Private Equity Fund Formation and Transactions - International Law Office

Formation and Terms of Operation
Regulation, Licensing and Registration
Taxation
Selling Restrictions and Investors
Exchange Listing
Participation in Leveraged Buy-out Transactions

Formation and Terms of Operation

Forms of vehicle
The Securities Act 2005 enables collective investment schemes, such as leveraged buy-outs, to be constituted in different legal forms. Collective investment schemes may be constituted as a company, a trust (including a unit trust) or any other legal entity prescribed or approved by the Financial Services Commission that meets the following criteria:

• Its sole purpose is the collective investment of funds in a portfolio of securities or other financial assets (eg, real property or non-financial assets, as approved by the commission);
• Its operation is based on the principle of diversification of risk;
• It is obliged, on request of the securities holder, to redeem securities at their net assets value, less commission or fees; and
• Its participants have no day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions in respect of such management.

Collective investment schemes include closed-end funds whose shares or units are listed on a securities exchange. On application, the commission may recognize collective investment schemes established in a foreign country. Recognition may be subject to such conditions that the commission considers necessary or desirable for the protection of the participants in the scheme.

The liability of prospective investors is limited to the amount remaining unpaid on shares they have subscribed to in the scheme or fund.

Formation of leveraged buy-out fund vehicle
All applications for the registration of a scheme or fund must be made through a licensed management company and will require the following documentation:

• three copies of the constitution;
• notice of first directors, secretary, management shareholders and the location of the registered office;
• consent forms of directors, management shareholders and secretary;
• 'know your customer' documentation on the directors, management shareholders and promoters;
• other information that is necessary for the establishment of a company;
• letters of reference from the banker, lawyer and accountant (letters of reference may be dispensed with if the promoter is itself a fund manager authorized in another jurisdiction. In such cases the letters of reference may be replaced by proof of authorization in the other territory and a copy of the promoter's latest accounts. Short curricula vitae are needed of the persons to be involved in key positions in the Mauritian company);
• a legal certificate from a local law practitioner;
• the name and address of a local representative;
• a set of constitutive documents of the scheme, including:
  • a prospectus signed by two directors;
  • custodian agreements;
  • a sub-custodian agreement;
  • an investment management agreement;
  • an administration agreement;
  • an investment advisory agreement; and
  • a secretarial and registrar agreement;
• the name and particulars of expatriate staff, if required; and
• a brief track record of the applicant and a detailed business plan.

Registration procedure
The commission must approve any scheme before it commences business. In considering an application, the commission must be satisfied of the following:

• the track record and credentials of the promoters;
• the fund structure;
• the objectives of the fund;
• the investors and the market targeted;
• the types of investment the scheme will deal in;
• the track record of the investment manager, custodian and administrator; and
• compliance with regulations in countries as appropriate (eg, the approval of the Securities and Exchange Board of India if investment is to be made in India).

Once the commission is satisfied, it will issue an approval in principle to enable all constitutive documents to be prepared and the global business fund to be incorporated.

The following government fees are payable to the commission in advance: (i) an application processing fee of $1,000, and (ii) an annual licence fee of $2,500. These are inclusive of both the company and the licensing fees, but do not include professional fees or those that may be charged by any third party or service provider.

Processing time
The timeframe for the incorporation and authorization of collective investment schemes in Mauritius is three to four weeks.

The existing regulatory regime requires that schemes - subject to the prior approval of the commission - appoint local and duly licensed collective investment scheme administrators, managers, custodians and auditors.

Collective investment scheme administrators
Under the existing regulatory framework, schemes holding category 1 global business licences (GBL1s) in Mauritius must at all times be administered by a qualified management company, be duly regulated and licensed by the commission and hold a valid management licence in accordance with the Securities Act and the Financial Services Act 2007. Scheme administrators may be appointed by collective investment schemes or closed-end funds (or scheme managers acting on their behalf) to provide administrative services, subject to the prior approval of the commission and such terms and conditions that the commission deems appropriate.

Under the Securities Act, administration services are restricted to the operations and administrative affairs of collective investment schemes or closed-end funds, including accounting, valuation or reporting services and the provision of the principal office of a collective investment scheme.

