Mergers of UCITS under UCITS IV. February 2011

Transcription

1 Mergers of UCITS under UCITS IV February 2011

2 Mergers of UCITS under UCITS IV As mergers of funds have always been possible in the UK, we in the UK have considerable experience of devising reconstruction proposals, both in respect of UK funds and involving funds established in other domiciles. The question is how we adapt our long established approach to accommodate the required approach for merging UCITS funds under the UCITS IV Directive which must be followed from July Now we have the proposals in HM Treasury/FSA s consultation document, issued late December 2010, on how they intend to implement it in the UK, we can focus on specific consequences for mergers involving UK funds. Scope of the UCITS IV regime First we need to identify the scope of applicability of the UCITS IV regime. The UCITS Directive envisages that it should apply both for: cross border mergers, which means what it says: the merger of funds, at least two of which are established in different member states (or alternatively established in the same member state into a newly constituted UCITS established in another member state); and domestic mergers meaning a merger between UCITS established in the same Member State where at least one of the involved UCITS has been notified pursuant to Article 93 which, in effect, means that at least one fund involved must have exercised its passport for the promotion of its units into another Member State. Note, this therefore excludes domestic mergers of funds which are purely promoted within their home member states. Care should be taken because this means that the term domestic mergers does not in fact cover all domestic mergers. In each case, merger means an operation whereby: one or more Merging UCITS, on being dissolved without going into liquidation, transfer all of their assets and liabilities to another existing UCITS or a new UCITS, the Receiving UCITS, in exchange for the issue of units to unitholders of the Receiving UCITS, and, if applicable, a cash payment of 10% of the net asset value of those units; one or more Merging UCITS which continue to exist until the liabilities have been discharged, transfer their net assets to another investment compartment of the same UCITS or to a new UCITS or to another existing UCITS the Receiving UCITS. This merger definition facilitates the way in which implementation of mergers have consequences on the local law for winding up processes and also facilitates a range of reconstruction proposals. Leaving aside some curiosities in the precise wording, which result from various differing approaches on the basis for mergers under Member States respective national laws, the main point to note from the scope of the UCITS IV regime is that it encompasses most reconstruction proposals in relation to UCITS funds where at least one of those is either sold cross border or the proposal involves funds in different EU jurisdictions. The FSA are proposing to use the Directive terminology of cross-border mergers and domestic mergers in their Rules and they also propose to introduce the terms merging UCITS and receiving UCITS to cover the funds involved. Required procedure For a merger subject to these provisions in UCITS IV: application to Merging Fund s regulator It is the Merging UCITS home member state which must authorise the mergers. An application to the regulator must include the terms of the merger, up to date versions of the Prospectus and Key Investor Information, a statement by each of the depositaries of the Merging and Receiving UCITS confirming they have verified compliance with certain requirements; and the proposed circular(s) that the Merging and Receiving UCITS intend to provide to their respective investors. The Merging UCITS regulator must request any additional information within 10 working days of receiving the initial information, and then has up to 20 working days from receiving complete information and must inform not only the Merging UCITS but also the Receiving UCITS regulator of their decision. involvement of Receiving Fund s regulator Once the Merging UCITS regulator has a complete file, it must immediately transmit copies of that information to the Receiving UCITS regulator. Each regulator is obliged to consider the potential impact of the proposed merger on unitholders of the Merging and Receiving UCITS to assess whether appropriate information has been provided to investors. Note the emphasis is on provision of information to investors (rather than seeking their 1

