Possible Sale of Irish Commercial Ports
It is expected that a number of commercial ports in Ireland are to be offered for sale by the Irish Government, depending on the results of the “McCarthy Report” on State Assets and Liabilities which is due to be published shortly.
Review Group on State Assets and Liabilities
In view of the levels of indebtedness of the Irish State, the Minister for Finance established a Review Group on State Assets and Liabilities in July 2010 to examine and provide advice on the proper stewardship of certain State assets and on opportunities for the better use of those assets. In carrying out its analysis over the last few months, the Review Group has been consulting with the relevant Government departments and State bodies that have oversight of the applicable assets, including commercial semi-state companies and regulators. It has also invited submissions from interested third parties by way of public consultation.
The members of the Review Group are economist Colm McCarthy (Chairman) of University College Dublin, Donal McNally, Second Secretary in the Department of Finance and economist Prof. Alan Matthews of Trinity College Dublin. The Review Group is currently finalising its work and its report is expected to be published in the coming weeks.
Terms of Reference
The following terms of reference were set for the Review Group:
- To consider the potential for asset disposals in the public sector, including commercial State bodies, in view of the indebtedness of the State;
- To draw up a list of possible asset disposals;
- To assess how the use and disposition of such assets can best help restore growth and contribute to national investment priorities; and
To review where appropriate, relevant investment and financing plans, commercial practices and regulatory requirements affecting the use of such assets in the national interest.
Possible Sale of Commercial Port Operations
The interim list of commercial State bodies to be reviewed by the Group includes the following port authorities: Dublin Port Company, Cork Port Company, Drogheda Port Company, Galway Port Company, Waterford Port Company, Shannon Foynes Port Company, Wicklow Port Company, New Ross Port Company, Dundalk Port Company and Dún Laoighaire Harbour Company (the “Port Companies”). The Port Companies are commercial limited liability companies owned by the State through the Minister for Finance and the Minister for Transport.
Regulation of Ports in Ireland
The Port Companies included in the list of commercial State bodies to be reviewed by the Group were established under, and are regulated by, the Harbours Acts 1996 to 2009 (the “Harbours Acts”). The Port Companies are statutorily responsible for the management, control, operation and development of certain harbours. They also have the power to make bye-laws with respect to the use of, and the safe navigation within, their respective harbours and generally with respect to the regulation of the harbour and the property of the Port Company concerned. The Port Companies also have as their objects the provision of facilities, services, accommodation and lands for ships, goods and passengers, the promotion of investment and the management, control, operation and development of the approach channels to the harbour. For example, Dublin Port Company describes itself as “a self-financing, private limited company wholly-owned by the State, whose business is to manage Dublin Port, Ireland’s premier port. Established as a corporate entity in 1997, Dublin Port Company is responsible for the management, control, operation and development of the port. Dublin Port Company provides world-class facilities, services, accommodation and lands in the harbour for ships, goods and passengers. The company currently employs 144 staff.”
As incorporated bodies, the Port Companies are obliged to comply with the Companies Acts 1963 to 2009 as they apply to companies limited by shares in Ireland, including in relation to the keeping of accounts and the filing of annual returns and audited accounts with the Companies Registration Office. In addition, the Port Companies have obligations under the Harbours Acts to provide to the Minister for Transport on an annual basis, audited profit and loss accounts, cash flow statements and balancing sheets, as well as any other audited accounts as the Minister may from time to time direct that the Port Companies are required to maintain. Each of the Port Companies is also obliged under the Harbours Acts to submit an annual report to the Minister of its activities and those of its subsidiaries during that year. Copies of the audited accounts and the annual reports are laid before the Oireachtas by the Minister.
Acquisition of a Port Company – Legal Issues for a Potential Buyer to Consider
If, based on the forthcoming Report of the Review Group, the Government offers for sale the Port Companies, a significant investment opportunity in Ireland will arise. As an island State, commercial ports are of considerable importance for trade and commerce. It is estimated that Irish seaports handle approximately 99% of Ireland’s foreign trade, by volume.
As part of a due diligence process in the acquisition of a Port Company, a potential purchaser would have a wide range of legal issues to consider in relation to the target company, including the following:
It is likely that each of the Port Companies has a large number of commercial contracts in place with operators at the ports concerned, for example with container ship companies, passenger ferry businesses, and stevedore operators providing Lift-on/Lift-off (lo-lo) and Roll-on/Roll-off (ro-ro) services. All such contracts would need to be carefully reviewed at the due diligence phase of the acquisition process.
