Legal & Regulatory Bulletin

A Publication of the Emerging Markets Private Equity Association

Issue No. 11 – Spring 2014 Contents In the spirit of Spring, this Bulletin focuses on growth—in the diversity of fund structures available to investors; in positive reforms in West and Central Africa and in the regulation of European Deal-By-Deal and Pledge venture capital; and in support for fund managers when implementing environmental, social Fund Models...... 3 and governance (“ESG”) requirements throughout their investment processes.

We start by exploring alternative fund structures to the traditional private equity fund model. Evergreen Alternatives to the Debevoise & Plimpton’s Geoffrey Kittredge and John W. Rife III describe the attributes of a deal- 2/20 Term-Limited Fund...... 5 by-deal fund, which allows investors to target a single opportunity rather than rely on the fund manager’s investment team to identify investments, and a pledge fund, which gives investors the Reforms to OHADA right to “opt out” of investment opportunities presented by the fund manager. Kittredge and Commercial Law: Rife highlight costs, complexities and investor protections that fund managers should consider Towards a More Attractive when evaluating these models. Legal Framework for Private Equity...... 7 Mara Topping of White & Case analyses evergreen investment alternatives to the term-limited closed-end private equity structure; an investment holding company, and a subsequent subscrip- New Guidance for Fund tion tranche and re-opened investment period model. Topping explains the growing attraction Managers on Integrating that the term flexibility of these models provides investors, particularly in sectors with long term ESG into the Investment horizons such as infrastructure and health. Process...... 11

The team at Orrick, Herrington & Sutcliffe then examines major steps taken by the 17 West and Pan-European Fundraising Central African states of the OHADA Treaty to improve corporate law throughout the region that Passport for Venture will make it better suited to private equity investment. The reforms contribute to a simpler and more secure legal framework for investors and companies involved in cross-border transactions Capital Firms: the EVCA within OHADA member states, such as the Democratic Republic of Congo and Senegal. Authors Guide to the EuVECA...... 13 Sydney Domoraud-Operi and Anthony Riley report that, while not without challenges, the law meets most of the EMPEA Guidelines for “effective, clear, and flexible securities laws” and sets the Legal and Regulatory stage for further development of local capital markets in the OHADA region. We note in passing Briefs...... 14 a recent public ministerial comment supportive of changes to Nigerian laws to make the country better suited to private equity investment. These are positive steps for the industry in Africa.

Next, we point readers to resources valuable to private equity industry participants with an interest in ESG. A recent report by the United Nations-supported Principles for Responsible Investment (“PRI”) provides new guidance to fund managers on how to identify, manage, and report on ESG issues throughout the investment process. We applaud this report, as well as the 130 + institutional investors and 150 private equity firms that have become signatories to PRI.

Finally, the Bulletin provides an overview on the European Venture Capital Fund Regulation (“Regulation”) by the European Venture Capital Association, a valued EMPEA partner. The Regulation permits qualifying venture capital managers to obtain a marketing passport similar to that available to larger managers under the European Union’s Alternative Investment Fund Managers Directive. We welcome this development as a simpler and more efficient process for qualifying venture capital managers to raise capital across borders within the European Union.

The Legal and Regulatory Council continues to encourage EMPEA Members to alert us to opportunities to partner with local and regional organisations to advocate improvements to regulatory frameworks throughout emerging markets. We look forward to meeting May 13th and 14th at the IFC/EMPEA Global Private Equity Conference in Washington DC, where regulatory discussions will feature prominently. As always, we await your comments and sug- 1077 30th Street NW, Suite 100 gestions, which can be shared with Jennifer Choi at [email protected]. Washington DC 20007 USA Phone: +1.202.333.8171 Mark Kenderdine-Davies Fax: +1.202.333.3162 General Counsel and Company Secretary, CDC Group plc Web: empea.org Chair, EMPEA Legal & Regulatory Council About EMPEA EMPEA Legal & Regulatory Council EMPEA is the global industry association for private capital in emerging Mark Kenderdine-Davies (Chair) markets. We are an independent non-profit organization. As EMPEA celebrates CDC Group plc our 10th anniversary in 2014, we have over 300 member firms, comprising institutional investors, fund managers and industry advisors, who together Benjamin Aller manage more than US$1 trillion of assets and have offices in more than 100 King & Wood Mallesons SJ Berwin countries across the globe. Our members share EMPEA’s belief that private David Baylis capital is a highly suited investment strategy in emerging markets, delivering Norton Rose attractive long-term investment returns and promoting the sustainable growth of companies and economies. We support our members through global Carolyn Campbell authoritative intelligence, conferences, networking, education and advocacy. Emerging Capital Partners Folake Elias-Adebowale Udo Udoma & Belo-Osagie

Publication Editorial Team Laura Friedrich Shearman & Sterling LLP Jennifer Choi Vice President, Industry and External Affairs William Hay Baring Private Equity Asia Katryn Bowe Industry Relations Associate Geoffrey Kittredge Debevoise & Plimpton LLP

Prakash Mehta Production Assistance Akin Gump Strauss Hauer & Feld LLP Zia Mody Ben Pierce AZB & Partners Pierce Designers Peter O’Driscoll Orrick, Herrington & Sutcliffe LLP

Paul Owers Actis

Oliver Rochman Proskauer Rose LLP

Mara Topping White & Case LLP © 2014 Emerging Markets Private Equity Association. All rights reserved. The EMPEA Legal & Regulatory Bulletin is a publication Jordan Urstadt of the Emerging Markets Private Equity Association (EMPEA). Neither Capital Dynamics this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, Solomon Wifa photocopying, recording or otherwise—without the prior permission of EMPEA. O’Melveny & Myers

Disclaimer: This material should not be construed as professional legal advice and is intended solely as commentary on legal and regulatory developments affecting the private equity community in emerging markets. The views expressed in this bulletin are those of the authors and not necessarily those of their firms. If you would like to republish this bulletin or link to it from your website, please contact Holly Freedman at [email protected].

