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EMPEA Guidelines (English Edition) EMPEA Guidelines (English Edition) Key elements of legal and tax regimes optimal for the development of private equity 1 About EMPEA EMPEA’s Board of Directors EMPEA’s Legal and Regulatory Council Robert Petty (Chair) EMPEA is the global industry association for private Clearwater Capital Partners Mark Kenderdine-Davies (Chair) capital in emerging markets. An independent, non- CDC Group plc profit organization, the association’s membership Teresa Barger (Vice Chair) comprises 300+ firms representing institutional Cartica Capital LLC Carolyn Campbell Emerging Capital Partners investors, fund managers and industry advisors Rebecca Xu (Vice Chair) who together manage more than US$5 trillion in Asia Alternatives Management LLC Antonio Felix de Araujo Cintra assets across 130 countries. EMPEA’s Members TozziniFreire Advogados Runa Alam share the organization’s belief that private capital Development Partners International (DPI) John Daghlian is a highly suited investment strategy in emerging O’Melveny & Myers markets, delivering attractive long-term investment Tom Barry returns and promoting the sustainable growth of Zephyr Management, L.P. Mark Davies King & Spalding companies and economies. EMPEA supports its Fernando Borges members through global authoritative intelligence, The Carlyle Group Folake Elias-Adebowale conferences, networking, education and advocacy. Udo Udoma & Belo-Osagie Drew Guff Siguler Guff & Company Laura Friedrich Despite significant differences across regions Shearman & Sterling LLP and countries, private capital managers and Mark Kenderdine-Davies (Secretary) investors face important common challenges and CDC Group plc Geoffrey Kittredge Debevoise & Plimpton opportunities. EMPEA’s mission is to foster a Maria C. Kozloski vibrant and informed industry to realize investment International Finance Corporation (IFC) Prakash Mehta returns and sustainable growth in emerging Akin Gump Strauss Hauer & Feld LLP Tope Lawani markets. In support of its mission, EMPEA: Helios Investment Partners Zia Mody AZB & Partners • Researches, analyzes and disseminates H. Jeffrey Leonard authoritative global information on emerging Global Environment Fund Gordon Myers markets private capital fundraising, investment IFC and exits, covering industry trends, benchmarks, Piero Minardi Warburg Pincus Peter O’Driscoll best practices and current market developments; Orrick, Herrington & Sutcliffe LLP • Convenes meetings and conferences around Sanjay Nayar KKR India Advisors Pvt. Ltd. Chike Obianwu the world that allow its members, prospective Templars investors and other interested stakeholders to Ziad Oueslati debate, network and learn about key issues AfricInvest Bayo Odubeko Norton Rose Fulbright affecting private capital investing in emerging Nicolas Rohatyn market countries; The Rohatyn Group (TRG) Paul Owers Actis • Collaborates with industry partners, including Mani Saluja national and regional venture capital/private Quilvest George Springsteen equity associations, to strengthen the network IFC Asset Management Company Tom Speechley and knowledge base of emerging markets private The Abraaj Group Mara Topping capital practitioners; and White & Case LLP Yichen Zhang • Advocates for policy and regulatory reforms that CITIC Capital Cindy Valentine strengthen the environment for private capital Simmons & Simmons investing in emerging markets. Nigel Wellings Clifford Chance ©2017 EMPEA All rights reserved. EMPEA encourages and grants Harald Zeiter permission for the distribution and reproduction of Capital Dynamics copies of this work for non-commercial purposes. Such copies, in whatever form, must be unmodified, in their entirety, including copyright notice and full attribution. Any adaptation, derivative work or any other modification requires prior written approval by EMPEA. Please contact Holly Radel at [email protected] or call EMPEA at +1.202.333.8171. EMPEA | The Watergate Office Building | 2600 Virginia Avenue N.W., Suite 500 Washington, D.C. 20037-1905 USA Phone: +1.202.333.8171 | Fax: +1.202.333.3162 | Web: empea.org EMPEA GUIDELINES Key Elements of Legal and Tax Regimes Optimal for the Development of Private Equity EMPEA is the global industry association for private capital in emerging markets. Our 300 members include the leading institutional investors and private equity and venture capital fund managers across more than 60 developing and developed markets. EMPEA’s members share the belief that private equity and venture capital are an important source of long-term financing for businesses in emerging markets. By providing growing companies with operational expertise, governance enhancements and expanded strategic networks in addition to capital, private equity and venture capital investors