At the end of December 2006 there were 43 companies traded on the main market for listed securities (the ‘Official List’) of the Irish Stock Exchange (the ‘ISE’) and a further 25 companies traded on the Irish Enterprise Exchange (‘IEX’). The IEX market is a secondary market designed for smaller or newer companies which may not satisfy all the requirements for admission to the Official List.
The market capitalisation of companies on the ISE grew to €119.3 billion in 2006, an increase of 26 per cent on the prior year total of €94.7 billion. The ISE saw equity turnover grow to €129.2 billion in 2006, a 19 per cent increase on the 2005 total of €108.8 billion and average daily turnover for 2006 was €511 million. The fourth quarter saw a 29 per cent increase in average daily turnover to €555 million when compared to the 2005 daily average of €430 million. The number of equity transactions being undertaken on the ISE also grew strongly. Approximately 900,900 deals were done in 2006 representing growth of 14 per cent compared to 792,120 in 2005. Quarter four saw an increase of 17 per cent in the daily average number of transactions to 3,652 from 3,131 in 2005.
There were ten new companies listed in the 12 month period to 31 December 2006, of which nine were on IEX, raising a total of £3.7 billion.
For the 12 months ended 30 June 2006, there were three takeovers of listed companies, contrasting with two takeovers of listed companies for the 12 months ended 30 June 2005. Of the three takeovers in 2006 and two in 2005, all were recommended at the time that the offer documents were posted.
2. REGULATORY STRUCTURE
The regulatory framework for the offering of securities, by sale or subscription, is contained in the Investment Funds, Companies and Miscellaneous Provisions Act 2005 and the Prospectus (Directive 2003/71/EC) Regulations 2005 (the ‘Irish Prospectus Regulations’). These provisions implement the EU Prospectus Directive 2003/71/EC. The provisions also include the provisions dealing with the issue of a prospectus for the purpose of an application for listing.
An offer of shares or debt instruments will be treated as a private placement not requiring the publication of a prospectus in any of the following circumstances:
• Where the aggregate price of the securities being offered, together with the price of any other shares offered in the preceding 12 month period, is equal to at least €100,000 but is less than €2,500,000. This type of private placement must be accompanied by a ‘local offer document’; and/or
Brokers and other financial intermediaries must take care when placing shares with their customers as this can be regarded as a separate offer for the purposes of determining whether it is an offer of securities to the public within the meaning of the regulations.
Irish law makes a distinction between private and public limited liability companies. Private companies are prohibited from making an offer of securities to the public. Private companies are not however prohibited from seeking to have their debentures listed on a stock exchange.
Securities are widely defined in the Irish Prospectus Regulations to include shares, debt securities, warrants, certificate, options and other securities of any description. It is possible to list shares in registered or bearer form or in the form of depository receipts. Derivative securities can also be listed. Special rules are set out in Chapters 12 and 13, respectively, of the Listing Rules for the listing of depository receipts and derivative securities
In addition to the EU Prospectus Directive, the Market Abuse Directive 2003/6/EC has been implemented into Irish law. The legislation required to implement MiFID has been enacted but does not become effective until 1 November 2007. The implementation of the EU Transparency Directive (2004/109/EC) has been commenced by the enactment on 24 December 2006 of Part 3 of the Investment Funds, Companies and Miscellaneous Provisions Act 2006. Full implementation of the EU Transparency Directive will not take place until sometime in 2007.
When offering securities to the public on the basis of a prospectus which has already been approved by a competent authority in another member state of the EU, companies incorporated outside of Ireland may avail of the mutual recognition regime which exists in the Irish Prospectus Regulations. This also applies to any company incorporated outside of the EU which has its prospectus approved by a competent authority in another EU member state. Non-EU companies are recommended to consider fully the EU jurisdiction in which they choose to make their first public offer in the EU as the jurisdiction will, if the issue is of equity securities or retail debt securities, then become their ‘home member state’ for all future offers.
Companies can elect either to have a primary listing or a secondary listing on the Official List of the ISE. Chapter 11 of the Listing Rules of the ISE sets out provisions for overseas companies seeking a secondary listing. In Chapter 11 the requirements of the Listing Rules are substantially modified, both for the purpose of the introduction and the continuing obligations of the company applying for the secondary listing.
3. REGISTRATION OF THE ISSUER AND SECURITIES
An overseas company is required to register as a branch in Ireland and deliver certain documents (including specifying an address for service of documents) to the Registrar of Companies if it establishes a place of business in Ireland. There is no legal requirement to register a place of business if the overseas company is seeking a listing or admission to trading on the Official List or IEX.
4. SUPERVISORY AUTHORITIES
The Irish Financial Services Authority (the ‘Financial Regulator’) is the single regulator for all authorised and approved persons, for investment exchanges, clearing houses and collective investment schemes. The Financial Regulator has delegated its responsibility as the competent authority for the approval of a prospectus under the Irish Prospectus Regulations to the ISE.
IEX is regulated by the ISE. As such, IEX does not constitute a regulated exchange for the purpose of the EU Prospectus Directive 2003/71/EC. This means that an IEX admission document will not require vetting by the Financial Regulator or any other body but if a company proposes to offer securities to the public generally and it cannot fit within the relevant exemption, the company will have to prepare a prospectus and have it approved by the ISE on behalf of the Financial Regulator.
While the Financial Regulator regulates the ISE, it does not have responsibility for the Listing Rules published by the ISE.
Through its rules, the ISE can sanction stockbrokers for improper conduct in the secondary markets. For this reason, the ISE monitors these markets to identify unusual trading activity, price movements, potential breaches of the ISE’s rules, insider dealing, market abuse and other forms of market manipulation. As breaches of some of these rules can also constitute an offence, the Financial Regulator also has a role in enforcing these rules.
5. OFFERING DOCUMENTATION
Where a company wishes to have its shares admitted to the Official List or to make an offer of its shares to the public, it must produce a prospectus, the contents of which must comply with the Irish Prospectus Regulations.
A prospectus must contain the minimum information required under the Commission Regulation (EC) N. 809/2004 as well as all information which, according to the particular nature of the issuer and of the securities offered to the public or admitted to trading, is necessary to enable investors to make an informed assessment of:
A prospectus must also include a summary which, in a brief manner and in non-technical language, conveys the essential characteristics and risks associated with the issuer, any guarantor and the securities. The summary is required to also contain a warning that it should be read as an introduction to the prospectus and any decision to invest in the securities should be based on consideration of the prospectus as a whole by the investor.
A prospectus may be drawn up as a single document or separate documents. A prospectus composed of separate documents shall divide the required information into a registration document containing the required information relating to the issuer and a securities note containing the required information concerning the securities offered to the public or to be admitted to trading. A summary must also be produced.
The requirements for the issue of debentures are substantially similar but less onerous. In addition to information about the issuer, details must be included of the debt securities for which application is being made as well as the tax treatment, withholding tax, the terms of the debentures and details of the trustee or other security holders as well as the main provisions of the debt instrument including any as to subordination, whether the debt securities are in registered or bearer forms, details of transfer and other information relating to payment, redemption and covenants.
The prospectus is prepared on the basis of information provided by the issuer. In the case of a new entrant without a primary listing elsewhere, an accountant’s report will contain the substantive information for the first draft of the document. The prospectus will be the primary responsibility of the sponsor, who will commonly delegate the drafting to the lawyers. After the preliminary drafts, the document will be developed through detailed discussions at drafting meetings.
The prospectus must be submitted to the ISE (as delegate of the Financial Regulator) for approval with compliance with the detailed the Irish Prospectus Regulations and the Listing Rules marked on the submitted document.
In the case of an application for listing on IEX, the IEX admission document has to be agreed with the IEX adviser.