To learn more about EMPEA or to request 1077 30th Street NW • Suite 100 • Washington, DC 20007 USA a membership application, please send an Phone: +1.202.333.8171 • Fax: +1.202.333.3162 • Web: empea.org email to [email protected]. — SPECIAL FEATURE: ALTERNATIVE FUND STRUCTURES —

Deal-By-Deal and Pledge Fund Models By Geoffrey Kittredge and John W. Rife III, Debevoise & Plimpton LLP

A manager seeking to deepen its track record or build a or sometimes earlier through a “cost sharing” agreement relationship with a prospective investor may seek to raise with prospective investors. In a pledge fund model, these capital on a deal-by-deal basis or by offering investors a preliminary costs can be paid by the fund itself or, if neces- pledge fund structure. sary, partially covered by the manager out of a management fee charged on subscribed capital. In a deal-by-deal fund, a dedicated vehicle will be created for purposes of making an investment in a single target oppor- Economic Terms tunity (or single portfolio of target opportunities). Unlike a traditional private equity fund model, where investors com- In general, there is a less well defined set of “market terms” mit capital to the fund on a blind-pool basis and depend on for deal-by-deal and pledge funds than there is for tradi- the fund’s investment team to identify and execute invest- tional private equity funds, so investors’ expectations about ment opportunities going forward, investors considering an market-standard terms are less fixed, with the result that investment in a deal-by-deal fund have full transparency on terms for these alternative structures tend to show a greater the underlying investments that will be made by the deal-by- degree of variability than traditional fund models. deal fund and are able to perform “M&A-style” diligence on such investments (in addition to the traditional fund invest- Some deal-by-deal funds do not pay a management fee ment diligence on the fund manager’s investment team) prior at all, though the manager may charge a one-off transac- to deciding whether to commit to the deal-by-deal fund. tion fee from investors upon successful completion of the underlying investment. To the extent that a management By contrast, in a pledge fund, investors make “soft commit- fee is charged, that fee tends to be based purely on invested ments” to the pledge fund prior to its investments being capital and to be a lower percentage than the 2% typical for identified. Unlike a traditional private equity fund, however, traditional small and mid-sized private equity funds. Pledge investors are given the right to “opt out” of (or “opt in” to) funds, on the other hand, are likely to charge a low man- each investment opportunity that the manager of the pledge agement fee on subscribed capital (whether or not drawn) fund presents to investors. In this way, each of the investors during a pledge fund’s investment period plus a higher fee is able to make its own decision whether or not to participate on deployed capital. in each investment opportunity instead of being required to participate in each investment (subject to narrow excuse Sponsors of both deal-by-deal and pledge funds typically rights) as is the case in traditional private equity funds. receive some carried interest on the profits of the fund. While the carried interest rates for pledge funds tend to be When managers are choosing between a deal-by-deal fund close to (though lower than) full carry charged by traditional model or a pledge fund model, there are a number of con- funds, deal-by-deal funds tend to be subject to lower carried siderations that they should bear in mind. interest rates.

Deal Execution Uncertainty & Costs As a result of the need for investors to diligence and approve an investment opportunity prior to participating in such an Unlike a traditional private investment, both deal-by-deal funds and pledge funds can equity fund, however, investors face a degree of deal execution uncertainty (and delay). This are given the right to “opt can place such funds at a disadvantage in a competitive out” of (or “opt in” to) each acquisition process, as a seller may be reluctant to engage “ and progress the sale process with a buyer that has limited investment opportunity that control over its ultimate ability to fund the acquisition. the manager of the pledge fund

In addition, a deal-by-deal model requires the manager to presents to investors. front the costs of identifying, investigating and negotiating the investment opportunity prior to consideration by prospective investors in the deal-by-deal fund, although these costs may be recouped when the deal-by-deal fund closes,

EMPEA Legal & Regulatory Bulletin Spring 2014 3 — SPECIAL FEATURE: ALTERNATIVE FUND STRUCTURES —

Sponsors of both deal-by-deal Conclusion and pledge funds typically Deal-by-deal and pledge fund models provide alternative receive some carried interest on fundraising possibilities to the traditional private equity the profits of the fund. While the fund model. While these alternatives can be useful for a “ manager developing its track record or seeking to build carried interest rates for pledge relationships with one or more prospective investors, they funds tend to be close to (though are generally used as stepping stones toward the sponsor- ship of a traditional private equity fund rather than as a lower than) full carry charged long term product line. While an investor that is getting to by traditional funds, deal-by- know a manager is likely to appreciate the degree of control deal funds tend to be subject to these alternative models provide over the deployment of its capital in the short term, many institutional investors are lower carried interest rates. not staffed or equipped to participate in the enhanced level of investor involvement required from these structures over the longer term (or across many regions and investment Complexity strategies) and, as a result, continue to seek discretionary Unlike deal-by-deal funds (and traditional private equity blind pool products as a core part of their private equity funds), the management, administration and documen- investment allocation. tation associated with a pledge fund is generally more complicated because the exercise of opt-out/opt-in rights by different investors changes the composition of the inves- About the Authors tor group for each portfolio investment. As a result, there are multiple “pools” of investment portfolio within a pledge fund organized as a single vehicle, which raises issues Geoff Kittredge is a Partner in the London regarding the tracking and allocation of expenses (e.g., bro- office of Debevoise & Plimpton LLP. ken deal expenses) and other liabilities, and the potential cross-collateralization of the different pools. Alternatively, establishing a new fund vehicle for each portfolio investment made by the pledge fund can simplify some of the internal complexity by eliminating the need for multiple John W. Rife III is an Associate in the London pools within a single pledge fund vehicle, but substantially office of Debevoise & Plimpton LLP. increases the administrative burden of the overall structure. By the same token, a sponsor considering raising a number of deal-by-deal funds will face a greater administrative burden than if those investment vehicles were housed in a single private equity fund structure.

