Corporate law update: 3 - 9 August 2024

This week:

• The Government is asking for views on how carried interest from private capital funds is taxed
• PERG and the BVCA are consulting on changes designed to refresh the Walker Guidelines
• The FRC is consulting on revised guidance on the going concern basis of accounting
• The court assesses whether an investment business was a partnership or rather a series of parallel, independent businesses

Government asks for views on taxation of carried interest

The Government has launched a call for evidence on the way in which carried interest from private capital funds is taxed in the UK.

Carried interest is a form of performance-related return paid to the managers of private capital funds (such as private equity and venture capital funds) and is calculated as a portion of the fund's returns.

In the UK, carried interest typically falls within the capital gains tax (CGT) regime and is taxed at a rate of 18% or 28%. This compares favourably with income tax rates of up to 45%.

In its call for evidence, the Government is asking whether the tax treatment of carried interest most appropriately reflects its economic characteristics, what the different structures and market practices are, and whether lessons can be learned from approaches taken in other countries.

The Government has asked for responses by 30 August 2024.

Access the Government's call for evidence on the taxation of carried interest

PERG and BVCA consult on refresh of Walker Guidelines

The Private Equity Reporting Group (PERG) and the British Private Equity and Venture Capital Association (BVCA) are consulting on significant changes designed to refresh the Walker Guidelines.

The Guidelines are designed to assist private equity firms and their portfolio companies with improving transparency in financial and narrative reporting. They require portfolio companies to make certain disclosures in their annual report, publish their report and a mid-year update in a timely manner, and share certain data to gauge the contribution of UK private equity to the economy.

They also require private equity firms to make certain website disclosures.

Although the Guidelines are voluntary, a firm must comply with them to be eligible for membership of the BVCA.

PERG has stated that the purpose of the refresh is to calibrate the Guidelines to today's reporting world and to ensure they remain fit for purpose and provide value.

The consultation seeks views on the following (among other things).

• Amending the definition of a "portfolio company", including potentially replacing the current enterprise value (EV) test with a test based on revenue.
• Expanding the size thresholds for inclusion within the Guidelines to include portfolio companies that grow organically or through buy-and-build strategies. (Currently, the EV threshold applies only on the initial acquisition of a portfolio company.)
• Conversely, introducing a new mechanism to remove portfolio companies that reduce in size from the scope of the Guidelines.
• Revisiting the current criteria for including infrastructure assets within the scope of the Guidelines.
• Updating additional disclosure requirements around ownership structure and management activity to request further information on the active management of companies.
• Introducing requirements on portfolio companies to provide more detail on management structure, risk management and internal control systems, engagement with employees and other stakeholders, diversity, corporate governance, board evaluation, and value, purpose and culture. The consultation seeks views on importing concepts from the Wates Principles, the UK Corporate Governance Code, the Companies Act 2006 (where not already applicable) and (in some cases) the FCA's Disclosure Guidance and Transparency Rules (DTR).
• Introducing more prescriptive disclosure requirements for portfolio companies around climate, including by potentially applying disclosure requirements derived from the UK's Streamlined Energy and Carbon Reporting (SECR) regime, UK statutory climate-related financial disclosures and/or the recommendations of Taskforce on Climate-related Financial Disclosures (TCFD).
• Updating disclosure requirements for private equity firms on hold periods, investment approach, diversity, and social and environmental impact, whilst removing provisions on conflicts of interest (which are felt to be dealt with adequate by FCA rules) and, potentially, requirements to disclose limited partners by category.

To assist with feedback, the BVCA has prepared a separate benchmarking report, which compares the reporting requirements under the Walker Guidelines with other UK reporting requirements.

Following the consultation, PERG intends to publish a feedback statement in late Autumn/early Winter and to engage further with members and stakeholders, with a view to publishing final amendments in January 2025.

PERG and the BVCA have asked for comments by 30 September 2024.

Read the consultation on refreshing the Walker Guidelines (opens PDF)

Read PERG's announcement of its consultation on refreshing the Walker Guidelines

Read the BVCA's disclosure benchmarking report for the purpose of refreshing the Walker Guidelines (opens PDF)

FRC consults on revised going concern guidance

The Financial Reporting Council (FRC) is consulting on a revised version of its guidance on the going concern basis of accounting and related reporting.

The guidance (the current version of which dates to 2016) is intended to help companies in performing going concern assessments and in preparing company-specific disclosures about their going concern conclusions and how they were reached.

The proposed revisions to the guidance are designed to reflect recent developments in the corporate reporting framework and auditing standards, as well as evolving reporting practice. The draft revised guidance also reflects the changes to the UK securities listing regime that took effect from Monday, 29 July 2024.

The FRC has asked for comments by 28 October 2024.

Read the FRC's press release on its draft revised going concern guidance

Access the landing page for the FRC's consultation on its draft revised going concern guidance

Read the exposure draft of the FRC's revised going concern guidance (opens PDF)

Court analyses whether venture was a partnership or a series of separate businesses

The Court of Appeal has assessed whether an arrangement under which investments were managed by four separate managers under four separate investor pools was merely a set of parallel, independent businesses or, in fact, an ordinary partnership.

Hamilton v Barrow and ors [2024] EWCA Civ 888 concerned a foreign exchange trading business. The business was split into five "sections", each managed by different individuals.

An investor in one section claimed that he had been misled as to how his invested funds would be applied. He brought claims against not only that section's manager but also the managers of other sections of the business.

The key question was whether the venture was an ordinary partnership between the various section managers or merely a set of parallel but independent businesses, each run by a different manager.

If it was a partnership, then the section managers would all be equally liable, as partners, for any misrepresentations made in connection with investments into an individual section.

The Court of Appeal upheld the High Court's decision and confirmed that the arrangement was an ordinary partnership. In reaching its decision, it cited numerous respects in which the different section managers had been co-operating and taking decisions together.

Read more about the Court of Appeal's decision that a venture was an ordinary partnership and not a series of separate businesses in our separate in-depth piece