Due diligence is integral to the preparation of a prospectus and there will be accountants, lawyers and other experts who will prepare due diligence reports in accordance with the terms of the engagement/instruction letters. Due diligence is also effected during the drafting meetings themselves. When the prospectus is nearing finalisation, it is subjected to a process of verification. This is effected by the preparation of a detailed set of verification questions, designed to test statements of fact, expectation or belief contained in the document.
Each prospectus must include a statement from the responsible persons that, to the best of their knowledge, the information contained in the prospectus is truthful and contains no omission likely to affect its import.
The responsible persons for prospectuses relating to equity securities are:
However, the issuer is not responsible if it does not authorise the application for admission or the offer to the public. In addition, directors are not responsible when a prospectus is published without their consent and they have given reasonable public notice that it has been issued without their knowledge or consent.
Certain persons (for example, experts) can state in the prospectus that they accept responsibility only for specific parts of the prospectus or only in specific respects and such persons must give written confirmation regarding statements made by them in the prospectus. In these written confirmations such person will state that they are only responsible to the extent specified and only if the material in question is included in (or substantially in) the form and context to which they had agreed.
In addition to the persons listed above, any guarantor and promoter of the issue is liable to pay compensation to all persons that acquire securities on the basis of a prospectus for any loss or damage sustained due to any untrue statements or omitted information. However, such persons are not liable if they do not consent to the issue of the prospectus (or withdrew consent before publication or acquisition of any securities by an investor) or if they have reasonable grounds to believe that the information in the prospectus was true or that the omission causing loss was rightly omitted.
The punishment for an offence in relation to the publication of a prospectus is a fine of up to €1 million (about US$1.3 million) or up to five years’ imprisonment.
It is the custom to include disclaimers in relation to the marketing of the securities in jurisdictions outside Ireland and in particular and specifically in the USA, Japan, Canada and Australia.
6. DISTRIBUTION SYSTEMS
The principal ways of marketing securities, to raise new capital or to widen the shareholding base are as follows:
Offer for sale
An offer for sale is an invitation to the public by, or on behalf of, a third party, to purchase securities already in issue or allotted.
Offer for subscription
An offer for subscription is an invitation to the public by, or on behalf of, a third party to subscribe for securities of the issuer not yet issued or allotted.
Placing
This is the selective marketing of securities to investors (usually clients of the issuer’s sponsor or broker on a non pre-emptive basis), which does not involve an offer to the public or to existing holders of the issuer’s securities generally. If the issuer is already listed, the price of the securities in a placing must not have more than a 10 per cent discount, unless approved by the issuer’s shareholders. Generally used for small issues, placings are the most frequently used method to list securities.
Intermediaries offer
An intermediaries offer is a marketing of securities, already or not in issue, by means of an offer by, or on behalf of, the issuer to intermediaries for them to allocate to their own clients. An intermediary is independent of the sponsor of the offer and does not assist in any way with its marketing.
Secondary issues can comprise a rights issue, an open offer, an acquisition or merger issue (vendor consideration), a vendor consideration placing, a capitalisation issue, an issue for cash, a conversion of securities, an exercise of options or warrants to subscribe.
There are two principal practices of distribution. There is the underwriting where the lead underwriter, often the sponsor, or a syndicate of underwriters will agree to underwrite an issue of shares at a fixed price in return for commission and subject to certain conditions and will typically seek sub-underwriters for that commitment. The underwriter is legally bound to purchase or subscribe for shares not taken up under the offer. The alternative, on an institutional offering, is a bookbuilding exercise where an underwriter builds a book of potential purchasers and establishes the prices by matching supply and demand; it facilitates a ‘done’ deal with placees/purchasers. An offering involving bookbuilding will still require underwriting but the risk and commission amount would be accordingly lower.
In an underwriting the brokers will act as agent of the underwriter offering participations in the issue by sub-underwriting letters to sub-underwriters. The sub-underwriters will earn commission by agreeing, subject to the same conditions as the underwriting, either to subscribe or acquire shares not otherwise taken up under the offer. Banks vary in the degree of risk that they are prepared to accept on underwriting, some requiring pre-marketing and/or pre-commitment and others being prepared to accept the risk on their own books.
For a fixed price underwriting, there will be the underwriting agreement between the bank (usually the sponsor and the agreement will include the provisions on the sponsorship of the offering) and the issuer or selling shareholder, which will contain the legal commitment to subscribe or buy as principal shares not taken up by investors. This commitment risk is then laid off by the sub-underwriting process. On a bookbuild offering, there will be an agreement with the same parties as on a fixed price underwriting, but with the underwriting syndicate, either individually or collectively, there is likely to be a separate sponsorship agreement.
The underwriting agreement will specify the commissions from which the underwriter will pay the brokers and sub-underwriters. Typically placers of equity securities earn commission of two per cent. The amounts vary depending on the type of issue and the commitment taken.
7. LISTING
In addition to having to publish a prospectus, the principal requirement when seeking a listing on the Official List for an issuer’s securities is to ensure that the issuer meets the conditions out in Chapters 3 and 4 of the Listing Rules (in the case of a primary listing) or Chapter 11 of the Listing Rules (in the case of a secondary listing).
Subject to very limited exceptions, at least 25 per cent of any class of the issuer’s listed securities must be in the hands of the public. In calculating this percentage all securities held by the directors or persons connected with them by group pension schemes or by people interested in five per cent or more are to be disregarded.
The IEX has less onerous requirements. There is no equivalent of having to have a minimum amount of the share capital in public hands and there is no requirement for a trading record as for a full listing. Finally, there is no need to have the IEX admission document approved by any regulatory authority, the IEX Adviser taking responsibility for compliance with IEX rules.
The Listing Rules set out application procedures and require certain documents to be lodged 48 hours before the final document is issued and other documents to be lodged on the day of issue. However, for the application for trading on IEX the only requirement is for the IEX Adviser to approve the IEX admission document. The IEX document would normally follow and contain much of the same material as contained in a prospectus but there is more flexibility in agreeing changes with the IEX Adviser.
A company applying for admission to the Official List must have been independently carrying on its main revenue earning activity for at least three years. However, the ISE can accept a shorter trading period (for example, where a new holding company is set up for the purpose of floating a company that meets the minimum trading record). A company applying for admission to IEX is not required to have a minimum trading record.
The company and its sponsor must confirm to the ISE that it has sufficient working capital for at least 12 months from the date the prospectus is approved.
The total market value of all securities (excluding treasury shares) to be listed must be at least €1 million, except where securities of the same class are already listed. The ISE can admit securities of a lower value if satisfied that there will be an adequate market.
In order to obtain a listing on the Official List, an issuer is required to appoint a sponsor, ie an authorised person registered with the ISE, who has the necessary experience in market practice to advise. The sponsor, as well as being responsible for assisting the issuer in complying with the Listing Rules, is required to confirm to the ISE that the Listing Rules have been and will be complied with and that there are no matters known to the sponsor which should be taken into account by the ISE which are not disclosed in the document. There are some issues for which a sponsor is not required.
Similarly companies seeking to have shares traded on IEX are required to appoint a nominated adviser (IEX Adviser) and broker to oversee the admission process and be available thereafter to offer advice to the company and to liaise with the ISE. The role of the IEX Adviser is akin to that of the sponsor, but the IEX Adviser remains in place following admission to trading on IEX. The IEX Adviser is appointed by the company but has a duty to the ISE to ensure compliance with the IEX rules. If the IEX Adviser resigns and is not replaced, trading will be suspended and, after a month, admission will be cancelled.
Chapter 2 of the Listing Rules contains the rules relating to the approval, function and appointment of the sponsor and there are comparable rules for the appointment of the IEX Adviser for the IEX market. The ISE maintains a list of sponsors and the sponsor takes responsibility for ensuring that the issuer has satisfied all applicable conditions.
