Alternative Investment Fund Managers Directive – another regulatory overkill?

25 Jun 2011 at 08:28

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The financial and economic crisis which has peaked for the time being in the collapse of Lehmann Brothers in the fall of 2008, has led to numerous cries, mostly by politicians within the European Union, to subject the sector of international finance to a stricter regulatory scheme.

The area of finance where stricter regulations were considered necessary to replace the laissez-faire is the management of Alternative Investment Funds (AIF). Thus, two years ago a first draft of an Alternative Investment Fund Managers Directive (AIFM Directive) was presented to the Commission of the European Union. Having received approval from the European Parliament at the end of last year, the draft was approved by the Economic and Financial Affairs Council of the European Commission in June 2011.

Therefore, the member states of the European Union will have to transpose the AIFM Directive into national law within the next two years. This means that one has to be prepared for national regulation, in compliance with the AIFM Directive, by July 2013.

The content of the AIFM Directive shall be briefly summarized in the following:

The AIFM Directive does not address Alternative Investment Funds as such but their management (Alternative Investment Fund Managers – AIFM), be it a natural person or a legal entity. An AIFM must henceforth obtain a concession for the management of such funds and the sale of participations in such funds from the national financial markets supervisory authority, which in Austria is the Finanzmarktaufsicht (FMA). It must be counted as an advantage that a concession, obtained in one member state of the European Union, entitles to conduct the same business activities in all other member states (the so called Passport Regulation).

The AIFM Directive applies to all AIFM with an official seat in the European Union which provide services to one or more Alternative Investment Funds. This applies irrespective of whether the AIF has its seat within the European Union, if the services are performed directly or through a third party, whether the AIF is an open-ended or close-ended fund and which structure the AIF and the AIFM have. This means that the management of funds which so far were not subject to regulatory oversight, like close-ended funds, will in future be supervised. This includes funds which have been regulated in Austria and in other member states by specific laws; for example the Austrian Investment Fund Act or the Austrian Real Estate Investment Fund Act, subjecting them to double the amount of regulations in future.

Exempt from the AIFM Directive are funds which fall under the Directive governing Undertakings for Collective Investment in Transferable Securities (UCITS). Interestingly enough the AIFM also does not cover national, regional and local governments and bodies or other institutions which manage funds supporting social security and pension systems. Small AIFM on the other hand will be subject to less regulatory requirements according to the AIFM Directive.

In order to be allowed to manage an AIF, one will have to fulfil certain qualifications. The AIFM Directive poses requirements with regard to the minimum capital, the reputation and experience of the directors, proof of appropriate risk and liquidity management, proof of adequate and legal prevention methods and the arrangement with a depositary bank.

Special rules apply to Private Equity Funds which are the core of the AIFM Directive. They are subject to special transparency regulations and reporting requirements. The reasoning behind this is that companies where Private Equity Funds hold a share shall be protected from so called “asset stripping”. Hence there is a duty to notify the authorities once the voting rights in a company, where a private Equity Fund holds participations, reaches or sinks below a certain threshold.

Inspired by the political discussion regarding the remuneration of bankers, in particular their bonuses, the AIFM Directive contains regulations with regard to the remuneration of management and employees. For instance 40% of the to be paid bonuses have to be deferred between three and five years until it is clear whether a bonus would really be justified.

The new European agency for the supervision of the financial markets, the European Securities and Markets Authority (ESMA) in Paris, has received special powers under the AIFM Directive, including the power to pass additional regulations with regard to the AIFM Directive.

Two years have passed since the idea of passing such a directive first came up. Now it seems clear that the real problem for the financial markets are the household debts of the public. It must therefore be doubted, or at least questioned, whether the real aim of the directive, to stabilize the financial markets, will be achieved. Any activities by private equity funds have nothing to do with the extreme budget deficits in almost all western countries. It must be feared that the directive will only lead to an increase in cost and more bureaucracy for the financial industry, which will in the end disadvantage European financial markets in competition for new investments.

Important changes in company law in 2011

30 Mar 2011 at 10:24

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The Austrian legislator has the intention of changing important areas of company law in 2011. As a consequence he has drafted two new laws and made the drafts available to the public which we shall summarize briefly in the following:

The first draft is the Registered Share Conversion Act. Companies not registered at the stock exchange will have to change their shares from bearer shares to registered shares.