When seeking the approval of the commission, the applicant must provide details of the administrative services that the scheme administrator will provide, full details on the scheme administrator and any other information required by the commission. There are minimum capital requirements.

Requirements
The existing regulatory regime requires that schemes appoint local licensed scheme administrators and auditors, as well as managers and custodians based in any jurisdiction, subject to the prior approval of the commission.

Custodians
The assets of the collective investment scheme or closed-end fund cannot be held for safekeeping by a person other than one approved by the commission or licensed as a custodian under the Securities Act. He or she should be independent of the scheme manager. Every collective investment scheme or closed-end fund shall appoint and at all times have a custodian.

Scheme managers
On application, in exceptional circumstances the commission may allow a company to be managed by its own board of directors, provided that the board of directors performs the functions of a scheme manager and such directors are jointly bound and responsible to perform the functions of the scheme manager.

Auditors
Under the present regulatory framework, schemes are required to appoint auditors in accordance with the law, subject to the prior approval of the commission. The commission will not approve an audit firm unless it is satisfied that the firm has adequate experience, expertise and resources to carry out such an audit. The commission may require that the auditor of a scheme submit such additional information in relation to the audit as the commission considers necessary.

However, schemes are not prohibited from instructing overseas investment advisers to manage their assets and may still execute management decisions in relation to investment and disinvestment overseas. Nothing prevents non-Mauritius-based intermediaries from participating as distributors or nominees.

Company secretary
A GBL1 company must have a minimum of one company secretary, who must be a natural person ordinarily resident in Mauritius, although a corporation may act as a secretary with the approval of the registrar and subject to certain specified conditions.

Carrying out business in Mauritius
The Financial Services Act requires that the central administration of any global business fund be situated in Mauritius and:

• have at least two directors resident in Mauritius of sufficient calibre to exercise independence of mind and judgement;
• maintain at all times its principal bank account in Mauritius;
• keep and maintain its accounts at its registered offices in Mauritius;
• prepare its statutory financial statements or cause to have such financial statements audited in Mauritius; and
• provide for meetings of directors to include as least two directors from Mauritius.

Access to information
If the fund is a domestic fund, is listed on the Mauritius Stock Exchange or both, all information will be publicly available. For domestic companies, the books of the Register of Companies are publicly accessible and can be consulted without giving prior notice.

The information of schemes and funds is restricted, and the books at the Register of Companies on schemes and funds are not publicly accessible and cannot be consulted unless duly authorized by the scheme or fund. Information submitted to the commission (eg, business plans, structure and credentials of promoters) is deemed confidential information and is not accessible by the general public.

Limited liability for third-party investors
Subject to a fund's constitution, third-party investors shall not be liable for any obligation of the company by reason of being a shareholder of the fund. The liability of investors or shareholders is usually limited to any amount unpaid on a share held by the shareholder, subject to its constitution.

Fund manager's fiduciary duties
In performing its duties and exercising its discretions under a relevant agreement, the investment manager shall:

• act in good faith;
• exercise all due skill, care and diligence that would be expected of a professional investment manager; and
• operate in accordance with best market practice, in particular when managing funds, selecting counterparties and evaluating counterparty risk.

Gross negligence
The recognized standards of civil liability for which civil proceedings may be entered against a scheme manager are negligence, default, breach of trust and breach of duty, where applicable.

Special issues or requirements
No special issues or requirements are attached to funds in Mauritius, except for those commonly prescribed in law. For example, pre-emption rights will apply to the transfer of shares if they have not been negated or waived in a fund's constitution.

Funds are capable of being converted and redomiciled under Mauritius law. Redomiciliations must be specifically allowed under the laws of the jurisdiction of formation of the funds to take place.

Limited partnerships as an investment vehicle do not exist in Mauritius so that foreign limited partnerships would be converted or redomiciled into limited liability companies under Mauritius law. The terms 'general partner' and 'limited partners' must be converted to fit the vehicle that will be used (ie, that of a limited liability company). A limited partnership agreement must be converted to a constitution.

Fund-sponsor bankruptcy or change of control
No legal or regulatory consequences arise from bankruptcy, insolvency, change of control, restructuring or a similar transaction of a leveraged buy-out fund's sponsor.