The sponsor should ensure that the issuer is properly guided with advice on the application and interpretation of the relevant admission rules and must provide its service with due care and skill and be independent. There are specific responsibilities with regards to ensuring the directors’ understanding of their responsibilities in respect of the financial reporting procedures, the working capital statement and any profit forecasts.
The IEX Adviser, on the other hand, has a continuing obligation in respect of the issuer after admission to the IEX Market.
The annual listing fees payable depend on the market capitalisation of the company’s securities, subject to a minimum of €6,350. For example, a company with a market capitalisation of between €12.7 million and €31.7 million pays €8,330, and a company with a market capitalisation over €2.5 billion pays €30,000.
8. SANCTIONS AND DISPUTES
Purchasers of securities are protected by a number of statutory and common law rights. Under the Irish Prospectus Regulations a prospectus is required to comply with the contents prescribed by the Irish Prospectus Regulations or alternatively in the case of IEX admission, by the IEX Rules and it imposes the general duty of disclosure as described. More specifically, the Irish Prospectus Regulations provide that the person responsible for the listing particulars can be liable to pay compensation to any person who acquires any securities concerned and who suffers loss in respect of them as a result of any untrue or misleading statements or omissions from the listing particulars.
In addition, at common law, a purchaser can bring an action for negligent misstatement if he has suffered a loss as a result of acting on that statement, where the loss was a reasonably foreseeable consequence of a negligible statement and that person owed him a duty of care.
Liability can also arise under the common law of fraudulent misrepresentation.
In the case of companies on the Official List or a listing on another regulated market in the EU, false or misleading statements made in the context of an offer of securities and/or an application for listing can constitute the offence of market abuse under the Investment Funds, Companies and Miscellaneous Provisions Act 2005 and the Market Abuse (Directive 2003/6/EC) Regulations 2005. In the case of companies on IEX a similar offence can be committed under Part V of the Companies Act 1990. The Financial Regulator has the power to investigate and to apply to the court for penalties to be imposed in the case of market abuse. Market abuse is, in essence, market manipulation or information abuse. The Financial Regulator has published a code of what constitutes market abuse.
It is a criminal offence under Irish Prospectus Regulations to make a statement, promise or forecast which a person knows to be misleading, false or deceptive in a material particular, or dishonestly conceals any material facts or recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive in a material particular, where this is done for the purpose of inducing, or is reckless as to whether it may induce, another person to buy shares.
It is an offence under the Market Abuse (Directive 2003/6/EC) Regulations 2005 to engage in a course of conduct which gives a false or misleading impression as to the market in or the price or value of any relevant investments.
9. ONGOING COMPLIANCE REQUIREMENTS
Most companies listed on the Official List maintain a separate primary listing on the Official List of the UK Listing Authority. Prior to July 2005, the disclosure obligations of Irish public companies with dual listings on the ISE and the London Stock Exchange were dictated by the insider dealing restrictions in the Companies Act 1990 and the UK Financial Services and Market Act 2000 as well as continuing obligations in the Listing Rules published by the UK Listing Authority as amended by the Green Pages published by the ISE.
While these disclosure rules have now been amended in Ireland and the UK to implement EU regulations and directives, the new compliance regime in Ireland has become somewhat more complicated as the new Irish disclosure rules are contained in the Market Abuse (Directive 2003/6/EC) Regulations, 2005 (the ‘Irish MAD Regulations’), Chapter 6 of the Irish Listing Rules, Part 4 of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 and the Financial Regulator’s Market Abuse Rules (the ‘IFSRA Rules’). In interpreting the rules regard must also be made to Commission Regulation (EC) 2273/2003 of 22 December 2003 (the Market Abuse Regulation) and CESR Guidance and Information on the Common Operation of the Market Abuse Directive (CESR/04-505b) (the CESR Guidance).
An entirely new feature of the Listing Rules is the introduction of six high-level principles (Listing Principles) that are enforceable like other provisions in the Listing Rules.
The Listing Principles are drafted in broad terms and, with the exceptions of Listing Principles 1 and 2, they are not objectively verifiable. Generally, they require listed companies to ‘take reasonable steps’ or to establish ‘adequate’ procedures or systems, rather than imposing absolute obligations. There is also some overlap between the Listing Principles and other obligations under the Listing Rules and Disclosure Rules, which means that conduct falling just short of breach of a specific Listing Rule or Disclosure Rule may be treated as a breach of one of the broader Listing Principles.
Listed companies are expected to interpret the Listing Rules in line with the spirit and purpose of the Listing Principles. The Listing Principles are as follows:
Listing Principle 1
A listed company must take reasonable steps to enable its directors to understand their responsibilities and obligations as directors.
Listing Principle 2
A listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.
Listing Principle 3
A listed company must act with integrity towards holders and potential holders of its listed equity securities.
Listing Principle 4
A listed company must communicate information to holders and potential holders of its listed equity securities in such a way as to avoid the creation or continuance of a false market in such listed equity securities.
Listing Principle 5
A listed company must ensure that it treats all holders of the same class of its listed equity securities that are in the same position equally in respect of the rights attaching to such listed equity securities.
Listing Principle 6
A listed company must deal with the ISE and the FSA in an open and co-operative manner.
The company must notify a Regulatory Information Service (an ‘RIS’) of certain information about directors including all directorships held in a publicly quoted company in the previous five years, any unspent convictions, any bankruptcies, voluntary arrangements and any public criticism by a statutory or regulatory authority.
Under the Companies Act 1990, major shareholders (holding five per cent or more of the shares in a public company) are required to notify the company each time their shareholding changes a whole percentage upwards or downwards or where a major shareholder’s interest falls below five per cent. The shareholder must notify the company of these changes within the five business days of the change. A listed company must notify an RIS as soon as possible, and in any event by the end of the business day following receipt of the information, of any information received from a major shareholder relating to their interests in the company’s share capital and any information obtained by the company pursuant to section 81 Companies Act 1990.
The notification to an RIS should include the date on which the information was disclosed to the company and the transaction date, if known.
The EU Transparency Directive will impose additional notification obligations when it is implemented in Ireland sometime in 2007.
The Listing Rules include new rules requiring a listed company to announce details of any lock-up arrangements that have not already been disclosed and changes to any lock-up arrangements previously disclosed.
Listed companies must notify an RIS as soon as possible of any change in their financial year end. If the change in the company’s financial year end leads to an extension of the accounting period to more than 14 months, the company must produce a second interim report.
Together with the notice of meetings, listed companies must send a proxy form containing prescribed information to each person entitled to vote at the meeting and ensure that the proxy form provides for at least two-way voting on all resolutions intended to be proposed with the exception of procedural resolutions. This new requirement for at least two-way proxy voting has been introduced to ensure consistency with ICSA guidelines.
The Electronic Commerce Act 2000 allows companies to send documents such as annual reports and accounts, to a shareholder in electronic format if the shareholder agrees.
Listed companies may send their shareholders any document (which they are required to send under the Listing Rules) in electronic format or to display that document on a website subject to the shareholder having consented and provided that certain other conditions are met. Where a listed company does this, it must make the documents available during normal business hours to security holders for a period of not less than 21 days from the date of communication or notification or, if later, until the conclusion of any general meeting to which the documents relate, in printed form and free of charge in sufficient numbers to satisfy demand from security holders at the company’s registered office and the offices of any paying agent of the company in Ireland and the UK.
In the event of transactions, the listing rules prescribe either an announcement, a circular to shareholders or, in the case of a substantial acquisition or disposal or a transaction with a related party, prior shareholder approval. A substantial acquisition or disposal is calculated by a comparison of assets to assets, profits to profits, turnover to turnover, consideration to market capitalisation or gross capital to gross capital where the assets to be acquired or to be disposed of would exceed 25 per cent on the various tests. There are further requirements on reverse takeovers. Related parties include directors and significant shareholders. The continuing obligations require circulars to be approved by the ISE before despatch to shareholders.
