on this new type of fund. However, some uncertainties also remained on this apparently promising vehicle.
Spring is coming. We hope that plenty of illumination will arrive with it.
Legal and Tax Watch
- Income affected:
- Distributions from gains and,
- net profits realized, directly or through an intermediary, on sale or redemption of carried interest securities.
- Securities involved:
- FCPR, FCPI and FIP [innovation fund, local area investment fund] shares/units,
- and venture capital shares,
- rights representing a financial investment in an entity set up in an EC member state or in an EEA state that has concluded a double tax convention with France containing an administrative assistance clause for combating fraud and tax evasion and the principal objective of which is investing in unlisted companies.
- give rise to differential rights over the net assets or income of the issuing structure, and
- the allotment of which depends on the person's position and status
- Persons affected
- venture capital companies,
- FCPR management companies,
- SCR management companies,
- entities as above,
- companies that render services relating to the management of FCPR or SCR funds or entities.
- the seller must be in receipt of normal remuneration under an office or employment contract that allowed him to subscribe for or to acquire the shares;
- the shares sold were subscribed for or acquired in consideration for a price corresponding to the value of the securities;
- carried interest securities constitute a single category of security;
- these securities must represent at least 1% of the total amount of subscriptions in the issuing structure. Nevertheless, the decree issued implementing the AMF opinion will determine cases in which a lower threshold could be set (this might apply to FCPIs and FIPs or depend upon certain investment policies).
- the amounts or consideration to which the securities give entitlement must be paid within five years after the date that the FCPR fund is set up or these shares and rights are issued. Furthermore, for FCPR venture capital fund units, including FCPI and FIP units, this must also be paid after repayment of other unit holders’ (investors’) capital.
If the above conditions are not met, distributions and profits are taxable to income tax according to the rules applying to income from employment.
This new tax treatment will apply to FCPR venture capital funds set up and to shares and rights issued on or after the date of publication of the implementing legislation, or at the latest 30 June 2009. Up to that date, the Instruction of 23 March 2002 will continue to apply.
Legal News
Publication of the law promoting income from work
Act no. 2008-1258 of 3 December 2008 promoting income from work, which reforms the treatment of stock-option, incentive and profit sharing plans was published in the Journal Officiel of 4/12/2008. In particular, it authorizes businesses with incentive schemes to make a payment before 1st October 2009 of an exceptional bonus capped at €1,500 per payee, attracting the same exemptions as the incentive plan.
Decree no. 2008-1341 of 17 December 2008 setting a cap on holdings by simplified FCPRs of unlisted company debt.
Simplified FCPRs are authorized "up to the limit of their assets set by decree" to acquire unlisted company debts.
The decree which has just appeared sets this limit at 15%. To calculate this limit, the denominator is the higher of the two following amounts: fund net assets or the fully paid-up amount of subscriptions to the fund (art. D. 214-50-1 of the CMF [Financial Markets Committee]).
Marketing of financial instruments, savings product and life assurance: codes of conduct for relations between producers and distributors
Order no. 2008-1271 of 5 December 2008 authorizes the Minister of Finance to approve the codes of best conduct that will be produced in the near future by the professional bodies representing the finance and insurance industries (Journal Officiel of 6/12/2008). The purpose of the codes is to govern the relations between the product issuers and distributors, for marketing financial instruments, savings products and life insurance. They are to define the information and advisory obligations of financial intermediaries who sell savings, investment or life insurance products. Furthermore, to improve the quality of documentation advertising these products, the entity designing the financial products must monitor the correctness of the promotional documentation used by the distributor.
"Side pocket" UCITS: following the order of 23 October 2008
The order of 23 October 2008 reforming the framework for third-party asset management authorizes all UCITS (SICAV and FCPs, open- and closed-ended funds) to transfer certain of their assets, disposal of which would not be in the interest of their investors, to a new structure of the same type (SICAV or FCP).
A decree 12 December 2008 (Journal Officiel of 14/12/2008) gives details of the conditions applying to the structure set up to receive these assets. In particular, it provides that transfer of a SICAV's assets can only be made to a contractual open-ended investment fund (art. D. 214-20-3 of the CMF). Similarly, an FCP mutual fund can only transfer its assets to a contractual closed-ended fund (art.. D. 214-22-1 of the CMF).
Finally, parts III and IV of the AMF General Regulations have had several articles added on the subject and the AMF has produced a number of clarifications in a document published on 22 December: "Questions and answers relating to UCITS spin outs under paragraph 2 of article L. 214-19 or paragraph 2 of article L. 214-30 of the Monetary and Financial Code".
The decree of 18 December 2008 on recognition of the NYSE LIFFE market
The NYSE LIFFE market is henceforth a foreign market recognized within the meaning of article L. 423-1 423-1 of the Monetary and Financial Code.
Insurance companies: new prudential and accounting provisions
A decree of 22 December 2008 containing various prudential provisions applicable to insurance bodies in particular determines the cases in which the Regulatory Authority can require a higher solvency ratio of an insurance business, or conversely to limit it, together with an impairment provision.
Finally a decree of 29 December 2008 ratifies regulation no. 2008-14 of the French Accounting Regulation Committee on the presentation of pro forma information on the consolidation and combination rules for businesses governed by the insurance code.
The decree of 29 December 2008 ratifying regulations no. 2008-13, no. 2008-15, no. 2008-16 and no. 2008-17 of the Accounting Regulation Committee
The various regulations mainly cover:
- the presentation of the pro forma information of regulation no. 99-07 of the Accounting Regulation Committee on consolidation rules:
- the accounting treatment of plans for options for purchase or subscription for shares and plans for employee share award schemes.
Order on the reform of the law on businesses in difficulty
Order no. 2008-1345 of 18 December 2008 on the reform of the law of businesses in difficulty makes the protection procedure more attractive by easing the access criteria and increasing protection for the head of the enterprise. It also improves liquidation procedures, speeding up progress of operations for the smallest businesses and promotes lending to businesses through increased effectiveness of certain guarantees in the event of liquidation. This Order will come into force on 15 February 2009.
Order on the reform of the law on financial instruments
Published in the Journal Officiel of 9 January, it gives a new definition of financial instruments. These now include, on one hand, financial contracts (that is to say forward contracts appearing on a list laid down by decree) and, on the other hand, financial securities.
This is an example of something that, although already modified in 2007 by the MiFID directive, will now undergo fresh changes following last October’s Order on asset management. Greater stability in our system would be desirable. This is of course just wishful thinking since at least two other Orders are expected in the coming weeks. These will apply to SICAFs [closed-end investment funds] and to publicly traded companies on their transparency obligations.
Decree of 5 January 2009 on cross-border company mergers
The decree particularly sets out the information that must appear in the joint merger project and the project notification to be gazetted.
European news
The Commission launches a public consultation on hedge funds
The European Commission launched a public consultation on hedge funds, particularly on systemic risk, the integrity and efficiency of markets, risk management, and transparency in respect of investors and investor protection. The consultation ends on 31 January 2009.
State Aid: the European Commission has reviewed state aid de minimis thresholds and private equity guidelines upwards
On 17 December last, the European Commission adopted a new framework for state aid. This is a temporary framework: it is to apply from 17 December 2008 to 31 December 2010. It provides for de minimis aid levels to rise from €200,000 to €500,000 (over 3 fiscal years) and the cap on Private Equity set at €1.5 million now rises to €2.5 million (over 12 months).
It is to be hoped that the French government authorities will act swiftly to bring our legislation into line, whenever necessary, particularly on the subject of the wealth tax deduction.
Tax news
Finally to take into account the publication of the Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain types of aid compatible with the common market in application of articles 87 and 88 of the treaty (General regulation of exemption by category), which in Annex I contains a definition of SMEs, the Finance Act updated several articles of the CGI which referred back to annex I of the Commission Regulation No (EC) 70/20001 of 12 January 2001 concerning application of articles 87 and 88 the EC treaty to state aid for SMEs: articles 199 terdecies-0 A ("Madelin" deduction), 885-0 V bis (wealth tax deduction for investment in SMEs). In practical terms this amendment has no effect since the definition of an SME is unchanged.
- Decree no. 2008-1403 of 19 December 2008 applying article 199 terdecies-0 B of the French General Tax Code
The decree relates to the income tax deduction for borrowings incurred for buying into a business. - Instruction 5 F-1-09 of 5 January 2009: Options for subscription or purchase of shares. Comments on articles 38, 39, 43 and 62 of the Law promoting profit-sharing and employee share ownership and article 8 of the Law promoting work, employment and purchasing power and article 74 of the Finance Act 2008.
- Instruction 4 H-10-08 of 26 December 2008: Tax credits for industrial, commercial and agricultural businesses incurring R&D expenditure.
- Instruction 4 H-9-08 of 24 December 2008: Impact on companies - Exemption for profits made by companies formed to take over an industrial business in difficulties.
- Instruction 4 E-2-08 of 24 December 2008: Industrial and commercial profits - Corporate income tax - Provision for impairment in equity investments - Deduction limits.
- Instruction 4 H-8-08 of 22 December 2008: Corporate income tax – Sundry provisions - Tax treatment of groups of companies.
- Instruction 4 H-7-08 of 9 December 2008: Corporate income tax - Tax treatment of holding companies - Article 21 of the Amended Finance Act 2007.
- Instruction 4 C-6-08 of 25 November 2008: Costs and expenditure (Industrial and commercial profits, corporate income tax, Common provisions). Interest on third-party equity. Conditions and limits for deduction of interest on advances granted by shareholders over and above their shareholding. Maximum rates of interest deductible for tax purposes.
AMF news
In outline, this regulation applies to portfolio manager companies and investment service providers providing portfolio management services on behalf of third parties. It deals with the valuation of financial instruments held by UCITS, OPCI real estate funds and as part of asset management mandates. It will not apply to shares or securities convertible into shares or to unquoted debt securities held as assets by FCPRs, employee savings plan UCITS holding the businesses' own shares, or for OPCI real estate funds.
AMF consultation on its draft general regulation relating to offering investments to the public
To prepare for coming amendments on offers to the public (and the purchase of shares), the AMF has put the amendments that it intends to make to its general regulations out for consultation. It makes one important stipulation: exemptions from the rules for offers to the public should no longer be limited only to public companies and limited partnerships.
New FCPR regulations
The COB Instructions of 6 June 2000 relating in part to approved FCPRs including FCPIs and FIPs, and also to light-regulation FCPRs should soon be replaced by four new regulations. The first two, which have been the subject of industry consultation, deal with Fund approval and returns procedures together with information for unit holders. The remaining two which have not at this stage been released for consultation are expected to deal with the contents of fund prospectuses.
Recent Legal Advice and Key Deals:
Upcoming conferences
Recent Legal Advice and Key Deals:
- secondary sale of portfolios;
- tax cases on article 209 B;
- tax cases on SCR "taxe professionnelle" [Regional business tax];
- study on the marketing of unlisted company securities/IT trading platform;
- implementation and monitoring of an ad hoc mandate to seek buyers for a holding in an investment fund portfolio;
- consultation on the liability of directors/shareholders in the event commencement of insolvency proceedings;
- projected sale of controlling holdings in a company listed on Eurolist B;
- consultation on the regulatory conditions for providing post-market services (clearing, settlement-delivery) in France (in a European context);
- consultation on the regulatory obligations applying to French investment service providers providing certain investment services to customers located outside the EU/EEA;
- consultation on the obligation to register with the SEC for French investment service providers providing a certain number of US customers with financial investment advisory and depository services in France.
Upcoming conferences:
- TEPA Capital, on 21 January at the Palais du Luxembourg (Paris) - A day set aside for professionals in SME investment to better understand the finer points of the TEPA act. Contributions from Me Daniel Schmidt and Me Florence Moulin.
- Club RH “Negotiations in company : principles and borders”, on 22 January, Me Beatrice Pola as speaker, organized in partnership with AEF, in the Paris office of Proskauer Rose.
- “Private Equity legal, tax and accounting news” seminar, on 27 January from 9 AM to 6 PM at Pavillon Ledoyen, a seminar on current events organized by "Association Française des Investisseurs en Capital" (AFIC) with Me Olivier Dumas, Me Guillaume Kellner, Me Maïté Lavrilleux and Me Florence Moulin as speakers.
- Round-table conference - CRA / CLENAM Meeting, about “the business angels investment in SME’s”, on 2 February from 6 PM to 8 PM, at the “Maison des Arts et Métiers” in Paris. With Me Daniel Schmidt as speaker.