1 Setting the Scene – Sources and Overview
1.1 What are the main corporate entities to be discussed?
This chapter focuses on the corporate governance framework of an Irish public limited company whose equity securities are listed on a stock exchange. In particular, it focuses on companies with a stock exchange listing on a main securities market in the EU (also known as a regulated market). The regulated market in Ireland is Euronext Dublin and the secondary market, to which a less stringent corporate governance regime applies, is Euronext Growth Dublin.
This chapter also briefly considers the corporate governance framework applicable to:
- companies with a secondary market stock exchange listing or a listing outside the EU, particularly in the US (on NYSE or NASDAQ) given that a number of US listed issuers have restructured into an Irish public company in recent years; and
- companies subject to regulation by the Central Bank of Ireland ("CBI"), namely credit institutions and insurance undertakings.
1.2 What are the main legislative, regulatory and other sources regulating corporate governance practices?
The primary source of governance of all Irish companies is housed in the Companies Act 2014, as amended (the "Companies Act"), the consolidated legislative framework for all types of Irish companies (excluding certain fund structures).
While the Companies Act includes provisions specific to companies with a stock exchange listing (e.g. regulation of shareholder meetings – the Companies Act includes the provisions of the 2007 EU Shareholders Rights Directive ("SRD I")), it is supplemented by other legislation, codes and rules specifically governing the regimes of companies with a listing, including:
- The Listing Rules or equivalent rules implemented by the stock exchange on which the company's securities are listed include key requirements relating to the corporate governance of entities. The Euronext Dublin Listing Rules (the "Listing Rules") include important shareholder information and approval requirements for large transactions and related party transactions as well as free float requirements for a company's shares.
- The UK Corporate Governance Code (which applies equally to Euronext Dublin listed companies by virtue of the Euronext Dublin Listing Rules) (the "Code") sets standards for board and company corporate governance and applies to companies with a regulated market listing on a comply or explain basis (to be addressed in a company's annual report each year). Non-EU listed companies and companies with a secondary market listing are not required to comply with the Code.
- The EU Market Abuse regime ("MAR") applies to all companies whose equity securities are listed on an EU stock exchange and sets the mandatory framework to prevent insider dealing and market manipulation as well as regulate the transactions of members of senior management and their connected persons in the company. It is supplemented by rules issued by the CBI (the competent authority in Ireland designated with responsibility for regulating MAR in Ireland).
- The EU Transparency regime ("Transparency") applies to all companies with a regulated market listing. It prescribes mandatory rules for annual and half-yearly reporting as well as shareholder interest disclosure obligations and certain requirements in relation to the conduct of a company's annual general meeting. As with MAR, the CBI is the competent authority for regulation of Transparency of Irish listed companies and it has also devised rules in respect of Transparency.
Companies undertaking regulated services will likely be subject to other binding corporate governance regulations. For example, credit institutions and financial institutions are subject to the CBI's binding code of conduct, the Corporate Governance Requirements for Credit Institutions and Insurance Undertakings (the "CBI Codes"). A listed company, and its directors, involved in a takeover offer must comply with the Rules of the Irish Takeover Panel (the "Takeover Rules").
Irish companies with a stock exchange listing will also typically take into account the recommendations set out in non-binding guidelines issued by investor groups (including the Pre-Emption Group) and proxy advisors (including Institutional Shareholder Services ("ISS") and Glass Lewis). While ISS and Glass Lewis have always played an active role in advising shareholders of companies with a US listing, including Irish ones, they have both taken a more active position in Ireland in recent years with respect to Irish listed companies and their actions (specifically recommending a "no" vote on remuneration policies and/or director appointments) have had a big impact on the voting decisions ultimately taken by shareholders.
