The scope and application of the AIFMD portfolio company provisions - including the "anti-asset stripping rules" – have changed significantly as a result of Brexit. This briefing highlights how these changes may affect your firm.
AIFMD portfolio company provisions: Brexit changes
Key change: The UK rules now apply to UK targets only; EEA rules apply to EEA targets only
From 1 January 2021, UK AIFMs and non-UK AIFMs that have registered their funds for marketing in the UK are subject to the AIFMD portfolio company provisions only if they acquire a material interest in a UK company (whether listed or unlisted). Prior to Brexit, these requirements would have been engaged on the acquisition of any EEA company.
EEA AIFMs and non-EEA (including UK) AIFMs that have registered their funds for marketing under EEA NPPRs will be subject to the AIFMD portfolio company provisions if they acquire a material interest in an EEA company (which no longer includes UK companies).
Post-Brexit, firms will therefore potentially need to consider two regimes.
Brief recap of the pre-Brexit position
Until 1 January 2021, if you were an EEA (including UK) AIFM, or a non-EEA AIFM marketing your fund in the EEA (including the UK) under national private placement regimes (NPPRs), you were required to comply with the AIFMD portfolio company provisions whenever your fund acquired a material stake in an EEA company (excluding SMEs and real estate SPVs).
The AIFMD portfolio company provisions require the AIFM to make various notifications and disclosures to regulators and other relevant stakeholders. If a controlling stake is acquired, certain distributions are restricted for 24 months post-acquisition (known as the "anti-asset stripping" rules).
What has changed?
On 1 January 2021, existing EU law was adopted into UK domestic law with necessary changes to reflect the UK's new status as a non-EU country.
The UK version of the AIFMD portfolio company provisions is contained in the Alternative Investment Fund Managers Regulations 2013. These have now been modified so that references to EEA issuers (i.e. listed companies) and EEA non-listed companies now refer instead to UK issuers (being a UK registered company listed on a UK regulated market) and UK non-listed companies (being a UK registered company not listed on a UK regulated market).
What does this mean in practice?
In practical terms, for acquisitions made on or after 1 January 2021, the AIFMD portfolio company provisions will now apply as follows:
Deals with both EEA and UK targets
Where an AIFM is subject to both UK and EEA requirements (e.g. a UK AIFM registers its funds for marketing under EEA NPPRs, or a third country (non-EEA, non-UK) AIFM has funds that are registered for marketing under both EEA and UK NPPRs) and the target group includes both UK and EEA companies:
- the AIFM is potentially subject to a double notification obligation (at the level of the highest EEA company in the group and also at the level of the highest UK company in the group); and
- the dividend restrictions under the anti-asset stripping rules potentially operate at multiple levels within the group (e.g. between UK target topco and acquisition stack, but also between EEA subsidiary and UK target topco or vice versa), potentially restricting the movement of cash within the target group.
Where an AIFM is subject to only UK requirements (i.e. it has not registered the fund for marketing under EEA NPPR), the application of the revised rules may result in the dividend restrictions operating at a different level within the target group when compared to the pre-Brexit position. For example:
- if the fund acquires a UK company with EEA subsidiaries, we would expect the AIFM to notify the acquisition of the UK company and for the dividend restrictions to operate as between the UK company and the acquisition stack (as before); however
- if the fund acquires an EEA company with a UK subsidiary, we would now expect the AIFM to notify the acquisition of the UK subsidiary and for the dividend restrictions to operate as between the UK subsidiary and its EEA parent.
Firms should consider the potential impact of these requirements at an early stage in structuring the deal and should ensure that all relevant advisers have taken account of the impact of the changes to the regime.
What about existing deals?
The legislation is not explicit about the impact on existing deals where the 24 month clock is already ticking. We think regulators would expect AIFMs to continue to comply with the restrictions on distributions until the 24 month period has expired. We would also suggest continuing to notify EEA regulators of disposals, if the acquisition has previously been notified.
Has anything else changed?
The substantive requirements of the AIFMD portfolio company provisions have not changed. We would therefore expect industry participants and advisors to continue to apply existing interpretations of the rules in the absence of any further legislation or guidance.