The IEX regime for continuing obligations is considerably lighter, approval of shareholders being required only in the event of a reverse takeover ie, where the target company is larger than the offeror.
A listed company is currently required to issue an annual report and accounts within six months of the end of the financial period to which it relates. This will reduce to four months when MIFID is implemented later this year. The accounts must be audited by an independent accountant whose report should confirm that the accounts give a ‘true and fair view of the state of affairs, profit and loss and changes in the financial position of the company and its subsidiaries’ or the equivalent in the relevant jurisdiction. Listed companies must also produce half yearly reports which must be published within 90 days of the end of the period to which they relate, together with a comparison for the same period for the previous year.
The disclosure obligations for listed companies under the new Disclosure Rules are designed to ensure that there is prompt and fair disclosure of relevant information to the market.
Under Regulation 10 of the Irish MAD Regulations, listed companies must publicly disclose without delay inside information:
The IFSRA Market Abuse Rules provide that a listed company must announce any significant changes concerning already publicly disclosed inside information without delay after these changes occur.
9.11 Other continuing requirements
The other continuing requirements are set out in Chapter 6 and also Chapter 8 (Related Party Transactions), Chapter 9 (Dealing in own Securities and Treasury Shares), and Chapter 10 (Content of Circulars). There are similar, but much less onerous, requirements under the IEX rules.
10. CORPORATE GOVERNANCE
10.1 The Combined Code
Companies listed on the Official List are expected to comply with the principles of good governance set out in the Combined Code published by the UK Financial Reporting Council. It is attached to, but does not form part of, the Listing Rules and sets out how companies should conduct themselves in order to comply with the principles of good governance. The Combined Code does not have the force of law.
In addition, all companies are required to adopted the Model Code for Dealings in Securities by Directors and to seek to comply with the Combined Code or explain the areas where they do not comply and the reasons therefore.
As well as the Combined Code, there are other corporate governance guidance notes which listed companies seek to apply, the main ones being the Turnbull Guidance on Internal Control, the Smith Guidance on Audit Committees and the Higgs Suggestions for Good Practice.
10.2 One or two-tier board
Whilst it is possible to adopt a structure similar to a two-tier board, most Irish companies have a unitary board; all directors therefore having equal fiduciary duties. Executive directors will additionally have their areas of executive responsibility and the chairman of the board has a particular role as head of the company.
10.3 Publication of internal regulations
The memorandum of association (which sets out the name and objects of the company) and the articles of association (which sets out the regulations for directors and shareholders) of an Irish company are available for inspection at the Registrar of Companies.
10.4 Responsibility of directors
An Irish company has a board of directors, each of whom has similar fiduciary duties, primarily to act at all times in the best interests of the company. Some will be executives, employed in the business of the company and others will be non-executive directors and if an issue arises, it is expected that the executive directors would have the primary responsibility to resolve the problem because of their closer knowledge of the business.
The internal regulations of the company (not the articles of association but the resolutions of the board and terms of reference of committees) are usually structured such that certain matters are dealt with by non-executive directors and they will, for example, comprise the membership of the audit committee, the remuneration committee and the nomination committee. However, both executives and non-executives can sign the accounts.
10.5 Committees
The articles of association of each company include the power to appoint committees for specific purposes. At the level of the company itself; there will be a set of rules and regulations describing what powers are delegated by the board of directors to other committees, including executives; there are terms of references for the audit committee, the remuneration committee and the nomination committee and there are frequently other committees such as the risk committee or the corporate governance review committee.
10.6 Consent of shareholders’ meeting
There is a requirement to have an annual general meeting (AGM) and to put the accounts, the dividend and the reappointment of the auditors before the meeting.
In addition, under the Combined Code, directors are expected to put themselves up for reelection every three years and any director appointed by resolution of the board since the date of the last AGM is also required to be put up for election at that AGM. Each of those matters requires an ordinary resolution, namely a vote in favour by 50 per cent-plus of those attending (in person or by proxy) and voting at the meeting.
Certain resolutions require a special resolution and some require extraordinary notice. Special resolutions require a 75 per cent vote of those attending (in person or by proxy) and voting at the meeting.
The Listing Rules require shareholder approval to be sought for certain transactions whilst IEX rules require shareholder approval only on a reverse takeover.
10.7 Appointment/dismissal of directors
In practice all appointments, and for the most part dismissals, of directors are dealt with by resolution of the board of directors. There is no different treatment for executive directors from non-executives.
If executive directors are dismissed from their executive position, the provisions of their service agreement usually state that they also cease to be a director. However, any such resolution will not prejudice a claim by the individual director for breach of contract.
The articles of association contain provisions for circumstances where directors lose office, usually relating to misconduct or breach of duty, bankruptcy or other offence. Many articles of association provide that a resolution calling upon a director to resign and signed by all other directors forces that director to resign from the directorship of that company.
If shareholders wish to seek to remove one or more directors, then, with a requisition notice signed by holders of ten per cent of the issued shares, the directors are obliged to convene a general meeting to put that resolution to a vote. If a meeting has been so requisitioned, the directors are obliged to convene that meeting within a 21 day period and are required to ensure that the meeting is held not more than two months after the date of the notice convening the meeting.
The Companies Act 1963 provides that any director can be removed by an ordinary resolution, by a vote of more than 50 per cent of those attending and voting at the general meeting voting against him. Twenty-eight days notice is required for the purpose of convening such a meeting. There are proxy battles where groups of shareholders seek to remove directors and procure the appointment of alternative directors.
10.8 Directors’ remuneration
The Combined Code provides, as a general principle, that the levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully but the company should avoid paying more than is necessary. A proportion of the executive directors’ remuneration should be structured so as to reward corporate and individual performance. It is suggested that service contracts should be for no more than one year’s duration.
The Listing Rules require companies on the Official List to include with their annual report, a report to the shareholders by the board which sets out the various information in regard to the remuneration and other benefits available in the company, including the following:
10.9 Statement
The annual report will include a chairman’s statement and sometimes statements from the CEO and finance director.
10.10Directors’ liability
All directors, executive and non-executive, owe duties of care to the company and have fiduciary duties relating to that duty of care. There is no particular distinction drawn between executive and non-executive directors.
Directors’ liability can arise in the context of securities issues, trading, compliance with regulatory requirements and the carrying out of fiduciary duties but the complainant in an action against a director will be the company. Irish law is very restrictive in allowing claims to be made against directors otherwise than by the company to whom the director owes his duties of care. There are specific provisions where directors may attract personal liability such as wrongful trading or fraudulent preference and there are certain statutory liabilities.
11. MARKET ABUSE, INSIDER TRADING AND OTHER SHARE DEALING RESTRICTIONS
11.1 Overview
Insofar as companies with securities listed on a regulated market in the EU are concerned, the insider dealing prohibitions in the Companies Act 1990 have been repealed by the Investment Funds, Companies and Miscellaneous Provisions Act 2005. In their place, new prohibitions on insider dealing, market abuse and market manipulation have been created by the Market Abuse (Directive 2003/6/EC) Regulations 2005. These regulations, together with the Investment Funds, Companies and Miscellaneous Provisions Act 2005 impose significant criminal and civil penalties in the event of any breach. In addition, significant powers have been conferred on the regulators in both Ireland and the UK for the purpose of preventing and remedying the breaches. The insider dealing prohibitions in the Companies Act 1990 continue to apply to companies listed on IEX.