The only requirement is that the commission must be informed forthwith of any change in sponsor, whether due to bankruptcy, insolvency, change of control, restructuring or a similar transaction, and the election of a new sponsor may be reviewed - and objected to - by the commission.

Regulation, Licensing and Registration

Principal regulatory bodies
The principal regulatory body is the Financial Services Commission, as designated by the Securities Act.

Under Section 43 of the Financial Service Act, the commission may at any time inspect the business premises of a licensee and audit its books and records to check whether the licensee is in compliance with:

• the requirements of any applicable enactment or guidelines;
• the conditions of its licence, authorization or registration;
• criteria or standards set out in any relevant acts under which it is regulated; or
• any regulations made thereunder.

Without prejudice to his or her powers under the Financial Services Act, if the chief executive of the commission has reasonable cause to believe that a person has engaged or is engaging in conduct in relation to securities that is not in the interest of the investing public or the public interest, he or she may order an investigation under Section 44 of the act. The commission may:

• enter any premises used or apparently in use by the licensee for business purposes at any reasonable time;
• search for any document or other thing that it considers may be relevant to the investigation;
• administer an oath, affirmation or declaration;
• seize any document, article, object or any electronically stored information which the investigator deems necessary; and
• summon any licensee or its officers, employees and associates, or any witness necessary for the conduct of the investigation.

The licensee, its officers and employees must give the chief executive full and free access to the records and other documents of the licensee as may be reasonably required for the inspection.

If a leveraged buy-out's investment manager or adviser is incorporated under Mauritius law, he or she must be registered with and duly licensed by the commission before he or she can offer investment and investment advisory services. The appointment of foreign investment managers and advisers must be authorized by the commission.

Leveraged buy-out fund manager requirements
The identity of the investment manager, its track record and licences or authorizations, if any, held by the investment manager must be disclosed to the commission.

Taxation

Tax obligations
As a GBL1-holder in Mauritius, a fund is tax-resident in Mauritius and is liable to Mauritian taxation at a fixed rate of 15% of its chargeable income. Domestic funds will also be taxed at a fixed rate of 15% of their chargeable income. Funds may be eligible for foreign tax credits on their foreign-source income. After the application of the provisions on foreign tax credit, the tax rate of 15% may be reduced to 3% where applicable.

Funds that are centrally controlled and managed in Mauritius may, with the approval of the commissioner of income tax, accede to the benefits of double taxation agreements.

Other fiscal incentives associated in Mauritius include:

• no withholding taxes on dividends paid out of income from approved global business activities;
• no withholding tax on interest;
• no capital gains tax; and
• no estate duty or inheritance tax payable on the inheritance of shares in a global business entity.

Non-resident investors in a leveraged buy-out fund are not subject to taxation or return-filing requirements in Mauritius.

Local tax authority ruling
It is neither necessary nor desirable to obtain a ruling from the local tax authorities with respect to the tax treatment of a leveraged buy-out fund vehicle formed in Mauritius.

Investors ordinarily resident in Mauritius may not invest in global business funds unless this has been approved by the commission. Investors in domestic funds will be taxed at a fixed rate of 15% of their chargeable income.

Organizational taxes
No organizational taxes are payable in respect to leveraged buy-out funds in Mauritius.

Tax treaties
Mauritius has concluded 33 tax treaties and is party to a series of treaties under negotiation.(1)

Funds that are centrally controlled and managed in Mauritius may, with the approval of the commissioner of income tax, accede to the benefits of double taxation agreements.

Other tax issues
Funds may be eligible for foreign tax credits on their foreign-source income. After the application of the provisions on foreign tax credit, the tax rate of 15% may be reduced to 3% where applicable.

Selling Restrictions and Investors

Legal and regulatory restrictions
With regards to the requirements for the offer and issue of securities under Mauritius law, the Securities Act and the Securities (Public Offers) Rules 2007 apply. The act provides that a person is deemed to make an offer or distribution of securities when that person invites another person to:

• purchase or subscribe to securities that have never been issued;
• enter into an agreement for the underwriting of securities;
• purchase securities underwritten;
• distribute securities previously offered without a prospectus; or
• purchase securities, other than securities acquired on a securities exchange in normal market operations, previously issued and held by a person, including an issuer, and where the offer or distribution is made from Mauritius or is received in Mauritius.

