Building the transparent relations between CIF and AMC
The enterprises that wish to register a CIF and to include it into its corporate structure in order to improve the corporate control, to preserve the assets, for legal optimization of taxes, etc., sometimes have the threats that an AMC will be able to dispose the fund’s assets on uncontrolled basis. We hereby would like to help you to understand the mechanisms for protection of shareholders’ rights namely in relation between CIA and AMC.
Role of AMC
We described the succession of actions, which should be taken to establish a corporate investment fund, in material “How to register a CIF”. CIF is established with active cooperation with assets management company (AMC). Thus, we would like individually to fix on the role, which AMC plays both at the stage of fund’s registration and at the stage of CIF’s working “operation”. First of all, it is necessary to fix on the nuances in conclusion of contract for fund’s assets management. This contract is drawn up between AMC and Supervisory Board of CIF, and shall be approved by general meeting of fund. And already after that the constituent meeting of CIF will be held. In practice, AMC and founders of CIF start cooperating long before signing the contract for assets management. As a rule, namely the specialists of AMC help to register a CIF since the very beginning.
However, CIF has no obligations to work only with the AMC, which was chosen at the stage of fund’s registration. Later, if the cooperation with AMC does not suit the shareholders of CIF, a company may be changed. For that purpose, it is sufficient to terminate the contract for assets management and to conclude the contract with another company. However, the members in CIF should consider the following nuance – namely the contract for assets management shall mentions the procedure for change of AMC.
A contract for CIF’s assets management shall contain:
- Rights and duties of the parties;
- Responsibility of the parties for improper fulfillment of terms and provisions in contract; infringement of confidentiality, disclosure of insider’s information;
- Procedure for change of terms and provisions in contract and conditions for early termination of contract;
- Procedure for AMC to repay the damages, caused to CIF, by improper fulfillment of terms and provisions in contract;
- Data about authorized persons of parties under contract, etc.
Practical aspects for use of contract for assets management
In addition to abovementioned compulsory provisions, the contract shall contain the additional restrictions for AMC to perform the transactions with CIF’s assets. Using these legal mechanisms it is possible significantly to improve the controlling role at Supervisory Board of fund. In particular, it is possible to anticipate that the transactions with CIF’s assets are performed if there are the signatures by two authorized persons – director of AMC and Chairman in Supervisory Board of CIF. Such mechanism will limit the right of AMC alone to dispose CIF’s assets. The double signature may be used both to CIF’s bank account and account in securities.
If the founders of CIF wish to use it in order to grant the loans to participants in fund (that is allowed by legislation), so, CIF’s bank account shall concentrate the significant monetary resources. CIF’s shareholders are interested strictly to control the use of these resources. The mechanism of double signature will just prove to be useful. Any document or directive will be illegal without signature by Chairman in Supervisory Board of fund. Providing that the Supervisory Board of fund is controlled by beneficiaries of holding, CIF will work as a reliable and at the same time absolutely controlled system for support of affiliated enterprises. It is important to mention that the transactions on granting the loans will have no tax consequences as the income tax to sums of debt service is not accrued.
Other “arrangements” in contract for assets management are possible. For example, the contract may mention that the acquisition or alienation of any property, which is CIF’s asset, is possible only due to consent of the Supervisory Board. Or the restrictions to perform the transactions with assets may be established if the appraised value of such transaction exceeds a certain sum that is fixed in contract. In case if the established sum is exceeded, the consent of the Supervisory Board is necessary.
How it is used in practice. Let’s suppose that an agrarian holding wants to defend its lands against raiders’ attacks. The solution is as it follows: the land lots that belong to the holding (enterprises, included into holding) are accumulated in CIF – become the fund’s assets that already in itself will be the significant obstacle for raiders. But, besides, the contract for assets management mentions that the real estate (that is the fund’s assets) cannot be alienated without consent from the Supervisory Board. If CIF’s Supervisory Board is controlled by holding’s beneficiary, so, even the theoretical possibility for any illegal alienation of real estate without knowing by a person, who is the owner of business, is excluded. Read the details about strategy for protection and preservation of assets in material “Investing in security: opportunities of venture funds”.
Role of regulator
The activity of AMC is controlled by National Securities and Stock Market Commission (NSSMC). AMC once a month shall submit the information about size of own capital, size of assets, indices of prudential standards to the commission. The failure to perform the legislative requirements or non-conformity to standards is the ground to recall a license. Strictly speaking, the requirements and the standards are designed in order to reduce the risks in transactions with securities, and, accordingly, to defend the investors.
Legislative requirements to AMC
The minimum size of AMC’s authorized capital shall be not less than UAH 7 mln. It is formed only from monetary assets. AMC bears the civil liability for infringement of regulation, IPO prospectus, investment declaration, contract for CIF’s assets management. AMC shall also conform to a number of prudential standards, in particular such as the adequacy of regulatory capital, adequacy of capital of the first level, etc.
AMC is a professional participant in stock market and shall receive the license from NSSMC in order to perform the activity in assets management. The licensing terms mention the number of certified specialists, who shall work at the company.
Besides, the commission has many other levers of influence on professional participants in securities market, including AMC. In case if the legislation about securities is infringed, the Commission may pass the warnings to participants in market, to stop the circulation of emitter’s securities, to impose the administrative punishments, penalty sanctions. The annulment of AMC’s license to perform the professional activity in securities market is of course the extreme event. Taking all that into consideration, AMC is interested honestly to perform its work, including contractual obligation per each individual contract for assets management. The contract between CIF and AMC itself shall be executed so that it will become a key element in protection of fund’s assets, and, accordingly, shareholder’s rights.