The key aspects of these regulations are as follows:
If any of the above offences are committed, the guilty person can be fined up to €10,000,000 and/or sent to prison for up to 10 years. Also, the guilty person can be subject to public censure and/or an administrative fine as well as being forced to compensate any innocent persons involved in the transaction for any loss suffered by them by reason of the price difference attributable to the inside information. The guilty person can also be forced to hand over to the listed company any profit which he or she made from the transaction.
The insider dealing prohibitions in the Companies Act, 1990 continue to apply in respect of companies quoted on IEX. The provisions are broadly similar to those contained in the Market Abuse legislation, and briefly put, the provisions prohibit dealing in shares where a person is in the possession of unpublished price sensitive information, or to communicating such information if he or she knows or ought reasonably to know that the other person will use that information for the purposes of dealing.
11.2 Insider dealing offences
Insider dealing offences include the following:
11.3 What is ‘inside information’?
Inside information is information:
• of a precise nature;
11.4 Exempted transactions
The following transactions are exempted from some of the market abuse prohibitions:
(iii) that results from an agreement concluded before the person concerned possessed the inside information concerned.
11.5 Market manipulation offences
The following transactions are specifically identified as constituting Market Manipulation Offences:
11.6 Trading in certain periods
The Model Code provides that a director should not deal in securities of a listed company during the close periods for the company. They comprise the period of 60 days immediately preceding the preliminary announcement of the full year results, the period of 60 days preceding the publication of the half yearly results and, if the company issues results on a quarterly basis, the period of 30 days immediately preceding that announcement. In addition, the Model Code provides that a director should not deal in securities when he is in possession of unpublished price sensitive information.
11.7 Takeovers
The Irish Takeover Panel Act 1997 (as amended) and the rules made under it (the ‘Irish Takeover Panel Rules’) deal with acquisitions of shares in the context of takeovers. The Irish Takeover Rules contain various prohibitions on dealings in certain circumstances.
If an offer has closed and has been unsuccessful, the Irish Takeover Rules prohibit the acquisition of shares for 12 months, if such acquisition would result in a holding of 30 per cent or more and would therefore require a Rule 9 mandatory offer. The Irish Takeover Rules also prohibit the offeror if the offer has been unsuccessful, from subsequently within a 12 month period, making a second offer to acquire shares on better terms than those made available under the original offer.
11.8 Analysts
There is no specific exemption for analysts in terms of committing offences under the Market Abuse Rules.
12. MUTUAL FUNDS
12.1 Fund structure
A fund may be established as a single fund or as an umbrella fund comprising of one or more sub-funds, each with a different investment objective and policy. A sub-fund may comprise of different classes of shares which share in the same pool of assets of the sub-fund. Typically classes of shares are distinguished by matters such as the minimum initial and subsequent subscription, differing management charges and differing entry and exit fees.
Irish funds can take one of four forms: an investment company with variable capital; a unit trust; a partnership; and more recently, a common contractual fund (‘CCF’). Partnerships are rarely established.
An investment company is a public limited company and it has legal personality. It has a board of directors which must meet regularly (and at least two of whom must be Irish residents) and it must convene annual general meetings of the shareholders. Segregation of liability between sub-funds in a company is now possible in Ireland.
A unit trust, on the other hand, is a contractual arrangement between a management company and a custodian. For a unit trust there is no requirement to hold annual general meetings and there is segregation of liability between the sub-funds in an umbrella established in the form of the unit trust.
The choice between these two structures, plc or unit trust, really rests on which structure the investor base prefers. Some investors are more familiar with the corporate vehicle and so prefer it.
12.2 Authorisation of Irish funds
Irish funds are authorised by the Financial Regulator. Certain parties involved with the fund and all the material documents of the fund must be approved in advance by the Financial Regulator in order for an Irish fund to be established. There are fees payable to the Financial Regulator for the establishment of a fund but these do not exceed €5,000.
12.3 Parties to a fund structure
The promoter of an investment fund must be approved by the Financial Regulator to act as such. Although there is no definition of a promoter, it is regarded as the entity responsible for the establishment of the fund. In considering such an application the Financial Regulator will consider the financial status of the proposed promoter, its regulatory status, ownership, management structure and experience in managing collective investment schemes or assets generally.
Similarly, the investment manager or adviser of a fund must also be approved to act as such by the Financial Regulator.
12.4 Fund parties
Investment decisions are taken by the investment manager who is appointed by the investment company or, in the case of the unit trust, the management company. The calculation and determination of the net asset value per share and the registrar and transfer agency functions are carried out by an administrator. The fund’s assets are held by the custodian (and its sub-custodians appointed by it pursuant to its global custodial arrangements). An Irish fund must have an Irish administrator and an Irish custodian.
12.5 Documentation
The constitutional document of the fund will take the form of memorandum and articles of association in the case of an investment company, trust deed in the case of a unit trust, deed of constitution in the case of a CCF and partnership agreement in the case of a limited partnership. An investment management agreement will set out the relationship between the fund and the investment manager and separate administration and custody agreements will also be entered into. The fund will issue a prospectus. All of these documents would be prepared by this firm, except the administration and custody agreement which are typically prepared by the service providers themselves in their standard form and these would then be negotiated by this firm on behalf of the fund.
12.6 Types of funds
A broad range of fund types are available in Ireland.
The non-UCITS category of fund comprises retail, professional and qualifying investor funds. The investment restrictions and borrowing requirements for professional funds are more relaxed than those that apply to UCITS and non-UCITS retail funds, with typically a doubling of the restrictions imposed on UCITS funds (ie 20 per cent of the fund’s net asset value may be invested in the securities of any one issuer and the fund may borrow up to 25 per cent of its net asset value for any purpose). There is a minimum subscription requirement for these types of funds of €125,000.
A qualifying investor fund is the least restrictive of all the funds in that the investment objectives and policies are framed by the promoter and not by the Financial Regulator and are agreed to on a case by case basis. This type of fund provides maximum flexibility for the promoter of the fund. It can be leveraged significantly and the concentration of investments in any one issuer can be considerable. However in the case of these funds each investor must make a certification about its net worth (in the case of individuals) or the level of assets under discretionary management or ownership and the minimum investment is €250,000.
12.7 Listing
Some pension funds can only invest in listed securities. The ISE provides a technical listing for shares or units of Irish funds. The application process with the ISE would parallel the approval process with the Financial Regulator. There would be initial and ongoing fees payable to the ISE.
12.8 Tax status
An Irish authorised fund is not subject to Irish tax of any kind. Certain Irish investors are chargeable to Irish tax on transfers or redemptions of shares or payments of dividends.
12.9 Timing
The approval of the promoter and investment manager typically takes two to three weeks to obtain. The establishment of a fund typically takes between six to eight weeks from the date of submission of the documents to the Financial Regulator, depending upon the complexity of the fund. However, a new streamlined process will be introduced for QIFs (in February 2007) which will mean the authorisation issues on the day after the filing of various documents with the Financial Regulator.
13. SECURITIES INSTITUTIONS
Ireland has adopted the necessary legislation to implement the Markets in Financial Instruments Directive (2004/39/EC) (‘MiFID’) but these provisions will not become effective until 1 November 2007.
Until this date, it will remain an offence under the Investment Intermediaries Act 1995 (the ‘Investment Intermediaries Act’) for any person operating in Ireland, who is not authorised under Section 10 of the Investment Intermediaries Act or otherwise exempted under the Investment Intermediaries Act, to act as an investment business firm (see definition below). An offence under the Investment Intermediaries Act is punishable by a term of imprisonment not exceeding ten years and/or a fine not exceeding €1,270,000. In addition, the guilty party will not be able to enforce any resulting investment agreement and may be required to pay or return any money or property transferred to him as a consequence of the investment agreement.