Investor Protections Investors in deal-by-deal funds are more likely than investors in a pledge fund to view their participation as that of an active co-investor rather than a passive fund investor. As a result, it is not uncommon for investors in deal-by-deal funds to seek a range of investor protections, including exit condi- tions, anti-dilution rights (including pre-emption rights in connection with the funding of any follow-on investments), consent rights over certain key decisions (a.k.a. “reserved matters”) taken with respect to the underlying investment and the ability to appoint a representative to the board of directors of the relevant company.

Evergreen Alternatives to the 2/20 Term-Limited Fund By Mara Topping, White & Case LLP indefinite investment holding company term. However, As private equity becomes a more significant source of where portfolio investments are in sectors with underlying financing in emerging capital markets, particularly in sec- value derived predominantly from current income such as tors with long-term return horizons such as infrastructure, infrastructure, finance, healthcare and education or even, in health, finance and education, private equity sponsors are some circumstances, real estate, there is a natural back-to- increasingly seeking evergreen investment alternatives to the back liquidity that conveniently accommodates the liquidity term-limited closed-end private equity fund. These evergreen requirements of an investment holding company. alternatives typically take one of two forms: (i) an investment holding company or (ii) a subsequent subscription tranche The typical closed-end private equity fund provides inves- combined with a re-opening of a second investment period tors with a built-in exit upon fund liquidation. In contrast, and long-term extension of a fund entity. investment holding companies must seek permanent exit opportunities for their investors by other means. Investment The Investment Holding holding companies such as Brait have successfully achieved liquidity for investors through listings on the South African Company Model stock exchange, for example. Other investment holding com- The establishment of an investment holding company with panies identify liquidity options for investors via privately unlimited life enables private equity sponsors to raise capital negotiated secondaries transactions—facilitated by the absent (i) time constraints on fundraising and (ii) artificial recent rapid growth in scale and sophistication of second- limits on portfolio company development and the harvesting ary markets. of value. Funds can be raised at any time during the life of the investment holding company via the full range of corporate Depending on how structured, the investment holding com- capital increase mechanisms. This means that there is no pany model also offers potential alternatives to investment rush to fundraise during a restricted period of time expiring advisor regulatory status. This is because in contrast to the on a final closing date. As such, the time and effort of the typical private equity closed-end fund with a manager pro- investment advisor team can be spent on what many such viding investment advice regarding the purchase and sale of investment professionals prefer doing and do best – deal- securities to a third party fund entity for compensation, if making, the true value-add of the private equity model. In the structured as a joint-venture with true management-sharing, investment holding company model, fund-raising need not the investment holding company may not be captured by be an exhaustive, concentrated push and further, there is no requirement to repeat such intensive fund-raising cycles every few years as is the hallmark of the typical private equity fund. The key to making the investment holding company When held by an evergreen investment holding company, portfolio companies can be exited as and when portfolio model work is building in investments are ripe. This is a sharp contrast to the private sufficient liquidity for investors. equity investment fund with its time-limited exit period. “ Whereas investors in private Even where closed-end fund terms are especially long, as in e.g. infrastructure funds which may extend as long as fifteen equity funds may rely on a time- years, a term limitation nonetheless can force early exits and limited exit period and even fund quasi-fire-sales. liquidation to force final pay-

The key to making the investment holding company outs, investors in an investment model work is building in sufficient liquidity for inves- company must rely on a flow of tors. Whereas investors in private equity funds may rely dividends or redemptions over on a time-limited exit period and even fund liquidation to force final pay-outs, investors in an investment company the indefinite investment holding must rely on a flow of dividends or redemptions over the company term.

EMPEA Legal & Regulatory Bulletin Spring 2014 5 — SPECIAL FEATURE: ALTERNATIVE FUND STRUCTURES —