3 Mergers of UCITS under UCITS IV approval), no doubt due to the fact that resolutions to approve mergers have not been prevalent in all European member states it is simply that we in the UK are used to engaging investors by way of asking for them to approve matters by way of a resolution. The Receiving UCITS regulator has only up to 15 working days from receipt of its file to indicate dissatisfaction (if any) and if so they then have up to 20 working days to confirm whether they are satisfied with any modified information. depositary or auditor involvement Depending on how the Merging UCITS home member state implements UCITS IV, either the depositary or an independent auditor must validate the criteria adopted for valuation of the assets and, where applicable, liabilities on the date for calculating the exchange or merger ratio; where applicable, the cash payment per unit; and the calculation method of the exchange or merger ratio as well as the actual exchange or merger ratio determined at the date for calculating that ratio. This will be implemented by a new regulation within the new UK 2011 UCITS Regulations. Requirements to report in suitable terms must be drawn up by either the depositary or an auditor satisfying the independence requirement. circular to investors A circular must be sent to investors both in the Merging and the Receiving UCITS. The circular must be sent once the regulators have completed their process, and it must be provided at least 30 days before the last date for request for redemption, or where applicable switch, without any additional charge. calculating the merger factor etc The specific provisions for the merger terms required (and the relevant domicile for their determination) may remove some flexibility which has often been helpful in determining the terms for implementation of mergers and determining the effective date. Further details are mentioned below but, as regards the procedural aspects, as one would expect, Member States must ensure that, where applicable, the dates for calculating the exchange ratio of units in the Merging UCITS into units of the Receiving UCITS must be after the approval of the merger by unitholders of the Receiving UCITS or the Merging UCITS. notification of implementation of the merger After completion of the process, the relevant parties will need to be notified of the completion. However, note that there is a Directive requirement that implementation of the merger shall be made public through all appropriate means as required by the law of the Receiving UCITS, and notified to the relevant regulators. Also the Directive provides for the Receiving UCITS or its Management Company to confirm to the Depositary of the Receiving UCITS on completion of the transfer of assets which seems curious, but this may derive from the differing extent of the roles given to Depositaries in different member states. The FSA propose to implement this requirement so that mergers are made public by inclusion in the FSA Register. To assist in explaining how the whole timetable might work, an outline timeline is attached to this briefing paper. This new timeline could mean that a merger procedure takes longer than it would have done in the past. Resolution required? The emphasis of the UCITS IV merger regime is on providing information to investors and not necessarily requiring a vote of investors. Only when required by the national laws of the member states shall a unitholder resolution be required. In such an instance, such approval must not require more than 75% of votes actually cast by unitholders present or represented at the general meeting. Where applicable, the voting requirements will be without prejudice to any presence quorum provided for under national laws. A member state may impose neither more stringent presence quorum requirements for cross border than for domestic mergers nor any more stringent presence quorum requirements for UCITS mergers than for mergers of corporate entities. The FSA are clearly taking a view that their COLL 4 provisions and COLL provisions should remain, unamended, in the light of these UCITS IV requirements. Consequently, in the UK, a unitholder meeting must continue to be held to approve any merger proposals where the FSA Rules require it. This would be in addition to the requirements of the UCITS Directive which would apply where a UK UCITS scheme is the (or one of the) Merging 2

4 UCITS and in addition any merger where a UK UCITS scheme is the Receiving UCITS and the exemption provided in COLL 7.6.2R(5)(6) does not apply. Terms of the Scheme Under the UCITS IV provisions there are detailed requirements for the terms of the merger scheme (and also the circular provided to investors). The UCITS IV Directive requires that the common terms of the merger shall set out the following particulars: the type of merger and of the UCITS involved; the background to, and rationale for, the proposed merger; the expected impact of the proposed merger on the unitholders of both Merging and Receiving UCITS; the criteria adopted for valuation of the assets and, where applicable, the liabilities on the date for calculating the exchange ratio; the calculation method of the exchange ratio; the planned effective date of the merger; the rules applicable, respectively, to the transfer of assets and the exchange of units; and in the case of a merger proposed into a new fund, the fund rules or instruments of incorporation of the newly constituted Receiving UCITS. It is required under UCITS IV that, for domestic mergers, the laws of the Member States determine the date on which a merger takes effect as well as the date for calculating the exchange ratio of units of the Merging UCITS into units of the Receiving UCITS and, where applicable, for determining the relevant net asset value for the cash payment. It would be helpful if we could retain some flexibility for the particular Scheme to document the relevant provisions. For cross border mergers, UCITS IV requires that the laws of the Receiving UCITS home member state should determine the relevant dates, which could cause further constraints for cross border mergers. The relevant regulators are not allowed to require that any additional information is included in the common draft terms of mergers. Fortunately though the UCITS funds themselves may decide to include further items in the terms of merger. Given the non prescriptive nature of the above list, it should therefore be possible to have some flexibility as to the precise terms of a Scheme for a merger so that we have similar flexibility to that which we currently enjoy in drafting schemes of reconstruction. The FSA are proposing to set these requirements out for the common draft terms for a merger in a new COLL Rule Free switch right Investors in both the Merging and the Receiving UCITS will have the right to request, without any charge other than those retained by the UCITS to meet disinvestment costs, the redemption of their units or, where possible, conversion into another UCITS with similar investment policies managed by the same management company or by any other company with which the management company is linked by common management or control or by a substantial direct or indirect holding. The extent of this free switch option might cause concern for some management groups. This free switch right runs from the date of the provision of information to investors of the proposed merger up to 5 working days before the date for calculating the exchange ratio. There is also provision for Member States to allow competent authorities (note here the regulator involvement) to require or to allow the temporary suspension of redemption of units. This should allow the UK to facilitate temporary suspension of dealings immediately prior to an effective date under the terms of the Scheme. These provisions would appear to allow a continuation of the typical current approach in the UK. Regulation 12 of the UK 2011 UCITS Regulations will establish this right to switch free of charge prior to a merger. The draft terms for the UCITS Regulations indicate that no charge will be made for the exercise of [the rights] except to enable the UCITS to meet disinvestment costs. Circular to investors The member states must require the Merging and Receiving UCITS to provide appropriate and accurate information on the proposed merger to their respective unitholders so as to enable them to make an informed 3

