IRELAND: An Introduction to Corporate/M&A

Chambers Europe 2019 - Practice Area Overview – Corporate, Ireland

Contributed by David O’Donnell

Overview  

Recently released figures from Mergermarket showed a significant jump in mergers and acquisitions activity in Ireland in 2018. The value of Irish mergers and acquisitions rose 370% compared with 2017, with 163 transactions taking place worth a combined EUR76 billion. This is the highest number of deals recorded in over five years. In 2017, Mergermarket recorded 151 transactions with a value of EUR16.2 billion.

Economic Outlook for 2019 

- Brexit 

Whether this upward trend in mergers and acquisitions activity continues in 2019 is likely to be markedly influenced by the nature of the UK’s departure from the EU. Enduring uncertainty regarding the manner of Brexit’s implementation and its legal ramifications makes it impossible to predict the range of implications the UK’s departure from the EU will have on the Irish mergers and acquisitions market in 2019, although current indications are that prospective transactional activity is not being deterred by the prospect of a disorderly Brexit. Brexit has the potential to be a double-edged sword in terms of its effect on the Irish mergers and acquisitions market. On one hand, Brexit is potentially advantageous for Irish mergers and acquisitions with international players diverting their attention away from the UK to other similar EU jurisdictions such as Ireland. On the other hand, uncertainty surrounding the nature of the Irish border has the potential to hamper Ireland’s crucial trade relations with the UK and related mergers and acquisitions activity with respect to enterprises possibly disrupted by border changes.

Irrespective of the nature which Brexit takes, its impact on deal management is likely to be felt in a number of key legal areas:

Merger Control 

Irish companies have benefited from EU merger control regulation since 1990. This allows for deals involving companies with high turnovers in more than one member state to be notified to the European Commission in one centralised notification, as opposed to being notified several times in several member states. This streamlined process provides cost and efficiency benefits. Post-Brexit, the EU turnover of many Irish companies will fall below the necessary threshold to gain access to the EU’s merger control system, as often the UK turnover of Irish companies brings them above the threshold. The result will be a requirement for merging companies to notify several national competition authorities’ agencies. Severe procedural problems would result from a duplication of the merger review process, including difficulties with information sharing, inconsistencies in timelines, outcomes and remedies. This complication of the pre-merger process would increase costs and burdens.

State Aid 

Brexit’s impact on state aid rules will also impinge on merging companies. Currently, EU law prohibits member states from using resources to provide selective financial support that may distort competition and affect trade between member states. This regime is enforced by the European Commission. Post-Brexit, a separate subsidy control framework for the UK could result in Irish companies losing their ability to complain to the commission about state aid by the UK to UK companies and maintaining a level playing field in state enterprise support.

TUPE 

Any post-Brexit alterations to the UK rules surrounding transfers of undertakings will also impact Irish mergers and acquisitions involving UK entities. For 2019 and the interim period before the UK leaves the EU, employers proposing to transfer employees from an Irish entity to a UK entity should be mindful that employees may have additional grounds upon which they may exercise their right of objection to such a transfer. Employees faced with the prospect of being transferred from an Irish to a UK entity can now argue that such a transfer would involve a substantial deterioration to their working conditions, given that their employment rights might (depending on how UK employment law evolves) be diminished significantly by legislative change once the UK leaves the EU. They could argue that such a transfer amounts to constructive dismissal and their employer being responsible for the termination of their employment.

- Tax 

Ireland's low tax environment and focus on the renewables, pharma and digital sectors continues to attract mergers and acquisitions activity.

The US tax reform that passed into law in December 2017 has undoubtedly dimmed the attractiveness of Irish corporates to US buyers. Nonetheless, for US corporates wishing to enter the EU market, Ireland remains a natural springboard. Brexit merely heightens this attraction. From an international tax perspective, the introduction of a new US Federal 10.5% tax regime for global intangible income coupled with 80% foreign tax credits means Ireland is the most tax efficient location for US companies to build an EMEA base. Often US companies commence this process with an acquisition of an Irish target.