regulations such as the U.S. Investment Advisers Act or the European Alternative Investment Fund Managers Directive ...if second tranche investors (AIFMD) regime. Such regulatory issues must be considered are offered a portion of carefully on a case-by-case basis, however, and weighed existing fund investments then against the loss of limited liability that acceptance of a original investors must get management role implies. The investment holding company “ model permits the flexibility to balance such regulatory and comfortable with complicated limited liability concerns to suit the facts, circumstances and true-up calculations required risk profiles of the sponsors and investors involved. to allocate to subsequent The Subsequent Subscription investors their proportionate Tranche and Re-Opened Investment share of existing investments. Period Model (the “SST Model”) The SST Model involves the re-opening and reiteration of the customary private equity fund structure to achieve a Conclusion longer-term, and even, if re-opened for multiple tranches, an The term limited closed-end private equity fund, with its evergreen time horizon. The SST Model typically takes one of built in exit mechanisms and limited investor liability, will two sub-forms: (i) a second subscription tranche at the end deservedly continue as a fixture of emerging capital markets. of the original term of a fund pursuant to which subsequent However, without underestimating the challenges of identi- investors take a portion of any existing fund investments fying sufficient liquidity and the assumption of managerial and initial investors remain in the re-opened and reiterated liability characteristic of the investment holding company fund, or (ii) a second subscription tranche at the end of the model or the complexities and trade-offs of true-up calcula- original term of a fund pursuant to which subsequent inves- tions and the encumbrance taint of the SST model, such new tors subscribe to the re-opened fund with the option only models and their calculated challenges can and increasingly of investing in new portfolio investments combined with an are being embraced by investors as practical and cost-effec- offer to original investors to withdraw or re-commit. tive evergreen alternatives to move private equity investment in emerging markets forward. SST Models, generally, require unanimous consent of existing investors to open up a second subscription tranche at the end of the term of the original fund. Further, if second About the Author tranche investors are offered a portion of existing fund investments then original investors must get comfortable with complicated true-up calculations required to allocate to subsequent investors their proportionate share of exist- Mara Topping is a Partner in the ing investments. Such true-up calculations must take into Washington, D.C. office of White & Case LLP. account, among other things, the time-value of money as well as the benefit of hindsight and lack of blind pool risk accorded subsequent investors. Second tranche investors must weigh the benefit of knowing the value of existing investments (if allocated to them) and the significant reduc- tion in closing costs associated with the SST Models against the liabilities and risks of subscribing to a vehicle that is neither new nor unencumbered.

6 © 2014 Emerging Markets Private Equity Association Reforms to OHADA Commercial Law: Towards a More Attractive Legal Framework for Private Equity By Sydney Domoraud-Operi and Anthony Riley, Orrick, Herrington & Sutcliffe LLP

Introduction organizing Collective Proceedings for Clearing Debts; Arbitration; and organizing and harmonizing Undertakings The Organisation pour l'Harmonisation en Afrique du Droit Accountings Systems; Contracts for the Carriage of Goods des Affaires ("OHADA"), which translates into English as by Road; and Cooperative Companies. the "Organisation for the Harmonization of Business Law in Africa" is an exclusively business-related legal framework Today, OHADA continues to extend the scope of its legal that was created on 17 October 1993 in Port Louis, Mauritius. reforms to better suit the needs of its Member States and their investors. Having previously reformed the Uniform Acts Initially established pursuant to a treaty adopted among 14 for Security Interests, Cooperative Companies and General Member States (the "OHADA Treaty"), OHADA membership Commercial Law in December 2010, OHADA adopted on has grown to 17 since 1993.1 OHADA enacts, among other 30 January 2014 substantial amendments to its core cor- provisions, Uniform Acts that have direct effect and super- porations law, the Uniform Act relating to Commercial sede contradictory national laws, subject to any transitional Companies and Economic Interest Groups (known as the provisions stipulated by the Uniform Acts. The OHADA "AUSCGIE"), with almost two hundred new articles and some Treaty also created a supranational supreme court with four hundred revised provisions. jurisdiction over the areas of law covered by the Uniform Acts (the Cour Commune de Justice et d'Arbitrage or CCJA), The new AUSCGIE will come into force on 5 May 2014. in English the Common Court of Justice and Arbitration, to Commercial companies and economic interest groups ensure uniformity and consistency of legal interpretation formed prior to the entry into force of the revised AUSCGIE across the Member States. are required to harmonize their articles of association with the new provisions within a two-year period following its The substance of the nine Uniform Acts relates to General entry into force. After that period, any non-harmonized Commercial Law; Commercial Companies and Economic provisions contained within the articles of association Interest Groups; organizing Security Interests; organizing of a company established within a Member State will be Simplified Recovery Procedures and Measures of Execution; deemed void.

1. The Democratic Republic of Congo is the newest Member State, having adopted the OHADA Treaty in September 2012. Whilst French speaking countries are the most numerous amongst the OHADA members, OHADA also includes Equatorial Guinea and Bissau Guinea, which are Spanish and Portuguese speaking, respectively.

EMPEA Legal & Regulatory Bulletin Spring 2014 7 The reform of AUSCGIE improves upon the previous legal Map of OHADA member states framework and introduces a number of significant developments: promoting the creation and development of enterprises; enhancing legal certainty for economic and financial activities and transactions; and, consequently, encouraging both local and foreign investment. These innovations contribute to a simpler, more secure legal framework for investors and companies involved in cross-border transactions in Member States, and make the OHADA laws better suited to private equity investment in Member States.

AUSCGIE has been reformed with the following four aims in mind: (1) creating a new, more attractive legal entity; (2) strengthening legal certainty while enhancing flexibility in the functioning of Member State incorporated companies; (3) imposing certain principles of good governance on commercial companies and economic interest groups; and (4) filling certain gaps in the existing law—in particular, creating greater flexibility as regards the options for corporate financing. These reforms are important for the private equity community for the reasons described below.

1. Introduction of a simplified form of joint-stock company (société par actions simplifiée) One of the major innovations of the revised AUSCGIE is the This form of corporate entity, based on its equivalent intro- introduction of a new corporate entity: the simplified joint- duced in France in 1994, can be organized and operated stock company (société par actions simplifiée or SAS). Under substantially by reference to the company's articles of asso- the revised AUSCGIE, any commercial company formed prior ciation, rather than by reference to the law. The main goal to its entry into force can be transformed into an SAS. is to offer investors in OHADA countries a flexible structure in which contractual freedom prevails.

