Over 70% of European CLOs priced in 2014 used Irish-incorporated issuers.
The Irish Companies Act 2014 (the "Act") was recently passed and is expected to come into effect on 1 June 2015. The Act replaces all existing Irish companies statutes in what is largely a consolidation, simplification and codification exercise.
However, there are a number of provisions which will impact new CLO transactions and require steps to be taken for Irish issuers of existing CLOs.
Designated Activity Companies
The Act creates a new type of private company limited by shares called a designated activity company (or "DAC") and changes the form of a private company limited by shares (an "LTD").
The primary difference between a DAC and an LTD under the Act is that an LTD will not be able to issue listed debt securities.
Therefore, all issuers incorporated after 1 June 2015 will need to be incorporated as DACs and all existing CLO issuers will need to convert to DACs.
Other than the ability to hold listed debt securities, there is little difference in the companies law applicable to DACs and that currently applicable to existing private limited companies.
It is anticipated that Irish corporate capacity, authority and due execution analysis following the commencement of the Act will not significantly impact on the classic Irish CLO structure, launch process or documents.
Existing CLOs and DAC Conversion
There is an 18 month transition period to allow existing issuers to convert to DACs. Any issuer which at the end of the transition period still has listed debt securities and which does not convert will be in breach of Irish law at that time. While this transition period is generous, we expect most issuer directors will want conversion to occur sooner rather than later as a matter of good corporate governance. Technically, liability may arise for the directors and the company if they fail to convert within the prescribed timeframe.
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.
Consideration should also be given to whether the constitutional documents should also be updated for the Act, although it is possible to retain the old form (they will continue to apply, save to the extent they contradict mandatory provisions of the Act). Where the constitutional documents are amended in this manner, a shareholder special resolution is required.
Prior to effecting any conversion and/or amendment, the relevant CLO transaction documents will need to be examined to determine whether trustee or other consents are required. Notices to the applicable listing exchange, noteholders and rating agencies will likely also be needed. Where any shareholder special resolutions are needed, as noted above, the terms of the usual orphan share trust over the shares in the issuer should also be examined as these normally contain restrictions to the share trustee's exercise of its rights as shareholder of record.
It should be noted that any Irish issuers incorporated as public limited companies will not be required to take any conversion steps under the Act (though a constitutional amendment to comply with the Act may be advisable). Most CLO issuers are however incorporated as private companies.
Given the Act has fully overhauled existing Irish companies legislation, there are inevitably new areas of nuance which Irish counsel and service providers are currently analysing. These are mainly local law issues which should not impact on the wider structuring of CLOs.
For example, director duties are codified and certain director obligations have been modified or introduced under the Act. The definition of subsidiary in the Act has been also amended so that the tests previously used for accounting consolidation purposes only (e.g. dominant influence) will apply for all purposes.
The security registration regime will create and regulate the priority of security, provide for different registration processes and will be updated to more closely resemble the position in the Financial Collateral Arrangements Directive (i.e. as to what forms of security are registrable under Irish law).
The Act is to be welcomed as it overhauls and modernises Irish company law, so bolstering Ireland's position as the primary jurisdiction for European CLOs.