During the course of 2021 and the first half of 2022, we continued to see financial sponsors being a key driver of M&A activity in the Irish market.  However, as Central Banks across the world continued with interest rates increases over the latter half of 2022 and over the course of 2023, leading to higher financing costs on M&A transactions, the level of PE led activity has decreased, certainly in so far as new platform deals are concerned.

To put the activity levels in context, in 2021, financial sponsors were involved in approximately, one third of all Irish M&A transactions (57 of 169 in 2021).  However in 2022 and over the course of the first six months of 2023, that figure had reduced to approximately one fifth of all transactions (62 of 300 in 2022 and 34 of 177 in the first six months of 2023) and the higher interest rate environment has undoubtedly contributed to the lower level of sponsor led activity.

As well as the decrease in overall volume of activity involving financial sponsors, another  noticeable consequence of the higher financing costs has been the lower number of high value transactions involving financial sponsors in the first half of 2023.  In 2022, 40% of the top twenty transactions by deal value involved a financial sponsor.  The same figure for the first half of 2023 is 25%.

We have, however, continued to see a good deal of activity from sponsor backed corporates as part of “buy-and-build” strategies, particularly in specific parts of the mid-market such as nursing homes, insurance brokers, veterinary and dentistry practices and professional services firms.

The two most significant differences are: (i) the pricing mechanism used, with trade sellers typically favouring a completion accounts mechanic whereas financial sponsors tend to have a preference for pricing the transaction on a locked box basis and (ii) the manner in which contractual risk and the related warranty protection is dealt with in the transaction documents, the use of W&I insurance being much more prevalent with financial sponsors than trade sellers.

Financial sponsor sellers will, for the most part, only give fundamental warranties in respect of title and capacity.  The target’s management team will typically provide some level of warranty cover in respect of commercial warranties, but the cap on liability for the management warranties will usually be significantly lower than the overall purchase price, hence the frequent use of W&I to cover the “gap” risk.  On the other hand, trade sellers will typically provide both fundamental and commercial warranties, albeit there had, until recently, been a noticeable reduction in liability caps for commercial warranties in trade sales as the M&A market has become more competitive.  Although the market has softened, we still expect those selling attractive businesses at realistic valuations to still be able to limit their overall warranty risk.

The transfer of shares in an Irish company must be (i) evidenced in writing by executing a share transfer form and (ii) signed by the transferor and, in the case of shares which are not fully paid, or an unlimited company, the transferee. It is also important to check the articles of association or the company constitution to ensure there are no restrictions on the transfer or issue of shares. Where the target is an Irish incorporated company, an Irish stamp duty cost will generally arise upon the acquisition of the shares, at a rate of 1% on the consideration paid (or market value, if higher), depending on how the investment is structured. For certain real estate holding companies, a higher stamp duty rate of 7.5% may apply.

On larger transactions, financial sponsors will typically issue equity commitment letters, which are supported by legal opinions. Equity commitment letters are usually structured as an irrevocable commitment given by the fund to the acquisition vehicle pursuant to which the financial sponsor commits itself to invest certain funds in the acquisition vehicle for the purpose of either paying the purchase price or, if closing does not occur as a result of the purchaser’s breach, a damages claim. The seller can then enforce its right to specific performance of this commitment letter directly against the PE fund if it fails to comply with its terms. A bank or institutional lender may also provide a loan commitment letter which will be conditional on the occurrence of certain events as set out in the sale and purchase agreement. On smaller transactions, financial sponsors may opt to provide comfort to the sellers through certain fund representations made in the share purchase agreement.

Locked-box consideration structures remain the preferred option for PE sellers in the Irish market. The locked box mechanism provides greater certainty as to the purchase price at signing, greater control over financial information, fixing the date of economic transfer of the target before completion and allows for prompt distribution of sale proceeds to sellers after completion. Despite the growing popularity of locked box mechanisms, given the number of deals involving international (and in particular US) buyers, where no financial sponsor is involved, completion accounts continues to be the most commonly used pricing mechanism, albeit only marginally.

The allocation of risk between a buyer and seller is very deal specific in Ireland. The current market for sale terms have shifted, on balance, to more buyer friendly.  However, in the last 12 months a definite trend has emerged whereby transactions are taking longer to execute as buyers spend more time on due diligence, testing valuations in an environment of higher inflation, higher interest rates and, generally speaking, a more challenging macro-economic and geo-political environment.

