Legal & Technical bulletin

June 2009 Issue 37 Keeping at the forefront of private equity and venture capital in the UK

Introduction
Since the last Bulletin in October, the financial world has been
on a roller coaster ride with knee jerk reactions from Brussels
in particular where the EC Directive on Alternative Investment
Fund Managers threatens to drown the private equity industry in
a cascade of legislative treacle.
The BVCA is lobbying hard and the Government is supportive of our efforts, but the
groundswell of public opinion in Europe is against private equity so a difficult road
lies ahead.
This Committee and the Regulatory Committee combined earlier this month
to provide a bulletin on the scope and regulatory requirements of the proposed
Sue Woodman directive. This can be found at http://www.bvca.co.uk/About-BVCA/features/
AlternativeInvestmentFundManagersDirective. The directive will affect marketing
Chairman
Legal & Technical Committee of funds, reporting by portfolio companies and will mean that a substantial and costly
Partnership Counsel, administrative burden will be incurred by funds with arguably very little benefit to
Alchemy Partners LLP anyone. Unfortunately, much of this is politically driven in Europe and thus common
sense plays a negligible role.
A further important issue that is coming over the horizon in April 2010 is the Carbon
Reduction Commitment which will have wide ranging consequences for private equity
funds and their portfolio companies. Whereas it is obvious that we should welcome
initiatives to reduce carbon emissions, the Government has specifically included a
separate section on private equity whereby a private equity fund is treated as a holding
company and all majority held portfolio companies are treated as its subsidiaries.
Any one portfolio company falling within the requirements of the Carbon Reduction
Commitment will draw all the other majority held portfolio companies in as well.
This does not provide a level playing field and the Committee has again been lobbying
hard to redress the issue. The Committee’s submission can be found on the BVCA
website and Roger Fink and Ian Warner of Pinsent Masons have written an informative
article on the issues. >>>

What’s inside
3 Carbon Reduction Commitment –
How will it affect you?
6 Execution of Documents at Virtual Signings
or Closings
8 Pre-Packaged Administrations –
Recent Developments
10 New IPEV Guidelines
13 The Pensions Regulator’s Code of Practice for the
No responsibility can be material detriment test: update and comment
accepted by the BVCA, the
Legal & Technical Committee
15 Limited Partnership Law Reform
or contributors for action 17 Time for Constitutional Change…
taken or not taken as a result of Memorandum & Articles of Association
information contained in this
Bulletin. Specific advice should 19 Trade credit insurance top-up scheme
always be taken in each situation.
For a number of years now, the BVCA has been lobbying for a change in limited
partnership law where certain provisions of the Limited Partnership Act of 1907 do
not now reflect the reality of investment today. The whole process seemed to have
stalled but thanks to the perseverance of those involved, the Department for Business,
Enterprise and Regulatory Reform has now agreed that the changes that the BVCA has
been pushing for will largely be introduced and Simon Witney of SJ Berwin describes
the proposals.
The recent ‘Mercury’ case has highlighted a change to the long held practice of
obtaining pre signed signature pages sent by email or fax to affect closings. Elizabeth
Ward of Linklaters with contribution from Gavin Brown of Slaughter and May and
Victoria Kershaw of SJ Berwin explains how it must be done to ensure legality.
Pre-packaged administrations are another focus of attention in these days of failing
companies and Gavin Brown focuses on this seemingly contentious practice, its pros
and cons and how considerable care must be taken in making sure that these are
approached correctly.
The International Private Equity Guidelines have recently changed and there has been
some concern about the perceived abolition of the current ‘safe harbour’ provision.
This is not the case and Graham Phillips of PricewaterhouseCoopers explains the
changes and what they mean. The BVCA is supportive of these changes.
Camilla Barry of Macfarlanes reviews the Code of Practice issued by the Pensions
Regulator in response to the BVCA’s campaign to obtain further clarity on the new
version of the ‘contribution notice’ introduced by the Pensions Act 2008.
Separately, the Committee has also submitted a set of questions and suggested
answers to the Regulator which are intended to clarify the Regulator’s interpretation
of the legislation. As soon as the Regulator has confirmed the answers, they will be
circulated to members and posted on the BVCA website for information.
The final part of the Companies Act 2006 is coming into force in October and Table A
will disappear. Stephanie Biggs of Kirkland and Ellis describes the new Model Articles
and their key provisions.
We also include some information about changes recently made regarding eligibility
to the trade credit insurance top-up scheme which I am aware has been an area of
concern for a number of members.
Finally, to ensure that we are addressing all the key concerns of BVCA members in the
legal and technical area, if any member has any issues which come within the remit of
this Committee, and which we should be considering, please do not hesitate to get in
touch either with me or Simon Walker to discuss.
My thanks go to all the members of the Committee who work so hard in the support of
the work of the BVCA and to the executive of the BVCA in helping with the production
of this Bulletin.

2 BVCA Technical Bulletin June 2009 Issue 37

Carbon Reduction Commitment –
How will it affect you?
The draft Carbon Reduction Commitment Order 2010 (the “Draft Order”), published by
the Department of Energy and Climate Change (“DECC”) under the Climate Change Act
2008, has implications for the private equity industry.

This article does not attempt to summarise in any detail which it will sell by auction and remove the
the Carbon Reduction Commitment (“CRC”) scheme but fixed price. Allowances will also be traded on a
instead focuses on how it will affect private equity funds secondary market;
and private equity backed portfolio companies.
• we estimate that the cost of buying allowances
A. THE CARBON REDUCTION COMMITMENT for 6,000 MWh of electricity (the minimum
SCHEME emissions for which allowances will have to be
purchased) is just short of £40,000. Clearly, when
In brief, the scheme under the Draft Order is as follows:
the cap in the fixed price is removed the cost
1. The CRC is a new statutory carbon dioxide could be a lot more than this;
emissions trading scheme for the UK.
• all proceeds from the sale of allowances will be
2. An “organisation” is included in the CRC if in the recycled to Participants in proportion to their
UK it has: relative contributions to total emissions under
the CRC and their performances and positions in
• one or more half hourly electricity meters settled
a league table;
on the half hourly markets; and Roger Fink
• a performance league table will be published by Corporate Partner –
• total half hourly metered electricity use of at Private Equity
the Government which will rank Participants. A
least 6,000 MWh during the 2008 calendar year. Pinsent Masons
Participant’s performance in energy efficiency
3. An organisation has to register under the CRC if will be measured on (i) actual emissions (ii)
its electricity use in the UK during the year ended changes in emissions relative to turnover or Ian Warner
31 December 2008 exceeded 6000 MWh (an revenue expenditure and (iii) how a Participant Corporate Partners – Funds
organisation which has to register being referred to has managed its energy use prior to the Pinsent Masons
in this article as a “Participant”). The CRC catches commencement of the scheme. Based on a
any business which exceeds this threshold - not just Participant’s improvement or otherwise it will, as
manufacturing businesses but also businesses in the part of the recycling of the proceeds of the sale
support services, property and other sectors. of allowances, either receive a bonus payment
from the Government or be subject to a penalty.
4. Each Participant will have to register with the
Environment Agency between April 2010 and B. GROUPING TOGETHER A FUND AND ITS
September 2010, report its emissions and those PORTFOLIO COMPANIES
of its group companies (as to which see below)
In its third public consultation on the CRC scheme
to the Environment Agency and then purchase
(published in March this year), the Government stated
from the Government a sufficient number of
that:
allowances to cover its emissions. One allowance
will have to be surrendered for each tonne of CO2 “Grouping organisations together under their par-
emitted (emitted in this sense means either directly ent will maximise the emissions coverage of the
or indirectly, for example through the use of scheme whilst limiting the overall administrative
electricity): responsibility to only one grouped entity rather
than multiple sites and subsidiaries.”
• the first sale of allowances will be in April 2011,
covering (i) actual emissions for the twelve For the purposes of the CRC, including in calculating
months ending April 2011 and (ii) forecast whether the 6000 MWh threshold is met, the emissions
emissions for the twelve months ending April of all members of a group (as defined in the Draft Order)
2012. Thereafter, sales of allowances will be are aggregated. Therefore, the emissions of group
conducted in each April to cover forecasted members will need to be included even if they do not
emissions for the following year; themselves meet the threshold.
• during the first three years of the scheme, In relation to a group, it is the Primary Member (as
allowances will be at a fixed price of £12 per explained below) which registers with the Environment
tonne of CO2. Subsequently, the Government Agency and which is therefore the “Participant” for the
is proposing to cap the number of allowances purposes of the Draft Order.

