This country-specific Q&A provides an overview to private equity laws and regulations that may occur in Ireland.
This Q&A is part of the global guide to Private Equity. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/private-equity/
What proportion of transactions have involved a financial sponsor as a buyer or seller in the jurisdiction over the last 24 months?
We have seen a significant increase in sponsor led M&A with some statistics showing up to 60% of deals involving private equity purchasers.
What are the main differences in M&A transaction terms between acquiring a business from a trade seller and financial sponsor backed company in your jurisdiction?
Very much the same as in the UK. No substantive business warranties, usual to have W&I insurance and if there is an identified contingent liability, a small escrow pot.
On an acquisition of shares, what is the process for effecting the transfer of the shares and are transfer taxes payable?
The transfer of shares in an Irish company must be:
i. evidenced in writing
ii. must be signed by the transferor and, in the case of shares which are not fully paid, or an unlimited company, the transferee.
Stamp duty at a rate of 1% is payable on the acquisition of shares. There is no stamp duty on the issue of new shares. In certain cases, where the shares derive their value or the greater part of their value from Irish non-residential land or buildings, the rate of stamp duty is 6%. In addition, where the consideration for the purchase of shares includes the discharge of debt, it is chargeable to stamp duty.
In situations where the consideration cannot be ascertained, and the transfer would otherwise attract duty by reference to the amount of the consideration, duty is charged on the market value of the property. This may arise in circumstances where there is a working capital adjustment after the execution of the instrument which would add to or subtract from total consideration.
How do financial sponsors provide comfort to sellers where the purchasing entity is a special purpose vehicle?
Equity commitment letters from the Fund itself supported by legal opinions are used on bigger deals. On smaller transactions with less experienced advisers, they may rely on a certain funds rep in the SPA.
How prevalent is the use of locked box pricing mechanisms in your jurisdiction and in what circumstances are these ordinarily seen?
Five years ago it was virtually unknown and now on all auction deals and PE exits, it is always used. It is less common on acquisitions from founders or on spin outs of a part of a wider corporate structure.
What are the typical methods and constructs of how risk is allocated between a buyer and seller?
It is very deal specific in Ireland with a wider range of "market practice" but the tread is moving in favour of Sellers. The old market practice of having liability for 100% of purchase price under warranties and indemnities is much less common with caps on liability of 25-30% now very common.
How prevalent is the use of W&I insurance in your transactions?
This is very prevalent particularly where you have a financial sponsor exiting or a very widely held shareholder base exiting. It has been one of the most overriding development in private M&A structures over the past 3 to 4 years.
How active have financial sponsors been in acquiring publicly listed companies and/or buying infrastructure assets?
There have been no recent public to private transactions in Ireland.
Outside of anti-trust and heavily regulated sectors, are there any foreign investment controls or other governmental consents which are typically required to be made by financial sponsors?
No, save in specific regulated sectors such as healthcare, financial services or energy and even in these sectors consents may not be mandatory.
How is the risk of merger clearance normally dealt with where a financial sponsor is the acquirer?
Reliance is placed on the substantive completion analysis; if there is no real concentration risk, buyers including PE and will take hell or high water risk but only where they have full confidence a clearance will be obtained.
Have you seen an increase in the number of minority investments undertaken by financial sponsors and are they typically structured as equity investments with certain minority protections or as debt-like investments with rights to participate in the equity upside?
This has been and remains a common structure in Ireland with plenty of institutional capital prepared to hold minority equity positions, warranted mezz debt and/or convertibles are less common but are not unprecedented. Debt funds in particular are now looking for some form of equity upside to deliver higher debt to equity lending.
How are management incentive schemes typically structured?
It is common for employees in Ireland to participate in share incentive schemes as a means of attracting and rewarding employees.
Are there any specific tax rules which commonly feature in the structuring of management’s incentive schemes?
Benefits obtained by the employee are generally subject income tax, social security and the universal social charge at a marginal rate of 52%. The timing of the tax charge will depend on the duration of the share option.
