Contributed By A&L Goodbody
The main lender-side players involved in financing the acquisition of Irish targets are domestic and international banks and debt funds.
Acquisition finance involving Irish target companies is mostly arranged and underwritten by domestic and international banks. In larger syndicated deals, the arranging banks may syndicate the debt to other banks and institutional investors.
The Irish lending landscape has changed significantly since the financial crisis. While banks remain the dominant source of acquisition loans, a number of alternative sources of finance have become available for Irish acquisitions. A major trend in Ireland has been the emergence of direct lenders as significant providers of capital in the Irish market. While the focus of these lenders has predominantly been on the financing of property acquisitions and developments, many of these lenders have also provided financing for acquisitions.
Unitranche debt, which combines features of both mezzanine and senior debt, has also been used in recent Irish acquisition financings. A unitranche facility is a single tranche term loan (usually provided by a direct lending fund) which combines a blend of senior and junior risk into a single interest rate. Given that most Irish targets fall within the mid-market space, it is expected that unitrache debt will continue to be a popular form of acquisition finance for Irish targets.
Recent years have seen a steady level of merger and acquisition activity in the Irish market. In July 2019, the Irish Central Statistics Office announced that GDP growth for Ireland was 8.2% in 2018, which is the fastest growth rate in Europe and an increase on the 2017 growth rate. The first half of 2019 has continued in the same vein as recent years, with a very steady level of M&A activity. In addition, there have been four acquisitions of public companies announced so far in 2019, which is significantly more than in recent years. While there is expected to be a significant level of M&A activity in Ireland over the next year, there remains a high degree of uncertainty in relation to Brexit and global markets which could have an impact on deal flow.
Due to its tax-friendly environment, Ireland is often also used as a holding company jurisdiction.
In relation to acquisition facilities for Irish target companies, Irish law is often the governing law of the facility agreement. However, depending on the composition of the lending group, the facilities agreement may be governed by the laws of another jurisdiction (usually English or New York law). Larger syndicated loan transactions will typically be governed by English law.
The high-yield bond market in Europe remains a New York law market. Therefore, where high-yield bonds form part of the capital structure, the indenture and related documentation will be governed by New York law. As far as is known, no high-yield bond issuances have been governed by Irish law to date.
The governing law of the inter-creditor agreement will typically be the same as that of the facility agreement.
The governing law of the security documents will be determined by the relevant chargor's jurisdiction of incorporation and, if different, the location of the relevant secured assets.
For Irish law-governed deals, the facility agreement is typically based on one of the Loan Market Association’s (LMA) recommended forms of facility agreement. For most deals, this will be the LMA's leveraged acquisition facilities agreement. The LMA does not publish a specific form of facility agreement for investment-grade acquisitions. For such acquisitions, the facility agreement will typically be based upon the company's existing working capital facility, adapted to include provisions relating to the acquisition and any additional protections sought by the lenders.
Inter-creditor agreements are also typically based on the LMA's standard form.
Where the loan or bond documents are governed by the laws of another jurisdiction, the finance documents will follow the forms customarily used in those jurisdictions.
All finance documents are typically drafted in English. There are no specific requirements relating to the language used in documentation.
The facility agreement will contain a condition precedent requiring the delivery of legal opinions. The Irish legal opinion(s) will provide opinions as to the capacity and authority of the obligors incorporated in Ireland and the validity and enforceability of the finance documents governed by Irish law. Occasionally, borrower's counsel will provide the capacity opinion; however, it would be typical for lender's counsel to provide both the capacity and enforceability opinions.
Acquisition financings of Irish companies can be and are funded through a wide variety of instruments (both debt and equity). The type and complexity of the financing arrangements will depend on the purchaser, the target, the relevant business sector, market conditions and the composition of the proposed lender group.
Given that most Irish targets typically fall within the mid-market space, the Irish acquisition finance market is dominated by senior-only structures. However, other types of debt funding may be used, depending on the specifics of the deal, and it is not uncommon for the capital structure to comprise a mixture of funding sources.
Senior loans are the most common type of debt finance used in the acquisition of Irish companies. Senior loans can be secured or unsecured, although they will typically be secured unless the borrower is a strong credit. Senior loans may be provided by banks, direct lenders and institutional investors. The senior component of an acquisition financing may be comprised of some or all of the following:
The facility agreement may also contain provisions allowing the borrower to incur incremental or additional facilities under the facility agreement.