An ‘investment business firm’ means any person who provides one or more investment business services or investment advice to third parties on a professional basis. ‘Investment business services’ is widely defined and includes dealing in investments, receiving, transmitting or executing orders in relation to one or more investment instruments other than for own account, dealing in one or more investment instruments for own account, managing investments, underwriting in respect of issues of one or more investment instruments or the placing of such issues or both, etc.
Section 9(2) of the Investment Intermediaries Act provides that an investment business firm will not be regarded as ‘operating in Ireland’ if it is a firm which has no branch within Ireland and (a) its head or registered office is in a non EU member state, or (b) its head or registered office is in another EU member state where the firm does not provide any investment business services requiring authorisation in that state, or (c) it is a firm which is authorised in another EU member state under the Investment Services Directive but which provides investment business services of a kind for which authorisation under that Directive is not available. However, if such a firm provides investment business services or advice to individuals in Ireland who do not themselves provide professional investment services or advice, that firm will be regarded as ‘operating in Ireland’ and will need to be authorised or otherwise will need to fall within one of the categories of exemptions available.
The categories of person exempted under the Investment Intermediaries Act are as follows:
Where a person is exempted under the Investment Intermediaries Act, they will nevertheless be required to comply with the relevant conduct of business rules in Ireland in respect of the investment business which they are conducting.
The MAD Regulations require that all persons producing or disseminating recommendations must take reasonable care to ensure that the recommendations are fairly presented and any interests or conflicts of interest are disclosed. In addition there must be prominent disclosure of the name and job title of the individual preparing the recommendation along with the name of the person responsible for its production.
14. NOTIFICATION OBLIGATIONS
14.1 Notification of substantial shareholdings
The Companies Act requires notification of certain levels of shareholdings. In essence, under Part IV of the Companies Act, a person is required to notify an interest in shares if he acquires five per cent or more, thereby going through a complete single percentage of a class or shares in a company, within the five business days next following the date on which the interest was acquired. Similarly a notification obligation arises on a person ceasing to be so interested in such percentage. The notification must be in writing and state the number of shares, the identity of the registered holder and the number of shares over which the interest arises in the case of a call option. The notification obligations of the Companies Act are wide ranging and cover any genuine interest, directly or indirectly, in shares and whether deferred, contingent or otherwise.
In addition, a public company can serve a Section 81 Notice on any person whom the company knows is, or has reasonable cause to believe to be, at any time during the three years immediately preceding the date of the notice, interested in shares in the company requiring that person to confirm the fact and to indicate whether or not he holds any interest in shares. This mechanism is regularly used to identify the building of a stake in a company prior to a takeover bid. If a person refuses to respond to a Section 81 Notice, the company is entitled to apply to court for an order that those shares be subject to certain restrictions concerning transfer, dividend payment and exercise of votes.
14.2 Register
There is an obligation on a company to keep a register of notifications and similarly in the event that the company sends a section 81 Notice, the company similarly is required to register any interests so disclosed. These registers are available for inspection without charge. A copy of the relevant register can be obtained on payment of a fee.
15. PUBLIC TAKEOVERS
15.1 Applicable laws and regulations
The European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006 (the ‘2006 Regulations’), which transposed the EU Takeovers Directive into Irish Law, came into effect on 20 May 2006. Certain provisions in the Directive can be transposed into law at the discretion of the member state. Under the 2006 Regulations Ireland has made article 9 (frustrating action), a mandatory provision (in line with Rule 21.1 of the existing Irish Takeover Rules) whereas Ireland has exercised its right under the Directive not to make article 11 (break-through right) a mandatory provision. Furthermore, the 2006 Regulations do not allow companies to take advantage of the (so-called) reciprocity provisions in article 12 (optional arrangements).
Whilst the Irish Takeover Panel would assume principal responsibility for the regulation of any takeover offer for an Irish incorporated company which has its shares traded on a stock exchange, the offer would have to be conducted so as to ensure that it complies with any applicable listing rules and market abuse disclosure rules.
15.2 Competent authority
The Irish Takeover Panel is the statutory body responsible for monitoring and supervising takeovers and other relevant transactions in Ireland. The Irish Takeover Panel was established by the Irish Takeover Panel Act 1997 (the ‘Irish Takeover Panel Act’) and is incorporated as a company limited by guarantee. The Irish Takeover Panel is designated as the competent authority under the 2006 Regulations for the purpose of article 4(1) of the Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids.
The Irish Takeover Panel is also responsible for making Rules to ensure that takeovers (not being takeover bids as defined in the 2006 Regulations) and other relevant transactions comply with the General Principles set out in the Schedule to the Act. In addition, the Irish Takeover Panel is responsible for ensuring compliance with the General Principles set out in Regulation 7 when performing its functions under the 2006 Regulations and with the Rules applying pursuant to Regulation 11. Both sets of General Principles are designed to ensure fair and equal treatment of all shareholders. The Irish Takeover Panel has extensive powers under the Irish Takeover Panel Act to make rulings and give directions, to hold hearings, to summon witnesses and to require production of documents and other information, where these are appropriate in the discharge of its statutory functions.
15.3 Announcements/Secrecy/Disclosure
The Irish Takeover Rules are designed to ensure that an announcement of an offer or possible offer is made at the earliest moment if there is any risk of a leak (and hence of insider dealing). Prior to an approach to the board of the offeree, the responsibility for making an announcement of a possible bid lies with the offeror. Once the board of the offeree has received an approach that may or may not lead to an offer, the primary responsibility for making an announcement passes to the board of the offeree. It is essential that an announcement in relation to an offer or potential offer is accurate, unambiguous and not misleading in any way.
Ordinarily, the offeror and the offeree will want to avoid an announcement until the terms of the offer have been agreed or, at the very least, a definite decision to make an offer has been made. However, an announcement will be required by the Irish Takeover Rules in certain circumstances and in particular where discussions are to be extended beyond a very restricted number of people or where, following an approach by the offeror to the offeree, the offeree becomes the subject of rumour and speculation or there is an anomalous movement in the offeree’s share price. A close watch therefore must be kept on the company’s share price.
Under the market abuse legislation, the company must publicly disclose without delay inside information directly concerning the company, in a manner that enables fast access and complete, correct and timely assessment of the information by the public. An offer or offer approach will constitute inside information.
The company may delay public disclosure of such information to avoid prejudicing its legitimate interests (ie by affecting the course of negotiations or jeopardising impending developments) provided that the failure to disclose the information would not be likely to mislead the public and that the company is able to ensure the confidentiality of the information.
The company must restrict access to the information to those who require it for the exercise of their functions and take measures to ensure that persons with access to the information acknowledge their legal and regulatory duties and the sanctions that may arise from breach of those duties. If the confidentiality of the information is compromised, the company must have in place measures to effect immediate public disclosure.
If the company or someone acting on its behalf discloses inside information to a third party then, unless the third party is under an obligation of confidentiality, the company must make complete and effective public disclosure of that information, simultaneously in the case of an intentional disclosure and without delay in the case of a non-intentional disclosure. The Market Abuse legislation prohibits listed companies from providing inside information to journalists or others under an embargo that seeks to prevent them using the information until it has been released to an RIS because this amounts to selective disclosure.
15.4 Shareholdings and dealings
The shareholdings and dealings of persons discharging managerial responsibilities, a category comprising directors and certain senior executives, (‘PDMRs’) of the company the offeree and their connected persons (under the UK regime) and persons closely associated with them (under the Irish regime), in shares of the offeree and offeror immediately before and during an offer period are subject to various restrictions under the market abuse legislation, the Stock Exchange Model Code (which now applies to PDMRs and their connected persons, and to employee insiders) (the ‘Model Code’) and the Irish Takeover Rules. In addition, all such dealings will have to be disclosed to the market and to shareholders.