The significant flexibility which is now afforded to sharehold- The reform of AUSCGIE ers in an SAS will inevitably make it the vehicle of choice for improves upon the previous private equity investment in Member States, enabling par- legal framework and introduces ties with different interests, expectations and rights (such as private equity investors and management) to sit alongside a number of significant each other as shareholders in the same entity, just as they “ would in a Delaware corporation or English limited company. developments: promoting the creation and development First and foremost, the SAS provides a structure in which the of enterprises; enhancing liability of shareholders is limited to their respective capi- legal certainty for economic tal contributions. Accordingly, the SAS meets the objective and financial activities and of limited liability for investors established by the EMPEA Guidelines. transactions; and, consequently, encouraging both local and Second, due to the flexibility in governance referred to foreign investment. above, shareholders are now able to exercise effective control over management. By way of example, the articles of association of an SAS may include provisions limiting the powers of the company's managers. Such provisions may prohibit the managers, in the absence of prior approval

8 © 2014 Emerging Markets Private Equity Association of the shareholders or an ad hoc body, from making deci- transfer restrictions set out in the company's articles of asso- sions that could be harmful to the shareholders. The articles ciation requiring the prior approval of the potential acquirer of association of an SAS may also provide for a statutory by the shareholders. This change gives teeth to share trans- body, such as a board of directors or a committee, in which fer restrictions that a private equity investor negotiates and shareholders may be given seats and assigned a role in the embodies in a company's articles of association. company's management. In addition, the revised AUSCGIE confirms the validity of Furthermore, the articles of association of an SAS allow the clauses which impose restrictions on share transfers, but differentiation of rights as between shareholders (whether only when they are, in the case of an SA, justified by seri- financial or non-financial), thereby permitting the inclusion ous and legitimate reasons and, in the context of both SAs of "reserved matters" and other minority investor protection and SASs, limited in time to ten years. Finally, the revised provisions. This means that a shareholders' agreement is AUSCGIE makes it clear that in the case of both SAs and therefore no longer the sole means through which to orga- SASs, share transfers made in breach of the provisions in nize the relationship amongst shareholders. Private equity the relevant company's articles of association are to be investors can now choose how to allocate the respective treated as void. rights and obligations of shareholders across the articles of association of the company and the shareholders' agreement. This distinction can be crucial, because a breach of key pro- 3. Improved corporate governance visions of an SAS's articles of association can result in the The revised AUSCGIE is far-reaching in terms of improved invalidity of the action causing the breach—whether the act corporate governance. It reinforces the application of good is a decision taken in the name of the company or a transfer governance principles by, among other things, (i) prohibiting of shares, whereas a breach of a shareholders' agreement directors from participating in any vote on their own remu- merely gives investors a right to pursue an action for dam- neration, (ii) further specifying the types of contracts that ages. Investors should, however, be aware that the articles of require the prior approval of an SA or SAS's board of direc- association of an SAS will be available to the public, and con- tors, (iii) introducing the notion of abuse of equality2 and (iv) fidentiality considerations will need to be balanced against introducing new offences relating to the management of the potential benefits of defining shareholders' rights in the companies, such as the failure by directors to submit com- articles of association. panies' financial statements within a month of their approval by the shareholders. Such developments provide additional Third, the transfer of shares in a SAS can be easily regulated comfort for private equity investors, particularly for those through the articles of association. The articles of association owning minority stakes, because they make portfolio com- may define the circumstances in which a shareholder may pany management more accountable. be required to sell its shares, including by way of exclusion. Under the revised AUSCGIE, a competent court can appoint a 2. Increased legal certainty provisional administrator when the operation of a company is deadlocked as a consequence of action or inaction by its Among numerous new provisions, four are particularly relevant for private equity investors and demonstrate a desire on shareholders or another corporate body. In addition, OHADA the part of the OHADA Member States for a clearer and more lawmakers took into account the practical constraints on effective corporate law, in line with the EMPEA Guidelines. investors by enabling participation in meetings and voting by video conference and by permitting decisions to be taken The first is the confirmed and express recognition by law at the shareholder and board level by written resolution. of the validity of shareholders' agreements, provided they are in compliance with AUSCGIE and the relevant company's 4. New financing opportunities and articles of association. The second important change is that the new AUSCGIE provides that a transfer of shares in a new types of securities limited company (société anonyme, or SA) or an SAS made The financing options for OHADA zone companies have been pursuant to the enforcement of a share pledge, where the broadened under the new AUSCGIE. Shareholders of an SA share pledge has not been established with the prior writ- or SAS are now entitled to determine the nominal value of ten consent of the relevant company, is subject to any share their shares through the company's articles of association.

2. Abuse of equality is a variation of the "abuse by minority" concept in which minority shareholders use their minority rights to frustrate corporate governance by boycotting board or shareholders meetings or taking other actions that prevent majority board or shareholder decisions being implemented. Abuse of equality is particularly intended to cover situations in which a company's share capital is held equally by two shareholders, and prevents a shareholder from blocking the operation of the company by negative votes or not voting, as the case may be.