While less common than senior-only structures, senior/mezzanine loans are another common type of debt structure used in the acquisition of Irish companies. Typically, the mezzanine debt will be provided by direct lenders (such as debt funds and specialist mezzanine houses). The mezzanine debt will benefit from the same guarantees and security as the senior debt, but will be contractually subordinated to the senior debt. Mezzanine debt will be more expensive than senior debt and usually accounts for a much lower proportion of the financing package than senior debt.
As noted above in 1.1 Major Lender-side Players, unitranche debt, which combines features of both mezzanine and senior debt, has also been used in recent Irish acquisition financings. This will typically be combined with a revolving credit facility (usually provided by a bank), which will rank super-senior to the unitrache facility.
PIK loans have not been a typical feature of acquisition financings in Ireland in recent years.
Depending on the specifics of an acquisition, bridge loans may be required or desirable. These are typically used where time does not allow for the putting in place of the long-term instrument (either debt or equity), for example, where an acquiror wishes to acquire a target quickly or where a bidder requires certainty of funds before submitting a bid. Bridge loans are intended to be short term in nature and as a result are typically structured to encourage prompt refinancing. Typically, they have a short availability period and will often be refinanced before they are even drawn.
While there have been a number of high-yield bond issuances by Irish entities, high-yield bonds have not been a typical feature of acquisition financings of Irish targets to date.
Private placements/loan notes have not been a typical feature of acquisition financings in Ireland to date.
The priorities of the different classes of creditor can be established by the use of:
Both forms of subordination are possible and are commonly used in Irish acquisition financings.
In smaller or less complicated transactions, rather than entering into an intercreditor agreement, the borrower’s sponsors and the lenders may enter into a simple subordination agreement. However, in most acquisition financings, an intercreditor agreement will be used. As noted above, Irish law-governed inter-creditor agreements will typically be based on the LMA's standard form.
Unlike in England, the Irish Companies Act 2014 (the Companies Act) gives statutory recognition to subordination which will bind a liquidator in a winding-up. In addition, there is general agreement that customary subordination provisions (such as those found in the LMA’s inter-creditor agreement) should be enforceable in Ireland.
The main purpose of an inter-creditor agreement is to clarify the relationship between two or more classes of creditors. Some of the key features of an Irish inter-creditor agreement are:
(a) first, the senior debt and hedging liabilities pari passu,
(b) second, the mezzanine debt; and
(c) third, the vendor, investor and the intra-group debt (the inter-creditor agreement will not rank the vendor, investor or intra-group debt as between themselves).
As noted above, bank/bond structures have not typically been used for financing of the acquisitions of Irish target companies. However, where these have been used, the inter-creditor agreement will be typically governed by the laws of England or New York.
Traditionally, the hedging counterparties will benefit from the same guarantees and transaction security as the senior lenders and will rank pari passu with the senior lenders. This reflects the fact that hedging is typically provided by the senior lenders, who will expect their hedging liabilities to rank alongside their senior debt. While this remains the default position, in larger deals (particularly those not governed by Irish law) the position can vary.
Taking security from an Irish company is typically straightforward and free from material impediments and formalities. In general, a lender can take security over any assets belonging to an Irish company, although certain limited categories of company may be prohibited from creating security over certain types of assets (eg, regulated entities may be prohibited from creating security over client monies). Therefore, it is usually possible for lenders to obtain a comprehensive security package at a reasonable cost.
While a security interest can take multiple forms under Irish law, the most common types of security interest provided in acquisition financings are:
A charge may be fixed or floating. A fixed charge is a charge which attaches immediately upon execution of the security document to a specific asset or class of assets. A floating charge does not take effect immediately but will ‘float’ over the asset or assets and remain dormant until a defined event occurs or the creditor gives notice, or both. A purported fixed charge may be recharacterised by a court as a floating charge where the chargor retains a significant ability to deal with the asset.
A security interest created by way of assignment can be legal or equitable. For a legal assignment, a written notice of the assignment must be served on the counterparty. There is no timeframe within which this notice must be served. It is also not necessary to require the counterparty to acknowledge the notice; however, it would be desirable to obtain the counterparty’s acknowledgement where the notice requires the counterparty to carry out or refrain from carrying out certain actions in respect of the assigned assets.
