Cayman Islands: The International Capital Markets Review, 6th Edition, Ireland

Last Updated: 20 January 2017
Article by Nollaig Murphy

INTRODUCTION

Legal framework

In 2016, the EU capital markets seemed to consolidate the reinstatement of the marketplace from the post-Lehman international crisis. A settled market for CLO and RMBS issuance was in evidence and steady issuance occurred. The highly cyclical volatility caused by regulatory uncertainty in previous years was less prevalent. However, the impact of Brexit on EU markets generally remains to be seen. While domestic corporate issuance of capital markets debt in Ireland has always been modest, significant volumes of structured finance debt were issued as  part  of  collateralised  loan  obligations  (CLOs),  collateralised  debt  obligations  (CDOs), residential  mortgage-backed  securities  (RMBS),  commercial  mortgage-backed  securities (CMBS)  and  repackaging  transactions  out  of  Ireland.  This  was  significantly  curtailed  in 2011  and  2012,  saw  some  return  to  activity  (especially  CLOs)  in  2014,  and  has  steadily increased over 2015–16 with CLO and repackaging volumes up on previous years. As can be seen below, 2016 issuance year to date shows volumes sustained around or above 2015 levels, with 25 public CLO deals completed as at July 2016 compared with 33 deals in 2015 for the full year.

Indeed, public CLO issuance reached €4.44 billion by the end of the first quarter of 2016 (up from €4.39 billion for the same period in 2015) with an estimated volume of circa €16–18 billion for year end 2016. Market participants have recently shown that they will continue to use Ireland as one of the preferred international financial locations – in 2016, as with 2015, Ireland remained the leading EU jurisdiction of issuance for public CLOs with more than 75 per cent of deals issued out of Ireland.

Capital markets transactions law

Irish capital markets law is generally integrated into parallel systems of common law, equity and statute, without any specialised tribunals governing its administration or enforcement. The fundamental legal principles governing debt and contractual obligations created under bonds and securities are still rooted in the original provisions set out in the Bills of Exchange Act 1882 but have been overtaken and enhanced significantly by a plethora of domestic and EU-originated legislation.

Current regulatory and legal status

The principal regulator of capital markets in Ireland is the Central Bank of Ireland (Central Bank).

The country's only regulated stock exchange is the Irish Stock Exchange (ISE). The ISE has two markets on which debt can be admitted: the Main Market, which is regulated, and the Global Exchange Market (GEM), which is not. Both of these include general corporate debt and specialist securities including asset-backed securities, specialist bonds and warrants. The Main Market and the GEM have each developed a large following in the international capital markets because of their quick turnaround times on 'reads' or reviews of draft listing documents and prospectuses, and on well-settled content requirements for relatively complex obligor  structures.  In  2013–14,  there  was  a  significant  increase  in  the  number  of  general corporate debt issuers seeking a listing in Ireland and that trend has continued. Most notably, a number of medium term note (MTN) corporate programmes continue to migrate their listings  to  Ireland.  The  boom  in  US-issued  CLOs  was  reflected  in  2015  with  7,219  debt securities issued on the ISE overall, and 551 new issuers listing.

The key legal, statutory and regulatory provisions relevant to debt securities include:

  1. contract law;
  2. statutory company law (including, in particular, the Irish Companies Acts 2014);
  3. common law;
  4. Directive 2003/71/EC, as amended by Directive 2010/73/EU (Prospectus Directive);
  5. Commission Regulation (EC) No. 809/2004, as amended by Commission Delegated Regulations (EU) 486/2012 and 862/2012 (Prospectus Regulation);
  6. Directive 2004/109/EC (Transparency Directive);
  7. Regulation  (EU)  596/2014  (Market  Abuse  Regulation)  and  the  European  Union (Market Abuse) Regulations of Ireland; and
  8. the Listing Rules and the Admission to Trading Rules of the Main Securities Market (Listing  Rules)  or  the  Listing  and  Admission  to  Trading  Rules,  Global  Exchange Market (GEM Rules), as applicable.

There are also statutory provisions and regulations applicable to particular classes or types of  securities  including  in  particular  commercial  paper,  certificates  of  deposit,  RMBS  or CMBS, general securitisations and uncertificated securities. The Companies Acts regime also incorporated (in 2006) certain exempting provisions from the general formal requirements for Irish companies issuing debentures for particular restricted classes of debt securities, to facilitate the use of private companies for non-public bond transactions.