June 2009 Issue 37 BVCA Technical Bulletin 3

Whilst grouping companies and other entities undertaking to one or more portfolio companies
then the emissions of the limited partnership and
together under their parent satisfies the those portfolio companies will be aggregated to
Government’s objective of increasing the determine whether they are required to participate
in the CRC scheme. If in aggregate the 6000 MWh
number of companies covered by the scheme, threshold is reached, the limited partnership and
this principle will cause considerable difficulties all those portfolio companies will be required to
participate.
to private equity funds
6. Although under the Draft Order legal responsibility
for compliance with the scheme will rest with the
private equity fund group as a whole, the fund
group will be required to nominate a “Primary
Member” with whom the Environment Agency will
correspond:
• in most instances, the Government regards the
highest parent organisation as the most likely
What is a “group” for CRC purposes?
Primary Member. For private equity funds this
1. Whilst grouping companies and other entities means that the limited partnership at the top
together under their parent satisfies the of the fund structure is likely to be the Primary
Government’s objective of increasing the number Member (acting through its general partner);
of companies covered by the scheme, this principle
• under the Draft Order a request can be made
will cause considerable difficulties to private equity
that the Primary Member should be someone
funds (and indeed to groups of companies which
other than the highest parent organisation. The
are not private equity-backed).
Environment Agency has the power to agree to
2. The CRC groups together “parent undertakings” this if it thinks appropriate;
and “subsidiary undertakings” by incorporating
• if the Primary Member is located overseas, it will
section 1162 of the Companies Act 2006 into the
be required to nominate a UK agent to carry out
legislation. Points to note on this are:
its obligations. Emissions of companies outside
• a person is a “parent undertaking” of a “subsidiary the UK will not be aggregated for the purposes
undertaking” if, amongst other matters, it (i) holds of the CRC to the extent of their overseas
a majority of the voting rights or (ii) is a member businesses.
and has the right to appoint or remove a majority
7. Whilst a number of private equity funds may as
of the board or (iii) has the right to exercise a
a result of the grouping provisions of the Draft
‘dominant influence’ either under the subsidiary
Order be required to consolidate their portfolio
undertaking’s articles of association or by virtue
companies, other funds may not have to do so if
of a ‘control contract’;
they are structured in such a way that there is no
• a partnership as well as a company can be a limited partnership or other entity which is parent
parent or subsidiary undertaking; undertaking (as defined) to any of the fund’s
portfolio companies.
• rights held by a person in a fiduciary capacity are
ignored for these purposes and rights held by a Thus the legislation would appear to operate
person as nominee for another are treated as indiscriminately and unfairly against a private equity fund
held by the other; if it happens to be structured in a way which is treated as
a group for the purpose of the Draft Order.
• a joint venture could also be treated as part of
the group of one of its shareholders (other than What are the issues for private equity funds
where two or more shareholders hold equal
8. If , as is commonly the case, a private equity
voting rights which amount to a majority).
fund has delegated the exercise of its rights and
It will be a difficult exercise for private equity funds responsibilities in relation to its portfolio companies
to work out how these definitions apply to their fund to the fund’s general partner and/or manager, will
structures and portfolio companies. We have tried below the general partner and manager also be caught by
to extract some general principles which may be helpful the CRC scheme?
in analysing the position.
• we mentioned above that under the Companies
What are the CRC requirements for a group? Act 2006 rights held by a person in a fiduciary
capacity are treated as not held by that person;
5. In a typical private equity fund structure where
there are one or more limited partnerships in place, • to the extent that the general partner and
if any of those limited partnerships is a parent manager are performing their functions on behalf

4 BVCA Technical Bulletin June 2009 Issue 37

 of the limited partnership, they are doing so in a Representations to DECC
fiduciary capacity;
10. The BVCA has made representations to DECC on
• however it is not clear that they are performing the problems which the legislation will cause to
all of their functions in this capacity. This will private equity funds and why it is inappropriate to
depend on the relationship between the general aggregate together group companies. If the idea is
partner and manager on the one hand and the to improve energy efficiency, the scheme should
limited partnership and portfolio companies focus on those companies whose businesses are
on the other hand. For example, if the general energy intensive and make them responsible for
partner or manager invests in the fund does this their own actions, rather than putting the onus
means it is not acting in a fiduciary capacity? on a Primary Member which is not involved in any
operational matters and catching other companies
• whatever the situation regarding the general
with very low emissions. Unfortunately DECC has
partner or manager, the limited partnership
not to date shown any interest in this argument; to
would still be caught by the scheme if it were a
the extent that the CRC scheme brings within its net
parent undertaking to portfolio companies in the
a larger number of organisations, DECC feels that
fund (as discussed above).
the scheme is achieving its purpose.
9. Grouping together portfolio companies, limited
11. Interestingly enough, the CBI has also expressed
partnerships (and possibly general partners and
concerns for group organisations about the
managers) is going to create a number of difficulties
practicalities and associated administrative costs
for private equity funds. These include:
of participating in the scheme. In particular, the
• the Draft Order says nothing about how the CBI is concerned about groups whose divisions
burdens of complying with the CRC scheme, have a high degree of operational autonomy, and
including the purchase of allowances and the that the consequence under the CRC scheme of
costs of compliance, are shared between group aggregating reporting and operational responsibility
companies. The Order is also silent on how the at a group level will be to separate accountability
Primary Member is going to be able to make sure from operational control.
the other group companies comply with their
12. Whilst of course supportive of the Government’s
obligations;
initiative in this area, the BVCA believes that the
• unlike the way in which a number of groups of Government should give private equity funds and
companies are structured, a private equity fund other groups the flexibility to decide whether:
does not have a single board of directors which
• to operate the scheme at an aggregated group
has authority over and manages the boards of
level; or
the individual portfolio companies. The CEO of
one portfolio company is not going to regard • allow individual companies to assume their own
himself or herself as being bound by the CEO responsibility for compliance.
of another portfolio company. Each company
The BVCA in its representations is seeking to ensure
will have its own operational board, each
that companies whose carbon emissions are below
board will have statutory duties by reference
6,000 MWh do not have to face the additional costs and
to the particular business of its company and
administrative burdens of having to comply with the CRC
each company will have its own shareholding
scheme.
structure with an individually negotiated
management stake;
• likewise, the Draft Order does not give any
guidance as to how a Primary Member will decide
the proportion in which group companies are
entitled to share in any refund payments arising
as a result of improvements in energy efficiency;
• if the legislation is implemented in its current
form and a limited partnership in a private
the scheme should focus on those companies
equity fund is treated as a Primary Member, whose businesses are energy intensive and make
then fund managers will need to consider them responsible for their own actions, rather
(i) if their fund and transaction documents
are flexible enough to allow the manager to than putting the onus on a Primary Member
allocate the liabilities incurred to the underlying which is not involved in any operational matters
portfolio companies, and (ii) how, if at all, the
Primary Member has any ability to direct the
and catching other companies with very low
true “groups” underneath the fund. emissions