EMPEA Legal & Regulatory Bulletin Spring 2014 9 ...the AUSCGIE now meets In addition, the revised AUSCGIE has removed the requirement that the board of directors of an SA be composed of most, if not all, of the at least two-thirds of the company's shareholders, thereby requirements of the EMPEA removing the need to make the shareholder structure of a Guidelines for "effective, company overly-complicated, such as granting one share to a “ board member, in order to achieve the required board com- clear and flexible corporate position. Shareholders may of course retain this rule, should securities laws" and sets the they wish to do so, but there is now no obligation. stage for further development Lastly, the definition of "offer of securities to the public" has of local capital markets in the been modified to address the financing needs of commercial OHADA region. companies by permitting them to offer securities directly to professional investors, such as credit institutions and mutual funds, who are referred to as "qualified investors" without the offering being treated as an offer to the public. The new provisions create the possibility for a variable-capital limited company (société anonyme à capital variable), in which there are no formalities or costs related to any Conclusion increase or decrease in share capital. The revised AUSCGIE is a significant breakthrough in terms of upgrading OHADA's corporations law to meet the The new AUSCGIE also provides for "industry contributions" requirements of private equity and other foreign investors. by which a shareholder makes available to a company tech- Significantly, the AUSCGIE now meets most, if not all, of the nical knowledge, labor or services in exchange for shares. requirements of the EMPEA Guidelines for "effective, clear However, industry contributions are not formally contrib- and flexible corporate securities laws" and sets the stage for uted to the company's share capital, and cannot be assigned further development of local capital markets in the OHADA or transmitted to a third party. Accordingly, financial inves- region.3 As a consequence of the new AUSCGIE, a legal tors can benefit from the expertise and experience of an framework now exists within the OHADA Members States industrial shareholder without any risk of dilution of their for complex corporate and financial transactions of the type shareholding. required by modern private equity investors.

Moreover, an SA and an SAS can now issue complex securities (valeurs mobilières composées) (such as convertible bonds), About the Authors granting access to capital or entitling the company to issue debt securities. Furthermore, a company may now set the Sydney Domoraud-Operi is an Of Counsel order of priority in which securities are to be repaid and in the Paris office of Orrick, Herrington & which permit their repayment only after all other creditors Sutcliffe LLP, and a member of the Energy (including the holders of equity-type loans) have been paid and Infrastructure Group. off, (prêts participatifs). Additionally, an SA and an SAS may now issue (i) preferred shares, with or without voting rights accompanied, temporally or permanently, by special rights Anthony Riley is a Partner in the London of any kind, and (ii) free shares to salaried personnel. Such office of Orrick, Herrington & Sutcliffe LLP, amendments provides for a wide range of different classes of and a member of the Corporate Group. equity securities, as recommended in the EMPEA Guidelines.

3. Nevertheless, some provisions of the AUSCGIE still lack clarity. For example, articles 243 and 244, which apply to all types of companies, introduce a concept of invalidity of corporate acts when certain provisions of the articles of association of a company which are "deemed essential" are breached. This qualification implicitly suggests that certain provisions of the articles of association are not essential and consequently creates a degree of legal uncertainty. Hopefully, the courts of the Member States and the CCJA will take a sensible approach in interpreting any such anomalous provisions and will seek to promote an environment that encourages investor confidence, in keeping with the spirit of the amendments to the AUSCGIE.

Recognition among private equity investors of the material risks and opportunities posed by environmental, social and governance (ESG) issues has swelled in recent years. As of 2013, more than 130 limited partners and 150 private equity firms had become signatories to the United Nations- supported Principles for Responsible Investment (PRI), signaling this growing acknowledgment of the potential impact of ESG issues on portfolio performance.

Private equity’s long-term nature and a related emphasis on close stewardship of investments make it particularly well suited to a responsible investment approach. However, many fund managers find it challenging to integrate ESG considerations into their investment decision making and organizational management because they lack frameworks for doing so.

In 2014, the PRI released a guide for fund managers titled Integrating ESG in Private Equity: a guide for general partners. The document, which reflects input from a global panel of 50 practitioners and industry stakeholders, including 15 EMPEA members, seeks to address this information gap by providing guidance on how to identify, manage and report ESG-related risks and opportunities.

The document covers the incorporation of ESG factors both within a general partner’s (GP) organizational structure as well as into its investment processes. The guidance aligns with that included in the PRI’s Guide for Limited Partners (LP) and includes suggested practices for integrating ESG As of 2013, more than 130 considerations into the due diligence, investment decision limited partners and 150 private and agreement and ownership phases of the investment process. It also recommends appropriate disclosure from equity firms had become portfolio companies on ESG risks and opportunities and signatories to the United methods for reporting on this to their investors. The guide “ Nations-supported Principles includes a number of case studies highlighting the work of fund managers, including several EMPEA members, that for Responsible Investment have made ESG assessments and action plans a standard (PRI), signaling the growing component of their due diligence and portfolio company acknowledgment of the potential strategic planning activities. impact of ESG issues on The guide also aims to be useful for LPs seeking informa- portfolio performance. tion that will help them benchmark the ESG practices being implemented in the market, to yield more informed manager selection, fund evaluation and portfolio monitoring.