Financial sponsor sellers will typically assume limited contractual liability under a share purchase agreement in relation to operational matters. Financial sponsor buyers will expect title and capacity warranties and also customary commercial warranties from sellers, save in respect of financial sponsor sellers, where the position outlined in paragraph 2 above is generally accepted.

W&I insurance has become increasingly popular in the Irish M&A marketplace in recent years. Typically, a buyer will want the warranties to be as far-reaching and broad as possible whilst a seller will seek to limit the scope of the warranty to reduce the financial impact arising from a warranty claim.  Depending on the level of cover acquired, the policy can be used to reduce the seller’s liability to as low as EUR1 for certain assets – in particular property assets, although we are seeing more and more this EUR1 cap applying in other industries. However, the seller typically retains risk for the title and capacity warranties, and full liability will apply if the seller has been found to have acted fraudulently or engaged in willful misconduct or willful deceit.

Financial caps on seller liability for breach of warranty claims of between 25% and 50% of the overall purchase price is common on mid-market and higher value transactions, whereas historically market practice in Ireland would have been for 100% of the overall purchase price to be “on risk” for breaches of warranty. In Ireland, a separate tax deed is typically used to allocate tax risk between a buyer and seller.

The increased use of W&I insurance has been a major development in the structuring of M&A transactions in Ireland in recent years. This has been particularly true over the last five years as a greater proportion of businesses which have been acquired by financial sponsors in recent years are now being brought to market, with the use of W&I insurance being a common feature of such exits. W&I insurance bridges the gap between the buyer’s need for strong deal protection and a seller’s desire for a clean exit free of residual liabilities. W&I insurance benefits both the buyer and seller as any potential liability arising out of a breach of warranty and/or indemnity transfers from the parties to the insurance provider and can provide significant comfort to a buyer and seller in a transaction.

The cost of the W&I policy is typically borne by the buyer as a deal cost, but we do see various approaches depending on the outcome of due diligence and the nature and scope of the particular policy which is to be put in place.

Public to private transactions by financial sponsors are very rarely seen in the Irish market – rarely more than one or two a year (and often none).  Despite no public to private transactions having taken place in the Irish market in the last 12 months, we did note an increase in the number of enquiries where clients were exploring opportunities in this space, particularly in light of the softening in public market valuations.   Public-to-private transactions are regulated by the provisions of the Irish Takeover Panel Act 1997 (as amended), the Irish Takeover Rules 2013 (Rules) and the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006. The Rules regulate the conduct of takeovers of Irish companies listed on certain stock exchanges. The Irish Takeover Panel oversees the application of the Rules to specific transactions.

Where PE funds participate in public-to-private transactions in Ireland, the Rules impose a rigid framework on such transactions and engagement by PE investors with the Panel will be required.

The EU Investment Screening Regulation became fully operational across the EU on 11 October 2020. Where foreign direct investments are likely to affect security or public order, Member States are subject to mandatory cooperation and information sharing requirements.

The Irish government recently passed into law the Screening of Third Country Transactions Act 2023 (the Act), the State’s first investment screening regime. The Act is designed to implement the EU Screening Regulation and ensure all Member States have the legal tools to screen investments by non EU / EEA undertakings and individuals of certain key infrastructure assets with an Irish nexus, in particular concerning foreign investments into critical utilities and infrastructure sectors, high-tech and personal data focused businesses, and media businesses.

The Act is expected to become operational from Q2 2024.  It is expected that the Irish approach to implementation will seek to maintain Ireland’s attractiveness as a location for inward investment, while reflecting the need to take into account national security and public order considerations in certain strategically important sectors.

In Ireland, competition clearances are, where applicable, a condition precedent to completion, leading to a split signing and completion pending approval from the Competition and Consumer Protection Commission (and the same approach is expected to be ‘market standard’ once FDI regime is established / FDI clearances required) . The risks of merger control clearance are often passed on to the purchaser by the use of a “strict hell or high water” clause, which may include an obligation on the purchaser to make any required divestments, behavioural commitments or litigate in the event the transaction is blocked from a competition perspective.

Minority investments undertaken by financial sponsors have increased in Ireland in recent years and this is something we expect to see continue as dedicated minority funds enter the market, both local and international.