June 2009 Issue 37 BVCA Technical Bulletin 5

 Execution of Documents at Virtual Signings or Closings
The 2008 Mercury case1 led to discussion about the effectiveness, under English law, of
virtual signings or closings and the practice of using pre-signed signature pages sent by
email or fax.

Elizabeth Ward
The judge, in his obiter comments, stated that in relation its final version and, while leading counsel and the JWP
Counsel to deeds, “the signature and attestation must form part take a different view on this point, it is recognised that
Linklaters LLP
of the same physical document” when the deed is signed, this is a question of statutory interpretation that was not
and in relation to all contracts, whether deeds or not, addressed in Koenigsblatt.
the document to be signed should exist as a “discrete
Furthermore, the approach of the judge in Mercury could,
physical entity” and the parties must sign “an actual
by analogy, also apply in the case of the execution of
existing authoritative version”. This case raised a number
a deed by a company pursuant to section 74A of the
of questions, in particular:
Law of Property Act 1925 and sections 44 and 46 of the
• whether simple contracts or deeds which are Companies Act 2006.
governed by English law could be executed by
Options for virtual signings and closings going
signing a blank signature page in advance and then
forward
attaching it to the contract or the deed once it had
been finalised; and In light of the Mercury decision, the JWP has prepared
guidelines setting out three options to assist lawyers in
• what procedure should be followed where parties
executing documents at virtual signings or closings. These
wish to effect a virtual signing or closing.
options are guidelines only and have been prepared on
Joint working party established the basis of a conservative interpretation of the Mercury
judgment. Consequently, they are not the only ways of
To answer these and several other questions arising from
validly conducting a virtual signing or closing. These options
the case, the Law Society Company Law Committee and
are set out in more detail in the JWP Guidance Note, which
Contributions from various committees of The City of London Law Society
can be found at http://www.citysolicitors.org.uk/FileServer.
formed a joint working party (the “JWP”) and sought the
Gavin Brown aspx?oID=571&lID=0, but are briefly, as follows:
Slaughter and May advice of leading counsel, Mark Hapgood QC. Linklaters
LLP, together with Slaughter and May and SJ Berwin LLP • Option 1: a final execution version of the relevant
Victoria Kershaw
S J Berwin LLP who contributed to this article, were among a number of document is emailed (as a pdf or word attachment)
firms who were members of this joint working group. to all parties. Each signatory then prints and signs
the signature page only, and sends a single email
The view reached by leading counsel and the JWP is that:
to the co-ordinating law firm to which is attached
• the Court of Appeal decision in Koenigsblatt2 that signatory’s signed signature page together with
remains the leading authority in relation to the final version of the document. This return email,
execution of documents; and together with the final version of the document
and the signed signature page, will constitute
• Mercury (a first instance decision) should be viewed
an original, signed counterpart of the document
as limited to its particular facts, and to the extent
and will equate to the “same physical document”
inconsistent with Koenigsblatt, the Koenigsblatt
referred to in Mercury. This option represents
decision should prevail.
a prudent approach in relation to the
In the case of both simple contracts and deeds, two execution of all contracts, including deeds
propositions set out in Mercury, namely that (i) the and real estate contracts.
document to be signed must exist as a “discrete physical
• Option 2: a final execution version of the relevant
entity”; and (ii) a party must sign the “actual existing
document is emailed (as a pdf or word attachment)
authoritative version” of the document, conflict with the
to all parties. Each signatory then prints and signs
propositions in Koenigsblatt that (a) there is no general
the signature page only and emails the signed
requirement for a document to be in final form at the
signature page to the co-ordinating law firm, which
time a party signs it, and (b) if the document is altered
has authority (by prior agreement) to attach it to
after signing, any signature on it can still stand as long as
the final approved version of the document. The
the signatory authorised the amendments at the time or
final approved version of the document with all
subsequently ratified them.
the signed signature pages attached with the prior
It should be noted, however, that the judge in Mercury approval of the parties will constitute an original
also took the view that section 1(3) of the Law of signed document. The prudent approach
Property (Miscellaneous Provisions) Act 1989 requires a would be not to use this option in relation
deed being executed by an individual to be executed in to deeds or real estate contracts.

6 BVCA Technical Bulletin June 2009 Issue 37

 Option 3: separate signature pages are emailed
•
(or circulated in hard copy) to the parties before
Importantly, in relation to deeds, the guidance
the document is finalised. The signature pages clearly provides that a prudent approach would
are signed by each party and returned to the co-
ordinating law firm by email attachments. The
be not to execute deeds by signing blank
co-ordinating law firm will hold to the order of the signature pages in advance.
signatories until authority is given for the signature
pages to be attached to the final document. The
final approved version of the document with the
pre-signed signature pages attached with the
Additional considerations
prior approval of the parties will constitute an
original signed document. Again, the prudent If there is a need to file a signed original of the document
approach would be not to use this option in with a registry such as Companies House or the Land
relation to deeds or real estate contracts. Registry (both of which will only accept “wet ink”
originals), the parties will need to make arrangements for
Which option should be used will depend on the nature
the wet ink signature to be obtained and attached to the
of the document to be executed, as shown above.
final deed or contract.
Importantly, in relation to deeds, the guidance
clearly provides that a prudent approach It will still be necessary for parties to consider the factors
would be not to execute deeds by signing affecting a particular transaction, including the place of
blank signature pages in advance. In relation to incorporation of the parties, whether a legal opinion is
REFERENCES
guarantees, if they are to be executed as deeds the required on the due execution and the nature of any 1 R (on the application of Mercury Tax
guidance is that they should be executed using Option 1 board authorities. In addition, in cases where particular Group and another) v HM Revenue
and Customs Commissioners and
above, whereas guarantees included in simple contracts procedures or restrictions apply to the execution of others [2008] All ER (D) 129
may be executed using any of the options. As for simple documents (for example, notarisation, escrow conditions 2 Koeningsblatt v Sweet [1923] 2 Ch
314
contracts which do not include a contract for the sale or tax considerations), care should be taken to ensure
or other disposition of land or a guarantee, any of the that use of one of the above options does not conflict www.fsa.gov.uk/Pages/About/What/
financial_crime/market_abuse/index.
options may be followed. with those procedures or restrictions. shtml

June 2009 Issue 37 BVCA Technical Bulletin 7

 Pre-Packaged Administrations – Recent Developments
In recent months pre-packaged administrations (pre-packs) have been used to restructure a
number of high profile companies, including Mosaic, Whittard, USC, the Officers Club, Laurel
Pubs, FishWorks and Entertainment Rights. Their increased use has attracted greater media
attention and is now also attracting a greater degree of scrutiny.