EMPEA Legal & Regulatory Bulletin Spring 2014 11 The report features several appendices, including case stud- The guide also aims to be useful ies of GPs at different stages of ESG integration. It also for LPs seeking information offers a synthesized view of procedures and frameworks in that will help them benchmark place across the industry and points to a number of pub- the ESG practices being licly available tools and resources on the integration of ESG “ information into the investment process, including: implemented in the market, to yield more informed manager • The CDC Toolkit is an overview of issues related to geogra- phy, sector and industry that is designed for GPs investing selection, fund evaluation and in emerging markets. It features short summaries of the portfolio monitoring. relevant ESG-related international standards and conven- tions, an extensive list of questions which can be asked during an ESG due diligence, an ESG reporting framework template, • The IFC Environmental and Social Management Toolkit an action plan template and advice on ESG reporting. for Private Equity offers GPs an extensive overview of templates and tools which can be deployed during the due • The Dutch DFI FMO offers an easy-to-use tool which provides diligence phase. The toolkit is organized around the three- the GP with an initial assessment of E&S risk against IFC phase investment cycle (screening, appraisal, management) Performance Standards regarding a particular investment. and generates the main environment and social (E&S) issues to be addressed for each investment. The online assessment • Environmental Defense Fund offers an ESG Management engine (the ES-gine) offers resources and templates to help Tool, a self-assessment whereby a GP’s current ESG-related tackle the identified E&S issues. management practices can be benchmarked against current best practices. • The Due Diligence Questionnaire Tool produced by the Institutional Limited Partners Association (ILPA) includes • The ESG Disclosure Framework for Private Equity provides sections dedicated to governance, risk, compliance and GPs with a better understanding of LP expectations on ESG ESG. The included checklist offers a clearer idea of LPs’ disclosure and how to meet them. The first five objectives expectations about how ESG is addressed during fundrais- relate to the fund due diligence process and the final three ing and provides metrics that can be used by LPs to assess relate to disclosure during the life of the fund. a GP on ESG issues.

For additional in-depth case studies, please visit EMPEA’s Emerging Markets Private Equity Impact Case Study Series, which highlights examples of the unique and catalytic role played by private equity investors for the companies in which they invest and the communities in which they operate.

In February 2014, The European Private Equity and Venture for qualifying venture capital managers to raise capital across Capital Association (EVCA) published an overview of the borders within the European Union, and the industry views European Venture Capital Fund Regulation, ("EuVECA"), a this development of a signal of EU policymakers’ recogni- July 2013 regulation that grants qualifying venture capi- tion of the importance of venture capital. The EVCA guide, tal managers the ability to market to qualified investors EuVECA Essentials, sets out the regulation’s key provisions, throughout the European Union on a single passport. The as summarized below. EuVECA regulation has been welcomed as a simpler process

What is the EuVECA? European Venture Capital Fund Regulation (“EuVECA”) establishes a marketing passport for venture capital firms The regulation is not that is similar to that available to larger managers under the compulsory. If a fund manager AIFMD. The Regulation includes measures to allow qualifying does not wish to use the venture capital managers to market their funds to investors across the EU under a new “European Venture Capital Fund” EuVECA designation, then it label. It sets out the requirements relating to the investment “ does not have to comply with portfolio, investment techniques, and eligible undertakings the Regulation. which a qualifying fund needs to comply with. It also establishes uniform rules on which categories of investor qualifying funds may target and on the international organization of the European Union falling below the AIFMD threshold of managers that market such qualifying funds. 500million Euro AUM (applicable to managesr managing unleveraged, closed-ended Alternative Investment Funds), The regulation is not compulsory. If a fund manager does not and which are subject to registration with the competent wish to use the EuVECA designation, then it does not have to authority of their home Member State. comply with the Regulation. The EuVECA Regulation applies on a fund by fund, vehicle by What is the regulation’s history? vehicle basis. Every fund using the label will have to prove that it intends to invest a high percentage of investments (at The European Venture Capital Fund Regulation (EuVECA) least 70% of the capital commitments) in supporting young came into effect on July 22, 2013 to complement and and innovative companies. coincide with the implementation of the AIFMD. Which countries does it apply to, The European Commission first published its proposal for European Venture Capital Fund Regulation in December 2011 and when? as part of its action plan to improve access to finance for SMEs. The regulation applies in all EU member states and the three EEA Countries (Norway, Iceland, and Liechtenstein), but not Who can apply for EuVECA Switzerland. authorization? As the EuVECA is a Regulation, and not a Directive, it does The EuVECA regime will only be available to managers not need to be transposed into national law. It therefore has of Collective Investment Undertakings established in the immediate effect in all member states.