15.5 Conflicts of interest
If a director has a potential conflict of interest that may prevent him from properly being involved in considering and advising shareholders about an offer, he should notify the board and its advisers at the earliest possible moment. In this case, an independent board committee consisting of all the directors except the director or directors with a conflict of interest should be constituted to consider the potential takeover offer and whether or not to recommend shareholders to accept the offer.
The Companies Acts prohibit a company from entering into certain arrangements or transactions with any of its directors or in some circumstances, persons connected with such directors. However, the Companies Acts provide that the company may enter into some of these arrangements or transactions if it has first obtained the consent of the company’s shareholders in general meeting. This is a particularly complicated area and specific advice should be sought in each case before deciding whether or not an arrangement or transaction is prohibited. The categories of prohibited transactions are as follows:
15.6 Frustrating action
The General Principles set out in the 2006 Regulations prohibit the board of a target company from doing anything which might deny the shareholders the opportunity to decide on the merits of a bid. Rule 21 of the Irish Takeover Rules contains detailed provisions concerning actions which must not be taken by the board of a target company once the board has reason to believe that an offer may be imminent.
As well as ‘poison pill’ type contractual arrangements and material disposals or acquisitions, the issue of shares or options and the entry into of contracts otherwise than in the ordinary course of business may constitute a frustrating action. Entering into or amending directors’ employment contracts may also be regarded as frustrating action. The target board may, however, invite shareholders to approve what would otherwise be frustrating action.
15.7 Supply of information and public statements during an offer period
Detailed rules are set out in the Irish Takeover Rules in regard to the provision of information. It is a fundamental principle of the Irish Takeover Rules that information about companies involved in an offer must be made equally available to all shareholders as early as possible at the same time and in the same manner. Statements must not be issued which, while not factually inaccurate, may mislead shareholders and create uncertainty in the market. Particular areas of sensitivity in which this must be avoided include future profits and prospects and asset values.
Offeree shareholders
Information about an offeree should be made equally available to all shareholders. Thus one-on-one meetings with shareholders may only take place provided no new information and no new opinions are expressed. The financial adviser to the offeree must be present and confirm to the Irish Takeover Panel that these restrictions were complied with.
The press
Particular care must be taken not to release fresh material in television or radio interviews or discussions. The Irish Takeover Rules require that if parties involved in an offer are interviewed on radio or television, they should seek to ensure that the sequence of the interview should not be broken by the interposition of comments or observations by others. They also require that a transcript should be provided.
Statements should not be made about the level of shareholder support unless these are current and verifiable.
In appropriate circumstances, the Irish Takeover Panel may require a statement of retraction. Particular areas of sensitivity include future profits and prospects, asset values and the likelihood of a rival offer arising.
Advertisements
The Irish Takeover Rules prohibit the publication of advertisements connected with an offer. This does not apply to product advertising or corporation image advertising not having a bearing on the offer.
Provision of information to potential offerors
Where information is disclosed by an offeree to an offeror, Rule 20.2 of the Irish Takeover Rules can require that it is also disclosed to a rival offeror or potential offeror which requests the same information. This is to ensure equality of treatment.
15.8 Employees
The bidder is required to include in its offer document a statement of its intentions regarding the future business of the target and its subsidiaries, its strategic plans for the target and their likely repercussions on employment and on the locations of the target’s place of business. The board of the offeree is then required to gives its views on the implementation of these plans and the effect it will have on employment in the group.
The board of the offeree is also required to append to the response document a separate opinion from the representatives of its employees on the effects of the offer on employment, provided the opinion is received ‘in good time’ before the despatch of that document. This is a relatively new requirement and while it falls short of constituting a prior consultation obligation, it is likely to result in target companies consulting more widely with employees than previously.
In addition to the fiduciary duties of directors referred to above, the target, its directors and all other parties to the takeover are required to observe the general principles. The ‘general principles’ are expressed in general terms and inform, and are amplified by, the Irish Takeover Rules.
There are currently two sets of general principles: those that are applied by the Takeover Bids Regulations 2006 to takeover bids for certain companies, including the company and those that apply to takeovers and other relevant transactions (not being takeover bids) regulated by the Irish Takeover Panel Act (which would include, for example, a takeover of the company by court-approved scheme of arrangement or a substantial acquisition of securities in the company). Set out below are the general principles which would regulate the conduct of a takeover bid for the company. The two sets of principles are substantively similar. The key principle in each case is that shareholders of the same class shall be treated similarly.
15.10 General principles applicable to takeover bids
The foregoing General Principles derive from the EU Takeovers Directive. To the extent that they impose obligations upon the target company, the Board would have special responsibilities to ensure that these requirements are fully complied with in the event of an offer. A key theme of the General Principles is that shareholders in the target company should not be disadvantaged and should have access to all relevant information concerning that company so as to allow them to properly consider the merits of the offer. It is essential, therefore, that the directors of the target company ensure that all relevant information is released to shareholders in a timely fashion and that it is presented in a manner which is not misleading.
Under the Irish Takeover Rules the directors of the target company are expected to advise the target shareholders on the merits and demerits of an offer or to state that they have not formed a view on the offer. If necessary, the Irish Takeover Panel can direct the directors of a target company to give such advice and such a direction is legally enforceable by the Irish Takeover Panel. Any advice given by directors will be assumed to have been given on the basis that it is subject to no other offer being made. In this regard, it should be noted that there are limits on the directors’ ability to irrevocably commit themselves in their capacity as directors to a particular course of action. This does not prevent the directors giving such commitments in respect of any rights attaching to shares they may hold in the company in a personal capacity.
15.11 Profit forecasts
The Irish Takeover Rules contain strict requirements in regard to statements that constitute profit forecasts, assets valuations or concern the financial benefits of a proposed offer. The Company’s financial advisers should be consulted in each case prior to any statement being made which could potentially be regarded as falling within such categories.
15.12 Inducement fees
Except with the consent of the Irish Takeover Panel, an offeree may not enter into any contract or any arrangement to pay any compensation to the offeror where the obligation to pay is contingent in any respect on the relevant offer or proposed offer lapsing or not being made. In the past, such payments have been permitted where the payment relates to specific quantifiable third party costs and the amount of the payment does not exceed one per cent of the value of the offer.
15.13 Stake building
In addition to the Takeover Rules itself, there are the Rules on Substantial Acquisition of Shares (the ‘SARs’) and the Irish Takeover Panel also operates as the regulator for those rules.
If any company is buying shares in a potential target company, it first has to consider the SARs which effectively prohibit any person from acquiring shares carrying ten per cent or more of the voting rights which, in aggregate with shares held, takes the person to over 15 per cent in any seven day period. There are exceptions, if the purchase is from a single shareholder or immediately prior to the announcement of a firm intention to make an offer.
An offer period for a company begins with an announcement of a possible offer and thereafter there is an obligation to disclose any dealings whatsoever by the offeror, and any person acquiring or selling more than one per cent of the shares (or class of shares) is also obliged to make a disclosure (Rule 8).
The principal provision is, however, Rule 9 of the Irish Takeover Rules, which requires any person acquiring shares resulting in a holding of 30 per cent or more of the voting rights (or increasing his stake above 30 per cent) to make a mandatory cash offer conditional only on statutory merger approval and achieving a 50 per cent level in the target company, aggregating the shares held and accepted. All shareholders in the target therefore have the opportunity to sell.
The insider dealing law applies to purchases of shares in the course of an offer but an offeror may use the safe harbour of buying for the purpose of the offer in accordance with the Takeover Rules and the SARs. The offeror is prohibited by Rule 4 from selling securities in the target except with the prior consent of the Irish Takeover Panel and following 24 hours’ public notice that sales may be made. Once any sales have been made, the offeror cannot then make purchases.
Otherwise the offeror can purchase shares in the market, although if it purchases shares at above the offer price, it is obliged to increase the consideration per share to the cash price paid in the market.