Approved Share Option Schemes
Income tax relief will be available where a right to acquire shares in the company is granted to its employees or directors and exercised in accordance with a share option scheme that has been approved by the Revenue Commissioners. A three-year claw back provision applies. In order to qualify for approval, the scheme must be made available to all employees and directors at the same time subject to a maximum service requirement of three years. There is scope to include a “key employee” element to an approved share option scheme but the scheme cannot be limited to key employees only. The total number of shares granted to key employees or key directors cannot exceed 30% of the total number of shares in respect of which rights have been granted to all employees and directors under the scheme. Where a share option scheme has not been approved by Revenue, income tax, PRSI, USC and CGT at the normal rate will apply. However, unapproved share option schemes generally provide more flexibility for companies and any associated tax cost is the responsibility of the employee and not the company. Unapproved share option schemes are more common in practice.
Entrepreneur relief is much more limited than in the UK. It will apply to the liability to CGT where the individual disposing of the shares holds at least 5% of the company’s ordinary share capital, and if applicable, CGT will be chargeable at 10% on the first €1,000,000 of gain (over a lifetime) with the balance taxed at the standard rate of capital gains tax of 33%.
Key Employee Engagement Programme
A new initiative was introduced in 2017 in respected gains arising on the exercise of qualifying share options acquired in SME companies. An SME is a company which employs fewer than 250 people and has an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million.
The regime exempts any gains realised on the exercise of qualifying share options granted between 1 January 2018 and 31 December 2023 from income tax, social security and the Universal Social Charge. However, the gain remains chargeable to CGT on future disposals on the shares. To qualify the share option must be held for at least 12 months, and be exercised within 10 years. The Minister of Finance announced improvements to the initiative in Budget 2019. The changes will see an increase the earnings threshold to 100% of salary (currently 50%), replace the three-year limit with a lifetime limit and increase the quantum of share options that can be granted under the scheme from €250,000 to €300,000.
Where the employees receive shares, which qualify as "restricted shares" (essentially restricts the employees ability to dispose of shares within a specified period), it may be possible to restrict the taxable value of the shares by up to 60% where the specified period is more than 5 years.
"Growth shares " or "flowering shares" are becoming increasingly common. Typically, these operate as a separate class of shares which allow an employee benefit from the future value of the shares with no entitlement to the current value of the business and are subject to performance targets. The company is responsible for operating PAYE, PRSI and USC on the difference between the acquisition price paid by the employee and fair market value of the shares on acquisition.
Debt is commonly used in acquisition financing in Ireland. However, it is important to consider whether interest on the borrowings is tax deductible and the rules can be complex.
Tax deduction against trading income
The general principle is that where interest is incurred wholly and exclusively for the purpose of a trade carried on by the company in the period in which the interest is accrued, it is allowable as a trading expense.
Tax deduction against rental income
In general interest on money borrowed to purchase, improve or repair a rented property is allowed as a deduction against the related rental income in arriving at the taxable rental income.
With effect from 1 January 2019, a 100 % deduction will be available for interest on loans for the purchase, improvement or repair of residential rental property, including foreign property loans (this is currently restricted to 85%). The deduction is unrestricted for rented commercial property.
Interest as a charge on total income (for companies and individuals)
Subject to a number of conditions being met, interest relief is available on acquisition debt used to buy the shares and can be treated as a ‘‘charge”. This means that it can be off-set against the company’s total profits or, in the case of an individual, against the income for the year of assessment in which the interest is paid. The charge can also be used against profits in other group companies subject to certain conditions. It should be noted that this is a complex area which is subject to a number of detailed anti-avoidance provisions.
Such interest is deductible against the total profits of the company. However, to the extent that there is excess interest, such current-year interest can be surrendered within a corporation tax group (i.e. a 75% group). The interest surrendered can be off-set against the other company’s total profits, minimising its tax.
Are senior managers subject to non-competes and if so what is the general duration?
Yes, one year in an employment contract, two years in an SPA.
How does a financial sponsor typically ensure it has control over material business decisions made by the portfolio company and what are the typical documents used to regulate the governance of the portfolio company?
This is governed by a shareholders agreement with the usual consent matters, board control and tight delegated authorities to subsidiaries.
Is it common to use management pooling vehicles where there are a large number of employee shareholders?
It is not that prevalent in Ireland as there are less tax incentives underpinning such structures.
What are the most commonly used debt finance capital structures across small, medium and large financings?