EMPEA Legal & Regulatory Bulletin Spring 2014 13 Legal and Regulatory Briefs

South Korea Lowers Barriers for FSDC PE fund that was at no time held by fewer than five persons would be regarded as being “bona fide widely held,” Retail Investors thereby changing the threshold for invoking the Deeming Source: Yonhap News Agency, AVCJ, Kim & Chang Provisions. This proposal is less onerous than the current Legal Newsletter threshold of 50 persons and would thereby exempt more investors from taxes earned by offshore funds. South Korea’s Financial Supervisory Commission will allow domestic retail investors to indirectly invest in private equity, This proposal extends to private equity the exemptions under thereby broadening access to the asset class for investors and the Safe Harbor Rule, which has exempted non-resident growing the pool of capital available to private equity funds. persons from Hong Kong tax on certain transactions since The reforms will broaden retail access to private equity by 2006. The proposed Extended Safe Harbor rule should apply permitting mutual funds to have exposure to the portfolio to a private equity fund that invests into portfolio compa- companies of private equity funds. nies which are incorporated outside of Hong Kong, do not undertake any business in Hong Kong and own less than Accredited investor rules throughout emerging and devel- 10% of their net asset value in Hong Kong real estate. Taken oped markets typically proscribe retail investors from together with proposed exemptions of SPVs under a PE fund investing in private equity funds due to the long-term and and the proposed changes to the Deeming Provisions, the illiquid nature of the asset class. Currently, the South Korean FSDC proposed measures are a welcome development by threshold for “qualified investors” is the ability to invest at private equity fund managers and investors. least 1 billion won (roughly US$94,750) for private equity funds and 500 million won for hedge funds. Draft Promotion and Protection of The announcement is part of the FSC’s “Plan to Strengthen Investment Bill proposed in South Competitiveness of Korea’s Financial Industry” (the “Plan), a broader effort to stimulate South Korea’s capital markets Africa that includes planned reforms to policies related to private Source: White & Case Client Alert funds. Other changes encompassed within the Plan include a shift from requiring advance registration for newly estab- In November 2013, South Africa’s FSB published the Draft lished funds to a notification within 14 days of establishment; Promotion and Protection of Investment Bill, which nar- additionally, private equity funds will be permitted to invest rows provisions on expropriation and investors’ recourse up to 50% of their net assets into derivatives and real estate to international arbitration. The move occurred after South and to provide debt guarantee and collateral. Africa cancelled its bilateral investment treaties with major European countries, including Belgium, Netherlands, The reforms are expected to come into effect in late 2014, Luxembourg, Germany, Spain and Switzerland. pending Korean parliamentary review. The Bill has sparked concerns among investors, as it proposes to remove recourse to international arbitration in the event Hong Kong Broadens Tax Exemption of a dispute. Foreign investors would instead have to rely upon mediation with the South African Department of Trade. for Private Equity Funds In comparison, bilateral investment treaties typically allow Source: EY Global Tax Alert foreign investors to employ international arbitration to settle investment disputes. The Financial Services Development Council of Hong Kong has proposed to exempt private equity funds that are incor- Foreign investors have also expressed frustration that the Bill porated or registered outside of Hong Kong from taxation. narrows the definition of expropriation in that it provides for The measures would also allow for special purpose vehicles, “just and equitable compensation” rather than compensa- which private equity funds often utilize to structure invest- tion at “full market value.” It does, however, roll over existing ments, to be tax exempt in Hong Kong. Furthermore, the guarantees against state seizure of assets.

14 © 2014 Emerging Markets Private Equity Association Proposals to Change Disclosure The first step in reducing the Requirements for Australian systemic and moral hazard Superannuation Funds risks posed by systemically Source: Asian Venture Capital Journal (AVCJ) “important financial institutions (i.e., “too-big-to-fail”) is to create In 2013, the federal government of Australia required super- methodologies to identify these annuation funds to publish full details on their portfolio holdings. In a private equity context, the legislation required entities. disclosure not only of the funds but also the assets in which the fund has invested. The industry expects regulations to be reversed, as the government reopened consultation on the bill finance companies and market intermediaries). It applies to in March. This disclosure system was scheduled to come into private equity and venture capital funds, as a subset of invest- effect on July 1, 2013, but had been deferred for 12 months. ment funds.

Offshore GPs are not obliged to approve the disclosure of There are five overarching “impact factors” that are common their portfolio holdings, but Australian-based fund managers to all NBNI financial entity: size, interconnectedness, substi- have little choice but to comply with the new regulations, tutability, complexity and global reach. The consultation will should they be fully implemented. produce indicators for each impact factor tailored to specific types of NBNI entities, such as investment funds. Some speculate that foreign PE firms will respond by refusing to accept investments from superannuation funds, thereby The methodology has its origins in the 2011 Cannes Summit, potentially denying Australian investors the opportunity to where G20 tasked the FSB to consult with IOSCO to prepare invest in some top-performing managers. methodologies to identify systemically important NBNI financial entities.

FSB & IOSCO Methodology on The methodologies were open for public consultation until Systemically Important Non-Bank/ April 7th. Once the identification methodologies have been finalized, the FSB will develop incremental policies within the Non Insurance Financial Entities existing framework to address the systemic risks that these Source: Financial Stability Board entities posed.

In January, 2014, The Financial Stability Board, in consultation with the International Organization of Securities Commissions (IOSCO) proposed a methodology to identify non-bank, non-insurance (NBNI) financial entities that are systemically important to the global financial system, i.e., “too-big-to-fail.” The consultative document also explains how the failure or distress of a NBNI financial entity could pose a threat to global financial stability.

According to the FSB, “Systemically important financial institutions (SIFIs) are institutions whose distress or disorderly failure, because of their size, complexity, and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.”

The first step in reducing the systemic and moral hazard risks posed by systemically important financial institutions (i.e., “too-big-to-fail”) is to create methodologies to identify these entities. These methodologies have already been developed for banks and insurers; the proposed framework extends them all other financial institutions (to investment funds,

EMPEA Legal & Regulatory Bulletin Spring 2014 15 2014 Marks EMPEA’s 10th Anniversary

Celebrating a decade of global connectivity, trusted intelligence & emerging markets growth

In 2014, EMPEA celebrates our 10th Anniversary. As we celebrate this milestone, it is important to recognize that these accomplishments would not have been possible without the support of our Founding Members, Board of Directors, Advisory Council, Expert Councils, Leadership Circle, and all of those who have given their time, offered advice, introduced a new colleague, or made a financial contribution. Furthermore, our success over the past 10 years is a direct reflection of the achievements of our members and their commitment to the industry.

EMPEA pledges to ensure that our members—whether LPs, GPs or industry advisors, experienced or new to emerging markets—will be equipped with the intelligence and relationships needed to navigate any market that is seeded with opportunity.

EMPEA is the global emerging markets private capital association. Our members share EMPEA’s belief that private capital is a highly suited investment strategy in emerging markets, delivering attractive long-term investment returns and promoting the sustainable growth of companies and economies.

We support our members through global authoritative intelligence, conferences, networking, education and advocacy.

For more information about EMPEA membership and to apply, email [email protected] or call 1.202.333.8171.

You can also apply online at www.EMPEA.org.

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