15.14 Obligation on price
The Irish Takeover Rules require an offeror to make a cash offer, either if ten per cent or more of the voting rights of the target shall have been acquired in the 12 months immediately preceding the relevant offer period, or if there is any purchase of shares for cash in the offer period itself. The cash consideration under the offer then must be at the highest price paid by the offeror or any concert party during the relevant period. If any shares have been acquired in the three months preceding or during the offer period for any consideration other than cash, then Rule 6 requires an offer to be made on no less favourable terms. Similarly, Rule 9 provides that the offeror must offer not less than the highest price paid for shares by the offeror or any concert party within the 12 months prior to the commencement to the Rule 9 obligation.
15.15 Timetable
The Irish Takeover Rules prescribe a clear timetable for an offer which begins with the making of the firm offer announcement (called a Rule 2.5 announcement) specifying the principal terms and all conditions that impose on the offeror a mandatory obligation to proceed with the offer. Once the Rule 2.5 announcement has been made, the offeror has up to 28 days to despatch the offer document.
Typically the offer document specifies a first closing date that cannot be less than 21 days after the date of posting and again, typically, the target would respond within 14 days. Other relevant dates include the right to withdraw which arises no earlier than 21 days after the first closing date; day 39 from the posting of the offer document which is the last date when the target company is allowed to provide new information; and day 46 which is the last date on which an offer can be increased. All offers must become unconditional as to acceptances by no later than the 60th day from the posting of the offer document and all conditions to the offer have to be satisfied by the 21st day following the later of the date that the offer has become unconditional as to acceptances or the first closing date. Finally the consideration must be posted within 14 days of the offer becoming unconditional or the date of receipt of the acceptance complete in all respects.
The timetable is complicated if there is a competing bidder in which case it is restarted on the basis of the date of the competing offer document, or if the competition clearance procedure is slower than expected, then the process can be frozen.
15.16 Irrevocables
A major shareholder has the alternative of either seeking to sell his shares immediately prior to the offer (the acquisition of shares from a single vendor taking an offeror over 30 per cent is permitted by both the SARs and Rule 5).
More typically, the major shareholder would be asked to give an irrevocable undertaking agreeing to accept the offer, when made on agreed terms, and it may be prepared to sign this to ensure that an offer is made. Irrevocable undertakings vary between ‘hard’ undertakings, committed to accept the offer, and ‘soft’ undertakings, allowing the shareholder to escape from its commitment in the event of a higher offer.
15.17 First announcement
There are varying announcements prescribed for in the Irish Takeover Rules but the key announcement is what is called a Rule 2.5 announcement which is the announcement of a firm intention to make an offer. That announcement must contain the terms of the offer, the identity of the offeror, details of any holding in the target or options, details of any derivatives relating to target shares, all conditions including normal conditions relating to acceptances, listing and increase of capital, details of any agreements or arrangements to which the offeror is party which may be relevant and details of any special indemnity arrangements.
If, on the other hand, an announcement is of a possible offer but there is no commitment, the target company may request the Irish Takeover Panel to require the offeror to make an offer or withdraw by a specified date.
Until the offeror has approached the target, it is under an obligation to make an announcement, in the event of a rumour of a bid or an untoward movement in the share price or the target. Once the approval has been made, the making of an announcement becomes the responsibility of the target.
15.18 Announcement to posting
There is a maximum 28 day period permitted between the date of the Rule 2.5 announcement and the posting of the offer document, although a much shorter period is usual. The offer document constitutes the making of the offer in law and starts the offer timetable.
15.19Contents
The offer document will typically contain a letter from the chairman of the offeror and if recommended, from the offeree. It will also contain a letter from the financial adviser setting out the terms of the offer in general, including price and reasons and other information. The offer document will contain appendixes with details which comply with the detailed requirements of the Irish Takeover Rules.
The offer document is required by Rule 24 to set out the offeror’s intentions regarding the target and its employees, financial and other information on the offeror, the offeree company and the offer (although the degree of financial information on the offeror is dependent on whether it is an Irish company and whether the consideration for the offer is securities or cash). It is also required by Rule 24 to include details of the securities for which the offer is made, the consideration being offered, middle market quotations for the securities being offered, details of any special agreements or arrangements in relation to the conditions, a description as to how the offer was financed, and a recommendation from the target, if recommended. It will also include shareholders and dealings of the offeror and offeree, together with a statement as to directors’ emoluments and special arrangements.
15.20Responsibility
All documents or advertisements sent to shareholders are required by Rule 19.1 to satisfy the highest standard of accuracy and care as if they were prospectuses. The directors of the offeror and target are each required to accept responsibility for the contents of their documents and for there to be included a statement to the effect that they accept responsibility for the information contained therein and that, to the best of their knowledge and belief (having taken all reasonable care to ensure that such is the case) the information contained in the document is in accordance with the facts and that it does not omit anything likely to affect the import of such information.
The Irish Takeover Rules require that directors of the target accept responsibility for any document issued by the target which relates to an offer. The document would ordinarily state that, to the best of the knowledge and belief of the directors (having taken all reasonable care to ensure that such is the case), the information contained in the document is in accordance with the facts and it does not omit anything material. The effect of the required responsibility statement in a published document is that if any statement in it is inaccurate or misleading (including by omission), then any director who has not taken reasonable care may be responsible, in negligence, to persons who suffer loss as a result.
Each director will be required to sign a form/letter of authority recognising the responsibilities outlined above and authorising the issue of documents approved by the offeree’s board or a board committee.
While detailed supervision of documents issued during a takeover is likely to be delegated to a board committee, each of the directors must reasonably believe that the committee is composed of persons who are competent to discharge this responsibility. Furthermore, the whole board must ensure that proper arrangements exist to enable it to monitor the content of the offer, including receipt of all documents and announcements relevant to the offer, details of relevant dealings by the company or its associates and details of any non-routine obligations incurred. Where appropriate, the opinions of advisers must be available to the board. Generally, all directors need to be kept up to date.
15.21Despatch
It is normal to despatch the offer document to all registered shareholders. To the extent that the shares are held through brokers, nominees or advisers, the information is communicated by them to their clients.
15.22Due diligence
Due diligence is a matter to be discussed between the offeror and the offeree. The offeree sometimes takes the view that, since any material information is required to be put into the public domain by the offeree, under the MAD Regulations, there is no material information that the offeree needs to make available. However this is a matter for discussion and frequently due diligence information is provided by the offeree to the offeror, subject to appropriate confidentiality undertakings.
Rule 20.2 requires a target to provide, if asked, the same information provided to any favoured offeror to a hostile offeror.
15.23Conditions
Although there are a number of conditions set out in the Rule 2.5 Announcement and repeated in the offer document, the Irish Takeover Panel under Rule 13 will not allow an offeror any subjective conditions and, more importantly, will not let an offer lapse due to conditions unless the circumstances are of material significance to the offeror. If the offeror was aware of the problem before posting the offer document and then sought to escape responsibility, the Irish Takeover Panel would be likely not to permit the condition to be used.
15.24Financing
The offer document has to contain a cash confirmation statement from the financial advisers to the offeror to the effect that resources are available to the offeror sufficient to satisfy full acceptance of the offer. This leads to a cash confirmation exercise where the financial adviser ensures that there are no restrictions, conditions precedent, events of default or other matters that could prevent funds being available to the offeror to satisfy payment of the cash consideration in full.
15.25Mixed consideration
It is possible to offer a variety of forms of consideration and typically consideration is either a cash consideration per share or a number of shares in the offeror, credited as fully paid. The consideration is sometimes a combination of shares and cash and in that case there can be a mix and match election so that to the extent a certain number of shareholders prefer cash, others can have more shares.
16. FOREIGN INVESTMENT CONTROLS
There are no controls on foreign investment into Ireland.
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