Definition of control – for the purpose of the Walker Guidelines

18 October 2010

The guidance that follows is for the purpose of private equity firms when considering the definition of ‘control’ which forms part of the definition of a ‘private equity firm’ in the Walker Guidelines (“guidelines”), dated November 2007.

New Walker companies

A portfolio company of a private equity firm or firms (“private equity firm”) becomes a Walker company, subject to meeting the other criteria as laid out in the guidelines, when any one of the following criteria is met:

  • It is evident the private equity firm holds a majority stake (>50% of the ordinary shares) in the underlying business;
  • If a private equity firm, in its own financial statements, discloses that it maintains control of the portfolio company;
  • A private equity firm has the ability to direct the financial and operating policies of a portfolio company with a view to gaining economic benefits from its activities. Consideration shall include, but not be limited to: management control; board seats; directors indicative of significant influence.

Where more than one private equity firm invests in a portfolio company, those firms will be jointly responsible for ensuring that the portfolio company applies the guidelines.

Walker company exits

A portfolio company of a private equity firm is eligible for removal from the mandatory Walker population when any one of the following criteria is met:

  • A private equity firm exits via an Initial Public Offering, even if the private equity firm retains a majority stake. The newly listed vehicle will be bound by the reporting requirements mandatory for listed companies;
  • An event occurs, such as a restructuring, whereby a private equity firm is no longer able to control the financial and operating policies of a portfolio company.

To ensure that the guidelines consider instances where there has been a dilution of ownership post initial acquisition, a private equity firm that holds 20 percent or more of the voting rights following such dilution will be presumed to exercise significant influence over that portfolio company, and will continue to be a Walker company, unless the contrary is shown. This test will not be applied at initial acquisition by a private equity firm, and will only be applied where there is a dilution of ownership post initial acquisition.

The British Venture Capital Association, with the assistance of Ernst & Young, the body commissioned to conduct research into the performance of portfolio companies, will discuss specific cases with private equity firms and feedback findings to the Guidelines Monitoring Group for its consideration.

For further information please contact Gurpreet Manku.