EU anti-avoidance tax changes continue to impact on mergers and acquisitions structuring. The introduction of a controlled foreign companies regime from 1 January 2019 is likely to lead to a re-structuring of passive offshore structures controlled by Irish corporates. Similarly, the possible introduction of restrictions on the tax deductibility of interest will impact mergers and acquisitions debt funding structures. The recent introduction of EU mandatory disclosure of cross-border tax avoidance arrangements will be relevant to M&A activity.

On digital, Ireland has successfully fought hard to avoid an introduction of an EU-wide digital tax. With its 6.25% knowledge box and generous R&D tax credits, Ireland remains a key intellectual property location which inevitably generates M&A activity. The presence of significant independent contractors in the sector heightens the payroll tax issues but the presence of potential tax indemnity insurance in the area can minimise risks.

Finally, with respect to real estate and the built environment generally, it should be noted that foreign buyers of real estate continue to need to structure for Ireland's non-resident capital gains tax. For commercial property, it should be noted that Irish stamp duty at a current rate of 6% can extend to shares of a non-Irish incorporated company that derives its value from Irish land.

Deal Trends 

- W&I Insurance 

As was the case in 2018, we expect to see a continued rise in the use of warranty and indemnity insurance ('W&I Insurance') in M&A transactions throughout 2019, with insurers being prepared to consider policies for more specialised risks, over and above the risks covered by a generic policy. W&I Insurance should be considered in deals which have liability risks around more technical issues in a specific sector of the target company. Furthermore, we expect premiums in such situations to be higher based on indications we are seeing in transactions. However, premiums for more standard W&I Insurance are expected to decrease. This is due to the fact that as the market for W&I Insurance becomes more competitive, policies which meet the objectives of the parties are becoming more readily available. We also expect the time required to put these policies into place to decrease as a result.

With the increasing pressure to execute transactions expeditiously, W&I Insurance can facilitate this to assist with advancing negotiations more smoothly. This is especially so in situations where discussions have come to a halt.

- Data Protection Compliance 

As was the case in 2018, we expect to see an increased focus during the due diligence process on the compliance of target companies with data protection rules. The significant fines which companies may inherit for non-compliance under the EU General Data Protection Regulation ('GDPR') has made this an area of particular importance during the due diligence process. Companies can be fined up to EUR20 million or 4% of their annual global turnover, whichever is the greater, for the most serious infringements. It is important to identify the risk in order to address GDPR compliance in the resulting documentation. Furthermore, if there is not sufficient compliance with GDPR, we expect to see purchase prices being negotiated down or alternatively satisfactory compliance costs being paid from the proceeds of sale. We see the key areas of focus being as follows:

- the ability of the target to retain key customer marketing data in light of GDPR consent requirements;
- revision of internal and external data protection policies to ensure compliance;
- conducting a data protection impact assessment;
- the need to appoint a data protection officer;
- the recording and supervision of data subject requests;
- review of contractual agreements to ensure that they are in compliance with controller/processor requirements; and
- transfer of data outside the EU.

Furthermore, from a cyber-security perspective, the rise in risks such as 'logic bombs' which may go undetected need to be closely considered by acquiring companies. A 'logic bomb' is a piece of code intentionally inserted into a software system that will set off a malicious function when specified conditions are met. For example, a programmer may hide a piece of code that starts deleting files, should they ever be terminated from the company. If such a cyber-risk was in existence in advance of closing the deal, a company may not feel the effects of it until after closing resulting in significant costs which the acquiring company is not protected against.

Legislative Changes 

There are a number of new pieces of legislation currently passing through the various stages of the Irish legislative process which, if passed into law, are likely to impact the Irish mergers and acquisitions market in 2019.

- Investment Limited Partnership and Irish Collective Asset-Management Vehicle (Amendment) Bill

The private equity ('PE') market continues to be critical to the Irish economy, driving growth by increasing the range of funding options available to companies. The steady flow of PE in Ireland since the financial crisis has seen a broad range of PE transactions, including PE mergers and acquisitions being carried out here. While there had been steady growth in activity in recent years, 2018 saw a significant slowdown in the Irish PE market.