While the extent of the security that is given will depend on the components of the structure and the creditworthiness of the borrower and target groups, typically a debenture (general security agreement) will be provided by an Irish company creating security over all of its present and future assets. The debenture will create (1) fixed charges and assignments over certain classes of assets and (2) a floating charge over all present and future assets of that company. Irish law permits security to be created over future assets, so security created under a debenture should automatically attach to newly acquired assets of an Irish company.
The concept of a trust (including a trust created under the laws of another jurisdiction) is recognised in Ireland. Therefore, except in the case of some bilateral facilities, security will typically be granted in favour of a security agent or trustee, who will hold security on trust for the benefit of the lenders from time to time. This means that there will be no issues with the lenders transferring all or part of the debt.
Third-party security is not uncommon, and is generally seen as workable as a matter of Irish law. This would most typically be encountered in relation to security granted by a shareholder or holding company that is not an obligor over shares it holds in or loans it has made to an obligor.
The most common security taken over shares in an Irish company is an equitable charge. In this case, the chargor remains the registered owner of the shares but delivers its original share certificates together with signed but undated share transfer forms to the chargee. It is also possible for a legal mortgage to be taken, pursuant to which title to the shares will be transferred to the chargee, but this is unusual as lenders typically do not want to become the registered shareholder of the company.
Security over inventory can be taken by way of either a fixed charge or floating charge. This will typically take the form of a floating charge as the chargor will usually need to retain the flexibility to deal with its inventory in the ordinary course of its business. Labelling of inventory to notify third parties that it is subject to security is not common.
Security over bank accounts can take the form of a fixed charge, a floating charge or an assignment.
The key consideration when taking security over bank accounts is whether the security should be fixed (which will effectively involve blocking the account, preventing the chargor from dealing with the account) or floating (which would allow the chargor to deal with the account in the normal course of its business). Taking a fixed charge over a blocked account is considered the most effective form of account security that can be taken. However, given that chargors typically need to be able to operate their accounts for normal trading purposes, it is often agreed to take a floating charge over operating accounts. The chargee will be permitted to convert the floating charge to a fixed charge on the occurrence of a trigger event and the security document may also provide for automatic conversion on the occurrence of certain events.
Typically, a notice of assignment will be served on the account bank, requiring the account bank to carry out or refrain from carrying out certain actions in respect of the secured account and specifying who is entitled to give instructions in respect of the secured account. In some instances, the chargee and the account bank may agree to enter into an account-control agreement which will specify how the account is to be operated during the life of the security.
Security over receivables can take the form of a fixed charge, a floating charge or an assignment. As noted above, to create a legal assignment, written notice of the assignment must be served on the counterparty to the receivable.
Intellectual property rights
Security over most forms of intellectual property is granted by way of a charge. Intellectual property may need to be registered in the relevant Irish or European registries.
Security over Irish real estate can only be taken by way of a charge by way of deed. Where security is created over real estate registered with the Property Registration Authority (the PRA), an additional security agreement in the form prescribed by the PRA is required. It is not possible to create a legal charge over future-acquired real estate and therefore future-acquired real estate should be the subject of a separate charge when it is acquired.
Security over a movable asset such as an aircraft, ship or rolling stock may be required to be registered in the state of registration or, if different, the state where the asset is located or operates from.
As noted above, where security is created over real estate registered with the PRA, an additional security agreement in the form prescribed by the PRA is required. Security over a ship must be taken by way of a statutory ship mortgage. Apart from these cases, there are no form requirements for Irish security documents.
Up-stream, downstream and cross-stream guarantee and security packages are available and routinely given in acquisition financings involving Irish companies.
Section 82 of the Companies Act prohibits an Irish company from giving financial assistance for the purpose of an acquisition of shares in the company or its holding company. The prohibition will apply unless:
Where the company providing the financial assistance is a public company or is a subsidiary of a public company, it may not avail of the summary approval procedure, but other exemptions may apply. In the context of an acquisition of an Irish public company, it should be possible to re-register the company as a private limited company, following which financial assistance could be given by the company and its subsidiaries if they avail of the summary approval procedure.