Gavin Brown
Slaughter and May What is a pre-pack? Dealing with the critics
A pre-pack is an arrangement to sell all or part of a Critics of pre-packs point at the opaque nature of the
company’s business or assets, which is made before process which leads to suspicion and to concerns as
an insolvency practitioner (IP) is appointed, with the IP to whether pre-packs are beneficial for all stakeholders
effecting the sale immediately on, or shortly after, his and whether certain stakeholders, such as unsecured or
appointment. The insolvency process used is typically junior creditors, are treated unfairly. The fact that many
administration but pre-packs can also be used with other business sales under a pre-pack are also to connected to
insolvency processes. parties further exacerbates the issue.
The good and the bad In response to these concerns SIP (Standard of
Insolvency Practice) 16 was introduced in January 2009.
In the right circumstances, a pre-pack can be the best
It seeks to address concerns that the pre-pack process is
way of extracting value from an insolvent business. The
“shrouded in secrecy” from the creditors’ point of view
principal advantage of a pre-pack is the speed at which
and that they are not always informed of the reasons
the business can be sold following the appointment
for the pre-packs or shown that “best value” had been
of the IP. This avoids the negative publicity which may
achieved. Therefore, SIP 16 requires IPs to:
destroy a business. Particularly susceptible are “people”
businesses or those in regulated sectors that cannot • keep a detailed record of the reasons why a pre-
trade when insolvent. packaged sale has been chosen as the best course
of action for creditors and be able to explain and
Whilst the speed at which a pre-pack can be put in
justify why it was considered appropriate; and
place brings advantages - preserving value and saving
businesses that might otherwise simply shut down - it • disclose certain specified information to creditors,
also gives rise to the main criticism of pre-packs which including whether efforts were made to consult
is the lack of transparency in the process. Typically the with major creditors, the identity of the buyer
sale of a business in a pre-pack will occur with little or no of the business or assets, any valuations of the
open marketing. Secured creditors are likely to be aware business or underlying assets obtained, alternative
of the transaction as they will generally be required to courses of action considered by the administrator,
release their security. In general, however, unsecured details of the assets involved and the nature of the
creditors will not find out about the sale until it has transaction, the consideration for the sale and the
been completed and so are presented with a done deal. terms of payment, and any connection between
There is also concern that pre-packs frequently involve the buyer and the directors, former directors,
the sale of a business back to connected parties (it is shareholders or secured creditors of the company.
estimated that this is the case in over half of all pre-pack
Court’s approach to pre-packs
transactions).
Where the pre-pack involves a court appointed
administrator the court will also consider the merits
of the intended pre-pack transaction when deciding
whether to make the administration order. The recent
case of Kayley Vending Limited [2009] EWHC 904
(Ch) provides helpful guidance on the information
that is likely to assist the court. It held that whilst it
was primarily a matter for the applicant to identify the
relevant information, it was likely in most cases that the
information required by SIP 16 ought to be included in
the application (although additional information may also
be relevant).

In the right circumstances, a pre-pack can The court also considered the timing of the provision
of that information and held that it would not be
be the best way of extracting value from an satisfactory to wait until an application was opposed
insolvent business before giving creditors sufficient information to evaluate

8 BVCA Technical Bulletin June 2009 Issue 37

the pre-pack. Such information was likely to assist
creditors in deciding whether or not to oppose the
Pre-packs do offer a means of protecting
application, and they should not be in the position of a company against the erosion of value
having to commit themselves to opposition, with the
cost implications that entailed, in order to obtain such
associated with formal insolvency processes and
information. Nor was it satisfactory to say that in so far in so doing they can often preserve employment
as the information was not provided to the court on
the hearing of the application, it would be provided to
and minimise losses both for the business and
creditors in due course and they would then be able to counterparties.
exercise any remedy in respect of abuse afterwards.
Another interesting feature of this case is that the
proposed administrator’s pre-appointment costs were
treated as an expense of the administration. That order
was made on a discretionary basis and departs from the
general principle that the pre-appointment costs of a
prospective administrator are a matter between him and
the party that instructs him. disclosure rules introduced by SIP 16 help to protect
against possible abuse of pre-packs and may promote
More or less?
greater use of the mechanism to achieve business rescue.
Pre-packs do offer a means of protecting a company Any approach to the court involving a pre-pack is also
against the erosion of value associated with formal likely to result in greater disclosure and transparency. Will
insolvency processes and in so doing they can often this greater transparency silence the critics? Time will tell,
preserve employment and minimise losses both for the but in current market conditions it seems likely that the
business and counterparties. The new transparency and pre-pack will continue to be tested.

June 2009 Issue 37 BVCA Technical Bulletin 9

 New IPEV Guidelines
On 22 May 2009 the IPEV Board issued an exposure draft on revision to the existing
IPEV Guidelines which were issued in March 2005. Once comments have been
processed, it is intended that the revised Valuation Guidelines take effect for reporting
periods after 1 July 2009.

