IFM40265 - Eligibility criteria: investment strategy condition

FA22/SCH2/PARA13(2) and 13(3)

In addition to meeting the activity condition, a company must also meet the investment strategy condition in PARA 13(2) if it is to be eligible to be a QAHC.

The investment strategy condition precludes QAHCs from pursuing a strategy which involves the acquisition of listed securities or other interests deriving their value from them. This is because listed shares could be held with a view to rolling up dividend returns and then passing those (income) returns to investors in the form of capital.

This condition is applied both directly and indirectly. For example, if a company holds listed securities via a subsidiary, the parent company will still have a strategy of acquiring listed shares.

A company will, however, only have an investment strategy of acquiring listed shares where it is actively pursuing such a strategy. The fact that a company is not precluded from making such investments, and might consider such a strategy in the future, does not necessarily mean the condition is failed at that point in time. The company would not fail the condition if it can demonstrate it is not actively pursuing the acquisition of listed shares as a strategy.

Provided certain conditions are met, a company can make an election under PARA 13(3) treating certain listed securities as if they were not listed (see IFM40266).

Public takeover bid

There is an exception to allow stake-building prior to a public takeover bid. It is common in the lead-up to a bid for the bidder to acquire a position in the target’s shares. The intention will be for a bid to occur eventually, the consequence of which (if it is successful) will be the de-listing of the shares. In the event the bid fails (or is not made at all), the bidder would generally be expected to divest itself of the stake it had built. The investment strategy condition does not specifically require this divestment to occur; it just requires that the shares were not acquired as part of a strategy to hold listed shares other than for the purpose of facilitating a takeover.

Exiting an investment

Where an investment entity exits an investment in a company by way of an initial public offering, it is common (and indeed typically required as part of the public offering process) for the selling entity to retain a stake in the newly listed company for a period. This is commercially driven – in particular, it is seen as expressing confidence to the market in the value of the shares being sold.

A necessary step in a divestment process could involve the acquisition of new shares by a QAHC. For example, a new holding company could be incorporated to act as the listed vehicle and inserted between the QAHC and its subsidiary which is being floated. This action would not by itself be regarded as a pursuit of an investment strategy involving the holding of listed shares.

The reference at PARA 13(2)(b) to other interests deriving their value from listed shares should be read widely. Most obviously it would encompass derivative contracts whose underlying subject matter is listed shares, or indices of listed shares. It would also include shares in companies if a material part of their value is comprised of listed shares.

Note, however, that the condition is not a prohibition on acquiring such shares – it is a prohibition on having a strategy of acquiring such shares due to their value deriving from listed securities. So, for example, if a QAHC acquires a company which happens to have a material part of its value deriving from listed shares, the investment strategy condition will not be breached if the target’s holding of listed shares was not the reason why the QAHC made the acquisition. The prohibition is only against the QAHC seeking, as a strategic matter, to take positions in listed shares, whether directly or indirectly.

Investment becomes listed after acquisition and is retained

It is possible that a QAHC may acquire unlisted shares in a company which subsequently lists, but where the stake concerned is small enough that the QAHC is not closely involved in the planning of the listing and quite possibly engineering it to provide an exit. This might occur if, for example, the QAHC acquired shares in an unlisted Real Estate Investment Trust (REIT) but in the future the ownership profile of the REIT changed such that it had to list in order to preserve its status.

Retaining the investment in these circumstances should not be regarded as a breach of the investment strategy condition, since at point of acquisition it would not have been the intention of the QAHC to hold the shares as a listed investment.