Privately placed, unlisted debt securities are not ordinarily subject to the rules of the Prospectus Directive, the Prospectus Regulation, the Transparency Directive or the Market Abuse Directive. The interplay of regulations within this regulatory environment is a complex area and invariably requires detailed specialist advice.

Companies Act 2014

The Companies Act 2014 commenced into law on 1 June 2015 and replaces all existing Irish companies' statutes in what is largely a consolidation, simplification and codification exercise. There are a number of provisions that will impact new Irish issuers of listed securities and require steps to be taken for existing Irish issuers of listed debt securities. The Companies Act 2014 creates a new type of private company limited by shares called a designated activity company (DAC) and changes the form of the existing private company limited by shares (LTD).  The  LTD  is  a  more  streamlined,  simplified  form  of  an  existing  private  company limited  by  shares.  The  key  difference  between  an  LTD  and  a  DAC  is  that  an  LTD  shall neither:

  1. apply to have securities (or interests in them) admitted to trading or to be listed; nor
  2. have securities (or interests in them) admitted to trading or listed.

This applies on any market, whether regulated or not, in Ireland or elsewhere (an LTD must also not have an objects clause).

A  DAC,  however,  is  not  subject  to  such  restrictions  as  regards  the  listing  of  its securities. Other than the ability to issue listed debt securities, there is little difference in the company law applicable to DACs and that currently applicable to existing private limited companies.

Conversion to a DAC

There is an 18-month transition period (from June 2015) under the Companies Act 2014 to allow existing issuers of listed debt securities to convert to DACs. Liability may arise for the directors and the company if they fail to convert within the prescribed time frame.

Conversion occurs by a simple resolution of the board of directors. The conversion process requires a change in the issuer's name (to include the 'DAC' abbreviation in place of 'limited') and includes the deemed amendment of the issuer's constitutional documents to reflect this change.

Existing Irish capital markets issuers that are public limited companies will not be required  to  take  any  conversion  steps  under  the  Companies  Act  2014  (though  it  may  be prudent that they also amend their constitutional documents to update them for the purposes of the Companies Act 2014).

Private  limited  companies  incorporated  prior  to  the  enactment  of  the  Act  which had  securities  admitted  to  trading  or  listed  on  any  market,  whether  regulated  or  not,  in Ireland  or  elsewhere  before  1  June  2015  do  not  need  to  convert  to  a  DAC  and  will  not be in contravention of the Act for having such listed securities (under the Companies Act 2014  (Commencement)  Order  2015  (as  amended)).The  Companies  (Accounting)  Bill 2016 published in July 2016 provides that the Act will be amended to make this exemption permanent for companies that have listed securities before 1 June 2015.

Public offers

Section 68 (and section 981, in relation to DACs) of the Companies Act 2014 states that an offer of debentures to the public by a private company will not be considered an offer to the public if:

  1. the offer is addressed solely to qualified investors;
  2. the offer is addressed to fewer than 150 persons other than qualified investors,
  3. the  terms  of  the  offer  provide  that  the  minimum  consideration  payable  by  each investor is at least €100,000;
  4. the terms of the offer provide that the denomination of units of the debentures being offered is at least €50,000 (increased to €100,000 by Section 68);
  5. the terms of the offer expressly limit the total consideration for the offer to less than €100,000; or
  6. the offer relates to classes of instruments usually dealt on money markets having a maturity date of less than 12 months.

Therefore, in the case of a retail transaction, an Irish issuer will be required to be incorporated as  a  public  limited  company,  whereas  in  relation  to  a  wholesale  transaction  it  is  possible to  use  an  Irish  private  limited  company  as  issuer.  The  above  exemptions  are  analogous  to the exemptions from the requirement to publish a prospectus contained in the Prospectus Directive.

While the regulatory structure outlined above provides the backdrop to much of the structuring and formal requirements of the legal documentation surrounding capital markets transactions in Ireland, most securities issued in Ireland tend to be listed in any event for legal or tax reasons. Accordingly, the key focus on production of a prospectus (in the case of the Main Market) or listing particulars (in the case of the GEM) for such securities is on the  requirements  of  the  Prospectus  Directive/Prospectus  Regulation  and  Listing  Rules  or the GEM Rules, as applicable, and the production of a prospectus or listing particulars in a form acceptable to the Central Bank (in the case of the Main Market) or the ISE (in the case of the GEM). In addition, it is not unusual for Irish note transactions to be listed on other 'recognised' exchanges for tax purposes such as the Cayman Islands Stock Exchange.