Capital financings in Ireland typically take the form of either long-term (i.e. four to five years plus one year option to extend) or short-term loan facilities akin to a bridge that may be refinanced by a bond on larger financing. Revolving facilities are very commonly made available for working capital purposes.
It is becoming increasingly common, in the mid-market space, for local financings to include mezzanine/subordinated debt. However, such financing structures are more often seen at the higher end of the market in US or UK originated transactions involving Irish counterparties.
As alternative credit providers move into Ireland, venture capital financing has increased, particularly in the fin-tech and pharmaceutical industries. The increase in activity in the Irish property sector has also resulted in the use of alternative financing structures, such as note issuance programmes, which enable investors who might not otherwise be permitted to lend into Ireland to build up market share.
Is financial assistance legislation applicable to debt financing arrangements? If so, how is that normally dealt with?
Yes there is a statutory prohibition, unless the form falls within an exemption or a whitewash procedure is followed. This statutory prohibition is very similar to the old section 151 in the UK.
Although there are numerous exemptions to this prohibition (including, for example, in respect of the payment of a dividend or distribution of profits), it is usual for the provision of financial assistance to be permitted by way of a summary approval procedure (or "whitewash" procedure). Public companies and their private subsidiaries are not able to avail of the summary approval process and are thus not permitted to whitewash the financial assistance.
The whitewash procedure involves a number of steps, including the swearing of a declaration by all or a majority of the directors of the relevant company that, among other things, the directors have (following full inquiry) formed the opinion that the company will be able to pay or discharge its debts and liabilities in full as they fall due for a period of twelve (12) months following the giving of the financial assistance. Shareholder and board approvals are also required, and several filings must be made locally following the conclusion of the whitewash procedure.
Failure to comply with the prohibition on financial assistance is a criminal offence and any financial assistance, eg guarantees, charges, etc. granted in breach of the legislation is voidable.
For a typical financing, is there a standard form of credit agreement used which is then negotiated and typically how material is the level of negotiation?
The Loan Market Association's standard form leveraged facility agreement is used for most commercial loan financings in Ireland. The level of negotiation on the terms of the LMA facility agreement will vary on a deal by deal basis, but as drafting often follows a pre-agreed term sheet commercial issues are usually agreed at an early stage of a transaction. The LMA form requires a number of Irish law related changes (particularly in relation to insolvency and tax), however, these amendments are not heavily negotiated.
Unlike the UK or US, the Irish market is more traditional in its approach to drafting and the lenders' counsel will usually draft the loan agreement, although the strength of the sponsor can sometimes dictate the ability of a borrower to present a "first draft" of the loan agreement.
What have been the key areas of negotiation between borrowers and lenders in the last two years?
Over the last two years, the key areas of negotiation include covenants and associated baskets around the use of cash, mandatory prepayment triggers and assignment and transfer provisions (and, in particular, the scope of white/black lists) and governing law. Accordion facilities are quite common features, as well as options to extend and the mechanics around exercising these options tend to be closely scrutinised.
In contrast to the UK, the local Irish market has not embraced cov-lite transactions, although in recent deals we are starting to see a relaxation of permissions around use of cash. Consequently, transactions involving local Irish banks will typically include substantial covenant protections. As a result, certain Irish borrowers have sought financing from foreign banks or the bond markets. It remains to be seen whether new alternative credit providers that are entering the market post-Brexit will reduce the requirement for significant covenant protection on wholly local deals.
Another common feature in the leveraged acquisition finance market is the use of certain funds language in the loan agreement even where the borrower is not a listed company.
Have you seen an increase or use of private equity credit funds as sources of debt capital?
There has been a sharp increase in the number of alternative credit funds and private equity investors active in the Irish market. The resulting uplift in Irish real estate development since the Brexit referendum has also increased opportunities for Irish borrowers/property developers to avail of capital from alternative sources. Although we have seen private equity credit funds lend through a variety of financing structures, typically funds are advanced via a secured loan or from the proceeds of a note issuance programme.
The majority of the alternative credit funds have been operating in the lower to mid-market space. Irish corporates typically obtain their term and revolving facilities from three to four relationship banks who may also offer a range of ancillary facilities, including cash management and treasury. One of the reasons why alternative credit funds tend not to form part of the club or syndicate is because regulatory constraints can preclude them from offering the ancillary facilities required by the borrowing group.