Following changes to the Future Fund's Directors' Certificate by the British Business Bank (BBB) on 2 June 2020, we were among the vanguard of firms, investors and startups highlighting the consequences and requesting a further update to ensure the universe of eligible companies was not unintentionally reduced.

The original changes to the Directors' Certificate introduced an economic control test which decreased the number of eligible companies in a way that we do not believe was intended or appropriate in the context of the purpose and goals of the Future Fund.

We're pleased the BBB has listened to feedback from those supporting the Future Fund's success, and taken expeditious and positive action. 

Today, changes were announced to remedy the issues caused by the original update to the Directors' Certificate. This further update removes the economic control test which decreased the number of companies eligible for the Future Fund and returns the connected person test to one which relates to control of the company.

The new guidance on the connected persons test can be found in the BBB's FAQs for investors:

Will an existing shareholder who holds a liquidation preference and who would potentially be entitled to a majority of the assets on a winding up on that basis be considered a "connected person" of the Company and therefore precluded from investing alongside the Future Fund as a matched lender?

No, shareholders with liquidation preferences will not be automatically excluded from the scheme. A “connected person”, as referred to in clause 2 of the director’s certificate, shall not be deemed to include any shareholder who would become such a connected person solely because of their holding a liquidation preference that would potentially entitle them to a majority of the assets on a winding up. For these purposes, the definition of “control” as used in the definition of "connected person" in section 1122 CTA shall be deemed to exclude section 450(3) (c) and (d) of the CTA from its meaning.

How does the requirement that an investor must be a Private Investor apply to funds and fund structures?

An Eligible Investor must also qualify as a Private Investor to be eligible for matched funding from the Future Fund. Please see the Glossary for details of these defined terms. In broad terms, "Private Investor” is defined as "a person, company or fund who is not connected with an Investee Company… or with a connected person of the Investee Company…".

"Connected persons" are defined using the definitions set out in sections 1122 – 1123 of the Corporation Tax Act 2010 (and by inference, sections 450–451, but excluding section 450(3) (c) and (d)), which amount to a concept of majority control defined by reference to ownership of the majority of shares in issue or control over the majority of voting rights.

These criteria apply to funds under the Future Fund eligibility rules. Whilst in different contexts and for different purposes a fund may not be a legal person and/or a fund may be considered to be a transparent look through entity, for the purposes of the Future Fund eligibility rules, all funds managed or advised by a single discretionary manager are considered to be a single investor regardless of their legal form. For this reason, multiple funds that are managed or advised by the same discretionary manager are also considered to be acting as a single investor.

The Future Fund is designed so that public investment is matched with investors who are not currently majority owners (and/or decision makers) of businesses. This is to ensure commercial outcomes for state aid and policy reasons, and to minimise the risk of conflicting interests.

We believe that this change will help ensure that the Future Fund is able to better achieve its stated objectives of supporting innovative UK companies with good potential that typically rely on equity investment and are currently affected by COVID-19.

By supporting these companies through the current period of economic disruption and the recovery, the Future Fund will allow these SMEs, which are proven drivers of the wider UK economy, to continue their growth trajectory and reach their full economic potential.

We played a lead role in advising the government on the Future Fund. More detailed advice and analysis can be provided on request; please contact corporate technology partners Angus Miln or Howard Palmer using the details provided on this page.