The Companies Act abolished the law of ultra vires (ie, the rule that a company may not act for a purpose not expressly or impliedly provided for in its memorandum of association) for Irish companies limited by shares. Therefore, an Irish company limited by shares has in general the same capacity as an individual. However, public companies and designated activity companies (a new type of company introduced by the Companies Act) must have an objects clause which sets out the powers of the relevant company. If the objects clause of the company does not (expressly or impliedly) specify that the company has the power to grant security, this could be open to challenge by a shareholder of that company; however, this should not of itself impact on the validity or enforceability of the security.
It is a general principle of Irish law that the directors of an Irish company must exercise their powers in what they consider to be the best interests of the company (ie, there must be a commercial justification or benefit for what the directors do). Where a company enters into a transaction that does not benefit it, that transaction will be void. Therefore, prior to authorising a transaction the directors of the company should consider the corporate benefit that accrues to the company from entry into that transaction.
Irish courts have typically taken a pragmatic approach to corporate benefit, and there is helpful Irish case law that supports the view that, when considering what corporate benefit results from a transaction, consideration may be given to the benefits that accrue to the group of companies of which the company in question is a member and not just to the company itself.
The main methods of enforcement under Irish law are the appointment of a receiver or, less commonly, the chargee becoming a mortgagee in possession of the charged asset.
The Land and Conveyancing Law Reform Act 2009 (the 2009 Act) sets out procedures for the enforcement of security (whether by appointment of a receiver or the chargee enforcing as mortgagee in possession). The provisions of the 2009 Act can be contracted out of in the relevant security documents (other than in the case of a "housing loan mortgage" which would be unlikely to be the case of an acquisition financing).
Therefore, in an acquisition financing, the circumstances in which security can be enforced will be documented contractually between the parties. Usually, the security will become enforceable after the occurrence of an event of default (or sometimes following acceleration of the facilities). Once a triggering event occurs, entitling enforcement action to be taken, the chargee will typically appoint a receiver to manage the secured assets with a view to realising sufficient proceeds to discharge the loan. The receiver’s powers will be set out in the relevant security documents. These will include the power to take possession of, manage and sell the secured property.
Guarantees are usually contained in the facility agreement. Therefore, these typically follow the LMA form (ie, each obligor guarantees all sums due to the finance parties by the obligors under the finance documents). Unlike many jurisdictions, guarantees are not typically required to be limited by way of guarantee limitations.
Like English law, Irish law distinguishes between guarantees and indemnities. A guarantee is a secondary obligation, which is dependent on the existence of the primary obligation. An indemnity is an undertaking as an independent obligation to make good a loss and will be enforceable even where the obligation guaranteed is not. Guarantees (including in the LMA form) are typically drafted as a guarantee and indemnity, so the distinction can be ignored in practice.
A guarantee must be in writing and signed by the guarantor to be enforceable under Irish law. A guarantee is a contract and so is subject to the general principles of contract law, including that there must be consideration unless the guarantee is executed as a deed.
In relation to restrictions on guarantees under Irish law, the rules with regard to corporate benefit and financial assistance will be relevant, see 5.4 Financial Assistance and 5.5 Other Restrictions above.
Transactions with directors
Under section 239 of the Companies Act, a company is prohibited from guaranteeing the liabilities of, among others, a person connected with one of its directors. The definition of "connected person" is broad and includes another company controlled by that director; however, there is an exemption for groups of companies. An otherwise prohibited guarantee can be validated by the "summary approval procedure" discussed in 5.4 Financial Assistance above.
If an entity is regulated or subject to supervision by the Central Bank of Ireland (CBI) or another regulatory body, it may be prohibited from giving guarantees or may require consents from the CBI to do so. Certain Irish regulated funds may not give guarantees to support the obligations of a third party.
There is no requirement for a guarantee fee in Ireland.
Equitable subordination is not a feature of Irish law.
There are a number of categories of potentially vulnerable transactions that could be investigated by a liquidator of an Irish company, and if the applicable conditions are met, set aside on application to the Irish courts by the liquidator. These include:
There are no restrictions under Irish law on a borrower, members of the borrowing group or a sponsor buying back debt. Therefore, the ability of such entities to acquire loan participations will depend on the terms of the loan agreement. Most loan agreements will include provisions setting out the circumstances and the terms upon which those entities are permitted to purchase or otherwise invest in participations in the facilities. These will typically be based upon the LMA leveraged facilities agreement, which provides, amongst other things, for extinguishment of the portion of the loan being purchased by a borrower and for disenfranchisement of sponsor affiliates.