By this law the Austrian legislator will implement a recommendation made by the Financial Action Task Force (FATF), in its report regarding Austria published on December 1, 2009. As known, the Financial Action Task Force was set up by the leaders of the G7 countries and the President of the EC Commission at their summit meeting in Paris in June 1989, as a group of experts with the task to analyze the methods of money laundering and to develop counter measures. The measures proposed by the FATF in 2009 are a further improvement of existing regulations to combat money laundering and terrorism financing.

To increase transparency of the shareholders structure of joint stock companies, they may in future only issue registered shares. They will have to include the following information about their respective shareholders in the company share register:

(Company) name of the shareholder and address for service, for individuals also date of birth;
Quantity of shares or stock identification number of shares held by the shareholder;
Shareholders’ bank account number at a credit institution, which can be used for all payments of the company to the shareholder;
If the shareholder holds shares in trust, the prior two requirements apply to the beneficial owner.

Only listed joint stock companies are exempted from the obligation to issue registered shares and may continue to issue bearer shares. However, in the future bearer shares of listed joint stock companies must be issued in collective share certificates, to be deposited in a depositary bank. From now onward, it is prohibited for listed joint stock companies to issue share certificates to individual shareholders.

The draft of the amendment has already been issued and was sent for review to interested parties by the Federal Ministry of Justice a few weeks ago. This amendment to the Stock Corporation Act shall come into force on May 1, 2011. Joint stock companies incorporated after that date must already comply with the new regime. If necessary, existing joint stock companies will have to adapt their articles of incorporation to the new regulations until April 30, 2013.

The second draft by the Austrian legislator is the Restructuring Simplification Act. Through this code, the Austrian legislator will implement regulation 2009/109 EC by the European Parliament and the Council from September 16, 2009 regarding the reporting and documentation requirements in the case of merger and divisions (demergers) of companies.

The act will change the Austrian Stock Corporation Act, the Division of Companies Act, the EU Merger Law, the Limited Liability Company Act, the SE-Code and the Company Register Code, in order to simplify mergers and divisions.

Upstream Mergers, ie. mergers of 100 per cent subsidiaries with their parents, will be simplified by dropping certain reporting requirements. Company divisions where the proportion of the participation of the shareholders will be kept unchanged will also require less reporting. Another regulation which will be eliminated by the new act is the supervisory board’s duty to compile a report regarding the company division (or merger for that matter).

In case of a company division or merger, companies listed on the stock exchange will no longer be required to publish an interim financial statement. Publication requirements will be less which will reduce costs since it will no longer be necessary to publish such acts in the official pages of the Wiener Zeitung (Amtsblatt der Wiener Zeitung). It will suffice to submit the documents electronically to the website (“Ediktsdatei”) of the courts.

The draft of the new law however does not only propose simplifications, it also improves the standing of creditors of companies involved in a merger or division. Creditors threatened by a company division shall henceforth have an actionable right to collateral.

In earlier changes of the Austrian Stock Corporation Act, the Austrian legislator already included regulation which requires a listed company to publish certain information regarding the company on their web-site. The legislator therefore has come to view a company’s web-site as a means to publish important company relevant information. As a consequence, he now mandates that a company, registered at the stock exchange and thus required by law to maintain a web- site, shall register the web-address of the company web-site, hence the URL, with the company register. Companies not listed at the stock exchange will have the choice whether they want to register their web-address with the company register.

Also this draft law is in the review process and the law shall come into force later in the year.

The above summary only represents general information with regard to the proposed statutory amendments. They cannot and should not substitute legal counsel in individual cases.

Austria: adapting to the changed environment

15 Dec 2010 at 11:29

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At the end of October 2010 the Austrian Government announced the federal budget for 2011 and the supporting tax measures for its consolidation. The government intends to reach a budget that is within the Maastricht-criteria by introducing new taxes and remodelling existing tax provisions.

We shall in the following briefly summarize these new laws as well as the changes to existing legislation and shall make an attempt to evaluate the consequences for Austria as a business location.