5 Mergers of UCITS under UCITS IV judgement on the impact of the proposal on their investment. This will be a major change for the UK fund mergers because there will be a requirement in all cases to write to Continuing Fund investors, not just where they might be materially prejudiced or there might be a COLL 5 compliance issue. The circular must include the following information: the background to, and rationale for, the proposed merger; the possible impact of the proposed merger on unitholders including, but not limited to, any material differences in respect of investment policy and strategy, costs, expected outcome, periodic reporting, possible dilution in performance and, where relevant, a prominent warning to investors that their tax treatment may be changed following the merger; any specific rights unitholders have in relation to the merger including, but not limited to, the right to obtain additional information, the right to obtain a copy of the report of the independent auditor or the depositary on request, and the right to request redemption or where applicable conversion of their units without charge and the last date for exercising that right; the procedure involved and the planned effective date of the merger; a copy of the Key Investor Information of the Receiving UCITS; a detailed comparison between the Merging and Receiving UCITS (which is not dissimilar to that which we would currently include in merger documents) but note that the specific requirements for the comparison will mean that the typical approach will need to adapt to include certain information on a particular basis relating to risk and fees; an explanation of whether it is expected that the merger will have any material impact on the portfolio of the Receiving UCITS and whether it intends to undertake any rebalancing of the portfolio either before or after the merger takes effect. Note that the Directive allows Member States to provide for a derogation from the usual UCITS investment parameters for the Receiving UCITS presumably on a short term basis given that there is a cross reference to the provision that there is a priority objective for remedying the relevant situation taking account of the interests of unitholders. (Whilst a difficulty with the cross reference is that it relates to the exercise of its subscription rights rather than the acceptance of assets in exchange for the issue of units, it will be interesting to see how Member States implement this particular delegation power and whether the FSA introduce greater flexibility in this area); and interestingly, where approval by way of resolution is required, the relevant Member State must ensure that the circular may contain a recommendation by the respective management company or board of directors of the investment company as to the course of action (which is interesting given that we have become somewhat more diffident about including such recommendations of late). Note that the Implementing Directive is quite specific in its terms: Information must be written in a concise manner and in non technical language that enables unitholders to make an informed decision. In the case of a cross border merger, it must explain in plain language any terms or procedures relating to the other UCITS which differ from those commonly used in the other member state. Information provided to a Merging UCITS investor must meet the needs of investors who have no prior knowledge of the features of the Receiving UCITS or of the manner of its operation drawing their attention to the Key Investor Information of the Receiving UCITS and emphasising the desirability of reading it. Where a summary of the key points of the merger process is provided at the beginning of the information document, it is required to cross refer to the parts of the circular where further information is provided. As to the method of providing the information, as you would expect, the circular must be provided on paper or in another durable medium. This might facilitate use of a durable medium other than paper but only where it is appropriate to the context and the unitholder has specifically chosen that method. In accordance with other similar UCITS IV provisions, it is confirmed that, for merger purposes, electronic communications are treated as appropriate in the context if there is evidence that the investor has regular access to the internet and provision by the investor of an address for the purposes of carrying on that business will be treated as evidence. We will need to see how the FSA adapt the notification provisions of the COLL Rules before working out the scope for modernising notification methods to take advantage of these provisions. 4

