The restriction on Closed-ended Investment Funds controlling, seeking to control or being actively involved in the management of investee companies is to be removed. In CP 06/04, the FSA expressed its intention to retain this requirement as it was perceived as one of the key features that distinguished an investment entity from a trading company.
However, the FSA has reviewed the matter further, particularly in light of market pressure to remove the requirement. As mentioned above, it is this requirement that has been a key factor in the recent decisions by a number of sizeable funds to list on AIM or Euronext rather than the Official List.
The FSA is now of the view that it is the objective of spreading investment risk that is the key distinguishing feature of an investment entity. This has therefore been reflected in the new rules proposed in relation to the acquisition of controlling interests. While a Closed-ended Investment Fund may take controlling stakes, its investment objective of spreading risk through portfolio diversification should be implemented so as to avoid:
- cross financing between group companies (eg, using the assets of one company which it controls to secure the borrowings of another company which it controls),
- the operation of common treasury functions as between the investment fund and its investee companies, and
- investee companies ceasing to be distinct stand-alone businesses.
A consequential change relaxes the requirement that any trading activity carried out by a Closed-ended Investment Fund or its subsidiaries must not be significant in the context of the group as a whole. This requirement will not apply to investee companies in which the investment fund has a controlling stake. This publication is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to a particular matter.