Taking effect 2011, Austria will levy the so called stability tax (“Stabilitätsabgabe”). Subject to the new stability tax are Austrian banking institutions, which also includes branches of foreign banks doing business in Austria. The stability tax will be levied in two forms: as a percentage of the balance sheet total and as a percentage of the total derivatives trade volume. The new Stability Tax Code contains detailed rules for calculating the total assets which will then form the basis for levying the tax. The stability tax for total assets up to €20 billion shall be 0.055% of this amount and if the total assets exceed €20 billion, 0.085%. The stability tax for derivatives will be 0.013% of all trades in derivatives by the institute in question. If in a derivatives trade there are two parts, purchase and sale involved, only one part will be taxed.

It remains to be seen whether this tax will generate as much revenue as the ministry of finance hopes, which many parties doubt.

Another new tax to be introduced will be the airline ticket tax (“Flugabgabe”). This will affect flights from Austrian airports. The amount will depend on the distance between the Austrian airport and the destination. The tax system differentiates between short/medium and long distance flights. Taxes will amount to €8.00, €20.00 and €35.00 per flight and are to be levied by the airline when selling the ticket. All European destinations will be short distance, as well as all states around the Mediterranean Sea and Russia.

Taxation of capital income will be changed to include taxation on realized capital gains as well as income from derivatives. These new taxes are called capital gains taxes and will amount to 25 percent. This will however only affect capital acquired from 2011 onward.

The tax system has also been changed with regard to private foundations. So far, a foundation’s income derived from capital or through the sale of participations of the trust and received a privileged taxation treatment which meant a reduced corporate income tax of 12.5 percent. This will be changed to the general corporate income tax rate of 25 percent. Hence, private trusts lose their tax privileges. This in turn will create the necessity for owners of large fortunes to consider whether it would be beneficial to change from a private trust to a normal corporation, administering the assets. In future, the latter will have advantages over the administration of assets in the form of a private trust.

Apart from these new taxes, income tax incentives for families with children and tax deductions for people in need of care will be reduced.

In the area of consumption taxes, the legislator has decided to raise the petroleum tax (“Mineralölsteuer”). This will probably affect the end consumer the most, be it that he is the owner of a vehicle or be it that the raised petroleum tax is passed on to the consumer through a price increase on transported goods. The so called standard fuel consumption tax (“Normverbrauchssteuer”), an Austrian tax to be paid when buying a motor vehicle, will be raised. Tobacco tax will also be raised.

But taxes will also be lowered in some areas. The so called research bonus (“Forschungsprämie”) will be raised from 8 percent to 10 percent. The taxation of credit or loan agreements, an oddity of the Austrian tax system, is henceforth abolished.

Apart from these new taxes, relatively little will change in the area of corporate taxation. Leaving aside the banking sector, other business sectors will not be subject to new taxes. Possibilities to structure businesses to the greatest tax advantages, which so far has been an advantage for Austria as a business location, will remain. This includes group taxation as well as the possibility to offset any balance sheet profits with losses generated by foreign entities owned by Austrian corporations. The tax accounting law has not been changed; amortization of the company value may still be claimed. A new wealth tax, requested by left leaning pressure groups, will not be introduced which is a relief to all tax payers.

Not so much a fiscal measure but more of a regulative measure, are the changes of the Austrian Gambling Code which have been decided together with the above mentioned tax changes. The Austrian gambling monopoly will be abolished as a consequence of European case law regarding gambling monopolies. It will not be requires for any private entity to have their seat in Austria in order to offer gambling opportunities in Austria. In accordance with the freedom to provide services, this may also be done from any other country in the European Union. A private entity offering gambling must however be subject to a supervisory agency at the place of business. The new code will regulate the conditions under which a private entity may acquire a gambling concession.

A concession may only be acquired by a corporation which has apart from a board of directors, a supervisory board and a minimum initial capital of €22 million. The conditions for acquiring a gambling concession closely resemble the conditions and prerequisites for opening a banking business in Austria. It remains to be seen how soon private parties will make use of this new statutory opportunity and how soon there will be real competition in the gambling market.

Leaving aside the banking sector, the government has taken a balanced approach, taking relatively small measures to consolidate the budget. The challenge will be to adapt each business to these new, albeit relatively moderate changes.