Requirement for a prospectus
Except for collective investment schemes authorized by the commission, a person can make an offer of securities to the public where:

• the entity whose securities are being offered is in existence at the time of the offer;
• the offer is made in a prospectus that complies with this part; and
• the commission has given a provisional registration to the prospectus.

In cases where an offer is made by an investment dealer acting for an issuer or any person holding securities on behalf of the issuer, the prospectus shall be established by the issuer or the person holding the securities.

A person cannot distribute an application form to the public for an offer of securities unless the registration of the prospectus has become effective and the form is attached to or accompanies the prospectus. The information in a prospectus should be in English or French and should be up to date at the time of issue of the securities.

A prospectus is not needed in the following certain instances:

• No solicitation is made for the purchase of the securities of a company at or in connection with the formation of the company;
• The transmission of securities is by succession;
• Securities are vested or transferred by operation of law or by order of a court;
• An offer or issue of securities is a private placement;
• An offer or issue of securities is made only to sophisticated investors;
• An offer or issue of securities is made only to related corporations of the issuer of the securities; or
• An offer by an issuer allows the exercise of an exchange, conversion or subscription rights previously issued for securities held by a reporting issuer or under a subscription plan, a share dividend plan or a dividend reinvestment plan or under an employee share plan or a similar plan, and is made only to officers or employees of the issuer, where the issuer has complied with its obligations under the act, any regulations made under the act or any commission rules on disclosure in relation to, among other things, the securities, employment and directors share plan.

Under the act, 'private placement' means an offer of securities where:

• the total cost of subscription or purchase for each person to whom the offer is made is at least equal to the amount determined by the rules;
• each person subscribes or purchases for his or her own account; and
• no publicity is made by the person making the offer.

A 'sophisticated investor' means:

• the government;
• a statutory authority or an agency established by an enactment for a public purpose;
• a company, all the shares in which are owned by the government or a body specified in the point above;
• the government of a foreign country or an agency of such government;
• a bank;
• a scheme manager (ie, a fund manager);
• an insurer;
• an investment adviser;
• an investment dealer; or
• a person declared by the commission to be a sophisticated investor.

For private placement there are no restrictions on a minimum investment amount or minimum denomination. However, based on market practice in Mauritius, a person is treated as a sophisticated investor or an expert investor where such person is (i) an investor who makes an initial investment for his or her own account of no less than $100,000, or (ii) a sophisticated investor as defined in the act or any similarly defined investor in any other securities legislation (as further expanded under the Securities (Collective Investment Schemes and Closed-End Funds) Regulations 2008).

There is no limit to the number of offerees that would trigger a public offer if sold to sophisticated investors or as a private placement.

Identity of investors
All changes to the composition of the ownership, management or control of the fund or the fund manager must be communicated to the relevant authorities (ie, the commission and the Register of Companies), where applicable, and may be subject to prior approval by the regulators. Ongoing filings and notifications are therefore required.

Licences and registrations
A person offering interests in a leveraged buyout fund is not required to have any licences or registrations.

Money laundering
A number of legislative changes have been introduced to enhance the existing anti-money-laundering framework and to combat the financing of terrorism.

This legislation is governed by the Financial Intelligence and Anti-money Laundering Act 2002 and the Financial Intelligence and Anti-Money-Laundering Regulations 2003.

The commission has also published its Code on the Prevention of Money Laundering and Terrorist Financing, which requires due diligence, record keeping and the disclosure of identities of investors and individual members of the sponsors.

The commission has been given statutory responsibility to supervise and enforce compliance by licensees (including management companies) of the requirements imposed under the Financial Intelligence and Anti-Money Laundering Act.

Exchange Listing

Listing
Leveraged buy-out funds are capable of being listed on the Stock Exchange of Mauritius.

Whether incorporated in Mauritius or overseas, a fund seeking a listing on the Official List of the Stock Exchange should:

• demonstrate an adequate trading record with published or filed accounts for the three years preceding the application for listing;
• have an expected market capitalization of not less than MRs20 million (approximately $593,000); and
• issue at least 25% of the shares to the public with a minimum of 200 shareholders. This threshold may be phased in, with companies issuing 15% of their shares initially, increasing to 20% within three years and reaching 25% after five years.

