The concept of regulatory clearance of deals is not new. Traditionally, many deals are subject to the Competition Consumer and Protection Commission (CPCC) scrutiny and until this year, the threshold of the deals was extremely high and had to be above a value of €60 million. However, two new pieces of legislation are set to change the rules.

The first adjustment is the lowering of the threshold for the CPCC to investigate mergers and acquisitions. It was particularly set up to examine potentially sensitive areas such as technology, but it can also look at hyper local situations.

Diarmaid Gavin, partner in the corporate department with legal firm RDJ LLP, explains how it works: “For example, consider a small village with two fuel filling stations. If the same person bought both, then the CPCC may get involved, and no one wants the CPCC knocking on their door after they have completed the transaction. So, we advise our clients to engage with the CPCC ahead of any possible worries, just in case,” he says.

The second change is Ireland’s first piece of investment screening legislation, the Screening of Third Country Transactions Act 2023 (the FDI Act), which is expected to commence in the first week of September 2024.

Philip Lea, partner, Corporate and M&A at Dillon Eustace LLP, says the FDI Act will give the Irish government power to review and prohibit certain third country (i.e., non-EEA) investments into critical Irish industries based on a range of security and public order criteria.

“A notification will be required where the transaction involves a third-country undertaking or person connected to that undertaking and a change in control over an asset or undertaking occurs or where the transaction relates to, or impacts on, one or critical sectors; and the cumulative value of the transaction in the period of 12 months before the date of the transaction is equal to or greater than €2 million.

“Similar to the merger control regime, the Minister of Enterprise, Trade and Employment may ‘call in’ transactions that are not notifiable but where the Minister believes the transaction affects, or would be likely to affect, the security or public order of the State. Dealmakers will need to be prepared to undergo this investment screening where a non-EEA country is involved in the transaction. Given the prevalence of US and UK investment in Ireland and the broad range of critical sectors, the FDI Act is a significant shift in FDI M&A,” says Lea.

The Act is being implemented in Ireland following an EU wide regulation.

Gavin says: “In order to protect Europe, the EU needed all the member states to put in place a screening regime, so that the Minister could check a transaction if requested by his French or Swedish counterpart, who might have a concern about something in their jurisdiction.

“What it does effectively is to allow the Minister to potentially prohibit or modify a transaction on the grounds of public security or public order grounds,” he says.

The Irish legislation determines that the target must operate the ‘critical’ element of its business, or the critical infrastructure must be located in Ireland.

Sectors covered under the act include infrastructure in energy, transport, water, health, communications, media, data processing, aerospace, defence and sensitive facilities as well as land and real estate crucial for the use of such infrastructure.

It also includes critical technologies and dual use items including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, quantum and nuclear technologies as well as nanotechnologies and biotechnologies.

“This new law does not just affect mergers and acquisitions; it can cover an investment or someone taking a stake in a company. It can also be used to patrol the supply of critical inputs, including energy or raw materials, as well as food security,” says Gavin.

Finally, access to sensitive information, including personal data, or the ability to control such information, and the media is also covered.

“And for the purposes of the act, the definition of third parties is anyone other than the company or individual based in the EU, Switzerland or the European Economic Area. That includes the UK and the US which are a big source of foreign direct investment in Ireland,” adds Gavin.

Risk assessment 

Adrian Benson, partner and head of corporate and M&A at Dillon Eustace LLP, explains that typical contractual provisions, used in a sales agreement to deal with risk, are warranties and indemnities, (W&I). However, when negotiating W&I the parties' interests are often far from aligned and there may be great reluctance to give a buyer comprehensive W&I at all. Therefore, W&I insurance is a specialist insurance product increasingly being used in private M&A to provide an amicable solution.

“W&I insurance is designed to provide cover against financial loss that may arise from a breach of warranty in an SPA, on a share sale, or from a claim under a tax covenant. It is far more commonly encountered on share deals than asset deals though this is largely accounted for by the fact that most private M&A in Ireland is structured as a sale of shares,” he says.

In the case of a policy taken out by the buyer, W&I insurers or underwriters effectively step into the shoes of the seller with the intention of providing, as far as possible, back-to-back cover with the position agreed in the Special Purchase Arrangement (SPA) and other transaction documents. With the insurer providing recourse for the buyer, the seller may be able to cap its liability at a nominal or at least lower amount than would otherwise have been possible, enabling it to achieve a cleaner exit.

The use of W&I insurance is becoming more prevalent in Irish transactions to limit the seller's liability under warranties. Depending on the level of cover acquired, the policy can be used to reduce the seller's liability to as low as EUR 1. 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 wilful misconduct or wilful deceit. The policy generally mirrors the warranties set out in the share purchase agreement, but the insurer may modify or carve out certain warranties and indemnities. Many of these limitations and carve-outs may, however, be covered under the policy for an additional premium.

If W&I insurance has been proposed by the seller, the seller may offer to contribute to the premium, either up to a set maximum amount, percentage of cost or what the seller feels is a reasonable policy limit, with any additional requirements, enhanced or higher policy limits options being for the account of the buyer.

“W&I insurers typically require that the parties involved accept a certain portion of the risk, and this is reflected in the policy retention (also known as the excess). This is the financial threshold beyond which the insurer will become liable under the policy and below which it is generally not liable,” says Benson.