Is a joint venture caught within the scope of the AIFMD?

Background

The Alternative Investment Fund Managers Directive (AIFMD) has been transposed into UK law with effect from 22 July 2013. An Alternative Investment Fund (AIF) is any collective investment undertaking that raises capital from a number of investors and makes investments in accordance with a defined investment policy (excluding retail funds that are regulated by the UCITS Directive). The AIFM imposes a number of new obligations and restrictions on those who either manage an EU AIF or market a non-EU AIF within the EU.

The AIFMD states that joint ventures are excluded from its scope. This is as expected, as the purpose of the AIFMD is to regulate entities like hedge funds and private equity structures rather than JVs in the usual sense. Nevertheless, the Directive contains no definition of joint venture. Financial Conduct Authority guidance says that there are no fixed, objective, criteria for ascertaining whether an arrangement is a JV – it is a question of fact. As a result, prospective JV parties will often be concerned as to whether their commercial arrangement is excluded from the AIFMD.

The FCA guidance indicates that the factors outlined below might show that a joint commercial arrangement is a JV.

Relationship between the parties; raising and investing capital

JVs are often undertaken by parties with a pre-existing business relationship, who have come together to discuss investing in a project before deciding what legal structure is best.

A JV will generally involve a number of investors jointly investing capital for themselves, rather than capital being raised and invested on their behalf. The investment of capital by a third party (or by a minority of investors on behalf of the others) can indicate that an arrangement is an investment fund rather than a JV.

The existence of an investment policy - often included as a schedule in the underlying transaction documents - can also be a sign that an arrangement is an investment fund rather than a JV. A good example is a real estate fund with a strict investment policy prescribing the type, value and geographical location of property which can be invested in.

Control of the JV vehicle

The European Securities and Markets Authority’s guidelines state that, in a JV, the parties should have:

"A form of direct and ongoing power of decision, whether exercised or not, over operational matters relating to the daily management of the [JV] undertaking’s assets and which extend substantially further than the ordinary exercise of decision or control through voting at shareholder meetings on matters such as mergers or liquidations, the election of shareholder representatives, the appointment of auditors or the approval of annual accounts."

• The basic point is that all parties should have a degree of continual day-to-day control over a commercial arrangement’s activities for that arrangement to be classed as a JV. This would often extend to key strategic financial, operating and planning decisions.
• The exact division of control will depend on the relationship between the parties. An obvious example is that, in a majority/minority JV, the minority will have less power than in a 50:50 JV. In any event, no single party should be able to control the activities of the JV unilaterally.
• Guidance specifically notes that, if the parties operate through a corporate vehicle, the investors may exercise control through nominees appointed to the board of that vehicle. This might be problematical in the UK, where the concept of a nominee who merely acts as his appointor’s mouthpiece is inimical to fundamental aspects of company law. Under English law, a director is a fiduciary who owes his duties to the company and, among other things, must exercise independent judgement. In the UK, having control through a nominee is best understood as having the power to appoint and remove the nominee, preferably at short notice, and – as a matter of agreement between the company and the JV parties – the nominee being able to disclose confidential and other information about the company to his appointor.
• The involvement of each party has to be more than a non-binding right to be consulted, or the ability to give directions.
• It can be acceptable for ordinary course decisions to be delegated to an executive, or outsourced to an operator, as long as all the parties maintain the appropriate degree of control.

Limited Partnerships

Many investment funds use Limited Partnership (LP) structures – where investors have a passive interest as limited partners, whilst both economic control and management are the responsibility of the general partner. Such arrangements are not (and are not intended to be) JVs.

However, if an LP is used by parties to facilitate a JV, and has the characteristics outlined in the previous sections of this article (in particular that all investors have the requisite degree of day-to-day control), such a structure could be an AIMFD-excluded JV. The key question is then how management control (through the general partner) is organised - and whether all limited partners participate in day-to-day management. It would be indicative (though not conclusive) that an LP arrangement was a JV if the limited partners exercised control as shareholders in the general partner or through being able to appoint its directors.

Ensuring a JV is outside AIMFD

Care should be taken when considering the legal structure of a JV and when drafting the relevant transaction documents, in order to ensure that the arrangement falls outside the scope of the AIFMD.

Investors should also note that:

• There are transitional provisions giving commercial arrangements that were already in place on 22 July 2013 a year to comply with (or remove themselves from the scope of) the AIFMD – i.e. until 21 July 2014.
• Closed ended investment structures that make no further investments after 22 July 2013 can benefit from “grandfathering” provisions and be exempt from the requirement to comply with the AIMFD, even if they would otherwise fall within its scope.

If you are concerned that a JV arrangement is caught, or want advice on how to set up a JV to ensure it falls outside the scope of the AIMFD, please contact us.