Employment and Pensions
With regard to employees, in our experience there are particular labour issues which are likely to arise in the context of the disposal of a port interest because of unusual customs and practices and collective agreements. Understanding these issues and potential liabilities would be key for any potential purchaser at the due diligence phase of the acquisition process. Planning for change and implementing organisational restructuring posttransfer within this highly unionised environment requires a clear understanding of the risks and parameters for negotiating such changes. A potential purchaser will need to be aware of the industrial relations issues that are likely to arise.
With regard to pensions, in our experience the terms of the pension schemes of the Port Companies can be complex. The pension schemes and their funding will need to be examined in detail by any purchaser in order to establish any potential liabilities connected to them.
The Port Companies have the power to acquire and dispose of land and would be expected to have significant property interests at the ports in question. In some cases development lands may have been purchased by the Port Companies. Complex property arrangements are often in place at ports in relation to oil pipelines, for example. Such issues would need to be examined by a potential purchaser. Sales of property by Port Companies would be conducted by way of lease, usually adopting a standard format, and any assignments of such leases would be subject to the Port Companies’ consents. Purchasers would be required to comply with the Port Companies’ regulations, including those relating to environmental and fire safety compliance.
Subject to Ministerial consent being granted, the Port Companies have a statutory right to borrow money. Therefore, a potential purchaser needs to be aware of any charges or encumbrances that may have been created against Port Company property and/or assets and registered against the Port Company concerned, for example with the Property Registration Authority and/or the Companies Registration Office.
Any potential purchaser of a Port Company with existing port or related interests is likely to face competition issues. Irish competition law requires a merger or acquisition to be notified to, and approved by, the Irish Competition Authority if certain given thresholds are met. The relevant thresholds are as follows:
- the worldwide turnover of each of two or more of the "undertakings involved" in the merger or acquisition is not less than €40m. The expression “undertakings involved” in an acquisition is taken to mean the target (and its subsidiaries) and the purchaser (and its group); and
- the turnover in the Republic of Ireland of any one of the undertakings involved in the merger or acquisition is not less than €40m; and
- two or more of the undertakings involved in the acquisition carry on business in any part of the island of Ireland (Northern Ireland and the Republic of Ireland).
Even if the above criteria for a compulsory notification are not met, competition issues may still arise as the general competition rules have been held to apply to a merger or acquisition which does not meet the thresholds for compulsory notification but gives rise to a substantial lessening of competition in the market. If the potential purchaser is engaged in overlapping activities due to its existing port interests or existing presence on related upstream or downstream markets, a voluntary notification may well need to be submitted to the Competition Authority to avoid competition risk. It may be that a bank providing finance stipulates as a pre-condition to drawdown under its acquisition facility that the proposed transaction is cleared by the Irish Competition Authority. Any notification to the Irish Competition Authority will require detailed submissions on various competition law aspects of the transaction including the relevant product and geographic markets and most likely will require the submission of an economic analysis supporting the contentions that the proposed transaction will not give rise to a substantial lessening of competition which may include for example arguments that the relevant geographic market is the island of Ireland (as ports throughout the island compete for business), rather than solely the port concerned by the acquisition. Voluntary notifications are required to be accompanied by an independent economist’s report.
It should be noted that all notifications to the Irish Competition Authority are published on the Authority’s website and significantly third parties are invited to make submissions within 10 days of the publication. With respect to the acquisition of port interests, it is our experience that it is likely that third parties will object and therefore it is important for the notifying parties at the outset to have their competition arguments well thought out and developed in anticipation of adverse submissions from third parties.
The Irish Competition Authority recently conducted a merger review of the proposed acquisition by Stena AB, through its subsidiary Stena Line (UK) Limited, of vessels, related assets, inventory, employees and contracts relating to passenger and freight ferry services operated by DFDS A/S between Belfast and Heysham and between Belfast and Liverpool. The above transaction was cleared by the Competition Authority on 7 April 2011 after conducting a full four month Phase 2 investigation. The Authority expressed competition concerns at the end of its initial one month Phase 1 review and decided to launch a full Phase 2 merger review. The Authority only conducts such in depth merger reviews in the most difficult of merger cases and indeed this was only one of two such Phase 2 merger reviews carried out by the Authority in the last 12 months. The Authority as part of its review contacted competitors and customers of the parties (The UK Competition Commission is continuing with its investigation and is expected to report by 25 July 2011). The parties had initially proceeded to complete the transaction prior to clearance by the Authority which resulted in the Authority issuing a press statement warning against gun jumping and confirming that the transaction was void until approved by the Authority. The above case highlights the need for significant competition law preparation in any such case.