There are a variety of capital structures used, ranging from ordinary equity investments with certain control rights, preferred equity or debt-like structures with limited governance rights but with the ability to participate in equity returns. While not a major feature of the Irish market in recent years, mezzanine debt and convertibles have also become more common. Typically, a financial sponsor who is taking a minority position will seek certain rights and protections including tag-along and drag-along rights, a right to information about the company, rights of first refusal in respect of new equity or debt issuances and board representation. It is important that a well negotiated shareholders agreement is put in place to ensure a minority investor obtains adequate protection, but in a way which does not unduly stifle the development of the relevant business.

In terms of divestments to continuation funds, this is not something that we have seen in the Irish market.

Private equity transactions are typically structured in Ireland using either a double or triple “newco stack”.  This will be made up of (i) a top holding company (“HoldCo”), through which the PE fund will holds its equity; (ii) an intermediate holding company (“MidCo”), which depending on the overall funding structure for the deal, will typically be used to hold the PE fund’s shareholder debt; and (iii) the purchaser vehicle (“BidCo”), which will be the vehicle used to acquire the shares in the target company.

Management will generally subscribe for ordinary shares in HoldCo representing between 5% and 15% of the overall share capital, such equity being commonly referred to as sweet equity.  The sweet equity shares will typically have no / limited value initially on completion of the buyout transaction and will often be non-voting.  Where there are a large number of managers in the sweet equity pool, a new nominee company (“NomineeCo”) will often be set up by the PE fund to hold the legal interest in the shares on behalf of management.

Management equity will also typically be subject to both vesting and good leaver / bad leaver provisions, whereby in circumstances where a member of the management team leaves the business prior to an exit, such shares can be bought from the relevant manager at an agreed price.  The valuation will depend upon the circumstances in which the manager leaves (i.e. whether the manager is a good leaver, in which case, the market value will typically be paid, or a bad leaver, in which case, only a nominal amount will be paid for those shares).

Given the increasing number of US financial sponsors that are active in the Irish M&A market, we are increasingly seeing more of a US style approach to management equity, with more prescribed performance KPIs to be satisfied in order for the management sweet equity pot to become participating on an exit.

In general, whilst share incentivisation is common in Ireland, the tax treatment of most forms of share incentivisation is not particularly advantageous for employees/directors based in Ireland, with marginal rates of income tax, universal social charge and social security generally applying on any benefits obtained (subject to the comments below). However, if the shares that the employees receive qualify as “restricted shares” (under Irish tax rules), there could be a material abatement – up to 60% – of the taxable value of the shares for Irish tax purposes (subject to certain qualifying conditions being met).

Ireland also introduced a “Key Employee Engagement Programme” (“KEEP”) which provides for an exemption from income tax, universal social charge and social security arising on the exercise of a qualifying share option to acquire shares in a qualifying company in the SME sector, provided certain conditions are satisfied.   To date, we have seen a limited take up of the KEEP scheme in private equity backed businesses.

Senior managers in Ireland are typically subject to non-compete clauses. While the standard duration of non-compete clauses in an employment contract for senior executives is typically between 6 and 12 months in duration, in a share purchase agreement, the non-compete period for sellers (which may include senior managers) can be up to three years in duration when the transfer of the undertaking includes the transfer of customer loyalty in the form of both goodwill and know-how. Like in many other jurisdictions, the balance between restraint of trade and protection of legitimate business interests makes enforceability fact specific.  In equity documents involving a financial sponsor, the typical time period for key managers is between 12 and 24 months.

Including specific covenants in a shareholders’ agreement (or investment agreement) is how a financial sponsor will typically ensure it has control over material business decisions made by the portfolio company. The main investment agreement will typically allow the financial sponsor to control the composition of the group’s board of directors, include veto rights over material business decisions and oblige the management team to submit regular financial and event driven reporting to the sponsor for the purpose of monitoring its investment. Alternatively, or in parallel with a shareholders’ agreement, a financial sponsor will hold the majority of voting rights in the target entity to ensure control over material business decisions.

Yes, as mentioned above, where there is a larger pool of management investing in the sweet equity pot, this will often be structured through a NomineeCo. Any arrangements put in place with the management team will be subject to a thorough tax analysis to ensure the most beneficial outcome for the participants on any exit.