6 For investors who buy units in either the Merging UCITS or the Receiving UCITS after despatch of the circular, the Implementing Directive requires that the circular and up to date key investor information must be provided to them, and indeed to anyone who asks to receive copies of the fund rules or instrument of incorporation, prospectus or key investor information of either UCITS. Although traditionally we have given such notification to new investors in the Merging UCITS, might the obligations on this issue become quite onerous ones with which to comply? The proposed new COLL provisions in COLL 7.7 effectively copy out these requirements. It is unlikely, however, that inclusion of these will, in practical terms, mean that merger documentation differs very much from the existing format for such documents because traditionally we have included much of this information in merger circulars. It will, however, in future be necessary to produce a document for Receiving UCITS investors. Currently this is only occasionally done where the COLL provisions do not in fact require a meeting of receiving fund investors. However, it is relatively simple to do because one can generate a shorter version of the circular which investors in the Merging UCITS will receive. Note that, unlike the position for the KII documents, there are no specific provisions on the length of the merger information document, whether for the Merging UCITS or the Receiving UCITS. Costs Where the UCITS has a management company (which will be the case for all UK domiciled funds) member states must ensure that any legal, advisory or administrative costs associated with the preparation and completion of the merger shall not be charged to the Merging or the Receiving UCITS or to any of their unitholders. The costs position needs to be carefully considered. Whilst, traditionally, merger costs have been borne by fund managers, there has been a move for some costs to be payable by investors, usually in relation to transaction and stamp costs. These would likely be outside the scope of legal, advisory or administrative costs but care will need to be taken in this area. Although the FSA proposals for implementing UCITS IV include a new draft Rule which states that any legal, advisory, administrative or any other costs associated with the preparation and completion of the UCITS merger are not to be charged to either the merging or the receiving scheme or any of their unitholders, the FSA indicate that they are not persuaded that this ban on charging merger costs to the fund should apply to mergers which are outside the scope of the UCITS IV Directive. Indeed, they indicate in the Consultation Paper that the need to obtain approval for the proposed merger acts in many cases as an incentive for fund managers to absorb some or all of the merger costs (which indeed is the case) but that this may not always be the case. There can be other factors and it might be that the risk of the inability to charge such costs to the fund might deter a fund manager from proposing a merger which would in fact be the best way of addressing a problem for an unviable or under performing fund. This is one area where the FSA have clearly stated their position, to the effect that they do not wish to roll out the UCITS IV approach to the wider UK authorised fund range. Likely impact on our established approach? Generally these UCITS IV merger provisions are unlikely to require UK managers to draft documents which diverge very far from the way in which UK fund managers currently draft merger circulars including Scheme documents. But inevitably these will have some impact on the established approach which UK fund managers have adopted for mergers and other rationalisations of fund ranges. The FSA wish to take a relatively straightforward approach of adding the UCITS Directive provisions for mergers to the existing UK requirements for mergers. Generally, the FSA have yet to form a view of which if any of the UCITS IV provisions should be applied to UK authorised funds more widely than those which are caught within the UCITS IV scope. But, in respect of mergers, their position seems to be relatively clear, certainly in respect of the costs point. There are pros and cons both to the UCITS IV approach and the traditional FSA approach on mergers. The UCITS IV provisions might take longer and have some more onerous requirements, whereas the existing UK provisions, which require a vote of investors of the Merging Fund and sometimes the Continuing Fund, may be seen as introducing an uncertainty of the outcome of the vote(s) and 5