1.3 What are the current topical issues, developments, trends and challenges in corporate governance?
Board accountability has been a prevalent topic in the last couple general meeting cycles of regulated market listed companies. Most Irish companies voluntarily follow the UK mandatory regime of presenting their directors' remuneration report to shareholders at each AGM for advisory approval. Shareholders, guided by the influence of "no" vote recommendations from proxy advisers, have become more willing to vote against the remuneration report holding directors' accountable for perceived performance issues in the company. This trend is only set to continue with the impending implementation of the 2017 EU Directive amending SRD I ("SRD II") into Irish law, which is due to become law on or before 10 June 2019. Once commenced, SRD II will require Irish regulated market companies to present two remuneration proposals at AGM, the first to approve the board's remuneration policy (at least once every four years) and the second to approve the directors' remuneration report (annually in respect of remuneration paid in the previous financial year). Member States have discretion as to whether the approval of the remuneration policy will be an advisory or binding vote (the approval of the remuneration report will be advisory) although the default is a binding vote. If binding, the company can only pay remuneration within the scope of a shareholder approved policy (save where no policy has been approved in which case it shall continue with past practice until a policy is approved at the next general meeting). If advisory, the board can pay remuneration within the scope of the policy provided that it has been presented to shareholders for vote, whether or not the vote was passed. The global shift towards discouraging short-termism and promoting long-term sustainable success of the company, generating value for shareholders and contributing to wider society, has been a key theme over the last couple years. It is a core principle of the changes introduced to the Code in its wide-ranging rewrite in 2018. In addition, legislation has recently been introduced at the Irish and EU level on non-financial reporting by boards of large (a company is large if: (a) (i) it has total assets exceeding €20 million (€24 million gross in the case of a holding company); and/or (ii) turnover exceeding €40 million (€48 million gross in the case of a holding company); and (b) it has an average number of employees exceeding 500 (for the company or its group) Irish public companies ("NFR"). NFR reporting requirements cover environmental matters, social and employee matters, respect for human rights, and bribery and corruption, including corporate polices and outcomes, principal risks and relevant KPIs. The NFR forms part of the directors' report in a company's statutory financial statements and is within the scope of the auditor's reporting. This is relevant not only to Irish regulated market companies but also those listed on secondary EU markets and US markets. Companies with more than 500 employees listed on a regulated market are also required to publish a board "diversity report" explaining the company's approach to board diversity.
The importance of having an independent auditor has become a focus in recent years with the introduction of mandatory auditor rotation and audit tendering requirements for regulated market listed companies in 2016. This has only started to become a focus recently due to transitional provisions made available under the legislation allowing the grandfathering of existing audit firms for a period of time. The prescriptive tendering requirements are designed to ensure that no audit firm is discriminated from a tendering process and auditors are appointed based on objective criteria.
In the increasingly global and oftentimes opaque investor landscape, recent EU legislation has been implemented in Ireland designed to regulate companies at the investor level, including: (i) regulating foreign direct investment ("FDI") into Ireland (similar in concept to the oversight of the Committee on Foreign Investment ("CFIUS") in the US); and (ii) requiring transparency of ultimate beneficial ownership at shareholder level. The 2019 FDI screening legislation establishes a framework for screening by Member States of FDIs into the Union on the grounds of security or public order. In addition, in 2016 (with additional legislation in 2019), EU antimoney laundering legislation introduced a mandatory reporting regime for beneficial ownership information of shareholders. It will have no impact on regulated market companies as they will be afforded an equivalency exemption due to the fact that they are already subject to the shareholder reporting regime required under Transparency. Companies in scope are already required to establish a beneficial owner register (natural persons holding at least 25% of ownership or control directly or indirectly) and the majority of the contents of this register will be publicly available on a central register by the end of 2019.
Another key development will be the establishment later this year of the Corporate Enforcement Authority as a standalone statutory agency (currently this function operates as the Office of the Director of Corporate Enforcement, an office of a government department). It is anticipated that the new body will be better equipped to investigate increasingly complex breaches of company law.
1.4 What are the current perspectives in this jurisdiction regarding the risks of short-termism and the importance of promoting sustainable value creation over the long-term?
See the response to question 1.3. As a result of significant pressures exerted by large institutional shareholders coupled with mandatory reporting on long-term and non-financial objectives, Irish listed companies are rapidly recognising the need to shift mindset from purely short-term financial reporting cycles to a more long term defensible strategy, taking into account not just short-term increases in shareholder value.
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This article first appeared in the International Comparative Legal Guide to: Corproate Governance 2019
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.