Private equity and venture capital update - July 2015

Welcome to the latest edition of Osborne Clarke’s quarterly private equity and venture capital update.

We hope that you find it interesting. If you would like to discuss any of the content, or have a subject that you would like us to cover in a future edition, please let one of us know. Our contact details are set out below.

Best regards,

Mark Spinner, Alisdair Livingstone, Rob Wood and Dipika Keen

Summer Budget 2015: What’s relevant for private equity and venture capital?

The Summer Budget 2015 delivered a few surprises for the private equity and venture capital sector. EIS and VCT funds are about to be locked out of buyouts. Managers may face a higher tax bill on their carried interest payments, although those payments will continue to be taxed as capital gains. This continues to be a risk area for the industry: just this week in the US Hillary Clinton has re-affirmed her intention to end capital gains treatment for carried interest.

Click here to read more.

Issues for founders on a VC fundraising

We have published a series of briefing notes guiding founders through the venture capital fundraising process, based on our extensive experience advising VCs and investee companies.

• Term Sheets explained (Part 1)

Term sheets are one of the biggest areas of confusion for founders when approaching a VC investment. Mathias Loertscher and Robert Wood explain some of the standard terms normally included in a term sheet, including valuation, the investor’s share class rights, board composition and consent matters. Click here to find out more.

• Term Sheets explained (Part 2)

Our experts explain some additional technical terms, including founder vesting, anti-dilution ratchets, and “drag and tag” provisions, as well as the sections of the term sheet that are legally binding. Click here to find out more.

LLPs will be required to keep a “PSC register” from January 2016

The people with significant control (PSC) register regime will be extended to limited liability partnerships (LLPs) from January 2016, according to the latest Government consultation. Click here to read more.

As we covered in our last update, the PSC register is a new compulsory corporate register which will name, and contain information on, individuals who directly or indirectly own or control more than 25% of a company’s shares or voting rights, or who otherwise have the ability to exercise “significant control” over the company or its management.

Now LLPs, as well as companies, will have to maintain such a register. The Government will be consulting on what modifications should be made to the regime so it fits the specific characteristics of an LLP (for example, how will control over voting rights in an LLP be determined?).

So, in addition to considering whether limited partners, investment directors or fund managers need to go on the register of UK portfolio companies, private equity and venture capital houses (most of whom are incorporated as LLPs) will now need to consider the impact of this legislation on their own structures.

The analysis will become clearer over the coming months as the Government publishes secondary legislation and statutory guidance on the “significant control” test, which is expected to be finalised by October 2015. No drafts of that legislation or guidance have yet been published.

Companies and LLPs must start keeping their PSC register from January 2016. The register will be open to public inspection and be searchable online via Companies House from April 2016.

We have a set of resources dedicated to the introduction of the PSC register here.

Smart cities in Europe

This week we release the first of a series of white papers on smart cities.

Cities need innovative solutions to help meet the long-term challenges arising from urbanisation. But, for cities to justify investment in smart technology, it needs to have been proven at scale and delivered tangible benefits. Some of the most innovative technology is being developed by early-stage companies that simply don’t have the funding to finance a large scale demonstration of their technology. This is where the real funding gap emerges, and where the opportunity for private equity and venture capital arises.

This report looks at the structure, participants and funding models of existing smart city demonstration projects. It analyses why these were successful, discusses why more demonstration projects are not being launched and provides insights on what might be done to encourage more.

Click here to download your copy of the report.

Inserting and enforcing drag rights

The Court of Appeal has upheld drag provisions which had been inserted into articles without the consent of the minority shareholder who was being dragged. We look at the main takeaways from the Court’s judgment in the high profile, private equity focussed case of Arbuthnott v Bonnyman.

Click here to read more.

New UK GAAP: The impact on deals

UK GAAP is changing. For accounting periods commencing on or after 1 January 2015, companies preparing individual company accounts under UK GAAP will be reporting under brand new accounting standards (New UK GAAP). The new accounting standards move significantly closer to IFRS in many respects, and it is anticipated that this transition will result in “line item” differences, which may, in some cases, be very material.

New UK GAAP will affect deals in two main ways:

• provisions in deal documentation dealing with warranties, completion accounts; and earn-outs will need to reflect the new regime. For example, when specifying which accounting policies apply to a set of completion accounts, we would expect “frozen” UK GAAP to be the default option (i.e. UK GAAP as applied to the last set of Accounts). This gives consistency and transparency for both parties; and
• company’s distributable profits position, for example, when considering whether it is able to fund a buy back or dividend, will need to be assessed by reference to New UK GAAP when it is in its first reporting period under the new regime.

Click here to read more.

Osborne Clarke news

Osborne Clarke has achieved a first in the UK legal profession – we have been awarded “Law Firm of the Year” by both The Lawyer and Legal Business in the same year.

“The final trophy this evening is not just being awarded for solid financials, though these are hugely impressive – our law firm of the year for 2015 stands out for its boundless energy and commitment to moving into growth sectors, for the way in which it truly looks after its people and for its international expansion,” said Catrin Griffiths, editor at The Lawyer magazine. Click here to read more.

In the last quarter, we advised on PE and VC deals with a value in excess of £200 million, including advising:

• Frog Capital on its series B round investment in Azimo
• Yieldify on its series A round investment from Google Ventures and SoftBank
• Growth Capital Partners and management on the sale of leading travel company Iglu.com to LDC
• Alcuin Capital Partners on the management buyout of the Groucho Club