Stamp duty applies to documents that implement certain transactions and is payable within 30 days of execution. Transfers of Irish stocks and marketable securities are chargeable to stamp duty at 1% of the consideration or market value (whichever is higher). Stamp duty on transfers of shares of Irish companies and potentially non-Irish companies that derive the greater part of their value from Irish real estate may be assessed for stamp duty at the rate of 6%. Transfers of other non-residential property attract a flat rate of 6% stamp duty. Exemptions exist, for example, in the case of intellectual property and certain financial instruments (eg, on the transfer by a company of loan capital subject to satisfying certain conditions and on a transfer on sale of a debt where the sale occurs in the ordinary course of business of either the vendor or purchaser).
Stamp duty reliefs are generally available for share-for-share exchanges and for intragroup transfers.
Withholding tax is tax levied by deduction at source. It is a tax on a payment or out of a receipt. It arises where a person makes a payment or collects a receipt and that person is required to deduct a sum representing the amount of tax on that payment or receipt and to account for the tax on it to the relevant tax authority.
Broadly speaking, Irish withholding tax at 20% has to be deducted from payments of annual interest (ie, interest on a loan of at least a year or capable of being continued for a year or more) made by Irish tax-resident persons, unless a domestic exemption or Treaty relief applies. Where, for example, the borrower is Irish-resident, Irish withholding tax will need to be addressed in the loan agreement. It is market practice in Ireland for an Irish loan agreement to include the standard LMA tax gross-up and indemnity provisions, tailored to Irish tax law.
The standard mechanics for gross-up and carve-out from gross-up in the standard LMA loan documents are as follows:
In addition to a potential Treaty exemption/reclaim, Ireland has a broad range of domestic exemptions enabling Irish source interest to be paid to certain categories of lenders gross and such categories are included in the "qualifying lender" definition. To the extent that a lender is not, or no longer qualifies as, a "qualifying lender", by reason of a change in law or Revenue practice, the gross-up risk lies with the borrower. The most common category of "qualifying lender" applying in respect of a non-Irish lender is where the lender beneficially entitled to the interest is a company which by virtue of the law of a Member State of the EU or a country with which Ireland has a double tax treaty (a Relevant Territory) is tax-resident in that Relevant Territory and that jurisdiction imposes a tax that generally applies to interest receivable in that jurisdiction by companies from sources outside that jurisdiction. This assumes the lender is not providing its commitment in connection with a trade or business which is carried on in Ireland through a branch or agency.
Ireland does not have any general thin-capitalisation rules. However, restrictions have been introduced to disallow a deduction in certain circumstances, including in some cases where the interest is paid on borrowings from a non-EU-resident company that is connected with it and where the borrowings are used to acquire the ordinary share capital of a company from a company that is connected with it.
In general, there are no restrictions on investment in Irish companies nor are there any ownership caps. However, certain categories of entities may have specific rules which may need to be considered. For example, an EU airline must satisfy the EU rules on airline ownership and control. Acquisitions of interests in Irish-regulated financial services providers may require either approval of or notification to the CBI. If competition issues arise, the European Commission or the Competition and Consumer Protection Commission may have jurisdiction over an acquisition in any sector.
While these are not directly issues for the lenders, lenders may need comfort on these points before committing to provide financing. In addition, regulatory compliance by the target and the maintenance of any required authorisations may need to be addressed in the representations, undertakings and/or events of default in the facility agreement.
Public takeovers in Ireland are regulated by the Irish Takeover Panel Act 1997, which established the Irish Takeover Panel (the Panel), the Irish Takeover Rules (the Takeover Rules) and the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006. The Takeover Rules apply to public companies incorporated in Ireland whose shares are, or have in the previous five years been, traded on the Irish Stock Exchange (including ESM), the London Stock Exchange (including AIM), the New York Stock Exchange and NASDAQ.
Takeovers of listed companies are structured either as:
In a tender offer, the bidder makes an offer directly to the shareholders of the target and largely controls the process. A scheme is driven primarily by the target and requires the approval of the Irish High Court. For recommended offers, schemes have been the favoured transaction structure in recent years.
The key financing-related issues that arise under the Takeover Rules on the financing of a takeover of a public company are: