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.
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