In Ireland, the investment-limited partnership is the vehicle of choice for PE for international promoters, as a vehicle designed to hold mainly PE and other real estate assets. Fears for the buoyancy of the Irish PE market due to global economic and political uncertainty and changes in the global PE market had spurred the Government to give the go-ahead in 2017 for legislative reform of the primary legislation governing the area: the Investment Limited Partnership Act 1994. It is hoped that the amending legislation will address problems with the current Act to support the development of the PE funds industry by making Ireland a more attractive domicile for such funds. The funds industry understands there is a huge market opportunity for PE that Ireland can capture; Ireland presently has only six regulated investment limited partnerships, compared to approximately 650 Luxembourg funds at the end September 2018.

A draft of the Bill is currently being prepared, which is listed as priority legislation and is due to pass through the Irish Houses of Government to become law in 2019. The Bill will seek to introduce enhancements to the Irish investment limited partnership; it is hoped the Bill will bring such partnerships into line with other Irish fund structures such as AIFMD and global standards. It is also hoped that the Bill will allow for the establishment of umbrella investment limited partnership, allow for a variety of players to act as general partners and improve the safe harbour provisions for activities limited partners can engage in. By boosting the Irish investment limited partnership offering, the legislation is set to stimulate PE activity including PE mergers & acquisitions.

- Employment (Miscellaneous Provisions) Bill 2017

The Employment (Miscellaneous Provisions) Bill 2017 passed the initial stages of the Irish legislative process in 2018 and forms part of the Irish Government's proposals to tackle 'zero hour' contracts and uncertain working conditions. The Bill's proposed changes have the potential to have a huge impact for employers in industry sectors where the use of flexible working arrangements is the norm, such as retail, tourism and hospitality. Key changes include:

- prohibition on the use of 'zero hour' contracts except in very limited circumstances;
- introduction of an entitlement to 'banded hours';
- provides for a right to a minimum payment where an employee is required to be available for work but is not actually called into work; and, most controversially,
- making it a criminal offence for employers to incorrectly designate employees as 'self-employed'.

Amendments criminalising the misclassification of employees as independent contractors have been flagged as unacceptable to the Government, so it remains to be seen whether this provision will survive legislative scrutiny. However, the impact on employers of the banded hours provisions and other aspects of this piece of legislation will still be significant and will need to be carefully considered by acquirers of businesses operating in sectors where flexible working hours are widespread.

- Irish Human Rights and Equality Commission (Gender Pay Gap Information) Bill 2017

Another piece of legislation which may also have implications for the mergers and acquisitions market in Ireland if passed into law is the Gender Pay Gap Information Bill 2017. Currently at Committee Stage in Dáil Éireann, the Bill in its current form proposes to enable the Irish Human Rights and Equality Commission (the 'Commission') to introduce a mandatory reporting scheme for certain employers in relation to gender pay differences in their companies.

Under the current form of the Bill, the Commission may introduce a scheme whereby employers with more than 50 employees would be obliged to publish information relating to the pay of employees for the purposes of showing whether there are differences in the pay of male and female employees and, if so, the nature and scale of such differences. Should the Bill become law and a scheme be introduced by the Commission, companies will be under new obligations which will be relevant to the due diligence process in merger & acquisition transactions. A buyer acquiring a target company would have to consider as part of its diligence process whether the legislation applies to the target, and if so, whether the target is in compliance with the legislation.

Conclusion 

2019 will be an interesting year for deal-makers. Coming off the back of a strong year for Irish M&A activity, it will be interesting to observe how the current economic climate will impact growth in 2019. As highlighted above, recent EU and domestic legislative changes (including potential legislative changes) are likely to create a number of new hurdles and discussions for getting deals over the line in 2019. Our base case is that the mergers and acquisitions market will remain buoyant in a deferred or 'soft' Brexit scenario. The ultimate effect of a 'hard' Brexit is too difficult to call, but more likely to be negative.