Other listing requirements include:

• the submission of various documents which provide detailed information on the company;
• conformation to the rules and regulations of the Stock Exchange; and
• the issue of listing particulars to the public prior to the listing.

A new applicant must be duly incorporated or otherwise established according to the relevant laws of its place of incorporation or establishment and operate in conformity with its memorandum and articles of association or constitution (or equivalent constitutive documents). Where a company is incorporated in Mauritius, it must be and remain a public company. A new applicant must have published or filed audited accounts which cover at least three years and the latest accounts must be in respect of a period ending not more than six months before the date of the listing particulars. In exceptional cases the Stock Exchange may accept accounts in relation to a period of less than three years. Before submitting an application for listing, a new applicant may seek any required information from the listing division regarding the application process and listing requirements.

The listing particulars must contain all documents provided for in the listing rules to enable investors to be reasonably well informed about the securities quoted and the issuer. The particulars must also specify:

• the assets and liabilities of the issuer;
• the financial position of the issuer;
• the stated capital of the issuer;
• the profits and losses of the issuer;
• the directorship of the issuer;
• the rights attaching to the securities; and
• the prospects of the issuer.

An issuer seeking a listing on the official list of the Stock Exchange must:

• file with the listing division of the Stock Exchange a draft formal application for listing in the form set out in the listing rules and the initial application documents set out in the listing rules. The application shall be considered initially by the listing division, which shall then advise the listing executive committee of the eligibility and suitability of the issuer for listing;
• issue listing particulars which comply with both the prospectus requirements of the Securities Act and the content requirements for listing particulars set out in the listing rules;
• provide in its constitution for various matters set out in the listing rules; and
• enter into a listing undertaking in the form set out in the listing rules.

In assessing the suitability for listing of a new applicant, the Stock Exchange may have regard to the continuity of management of the new applicant throughout the three years covered by the accounts mentioned above.

The Stock Exchange will consider whether: (i) the current executive directors have collectively had direct management responsibility for all the group's major businesses and key executive directors have played a significant role in the group's activities; and (ii) the senior management of the group, taken as a whole, has changed materially.

The directors of a new applicant that is a company must have collective appropriate expertise and experience for the management of its business. The company must ensure that each of its directors is free from conflicts between duties to the company and private interests and other duties which might be detrimental to the business or prospects of the applicant, unless the applicant can demonstrate that arrangements are in place to avoid detriment to its interests. Directors must also satisfy the Stock Exchange that they are of good character and integrity. To that effect, each director and proposed director of a new applicant must make a declaration and undertaking in the form set out in the listing rules and submit this to the Stock Exchange.

Restriction on transfers of interests
There are no restrictions under Mauritius law. It is solely up to the board and management of the fund to restrict transfers, either in its offering memorandum or prospectus, or in the fund's constitution.

Participation in Leveraged Buy-out Transactions

Legal and regulatory restrictions
If a fund is structured as a scheme or fund, it will be allowed to carry out business activities outside Mauritius only by virtue of its status as a global business fund and its GBL1 licences.

Compensation and profit sharing
There are no restrictions that affect the structuring of the sponsor's compensation and profit-sharing arrangements with respect to the fund and, specifically, anything that could affect the sponsor's ability to take management fees, transaction fees and a carried interest (or other form of profit share) from the fund.

For further information on this topic please contact Malcolm Moller at Appleby by telephone (+2 30 203 4300), fax (+2 30 210 8792) or email (mmoller@applebyglobal.com).

Endnotes

(1) Mauritius is party to treaties with:

• Barbados;
• Belgium;
• Botswana;
• China;
• Croatia;
• Cyprus;
• France;
• Germany;
• India;
• Italy;
• Kuwait;
• Lesotho;
• Luxembourg;
• Madagascar;
• Malaysia;
• Mozambique;
• Namibia;
• Nepal;
• Oman;
• Pakistan;
• Rwanda;
• Senegal;
• Seychelles;
• Singapore;
• South Africa;
• Sri Lanka;
• Swaziland;
• Sweden;
• Thailand;
• Uganda;
• the United Arab Emirates;
• the United Kingdom; and
• Zimbabwe.

An earlier version of this update first appeared in Getting the Deal Through – Private Equity 2009, published in 2009 by Law Business Research.