can significantly impact business growth, elevate environmental and other industry standards, create jobs and improve access to services for underserved populations, thereby improving the overall quality of people’s lives. Private equity and venture capital investors’ success in individual emerging markets may also help attract other investors to undercapitalized economies. Accordingly, EMPEA supports the development of legal and regulatory frameworks that address risks and encourage alignment of interests, but do not unintentionally restrict capital flows or limit investors’ participation in opportunities they find attractive. The EMPEA Guidelines are intended to identify those elements of legal, regulatory and tax regimes that experience from other markets has demonstrated will help attract robust international and local private equity and venture capital investment. Given the core facets of the private equity model—active ownership, often of minority stakes, in private businesses seeking not only capital but also enhanced governance or more professionalized management, over a period of several years—private equity investors seek clarity and consistency around securities laws and minority investor protections, as well as fair and equivalent treatment for all providers of capital regardless of their mode of investment or country of origin. Additionally, because private equity funds are pooled vehicles comprising capital from investors spanning multiple jurisdictions, clear, consistent and internationally competitive tax treatment is also vital. We envision the use of the Guidelines primarily by three groups: regulators engaged in an assessment of their own regulatory regimes vis à vis practices in international markets; private equity firms engaging in dialogue with regulators in their home markets; and investors in private equity funds who are seeking a framework for evaluating the legal and regulatory environment in individual markets. The Guidelines are intended to serve as a general framework for constructive dialogue amongst all these stakeholders—policymakers, regulators and investors—thereby promoting private equity and venture capital investment in emerging markets. Our hope is that engagement on these issues will result in thoughtful assessments of both best practices and opportunities for positive change. 3 EMPEA Guidelines 1. Effective, clear and flexible corporate and securities laws, with the ability to negotiate rights in capital structures. Private equity investment will be more robust in markets with corporate and securities laws designed to provide liquidity to businesses and their investors, to foster fundraising through public offerings, to encourage local and international listings and to promote the development of local capital markets. Issues particular to private equity investment ideally addressed in such laws include: (i) limited liability for investors who provide capital, but do not take an active role in the management of the investment vehicle, (ii) the ability to flexibly negotiate equity and debt interests in both corporate and partnership structures, (iii) mandatory disclosure of directors’ and officers’ conflicts of interest, (iv) clarity on directors’ and officers’ fiduciary duties, (v) reasonable protections for minority investors, and (vi) flexibility with respect to share repurchases, treasury shares and distributions of cash and other assets. 2. Conformity to international standards of business integrity and anti-corruption. In addition to adopting international conventions and national legislation to combat bribery, corruption and money laundering, regulators should demonstrate effective enforcement and support a culture of business integrity, transparency and anti-corruption. Private equity investors prefer to invest in countries that conform to evolving international standards on environmental protection and human rights, including health and safety and protection of worker rights. Jurisdictions that encourage the adoption of best practices in this regard are preferred, especially since many private equity investors are mandated by their own investors to ensure that portfolio companies adopt high standards of business integrity. 3. Clear, consistent and internationally competitive taxation. Markets optimal for private equity investment also feature tax systems that are predictable and promote the long- term growth of capital, and allow foreign and domestic private equity investors to pool their capital in an investment vehicle. Private equity investors seek tax clarity and certainty. Key features of such tax systems minimize the risk of onerous treatment of foreign investors, e.g., protection from additional or double taxation at the level of the investment vehicle or on distributions by
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