Graham Philips
Partner,
PricewaterhouseCoopers It will not have escaped most people’s notice that in of Attributable Enterprise Value does not include a
recent months there has been considerable focus on the specific deduction for any marketability discount and all
concept of fair value. Both the International Accounting the commentary, including the suggested percentage
Standards Board (“IASB”) and the Financial Accounting ranges of discount to apply, have been removed.
Standards Board in the US (“FASB”) are working very Instead, the new guidelines require the risk associated
closely together on this subject. The IASB have decided with a lack of marketability or liquidity of a holding in an
that it is appropriate to have a financial reporting unquoted investment to be treated as an adjustment
standard dealing with the subject of fair value; this mirrors to the market–based earnings multiple of comparator
the situation in the US. An exposure draft on fair value companies.
was published by the IASB in May 2009.
In essence, the adjustment required to the earnings
The International Private Equity and Venture Capital multiple is designed to reflect the view of a prospective
Valuation Board (“IPEV Board”) has issued an exposure purchaser who, it is contended, would factor in a price
draft for revisions to the IPEV Guidelines. The first adjustment to take account of the additional risks of
valuation guidelines were issued in March 2005 holding an unquoted share. The guidelines also recognise
and since that date there have been a number of that this marketability/liquidity discount adjustment will
industry developments as well as further refinements be greater where there is a minority shareholding - and
to the principles inherent in the “fair value” concept. the shareholder cannot control the realisation process
Accordingly the IPEV Board have decided to revise the - compared to a majority holding where the realisation
IPEV Guidelines. The comment period closed on the 12 process can be controlled.
June 2009.
1.2 Price of Recent Investment methodology
As with the prior version of the guidelines, they are
There is new guidance on the use of the Price of a Recent
an articulation of Best Practice for the valuation of
Investment methodology to derive fair value. The Price
investments held by private equity funds and are not
of a Recent Investment methodology is calculated either
mandatory, since each fund and therefore its basis
at initial investment when cost will be used or, if there is a
for the valuation of investments is governed by legal,
subsequent investment in the entity, the price of the new
contractual or regulatory terms.
investment.
Nevertheless the principles, requirements and
What has been removed form the old guidelines
implications of both IFRS and US GAAP have been
is the reference to one year as a reasonable time
taken into account in revising this current version of the
period for the use of this valuation methodology.
guidelines. The intent is that the guidelines provide a
Although the one year reference was only referred
framework to enable managers to present the fair value
to as a period “often applied in practice” to some
of an investment which is consistent with underlying
extent it became a norm for keeping an investment
accounting principles. It is fair to say that a majority
at cost for the first 12 months. The one year rule was
of private equity managers adopt the principles of the
reinforced in the application guidance section of the
guidelines in reporting to investors and, where applicable
guidelines - “the period of time will depend on the
under the constitution of the Fund, in preparing the
specific circumstances of the case, but should not
annual accounts for the funds. It is not expected that
generally exceed a period of one year”. In fact the
the fair value of an investment derived under the new
recommendations in the existing guidelines always had
guidelines would be notably different from one estimated
a requirement for the valuer to assess at each valuation
under the existing guidelines.
reporting date whether there had been a change in fair
1. Principal changes to Guideline value. “ … During the limited period following the date
Recommendations and supplementary of the relevant transaction, the Valuer should in any
commentary case assess at each reporting date whether changes or
events subsequent to the relevant transaction would
1.1 Marketability discount
imply a change in the Investment’s fair value”. The new
The requirement to apply a marketability discount to guidelines make it clearer in the supporting commentary
derive the attributable enterprise value has been removed that the use of the Price of Recent Investment
from the new guidelines. This means that the calculation methodology depends on stable market conditions

10 BVCA Technical Bulletin June 2009 Issue 37

whereas a rapidly changing environment would suggest of investee companies, or changes to the market
that such a methodology might not be appropriate. or other economic conditions which affect the
underlying investee fund;
The commentary has also been expanded to deal with
the situation where the Price of Recent Investment • information from a secondary transaction
methodology is no longer relevant and there are no providing it is sufficient and transparent;
comparable companies or transactions from which
• particular clauses in the Fund agreement that
to derive fair value. In these circumstances, the new
affect distributions which are not reflected in
guidelines refer to use of the milestone analysis
apportioned NAV; and
approach where the valuer attempts to determine
whether a change in milestone and/or benchmark • materially different valuations by Fund manager
indicates that the fair value of the investment has GPs for common companies with identical security
changed. The new guidelines include illustrative holdings.
milestone measures under the headings of financial,
There is also a section relating to secondary transactions
technical and marketing and sales
which suggests that valuers of Fund-of-Funds should
1.3 Comparator Multiples consider the value of a secondary transaction in
determining the appropriate NAV of an investee fund
There is more guidance on the use of comparator
but only if the secondary transaction is considered
multiples and the reasons why comparator multiples
orderly and all the terms are known. In practice, most
may need to be adjusted. The guidelines require that the
secondary transactions are opaque and information is
particular reasons for differences should be explained at
extremely limited.
each valuation date
1.5 Available market prices for holdings of
1.4 Fund-of-Funds
Quoted Instruments and discounts
The new guidelines include a new section dealing with
This section has been revised so that the
the fair value of an investment in an underlying private
recommendation allows the use of the most
equity fund. The new guidelines require that the valuer
representative point estimate in a bid/offer spread
of a Fund-of Funds entity determines the attributable
(usually taken as the mid-market price) where accounting
proportion of the reported net asset value (“NAV”) of
regulation does not require the use of bid price.
each underlying investment. Clearly, it will be necessary
Previously, the supporting commentary required the
for the valuer to determine that the reported NAV has
use a bid price where a bid/offer spread existed and an
been prepared on proper fair valuation principles which
implication that a mid- market price should only be used
should be determined from initial due diligence, ongoing
where the difference to the valuation was not material.
monitoring and reviewing the financial reporting of the
investee fund. The commentary that stated discounts should not be
applied to prices quoted on an active market, unless
It may be necessary for the valuer to make adjustments
there is some contractual, Governmental or other
to the reported NAV. The most common of these would
legally enforceable restriction preventing realisation
be where there has been no accrual for potential carried
at the reporting date has been upgraded to a main
interest or performance fees. However, the guidelines
recommendation. If a discount is determined as
detail other adjustments that might be necessary which
appropriate, the new guidelines refer to the discount
include the following circumstances:
reflecting the time value of money and the additional
• where there is significant elapsed time between risk from reduced liquidity. The new guidelines use
the reporting date of the investee fund and the the same six month lock-up period as an example but
Fund-of-Funds reporting date. This could include have ranged the appropriate discount as 10% to 25% at
adjustments relating to further investments, inception compared to the single figure of 20% referred
realisations, subsequent changes in the fair value to in the existing guidelines.

The new guidelines make it clearer in the supporting commentary

that the use of the Price of Recent Investment methodology
depends on stable market conditions

June 2009 Issue 37 BVCA Technical Bulletin 11

 2. Application Guidance repaid in settlement of the debt at the time of realisation
of the investee entity; this would normally be the par
The application guidance section of the new guidelines
value of the debt.
includes two new topics:
If, on the other hand, a fund has acquired some traded
2.1 Distressed market
debt at a discount in the market and intends to cancel the
Reflecting the recent market turmoil and the debate over debt rather than seek repayment, then the lower amount
whether a particular market is distressed or forced (ie not could be deducted from Enterprise Value
orderly), some guidance has been set out for valuers to
3. Summary
consider when they are considering whether individual
transactions are indicative of fair value and can be used • Assuming the new guidelines are finalised relatively
for comparator purposes. Such indicators are: soon, the implementation date of 1 July 2009
means they will apply to funds completing quarterly
• a legal requirement to transact, for example a
valuations at 30 September 2009 and all funds
regulatory mandate.
reporting at 31 December 2009. Accordingly,
• a necessity to dispose of an asset immediately and directors and principals should be briefed on the
there is insufficient time to market the asset to be sold. changes.
• the existence of a single potential buyer as a result • Amendments to the documentation of data (eg
of the legal or time restrictions imposed. proforma Attributable Enterprise Value worksheets)
to support the valuation of an investment will need
• There was not adequate exposure to the market to
to be made.
allow for usual and customary marketing activities.
• Consideration should be given to the appropriate
2.2 Deducting higher ranking instruments
level of adjustment to market-based comparator
This topic covers the situation where third party debt is earnings multiples to reflect marketability/liquidity
part of the acquisition structure and is actively traded. discounts.
Again, the market turmoil has meant that such debt can
• The additional guidance on the use of the Price
trade at considerable discount to par. The application
of Recent Investment valuation methodology
guidance makes it clear that in calculating Attributable
needs to be assessed against existing practice and
Enterprise Value, the debt amount to be deducted from
modified where necessary.
Enterprise Value should be the amount expected to be