Capital financings in Ireland typically take the form of either long-term (i.e. four to five years plus one (or one plus one) year options to extend) or short-term loan facilities akin to a bridge that may be refinanced by a bond on larger financings. Revolving facilities are commonly made available for working capital purposes. It is not uncommon for medium to large financings to have a mezzanine element. With multiple alternative credit providers having entered the Irish market in recent years, venture capital financing has increased, particularly in the fintech and pharmaceutical industries. The increase in activity in the Irish property sector has also resulted in the use of alternative financing structures, such as note issuance programmes, which enable investors who might not otherwise be permitted to lend into Ireland to build up market share. We are also seeing continued growth in alternative credit providers, as well as more traditional lenders, offering finance through investment funds, many of which are also established in Ireland.  This often involves the provision of secured or unsecured subscription (or capital call) facilities to bridge capital calls to investors, thereby improving the availability of working capital and/or investment finance.

Yes, it is unlawful for an Irish company to directly or indirectly give financial assistance for the purpose of an acquisition of its own shares or, where the company is a subsidiary, in its holding company. There are however a number of exemptions, with the most common exemption being the carrying out of a whitewash procedure (known as a summary approval procedure), which approves and permits the form of assistance rendering it lawful. The Companies Act 2014 introduced a carve out against financial assistance where the company’s principal purpose in giving the assistance is not to give it for the purpose of any such acquisition (the so-called “principal purpose test”) or the giving of the assistance for that purpose is only an incidental part of some larger purpose of the company (the so-called “incidental part test”), and, in each case, the assistance is given in good faith in the interests of the company.

The summary approval procedure involves a number of steps, including the swearing of a declaration by all or a majority of the directors of the relevant company that, among other things, the directors have (following full inquiry) formed the opinion that the company will be able to pay or discharge its debts and liabilities in full as they fall due for a period of twelve (12) months following the giving of the financial assistance. Shareholder and board approvals are also required. Public companies and their private subsidiaries are not able to avail of the summary approval process and thus, unless the relevant financial assistance falls within one of the other more limited categories of exemption, it will not be permitted. Failure to comply with the prohibition on financial assistance is a criminal offence and any financial assistance (e.g. guarantees, charges, etc.) granted in breach of the legislation is voidable.

The Loan Market Association’s standard form leveraged facility agreement is used for most medium to large corporate loan financings in Ireland. The level of negotiation on the terms of the LMA facility agreement will vary on a deal by deal basis but, as drafting often follows a pre-agreed term sheet and commercial issues are usually agreed at an early stage of a transaction. The LMA form requires a number of Irish law related changes (particularly in relation to insolvency and tax matters), however, these amendments do not tend to be heavily negotiated. Unlike the UK or US, the Irish market is more traditional in its approach to drafting and the lenders’ counsel will usually draft the loan agreement, although the strength of the sponsor can sometimes dictate the ability of a borrower to present a “first draft” of the loan agreement.

Recent changes in the interest rate environment has led to hedging requirements being a key area of focus for borrowers and lenders. With many deals coming under pressure from an interest cover perspective, this is leading to negotiations over increased amortisation or debt pay down.

Financial covenants (and cures to any covenant breaches) are invariably a key area of negotiation, along with assignment and transfer provisions (and, in particular, the scope of white / black lists).

Accordion facilities, options to extend the term and the mechanics around exercising these options also tend to be closely scrutinized as borrowers seek more flexibility from their financing facilities. Other areas where we have seen increased focus recently are the inclusion of green and particularly sustainability-related provisions as the market position on these provisions is maturing and an increased concentration on benchmark and interest rate fallback related provisions due to the phasing out of LIBOR.

There has been a sharp increase in the number of alternative credit funds and private equity investors active in the Irish market in recent years. In the real estate sector in particular, the relatively conservative lending practices of the traditional Irish banks has resulted in many Irish real estate developers and investors seeking capital from alternative sources, including certain international asset managers.

In the SME sector, the Irish government has developed a number of initiatives to ensure that the supply of credit in the market (from bank and non-bank sources) is sufficient to meet the existing and future funding needs of SMEs. The Irish government has, via the Ireland Strategic Investment Fund, invested directly in private companies and has also invested in a number of private equity credit funds who provide debt capital to Irish SMEs.  Although we have seen private equity credit funds lend through a variety of financing structures, typically funds are advanced via a secured loan or from the proceeds of a note issuance programme.