Other regulatory frameworks – listed securities

Where an issuer lists its debt on the Main Market of the ISE, in addition to the obligation to publish a prospectus complying with the requirements of the Prospectus Directive, the issuer will also be regulated under the Market Abuse Directive and the Transparency Directive. Obligations under the Market Abuse Directive include:

  1. the prohibition of market abuse and market manipulation by the holders of inside information;
  2. an obligation to disclose price-sensitive non-public information to the market;
  3. the preparation and maintenance by the issuer or any other person of lists of holders of inside information; and
  4. the obligation to make fair recommendations to investors.

The Market Abuse Directive is implemented into Irish Law by the Market Abuse (Directive 2003/6/EC) Regulations 2005 on 6 July 2005.

Obligations under the Transparency Directive include:

  1. the publication of audited accounts within four months after each financial year end and the preparation of half-yearly financial reports (where the minimum denomination of the securities is less than €100,000);
  2. the requirement to treat security holders equally; and
  3. the  requirement  to  maintain  a  flow  of  information  to  security  holders  on  an ongoing basis.

The Transparency  Directive  is  implemented  into  Irish  law  by  the Transparency  (Directive 2004/109/EC) Regulations 2007 on 13 June 2007.

The Market Abuse Directive and the Transparency Directive only apply to securities listed on a regulated market, unless those securities derive their value from another security or instrument traded on a regulated market. Thus, GEM-listed and unlisted securities will typically not be subject to the Market Abuse Directive or the Transparency Directive (save for those recent changes noted below). However, it should be noted that a number of the GEM Rules mirror the requirements of the Transparency Directive (which forms the basis of the continuing obligation rules for the Main Market). In addition, the GEM Rules specifically require that GEM-listed issuers comply with the requirement to disclose inside information imposed by the Market Abuse Directive. In 2013 and 2014 the provisions of the Market Abuse  Directive  underwent  close  scrutiny  in  relation  to  numerous  market  buy-backs  to ensure compliance by international financial institutions in 'vertical slicing' transactions, as many of these bonds were listed in Ireland.

There are also short-selling restrictions imposed on investors in relation to positions held in EU sovereign debt under Regulation (EU) No. 236/2012 from 1 November 2012.

Certain changes were made to the market abuse regime and the Transparency Directive (and related matters) for listed issuers in 2015–16 and are set out below in more detail.

iiStructure of the Irish courts

The  Supreme  Court,  the  Court  of  Criminal  Appeal,  the  High  Court,  the  Circuit  Court and  the  District  Court  constitute  the  various  courts  in  the  Irish  legal  system.  The  Courts (Establishment  and  Constitution)  Act  1961,  together  with  the  Courts  (Supplemental Provisions) Act 1961, provided for the establishment of, and prescribed the jurisdiction of, the various courts.

The Court of Criminal Appeal, given its limited function as a court for the conduct of appeals against conviction or sentence from criminal trials, is irrelevant for present purposes. Likewise, the district and circuit courts do not play an appreciable role in dispute resolution in a commercial context because of their limited jurisdictions.

It follows that the High Court is invariably the court of first instance for significant commercial  disputes. Within  the  High  Court  structure,  there  is  a  specialist  list  called  the Commercial List (or the Commercial Court), which is a division of the High Court. There is currently a proposal to amend the Irish Constitution to enable the creation of a Court of Appeal for civil matters. This is required to address the current backlog of appeals before the Supreme Court.

iiiThe Commercial Court

The establishment of the Commercial Court in 2004 represented a radical departure in the manner in which commercial disputes were managed under the Irish legal system. Following similar  reforms  in  England  and  Wales,  the  Commercial  Court  was  established  to  reduce the often inordinate delay in the conduct of commercial proceedings in the ordinary High Court. In that regard, it was typical for a dispute in the ordinary High Court to take several years from commencement of proceedings to the handing down of the judgment. This can still apply for disputes not admitted to the Commercial List.

The establishment of the Commercial Court has been a considerable success, largely because the rules established for the conduct of proceedings in the Commercial List provide

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Nollaig Murphy
 
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