12 BVCA Technical Bulletin June 2009 Issue 37

The Pensions Regulator’s Code of Practice for the
material detriment test: update and comment
Review of the Code of Practice issued by the Pensions Regulator in response to the
BVCA’s campaign to obtain greater clarity on the new version of the “contribution
notice” introduced by the Pensions Act 2008

Since their invention in 2004, contribution notices “Material detriment” exists wherever some act or failure
(“CNs”) have been the Pensions Regulator’s cruise missiles. materially reduces the likelihood of scheme benefits
Targeted and extremely effective, the mere threat of their being paid. Put another way, unless the scheme is fully
potential deployment on the battlefield of pension scheme funded on a “self-sufficient” or insurance market basis,
funding was intended to act as a deterrent against anyone anything that reduces either the ability of sponsors
who sought to duck statutory ‘section 75’ debt obligations. to provide funding or the dividend which the pension
Unlike their cousins financial support directions (“FSDs”), scheme might receive on the insolvency of the sponsors
Camilla Barry
CNs have an immediate and potentially lethal financial could lead to deployment of a CN2. A CN2 can,
impact. And they can be used against individuals, while however, still only be launched if reasonable in all the Senior Pensions Lawyer
Macfarlanes LLP
FSDs are largely reserved for use against companies. But circumstances and the independent Determinations
when the rules of engagement for the original version of Panel has given the order.
contribution notices – which we might call CN1s - were
To gain access to the new weapons, through the efforts
actually applied to real-life situations, they were found by
of the BVCA and other industry bodies the Regulator has
the Regulator to be too restrictive.
been persuaded to issue a Code of Practice – a sort of
The threat of being on the receiving end of a CN1, if not field operations manual - setting out the circumstances
exactly an empty one, was at risk of becoming one which in which it expects to deploy them. The list, which is
could be considered real only in a very limited number intended to provide comfort to ordinary citizens, is short:
of cases. Yet there are still some 10,000 defined benefit
• The transfer of the scheme out of the jurisdiction.
pension schemes on the landscape, and to find and deal
with the true villain hidden in the pensions foothills was • The transfer of the sponsoring employer out of the
going to be a very difficult task with the operational jurisdiction or the replacement of the sponsoring
restrictions in place. employer with an entity that does not fall within
the jurisdiction.
What the Regulator considered to be the inherent CN1
design-fault was that they could only be used where • Sponsor support is removed, substantially reduced
a “main purpose” hurdle could be passed. There had or becomes nominal.
to be provable intent to avoid or artificially reduce the
• The transfer of liabilities of the scheme to another
employer’s obligations to the scheme arising where a
pension scheme or arrangement which leads to
“section 75” debt had been or might be triggered. In
a significant reduction of the sponsor support or
addition, certain types of avoidance were subject to an
funding in respect of these liabilities; or
additional “bad faith” hurdle. Evidence of commercial
parties acting in bad faith or with the deliberate purpose • A business model or the operation of the scheme
of avoiding pension liabilities has proved hard to find – which creates from the scheme, or which is
possibly because it isn’t there. designed to do so, a financial benefit for the
employer or some other person, where proper
The design-fault caused particular problems when the
account has not been taken of the interests of the
Regulator thought about using CN1s in the context of
members of the scheme, including where risks to
“non-insured pension buy-outs” – the process whereby
members are increased.
a scheme sponsor could magically offload all or part
of its pension liabilities without actually having to pay The Regulator has offered to supplement the
insurance company prices to do so. To date, no CN1s Code with illustrative examples.
have yet left the Regulator’s Brighton launchpad, and
The comfort, while better than nothing, is however
there does come a time when, to be effective, threats
limited. The Regulator has expressly reserved the right to
have to be carried out.
use the CN2 in other situations. Also, under the last three
Now, from the Pensions Act 2008 drawing-board, we have criteria, it is not clear where the line will be drawn: how
“CN2s” (again, not their official name but it may catch on). much reduction in sponsor support will be a “substantial”
When considering deployment of a CN2, there is now no or “significant” reduction?
“main purpose” hurdle to clear. Instead, there simply needs
The first draft illustrative examples published in the
to be some form of “material detriment” to the pension
Regulator’s recent Consultation Response on the earlier
scheme caused by the acts or failures of the potential target.
draft Code of Practice highlight the issue by suggesting a

June 2009 Issue 37 BVCA Technical Bulletin 13

Unlike their cousins financial support directions Poor trading and the adoption of “a properly chosen,
compliant scheme investment strategy taking account of
(“FSDs”), CNs have an immediate and potentially the employer’s ability to cope with adverse experience”
lethal financial impact. are given as other examples that would not lead to a CN2.
Could such matters ever have been within range? The
trustees control the investment strategy.
Perhaps the intention behind the provision of illustrative
examples is in fact not to guide citizens to safe zones but
to prepare to defend a wide interpretation of the Code
of Practice.
The Regulator will be bound by the Code of Practice in
the context of determinations by the Determinations
Panel and in relation to any appeal court or tribunal that
might have to consider whether the issue of a CN2 in
a particular case is reasonable or lawful. It is perhaps
very low threshold. The examples are also peppered with
understandable that the Regulator would not want to
the words “not normally”, further blurring the line.
limit its own range by being too helpful to its potential
Readers are told that the payment of routine annual targets.
dividends by profitable companies paying off the pension
The real message in the Code of Practice, which is due
scheme deficit with “an appropriate recovery plan” will
to come into effect (with finished examples), some time
not normally be targeted. But what of special dividends
“this summer”, is possibly that the Regulator is taking
on a disposal? No guidance is given, suggesting perhaps
great care to avoid a statement that taking any return
that these could put recipients in range even where there
from a company with underfunded pension liabilities is
is an appropriate and sustainable recovery plan.
always dangerous. To make such a sweeping assertion
Again, the Code states that the granting of security to would drive away investment. On the other hand, the very
a bank as part of a renegotiation of borrowings will not wide potential target-zone ensures that no-one taking
normally constitute a material detriment where the such a return will feel completely safe. This combination
employer has engaged with the trustees and provided may be intended to ensure that any potential return gets
appropriate mitigation. What if no mitigation could be shared with the pension scheme. All that is now needed
provided? How much mitigation would be appropriate? are some returns to share with anyone.

14 BVCA Technical Bulletin June 2009 Issue 37

Limited Partnership Law Reform
Following years of lobbying, the Department for Business Enterprise and Regulatory
Reform (BERR) appears to have finalised its approach to the long-overdue reform
of limited partnership law. Unfortunately, BERR have considered it necessary to take
a modular, staged approach to implementing reform. Although this is not entirely
satisfactory, it does at least now appear that many of the changes that the industry has
been asking for will be made within the next few years.

