Welcome to our U.S. Offices update. It has been a busy start to 2014 and we are continuing to see a lot of interest in the use of Irish holding companies in public international M&A transactions. We discuss why Ireland is the favored location for this activity. There has also been good news for the Irish securitisation industry with confirmation from the Irish Central Bank that the AIFMD regulatory regime will not apply to most Irish securitisation vehicles. Meanwhile the Irish funds industry goes from strength to strength and the introduction of a new corporate investment vehicle (the ICAV) later this year will add even greater flexibility. Ireland’s preeminent position in the funds world has also been reinforced with the results of a recent EIU study commissioned by Matheson. Finally, we provide an update on recent data protection developments in Europe and, in particular, in the context of the EU/U.S. safe harbor regime for data transfers from the EU to the U.S.
Inversion transactions into Ireland
Corporate inversion transactions of U.S. groups from haven territories over the last decade have primarily been to either Ireland or Switzerland. As safe harbor provisions under 7874 have become more difficult to satisfy, the inversion transactions into Ireland that have occurred in more recent times were pursuant to merger transactions between U.S. and foreign companies in circumstances where the level of foreign stockholder participation has enabled the new Irish resident parent to be respected as such from a U.S. federal income tax perspective. Ireland continues therefore to be the favored holding company location as evidenced by the number of announced public deals. Most of these have been deals involving Irish targets with Irish Takeover Code rules applying, except where the Irish target has been private.
More recently, there has been deal activity with non-Irish targets and this is likely to be an emerging trend. Whilst the UK and the Netherlands have also seen some inversion deal activity, the combination of the Irish corporate governance rules and holding company regime should ensure that Ireland will continue to be a favored jurisdiction where circumstances permit an outbound U.S. expatriation. It is also noteworthy, given the number of precedent public deals with an Irish NYSE or Nasdaq listed parent, that there is now a familiarity and comfort level amongst the investment banking and stockbroking community where an Irish holding company is the new group parent of the combined businesses. We have also seen increasing evidence of foreign owned start-up and high growth companies establishing their holding company domicile in Ireland, even where the group business operations are substantially based overseas.
Given the recently announced draft proposals concerning the 7874 rules by both President Obama and Chairman Camp, it is likely that there will be further deal activity of this kind in advance of possible future code changes which may make inversions more difficult to complete. For now, the combination of Ireland’s corporate law and holding company regime would indicate that it is well placed to see further business combinations involving Irish parent companies in the near term.
AIFMD Regulatory Exemption for Irish Securitisation Companies
On 8 November 2013, the Central Bank of Ireland (the “Central Bank”) updated its guidance on the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (“AIFMD”). In a welcome move, the Central Bank published an updated fifth edition of its AIFMD Questions and Answers guidance document. This clarified that Section 110 Securitisation companies will, in most cases, be outside the scope of AIFMD.
In recent years, Section 110 companies have become a popular investment vehicle for U.S. private equity and hedge funds, particularly in the context of European investments. Aside from traditional securitisation transactions, section 110 companies have increasingly been used to invest in distressed assets and loans and also in the context of loan origination transactions.
For further information on Irish section 110 companies, please click here.
ICAV – a new Irish fund vehicle which can be checked
The Irish Minister for Finance recently published a framework for legislation which will give effect to a new form of corporate fund vehicle - the Irish Collective Asset-Management Vehicle (“ICAV”). The Irish government has stated that this legislation is being drafted as a matter of priority and is due to come into force later this year. The introduction of the ICAV will mean that fund promoters will have an additional option when selecting their preferred Irish fund vehicle. The introduction of the ICAV follows an industry-led project and several members of our Asset Management Group have been heavily involved to date.
As well as being less administratively burdensome than the existing Irish corporate vehicle, the public limited company (Irish plc), an important feature of the ICAV for U.S. promoters is that it will be able to elect its classification under U.S. check-the-box taxation rules. The Irish plc is not currently permitted to check-the-box for U.S. taxation purposes. This means that Irish plcs are treated as a separate entity and are not disregarded for U.S. purposes and potentially gives rise to two levels of tax: at the corporate level when the income is earned and at the shareholder level when distributions are made. However, an “eligible entity”, namely an entity that can elect its classification under the check-the-box rules, can elect to be disregarded for U.S. tax purposes. The ICAV will be an eligible entity for these purposes. It will also be possible to convert an existing Irish plc into an ICAV.
The proposals for the ICAV legislation demonstrate Ireland’s proactive approach in meeting the evolving needs of fund promoters and its competitiveness as a leading international fund domicile. Please read on for more information.
EIU report indicates Ireland is the preferred jurisdiction for funds in Europe
Matheson recently commissioned the Economist Intelligence Unit (EIU) to conduct an independent global survey of 200 asset managers to identify their preferences when choosing a European fund domicile, and to examine what are the most influential factors when deciding among competing domiciles. The results of the study identified Ireland as the clear market leader and domicile of choice in Europe not only for U.S. and UK managers, but also managers in Western Europe, Latin-America and the Asia-Pacific region.
Data Privacy: Progress towards a more secure Safe Harbor
The EU has historically taken a very strict approach to the protection of personal data and relevant laws differ substantially from applicable laws in the U.S. Because of these differences, the U.S. and the EU entered into a Safe Harbor agreement, to bridge differences and facilitate the movement of personal data from the EU to the U.S. The Safe Harbor agreement essentially requires organisations in the U.S. who voluntarily subscribe to the Safe Harbor framework to comply with data protection standards which are analogous to EU data protection laws when processing EU citizens’ personal data. It also requires the U.S. Federal Trade Commission (“FTC”) to enforce these standards. The EU has long been concerned with the level of enforcement of Safe Harbor, especially following recent revelations of mass surveillance by the U.S. National Security Agency.
The EU Commission sent a list of recommendations to the FTC last November, mainly relating to enforcement. This was backed up by a threat from both it and the EU Parliament that Safe Harbor might be suspended unless changes are made by summer 2014. While there are other methods of legitimising the transfer of personal data to the U.S., the Safe Harbor is most favoured by businesses on both sides of the Atlantic. Any disruption to it would be a significant issue for these businesses.
In response, the FTC has recently stepped up its enforcement of the Safe Harbor by reaching settlements with 13 U.S. entities that had falsely held themselves out to be Safe Harbor compliant. Representatives from the US Department of Commerce have also recently travelled to Brussels for discussions on the regime and further meetings are set for Washington in the coming weeks. The outcome of these discussions should hopefully form a secure basis for the Safe Harbor for many years to come and will clarify that the Safe Harbor is here to stay.