Successful ways for branch registration of English companies in Austria

22 Oct 2010 at 14:11

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In the past the registration of a branch of an English company in Austria encountered significant legal resistance and often was rejected by the courts. The cause of this resistance was more often than not a lack of understanding of the Austrian courts of the legal structure of English companies and the inability of the applicants explaining the characteristics of English companies to the Austrian courts. With the recent decision of the Commercial Court of Vienna (1) the registration of an English limited company was accepted and the resistance was finally broken. BMA Brandstätter Rechtsanwälte GmbH represented the English limited company in this case and successfully registered the branch in Austria. By following the steps which led to this positive decision, the registration of English branches in Austria should be trouble-free in the future.

The origins of these problems are the differing legal systems. It is well known that in England the common law system is in legal force whereas Austria is a civil law country. These differing legal systems led to essential differences in the company laws of both countries.

In England the ultra vires doctrine has been in legal force since the landmark decision of 1875 of the House of Lords in the case Ashbury Carriage Company v. Richie. According to the ultra vires doctrine a company’s legal capacity is defined by its memorandum of association. Therefore the memoranda of association of English companies were drafted in a particularly extensive and detailed way, especially their scope of business. That was done to give the companies the necessary legal capacity and their directors the necessary capacity to act for the company. In accordance with the ultra vires doctrine, acts of the directors of the company exceeding the scope of business of the company are considered void. This often led to conflicts with contractual partners and creditors of such company.

The Companies Act 1985 abolished the ultra vires doctrine and explicitly allowed general clauses fixed in the memorandum of association. Now, the Companies Act 2006, in contrast to the ultra vires doctrine, regulates in section 31 that in case of doubt the scope of business of a company is unrestricted, as long as there were no restrictions explicitly made. Furthermore, the limitation of the capacity to act of the directors was basically abolished by section 39 and 40 of the Companies Act 2006.

Despite these changes in the legal system, very often in practice the old memoranda of association are still in use in which one can find provisions such as:

“To invest and deal with the monies of the Company in such shares or upon such securities and in such manner as from time to time may be determined.”

“To lend and advance money or give credit on any terms and with or without security to any company, firm or person …, to enter into guarantees, contracts of indemnity and to secure or guarantee in any manner and upon any terms the payment of any sum of money or the performance of any obligation by any company, firm or person…”

“To borrow or raise money in any manner and to secure the repayment of any money borrowed raised, or owing by mortgage, charge, standard security, lien or other security upon the whole or any part of the Company’s property or assets …”

Usually there are no such provisions in Austrian memoranda of association. The ultra vires doctrine does not apply in Austrian company law, the legal capacity of legal entities is basically unlimited. In particular, the legal capacity is independent of content and range of the company’s scope of business.

If an English company wants to register a branch in Austria with a memorandum of association containing such provisions as quoted above, such provisions are interpreted by the Austrian courts in the sense that the company wishes to do banking business. As a prerequisite the courts demand a license according to the Austrian banking regulations. Since the English company actually is not involved in any banking business, does not intend to do so, and is thus not prepared for obtaining a banking licence, the registration of a branch often fails because of such misunderstanding.

During the registration procedure of the decision quoted above the English company successfully explained to the court the differences between the two legal systems and clarified the misunderstanding about the content of the English memorandum of association and the actual activities of the company.

It was outlined to the Commercial Court of Vienna that content and range of the memorandum of association is still influenced by the ultra vires doctrine. Furthermore it was explained to the court that the legal term of banking business is harmonised by the directive 2006/48/EU. Therefore, banking businesses that require a license in England require a license in Austria too and vice versa. Requiring a license from an English company that does not need a license in England would be a violation of Austrian banking regulations. This would constitute a violation of the harmonized legal term of banking business and at the same time a violation of the principle of freedom of establishment according to articles 49 and 54 of the EU-treaty in the Lisbon version.

Crucial for the understanding and the correct interpretation of such provisions of English memoranda of association as quoted above is the fact that the company only deals with its own money and not with money from others. This is the essential difference to the banking business, where it is all about money from customers. Taking out credits or issuing bills of exchange is usual commerce and not banking activity. Finally it was explained to the court in this case that according to the Austrian banking regulations a banking business is only given if its activities exceed a certain quantitative threshold. Sporadic credit and loan accommodation – as it is usual in commerce – is not meant to be a banking business.

Considering the legal characteristics during the registration process of a branch of an English company in Austria and explaining these characteristics to the court should make the registration of English branches trouble-free in the future.

(1) Commercial Court of Vienna, the 22nd March 2010, 73 Fr 14201/09 x – 9.