The first step in this process is a “Legislative Reform announced in March that the reforms could not proceed
Order” (LRO) which (if it clears the Parliamentary hurdles in their then proposed form.
in time) is intended to come into force on 1 October
The LRO
2009. This first LRO will confirm that a certificate of
registration is conclusive evidence of the existence of Following the Government’s announcement, BERR has Simon Witney
a limited partnership. To many practitioners, this is the worked with the BVCA to restructure its proposals, Partner
most urgent reform. opting for a modular approach to reform. In order SJ Berwin LLP
that certain of the less controversial reforms might be
Background
implemented more quickly, it is intended that several
The reform of UK limited partnership law - which successive LROs will be introduced. The first of these
governs the market standard private equity fund deals with the conclusiveness of registration of limited
structure - has been a topical issue for well over a partnerships, with other reforms intended to follow in
decade. In November 1997, the Department for Trade subsequent LROs.
and Industry (which is now BERR) requested that the
The first LRO will provide that, once a limited partnership
Law Commission and the Scottish Law Commission
has fulfilled the requirements for registration, the registrar
undertake a joint review of partnership law. The
will issue a certificate of registration signed (or sealed) by
joint report was finalised and published in 2003 and
the registrar, stating the name of the limited partnership,
interested parties were asked to respond in 2004. The
its registration number, the date of registration and
consultation responses made clear that there was no
the fact that the limited partnership is registered. The
consensus in relation to reforming partnership law as
certificate is then to be treated as conclusive evidence
whole, but finally, in 2006 and after much lobbying from
that the limited partnership came into existence on the
the BVCA, the Government decided to move forward
date of registration, which is a significant clarification of
with some of the Law Commissions’ proposals, and
the current law.
agreed to reform limited partnership law only.
The LRO will also require the name of the limited
In August 2008, BERR published a consultation document
partnership being registered to end with the words
setting out its proposals to ‘modernise and simplify’
“limited partnership”, “LP” or “L.P.” (or the Welsh
the law of limited partnerships. The initial proposals
equivalent).
included a draft LRO that provided for the Limited
Partnership Act 1907 to be repealed and new provisions There is also a small but helpful amendment to Section
dealing with limited partnerships to be inserted into the 5 (Registration of limited partnership required) of the
Partnership Act 1890 (which sets out the basic structure Limited Partnership Act 1907, which should make it
for general partnership law). The reforms proposed were clear that an error in the registration of a limited partner
extensive, although not as wide-ranging as had initially will not cause the limited partnership to lose its limited
been anticipated. The focus of the reforms related to partnership status.
the establishment, registration and de-registration of
a limited partnership, the liability of limited partners to
third parties and the rights and obligations of general and
limited partners in a limited partnership.
BERR received 33 responses to the proposals, one of
which was a co-ordinated and supportive response from
the BVCA, the Association of Partnership Practitioners,
the Institute of Chartered Accountants in England
and Wales and ten law firms who routinely advise on BERR has worked with the BVCA to
limited partnership funds. But unfortunately, because of
some other, dissenting responses to the consultation
restructure its proposals, opting for a
(and a lack of resources within BERR), the Government modular approach to reform.

June 2009 Issue 37 BVCA Technical Bulletin 15

 Other changes may carry out without being deemed to have participated
in the management of the limited partnership).
The BVCA has also had informal confirmation that
Companies House will offer a guaranteed same day Looking forward
registration service with effect from October, something
While the modular approach adopted by BERR is far from
else that the industry has long sought and which will make
ideal, it is certainly better than nothing. The first LRO is a
establishment of a fund easier.
good start, and the Legal and Technical Committee will
BERR has intimated that phase 2 of the reform is likely continue to encourage BERR to bring forward further
to comprise further technical changes relating to reforms in the coming years to make other necessary
registration formalities, while phase 3 will encompass changes to the law of limited partnerships in the UK. We
more contentious issues - including returns of capital and hope that it will not take another 12 years before the next
the “white list” (the list of activities that limited partners change sees the light of day!

16 BVCA Technical Bulletin June 2009 Issue 37

Time for Constitutional Change…
The Companies Act 2006 is heading for the finish line, with all remaining provisions
coming into force on 1 October 2009. The implementation of new provisions relating to
company constitutions brings with it a new set of default articles of association, known
as “Model Articles”, which will replace the familiar “Table A”. This article looks at the key
constitutional changes, and how these will affect private equity investment articles.

Memorandum of association businesses. This means that they are unlikely to be

suitable for private equity investment vehicles without
At present, a company’s memorandum of association is
significant amendment.
a significant constitutional document, which sets out the
scope of the company’s legal capacity through its objects The Model Articles for public companies are more
clause, and also sets out the amount of its share capital. extensive and envisage more formal corporate
Under the new regime, the memorandum will simply governance procedures, so these may, in some cases, Stephanie Biggs
be a statement confirming that the subscribers wish to provide an alternative starting point. However, in a Associate
form a company; it will no longer contain any operative private equity context, they may well be overly detailed Kirkland & Ellis International
provisions. and restrictive. It is likely, therefore, that private equity LLP
investment articles will need to be fully bespoke, based
The objects of any company formed on or after 1 October
on the Model Articles for private companies, but
2009 will be unrestricted, unless the articles expressly
containing some provisions from the Model Articles for
provide otherwise, so there is no longer any need for
public companies and some unique provisions.
an extensive objects clause. In addition, the concept of
“authorised” share capital is to be abolished, so there will The provisions of the Model Articles for private
be no cap on the company’s ability to issue shares, and no companies that are likely to need most amendment can
need to state the amount of the company’s share capital be split into two broad areas: directors and share capital.
in the memorandum. The statement that the members’
Directors
liability is limited will instead be contained in the primary
constitutional document – the articles of association. For Like Table A, the Model Articles assume a uniform board, so
an existing company, the provisions of its memorandum it will continue to be necessary to include bespoke articles
will automatically be transitioned into its articles. to deal with the appointment of an Investor Director, and
to ensure that any Investor Director is suitably entrenched
It is possible – although uncommon – under the
in decision-making processes. These clauses will be
current rules to entrench provisions in a company’s
substantially the same as at present, but some additional
memorandum in such a way that they cannot be
points arise in relation to procedural matters.
altered. In contrast, a company’s articles of association
can always be varied by special resolution. To preserve The first area to consider is directors’ decision-making.
this possibility, the Companies Act 2006 will allow for The Model Articles for private companies allow for an
provisions to be entrenched in a company’s articles, informal decision-making process, where directors can
so that they can be changed only by following the take decisions simply by indicating to each other, by
procedure provided for in the articles. The new any means, that they are all in agreement. This is likely
entrenchment procedure is wide in scope, and may prove to work well for small businesses, which often work in
to be a useful means of “hard-wiring” investor rights. this informal way, but does not sit comfortably with
the concept of a non-executive Investor Director, who
Default articles
is likely to need more formal briefings and procedures.
Any company limited by shares that is incorporated These provisions will, therefore, need to be adapted to
under the Companies Act 1985 will have standard reintroduce the necessary level of formality.
“Table A” articles, except to the extent that Table A is
In addition, the Model Articles for private companies
excluded or modified by the company’s tailor-made
make no provision for alternate directors. The ability for
articles (if any). The same principle applies under the
Companies Act 2006: a company will have the relevant
“Model Articles”, except to the extent that they are
excluded or modified.
However, under the new regime, there are two sets of
Model Articles for companies limited by shares: one Under the new regime, the memorandum will
for private companies and one for public companies. simply be a statement confirming that the
The Model Articles for private companies have been
prepared on a “think small first” basis, and are intended to subscribers wish to form a company; it will no
be suitable without alteration for small owner-managed longer contain any operative provisions.