7 Mergers of UCITS under UCITS IV it might therefore be viewed as helpful for the voting requirement to be removed? In any event, the position on voting for UCITS mergers depends on the decision taken by each member state, and this possibility may introduce unhelpful differences of approach between regulators and therefore differences in approach depending on the jurisdictions involved in cross border mergers. The FSA s approach to continue to require a resolution of the merging fund investors on top of the UCITS IV requirements will have an impact on the length of timetables and cost involved in merger proposals involving UK authorised UCITS funds. The addition of the UCITS IV provisions on top of the existing UK provisions for mergers is expected to add costs to merger proposals - the impact assessment in the HM Treasury / FSA consultation paper suggests something in the region of 20%. This is an increase mainly arising from the additional requirements for UCITS IV which could only have been mitigated, for example, by removal of the need for a resolution of unitholders in the merging fund, which might have been seen as reducing the level of investor protection. The UK still regards unitholder resolutions as a sound way of seeking to further investor protection so this was probably not regarded as an appropriate way forward by the FSA. Most likely though the real change on which we should focus will be that, when the proposals are implemented across the EU, fund managers operating internationally should obtain the real possibility of rationalising their fund ranges more conveniently, especially those established in jurisdictions such as Luxembourg, which have to date not effectively facilitated a wide range of fund mergers. 6

8 UCITS merger timetable x Fund Manager decides to propose merger Allow one month to draft circular etc and discuss with relevant parties (including Depositaries) x x Agree merger documentation (and Depositary agrees to issue its statement) Submit papers to Merging UCITS regulator (Note: the possible total time period for regulator consideration may be 49 to 68 days, plus time for responding to regulators questions) Within 10 working days, Merging UCITS regulator may require additional information. (5 days allowed for answering questions but of course this period may vary.) It may be unrealistic to assume that the Merging UCITS regulator finds all relevant points within the first 10 working days prior to it confirming it has complete information, although this is presumably the assumption. x - 94 Fund Manager provides additional information. Assuming this additional information completes the file, time periods start running for the regulators: Once the Merging UCITS regulator has complete file, obligation on Merging UCITS regulator immediately to transmit copies to Receiving UCITS regulator, and Merging UCITS regulator has 20 working days to determine the matter. Within 15 working days, the Receiving UCITS regulator must notify if it is dissatisfied with the information provided and, if it is dissatisfied, it has a further 20 working days of receipt of the modified information to determine whether or not it is satisfied or not with the modified information. x - 45 Complete regulatory approval process, and print circular. Allow say 5 days printing time which may of course vary depending on the circumstances. Despatch circular to investors Must give investors at least 30 days notice before the last date for requesting redemption or switch units without charge End of right of investors in both Merging and Receiving UCITS to redeem or switch units free of charge (presume right may be extended to closer to the Effective Date, although only up to 7 days is required under the UCITS Directive) Unitholder meeting (if required, as for example will be required in the UK). Note 75% voting threshold x x + [?] Effective Date (assuming valuation point on that date for calculating merger factor) Publicise implementation of the merger through all appropriate means as prescribed by Receiving UCITS regulator, and notify Receiving and Merging UCITS regulators. Notes: 1. This is only an indicative timeline to show the combination of time periods for which the UCITS Directive now makes provision for UCITS mergers. Into such timeline one would need to consider your specific circumstances, timing for collating information and responding to regulators comments; and also additional points, such as the need for a validation of the merger factor by the depositary or an auditor. 2. The timetable might be longer for a cross border merger than for a domestic merger. For a cross border merger, the Receiving UCITS regulator would be able, if it were dissatisfied with the information provided, to trigger an additional 20 working day period in which to consider revised information. 3. A unitholder resolution is now not required under the UCITS Directive. Reliance is placed upon a circular being provided at least 30 days before the last date for exercising the right to redeem (note: not the Effective Date). Into this time period however there may of course need to be built in a unitholder meeting procedure if the local law of the relevant UCITS so requires. 4. Clearly this sort of merger timeline is much longer than the timelines to which we are accustomed. 7

9 Mergers of UCITS under UCITS IV Contacts Kirstene Baillie Partner t: +44 (0) e:

10 Holding UK property offshore Mergers of UCITS under UCITS IV The Indian investor This publication is not a substitute for detailed advice on specific transactions and should not be taken as providing legal advice on any of the topics discussed. Copyright Field Fisher Waterhouse LLP All rights reserved. Field Fisher Waterhouse LLP is a limited liability partnership registered in England and Wales with registered number OC318472, which is regulated by the Solicitors Regulation Authority. A list of members and their professional qualifications is available for inspection at its registered office, 35 Vine Street London EC3N 2AA. We use the word partner to refer to a member of Field Fisher Waterhouse LLP, or an employee or consultant with equivalent standing and qualifications.