AIFMD asset stripping rules go beyond EU

Unbeknownst to many, certain non-EU fund managers are captured by asset stripping and notification provisions contained within the EU Alternative Investment Fund Managers (AIFM) directive that took effect on Monday. 

The directive restricts firms from making distributions to shareholders where a company is “controlled” by a fund (or by funds acting together). The rules are designed to prevent financial sponsors from breaking up a company for its most prized assets too early in an acquisition. 

Non-EU fund managers that are marketing in the EU after July 22 will be required to comply with the asset stripping provisions if they make an investment in a company with EU subsidiaries. 

“This hits all M&A, not just EU M&A,” said Geoff Burgess, corporate partner at Debevoise & Plimpton. “Once your non-EU fund acquires a portfolio company outside of the EU, but has subsidiaries in the EU, that subsidiary is hit by these [asset stripping] rules.”

Legal sources argue this creates an uneven playing field between GPs subject to the directive and those not. For instance, if you are a non-EU manager with a non-EU fund (and are not marketing in the EU) then these rules will not apply, explained Burgess. 

Some in the industry are concerned that opportunities for dividend recaps will be restricted by the asset stripping provisions. Dividend recaps can be an exit route for private equity firms as they recoup some or all of the money they used to purchase their stake in a business.

An impaired exit climate means more private equity firms are looking at dividend recaps to return money to investors, according to research by Fitch Ratings at the end of last year.

Non-EU fund managers that must abide by the asset stripping rules must also comply with the directive’s notification provisions. These provisions require GPs to disclose to the target company, its shareholders and its regulator: the identity of the manager; the policy for preventing and managing conflicts of interest between the manager, the fund and the company; and the company’s communication policy, “in particular as regards employees”, according to a client alert from Debevoise & Plimpton.

A non-EU manager must also notify the EU company, its shareholders and the manager’s regulator within 10 working days of acquiring “control” (more than 50 percent of voting rights) of the portfolio company. They must also disclose the voting rights and information about the different shareholders involved and the date on which control was acquired.