Ireland: Directors Must Manage Brexit Risk

Both the economies and the legal systems of Ireland and the UK have been closely intertwined in the past. Brexit is changing all of this, imposing specific risk management and duties of which directors must be aware.

Currency risk

Currency risk has become a board-level issue in Ireland, as Geoffrey Meagher, former president of CPA Ireland, pointed out. A majority of Irish companies are closely tied to ones in the UK, in one form or another; a poll by the Irish Institute of Directors in early 2017 showed that 75 per cent of Irish C-class executives have links with the UK.

Thus, the increased volatility of the British pound since Brexit has become a major issue. “Directors have to be aware of currency management since Brexit,” he said. “If they don’t have a clear policy in place, someone may get a rush of blood to the head. If a risk management policy is properly worked out it will govern the strategy for the mitigation of currency risk.”

The majority of Irish companies have economic interests in the UK. Although only about 16 per cent of Irish exports go to that country, the real importance of the UK as a trading partner is understated by that statistic, according to analysts at the Dublin-based Alpha Wealth. “In contrast to exports to the US, a much higher proportion of exports to the UK are from indigenous Irish industries where the real economic value added is considerably higher. Perhaps a better indicator of the economic relationship between the two economies is the fact that more than one-third of Irish imports come from the UK.”

“In fact, a 1 per cent reduction in UK GDP has, in the past, led to a 0.3 per cent fall in Irish GDP,” the analysts estimated.

Issues the board should consider include: pricing mechanisms, which may need to be managed differently in volatile currency contexts, and transfer pricing, as trading terms may have to be renegotiated and hedging. “Hedging’s an obvious answer to currency risk but of course hedging comes at a price doesn’t it? So the board must work out who bears the cost and the risk of that hedging,” warned Michael Luckman of the UK law firm Gowling.

Resident director requirement

Ireland has become the ‘gateway’ of choice for UK companies considering a headquarters move to an EU nation in the wake of Brexit. A recent poll showed that three-quarters of UK-based companies have said they are considering a move to Ireland as their first choice if they decide to leave. This does mean, however, that at least one director must take up residence in a European Economic Area (EEA) country (European Union plus Iceland, Lichtenstein and Norway) – and that may not include the UK, depending on how Brexit negotiations work out. According to PwC, there are 1,700 Irish companies that are relying on a UK director to meet this requirement.

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It is the Irish Companies Act 2014 that places this requirement for an Irish company to have an EEA resident director on their board, but the Act offers some procedures for alternative solutions. If directors wish to remain in the UK, it is possible to put a Non-Resident Directors Bond in place. The Bond must be valid for two years minimum. It insures the company for a sum of €25,000, and its purpose is to cover any fine imposed on the Company in respect of offences under the Companies Act 2014 (e.g., failure to file Annual Returns and Audited Accounts on time, any fine for failure to supply information to the Irish Revenue Commissioners, or any penalty that the company is held liable for in tax).

It is also possible to obtain a certificate from the Revenue Commissioners showing that the company is closely connected to economic activities in Ireland. This may take the place of a bond.

Mergers & acquisitions

More complicated are the rules changes for Irish companies involved in mergers and acquisitions caused by Brexit: These could raise the risks for M&A approval.

The departure of the UK from the European Union will change access to EU Merger Control Regulation, which has a “one-stop shop” system, as Vincent Power of the M&A specialist law firm A&L Goodbody explained:

“Under the EU system, deals with high turnover in several EU Member States are notified just once to the European Commission instead of having to be notified in several EU Member States.  Businesses almost invariably welcome this one-stop system, which streamlines the process, involves no filing fees and facilitates deal planning because just one filing regime with a fixed timetable is involved.  Businesses liked the regime so much that they lobbied the EU to have the system to extend to some smaller deals than had been included in the original regulation (in Regulation 4064/89) with the result that the current system (in Regulation 139/2004) covers even more deals than originally anticipated,” Power said.

Primary thresholds for deal size are €5 billion (£4.43 billion), or the parties have individual EU-wide turnovers of more than €250 million (£221.9 million). Secondary thresholds – a merger that does not meet the primary thresholds – may still require notification to the European Commission if:

  • The parties have a combined global turnover of more than €2.5 billion (£2.23 billion);
  • The combined aggregate turnover of all undertakings in each of at least three EU member states is more than €100 million (£88.7 million);
  • The aggregate turnover of each of at least two of the undertakings in each of at least three EU member states is more than €25 million (£22.1 million); and the aggregate EU-wide turnover of each of at least two of the undertakings concerned is more than €100 million (£88.7 million).

“The chances are that the UK turnover of the Irish companies is their biggest, and so they would fall below the EU threshold once the UK leaves the Union,” Power said.

Staying up-to-date with rule changes – Diligent

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