EVCA Handbook Professional Standards for the Private Equity and ...

20 EVCA Handbook Professional Standards for the Private Equity and Venture Capital IndustryRecommendationIn relation to investor consents, the GP should consider requiring thePortfolio Company to obtain investor consents for corporate, financialand accounting, business and other key matters. The list of matterswill vary depending on the relevant jurisdiction and the size ofinvestment, but the following should be considered:• significant developments in the business (e.g. capital expenditure,new issues of capital, disposals of a significant amount of assetsincluding real estate, changes to the Portfolio Company’sconstitution);• changes in the capital structure and borrowing arrangements;• changes in leases or other material contracts;• material litigation claims;• changes of control, acquisition or disposal of shares by othershareholders;• adoption of the Portfolio Company’s audited accounts;• making any dividends or distributions;• adoption of a new business plan;• changes to the Portfolio Company’s key management or theirremuneration;• adoption of or changes to the communication policy;• developments in the financial or other performance criteria of thePortfolio Company which will materially change the nature of thebusiness in which the Fund has invested;• winding up or dissolving the Portfolio Company; and• any transactions between Portfolio Company and Shareholder.Investor consents, while needing to be comprehensive in scope, mustnot be so wide-ranging as to restrict the management team’s ability torun the Portfolio Company or take up excessive amounts of the GP’stime. The above list is not exhaustive, rather it gives an indication ofsome typical matters which are subject to investor consent.When considering the advantages to the Fund of taking any controlrights, the GP should also consider possible liabilities or restrictionsimposed by law on those exercising certain types of control.3.3.9. The Portfolio Company’s corporate strategyQuestionTo what extent is the GP on behalf of the Fund responsible for thedefinition and execution of the Portfolio Company’s corporatestrategy?ExplanationAt the time of investment by a Fund, the investment decision isnormally taken in support of a specific strategy, business plan andmanagement team. Frequently, through the negotiation processleading up to investment by the Fund, the GP will have had significantinput in determining the target’s future corporate strategy. Overa period of time, this business strategy may need to be refinedand amended.RecommendationThe GP should be an active participant through its boardrepresentation or, where permitted by the relevant company lawin a particular jurisdiction, through the exercise of shareholder votingor contractual rights in the setting of the Portfolio Company’s initialstrategy. The responsibility for execution of strategy sits with theboard and management team of the Portfolio Company. The GPshould ensure that it remains informed on the progress being madetowards achievement of the strategy. Where appropriate, the GP,once again through its board representation or through the exerciseof shareholder voting or contractual rights, where so permitted,should be available to advise and assist where the strategy needsto be refined and amended.Further, the GP should ensure that the Portfolio Companyunderstands the importance of having the right mechanismsand processes in place for responsible, efficient and appropriatedecision-making and effective corporate governance.The degree of activism of the GP will vary according to the natureand structure of investments made and the jurisdiction in which thePortfolio Company is located. The GP should therefore ensure its levelof involvement is suitable relative to the circumstances of a particularPortfolio Company and the Fund’s ownership strategy/policy.3.3.10. Co-operation with co-investors and syndicate partnersQuestionWhat relationship should the GP have with co-investors and othermembers of a syndicate in which the Fund participates?ExplanationWhere an investment has been syndicated or there are co-investors,a GP may not be able to control an investment and may have toco-operate with other shareholders in order to achieve definedgoals and build a consensus as to appropriate actions to be taken.RecommendationThe GP should act in the interests of the Fund and any other clientsinvesting in the relevant Portfolio Company and identify and manageany conflicts of interest that may arise between them. Whereverpossible, the GP should not accept any obligations in favour of otherinvestors, unless it would be in the Fund’s interests to have someagreement or understanding with those investors.3.3.11. Co-investment and parallel investment by theGP and its executivesQuestionWhat issues should the GP consider regarding Co-investment andparallel investment by itself, its associates or its executives?ExplanationWhere the Fund documents permit the GP, its associates or itsexecutives to co-invest or make parallel investments alongside theFund, there is potential for the Fund’s interests to be prejudiced.RecommendationSubject to what is provided in the Fund documents, details ofCo-investment arrangements should be disclosed to the Fund’sLPs. To avoid the potential of prejudice to the Fund’s interest, it isrecommended that such documents only permit Co-investment orparallel investment by the GP, its associates or its executives whereinvestment and divestment is exercised on a pro-rata basis with theFund, in the same securities, at the same time and on the sameterms. If this recommendation is not followed, it is particularlyimportant that the operation of the Co-investment arrangementsshould be disclosed to LPs.