June 2009 Issue 37 BVCA Technical Bulletin 17

 an Investor Director to appoint an alternate is often useful, Second, the concept of authorised share capital has
and should be included in investment articles. One option been abolished, so there is no ceiling on the number
is to incorporate the alternate director provisions from of shares that can be issued by directors, provided that
the Model Articles for public companies, which allow the they have the necessary authority to allot. Consequently,
alternate to participate in decision-making in place of the if the articles include, as is common, a “section 80
appointing director. The alternative is to include a bespoke authority” (under the Companies Act 2006, a “section
provision that is wider in scope and allows the alternate to 551 authority”) for the directors to allot shares, it will be
step more fully into the shoes of the appointor. necessary to consider whether this authority should be
restricted in scope, or made subject to investor consent,
The other area where bespoke provisions will almost
to protect against dilution.
certainly be needed is in relation to directors’ conflicts of
interest (see the October 2008 Legal & Technical Bulletin Absent friends
for a full discussion of this topic). Provisions to consider
Finally, you may notice that a number of standard
include: express authorisation of conflicts for Investor
provisions cease to appear in articles of association from
Directors, both in relation to the conflict inherent in being
1 October 2009.
an Investor Director and for other conflicts that might
arise by virtue of being an investment executive (e.g. It is no longer necessary to include an express power
from carry or co-investment arrangements); provisions for a company to sub-divide, consolidate or reduce its
allowing Investor Directors to manage conflicts arising share capital, to issue redeemable shares or to purchase
from holding multiple portfolio company directorships; its own shares. A private company limited by shares
and provisions allowing the sponsor to monitor conflicts will automatically have all these powers, unless they are
arising in relation to management. expressly excluded or restricted by the articles.
Share capital The provisions relating to shareholder meetings are also much
reduced, as Part 13 of the Companies Act 2006 sets out in
As now, private equity investment articles will include
detail the procedures that must be followed. Likewise, the
detailed equity arrangements, setting out the rights
Companies Act 2006 provides for electronic communications,
attaching to different classes of share, and including good
and these provisions can largely be incorporated into the
leaver-bad leaver provisions, transfer restrictions, drag and
articles of association by reference, removing the need for
tag rights and so on. These commercial provisions will not
detailed e-communication provisions.
be materially affected by the essentially technical changes
brought in by the Companies Act 2006, and the drafting Making changes?
is likely to remain much the same. However, there are a
Broadly speaking, the Companies Act 2006 transitional
couple of technical points that are worthy of note.
arrangements ensure that companies can continue
First, the Model Articles for private companies work on to operate under their existing articles of association.
the basis that all shares will be fully paid; they do not Consequently, provided that existing portfolio company
provide for partly paid shares, and do not have all the articles have been amended to include up to date conflicts
associated provisions relating to calls on shares, lien, of interest provisions, there should not generally be any
forfeiture etc. This has the advantage of brevity, but immediate need to undertake a full scale updating exercise.
in some cases it will be beneficial to allow for partly
However, it is likely that old articles of association will
paid shares. In this case, the relevant provisions can
contain some provisions that do not work well with, or
be incorporated from the Model Articles for public
simply do not take full advantage of, the Companies Act
companies. Even if partly paid shares are not required,
2006, so if articles are being amended in connection
it may still be desirable to include a lien over shares for
with a transaction, it may well be worth undertaking a
other moneys owed to the company by its shareholders.
Companies Act 2006 update at the same time.

18 BVCA Technical Bulletin June 2009 Issue 37

Trade credit insurance top-up scheme
In June, the Government announced an expansion in eligibility of its Trade Credit Insurance
Top-Up scheme. The scheme provides support to businesses who have suffered reductions
in their level of credit insurance cover by providing additional insurance to ‘top up’ the level
of cover provided by the private sector.

Eligible businesses will be able to purchase ‘top-up’ credit insurance cover under a new scheme launched by the
government. The scheme is a short-term measure to provide real help to businesses, in the current economic climate,
whose credit insurance cover has been reduced by their provider.
Key features of the TCI top-up scheme:
• It is open to new applicants until 31 December 2009.
• It can be purchased in respect of reductions in cover that have occurred since 1 October 2008, with cover under
the scheme back-dated to start from when the reduction took place.
• The duration of each policy - written under the scheme - is for a maximum of six months.
• The value of cover you receive is determined by the level of cover provided by your underlying policy. If the level
of your underlying policy changes during the six month period then the level of top-up cover will also change
accordingly.
• You can buy more than one policy - each policy bought under the government scheme covers your relationship
with one buyer.
Eligibility for the scheme
• Top-up cover is available if you hold a whole-turnover trade credit insurance policy
• Your trades are within the UK with payment terms of no more than 120 days
• The level of cover being compared to was in place for at least 30 days
• Your cover was reduced on, or after, 1 October 2008
• The reduction in cover was triggered by the credit insurance provider
• This scheme does not cover exports
Please also note that:
• top up cover is available if you hold a whole-turnover trade credit insurance policy
• this scheme does not cover exports
Level of cover provided by the scheme
You can buy insurance to the value of the lower of the following amounts:
• the amount equal to the level of cover now offered under your credit insurance policy
• the amount which restores the level of cover to the amount you had previously
• £1 million
Information taken from Business Link.
For further information visit www.businesslink.gov.uk/creditinsurance
For further information
contact the BVCA
From 6 July, contact us at:
1st Floor North
Brettenham House
Lancaster Place
London WC2E 7EN
T: +44 (0)20 7420 1800
www.bvca.co.uk
Save the Date
Technical Updates at the

Tax, Legal and Regulatory Event

London 26 November 2009
The BVCA’s Tax, Legal and Regulatory Committees have joined forces to bring you the first combined technical
conference open to all BVCA members. Join us to have your complex questions answered by specialists.
Drawing on the knowledge of members from these three Committees, delegates will come away with an improved
understanding of the challenging tax, legal and regulatory issues that affect our industry as a whole and have a
direct impact on many of our businesses.
tax legal & technical RegulatoRy

David huff Sue Woodman Margaret chamberlain

Chair – Tax Committee Chair – Legal & Technical Committee Chair – Regulatory Committee
3i Alchemy Partners Travers Smith
Topics likely to include: Topics likely to include: Topics likely to include:
1 Practical tax compliance issues for 1 Consolidation, fund accounting 1 EC Directive on alternative
Private Equity firms and valuation issues Investment Fund Managers
2 Overview of VaT issues for Private 2 Carbon reduction requirements 2 Regulatory updates: UK and other
Equity firms, transactions and
portfolio companies 3 EU Transparency and portfolio 3 Market abuse, insider dealing and
disclosure requirements confidential information
3 Update on tax structuring options
for funds and transactions

CPD Points Accreditation being sought

Special offer!
Members attending this conference will be eligible for competitively discounted entrance to the BVCA Annual
Gala Dinner, held in London on the evening of 26 November 2009.
Register your interest
For further information about the event or to register your interest, please contact Charlotte Picot:
cpicot@bvca.co.uk / 020 7025 2961.
Sponsorship and advertising
To find out more about the opportunities available, please contact Simon Hooper: shooper@bvca.co.uk /
020 7025 2957.