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Transparency and disclosure in Europe20/08/2008. Source: SJ Berwin . Simon Witney 
The European private equity industry took a further step towards openness and engagement at the end of June, when the Danish Venture Capital and Private Equity Association (DVCA) published its version of the UK's Walker Guidelines - just a few days after the Swedish association (SVCA) did the same. The Swedish Recommendations on openness and transparency in the private equity industry and the Danish Guidelines for responsible ownership and good corporate governance are modelled on Sir David Walker's recommendations for the UK industry, which were issued at the end of last year.
No doubt feeling some of the pressure from the campaign on private equity that is being led by the Danish MEP (and former Prime Minister) Poul Nyrup Rasmussen in the European Parliament, the Danes and the Swedes have followed the BVCA's lead and have adapted the principles established by the British Guidelines for their domestic markets. This will increase pressure for pan-European rules, which now seem even more likely to follow.
While the SVCA's recommendations apply to all their members, the actual content of the recommendations is less comprehensive than the British and Danish equivalents. The SVCA points out that Swedish company law already has more rigorous reporting requirements for private companies than the UK, and gives a statutory role on company boards to trade unions.
But the Danish version does go further than Walker in a number of important respects, and applies to smaller funds and their portfolios than the British rules: the thresholds are significantly lower. While the British rules are likely to catch around 15% of the BVCA's 220 members, over half of the DVCA's 27 members are either fully or partially covered. (The partial coverage is for those members whose ultimate holding company is not in Denmark, who are only subject to some of the rules). DVCA member firms who undertake the bulk of their activities in Denmark will have to comply with the Guidelines if they manage committed capital of just DKK500 million (€67 million), and private equity owned companies will qualify if they are categorised as "large" (class C) under Danish accounting rules. A "large" company is currently one with 250 employees or more, if it has assets of more than €16 million and revenues of at least €32 million, although the thresholds are set to rise a little later this year.
The Guidelines point out that Danish rules already require a pretty detailed management report in the accounts of private companies, but that the regulations are not specific in a number of respects. For that reason, the Guidelines specify the information that is required, including details of the management and governance systems, the capital structure (and its associated risks), as well as extensive information on employees.
At the fund level, the Guidelines also draw heavily on the Walker recommendations, but additionally include information on carried interest if it departs from "industry norms" (a 20% carry after an 8% hurdle), and a requirement to include the management company accounts on the website. Funds must detail policies on social responsibility and name a press contact, as well as identify the management of the fund and its investment strategy.
The Danish Guidelines also include a section on "communication", particularly with regard to employee matters and on acquisitions and exits, which is more prescriptive than the UK equivalent. The funds have obligations to "prioritise good and open ongoing collaboration with the [portfolio] company's employees", and have to present their plans for a business once they have acquired it.
The Danish Guidelines - which, like the British rules, apply on a "comply or explain" basis - come into force at the beginning of next year (except the section on conflicts of interest, which is effective immediately). They (and, to a lesser extent, the Swedish equivalent) represent an important next step for the European industry as it looks at issues of communication and transparency. But the lower thresholds in the Danish rules will leave many to conclude that "regulatory creep" will draw an ever increasing number of funds and private companies into the net. The cost benefit analysis - in which the costs of compliance are weighed against the benefits to the wider community in the extra information that results - was very much in Sir David Walker's mind when he drafted the UK Guidelines. It needs to remain at the forefront of the minds of those who are building on his work.
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris, Brussels, Milan and Turin. If you would like further information on the firm's services to the private equity industry please contact Simon Witney in the London office on 020 7111 2222 or visit the website at www.sjberwin.com.
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