Conflicts of interest in the venture capital industry in Spain, Wales and England

Article 3.3 of the new EVCA Code of Conduct adopted on October 2008 states that: “Conflicts of interest arise inevitably within business and occur when a person who has a duty to another also has a personal or professional interest that might interfere with the exercise of independent judgement.

Conflicts of interest should be diligently identified and disclosed to all parties concerned.”

1. CONFLICTS OF INTEREST IN THE VENTURE CAPITAL INDUSTRY IN SPAIN

Under Spanish law there are two types of venture capital entities: a venture capital company (sociedad de capital riesgo) which has legal personality and may be self-managed or may delegate the management of investments in a management company (sociedad gestora de entidades de capital riesgo); and a venture capital fund (fondo de capital riesgo) which does not have legal personality and is required to be managed by a management company.

A - Conflicts of interest which arise when a venture capital entity invests in a participated company in which a manager has an interest

The management agreement between the venture capital company and the management company or the subscription agreement between a fund´s investor and the management company, may be deemed to be a Spanish commission agreement, as the purpose of the agreement consists of commercial acts (the acquisition, management and divestment in entities) and the management company is a “sociedad anónima”, i.e. a commercial operator.

Consequently, article 267 of the Spanish Commercial Code applies to the management agreement. This article states that: “No commission agent shall purchase for himself nor for a third party what he had been commissioned to sell, nor shall sell what he had been commissioned to purchase, without prior consent of the principal."

In the framework of Spanish venture capital legislation, article 22.Two of Law 25/2005, dated 24 November, regulating venture capital entities and their management companies, recognises the possibility of investing in companies of the group or of the group of the management company. The only requirement is to have fulfilled the procedures stated in the internal conduct regulations of the management company “to prevent conflicts of interest and make sure that the operation is carried out in the exclusive interest of the entity.”

The acquisition of companies partially owned by directors or members of the investment committee of the management company is not market practice. Furthermore, the 99 per cent exemption on venture capital entities corporate tax does not apply when the purchaser of a company is related to the venture capital entities or its partners or investors. For this purpose, a venture capital entity, partner or investor shall be deemed to be a “related party” if it holds, directly or indirectly, more than twenty-five percent of a participated company.

Nevertheless there are circumstances in which directors, partners or members of the investment committee may sell a company to a venture capital entity. For example, when promoters of a venture capital entity have identified a good investment opportunity, but the venture capital entity has still not been formed. The incorporation proceeding of a venture capital entity is much longer than the incorporation proceeding of a non regulated vehicle. Therefore, the promoters may incorporate a “warehouse company” which acquires the target company. Once the venture capital entity has been duly incorporated, it then acquires the target company. This acquisition process shall fulfil internal rulings on conflicts of interest.

Read: Conflicts of interest in the venture capital industry in Spain, Wales and England

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