The underlying commercial issues relating to Irish and UK insurance and reinsurance share sales, and transfers of portfolios of insurance and reinsurance business, tend to be much the same in the UK and Ireland. There is little difference between the laws and regulations at the moment, though that could change post-Brexit, according to Pinsent Masons partner Naoise Harnett. There are broad commonalities in the M&A structures used at present, but there are a number of key differences between them to be aware of.
Irish and UK insurance and reinsurance share sales are based upon share purchase agreements (SPAs) with an accompanying tax deed, and are usually very similar in form, notes Harnett. Pointing to some of the differences, he explains that a common pricing mechanism in a UK share sale is a locked-box mechanism, where the purchase price of a target company is based upon accounts predating completion to provide price certainty.
“A more common pricing structure in Ireland involves preparing completion accounts to test the target’s value on the completion date,” he adds.
It is generally accepted that restrictive covenants in an Irish share sale for any longer than two years would not be enforceable if challenged in the courts. In the UK, restrictive covenants for as long as three years could be enforceable.
“The seller’s maximum liability in damages for a warranty claim under an SPA in both Ireland and the UK will often be limited to the purchase price paid by the buyer,” he continues. “In a competitive auction process, the maximum cap on liabilities could be lower. Irish lawyers push hard for inclusion of a warranty confirming the accuracy of the contents of documents disclosed in a data room to the purchaser to allow pre-sale due diligence. In the UK, such a warranty would typically be negotiated out of the SPA.”
These acquisitions will always be subject to regulatory approval, which means there will be a split signing and completion.
“While based on the same EU regulation, our experience is that the UK regulatory approval process is more streamlined and swifter than its Irish counterpart.”
Portfolio transfers
Transfers of portfolios of direct insurance business from Ireland and the UK are subject to court approval.
"Both the Irish High Court and the English High Court have applied the same principles in a consistent manner in deciding whether to approve a transfer of insurance business," Harnett explains. "Notwithstanding that, English court decisions only have persuasive authority in Ireland. The principles in the leading English court case of RE London Life Association Limited have been adopted by the Irish High Court. While a recent English High Court decision looked beyond the principles in the RE London Life Association Limited case to other factors, the judgment in that case is subject to appeal. However, we believe the Irish High Court would be likely to follow the approach ultimately adopted by the English Court of Appeal in the event similar circumstances arise in an Irish context."
A reinsurance treaty to transfer the economics of the underlying portfolio to the proposed transferee prior to court sanction of the transfer of the insurance policies is a common feature of UK portfolio transfers.
“While not as prevalent in Irish portfolio transfers, pre-transfer reinsurance treaties are utilised in larger Irish arm’s-length portfolio transfers,” says Harnett.
"In a UK portfolio transfer, the UK regulators generally comment extensively on the independent actuary's report and draft court papers before approving them. This can be contrasted with our experience of the Central Bank of Ireland, which generally receives and reviews the independent actuary's report and draft court papers, but does not provide prescriptive comments."
Closely aligned
Notwithstanding the existing differences in approach, Harnett believes the structure of Irish and UK insurance and reinsurance share sale transactions will continue to be very closely aligned post-Brexit.
“One further potential difference post-Brexit will be the extent to which the regulatory approval process in the UK is streamlined and amended once the UK is not required to adhere to European rules,” he points out.
And there will be regulatory change. “The Irish and English courts are likely to continue to apply a very similar approach to approval of portfolio transfers,” he concludes. “However, the regimes in each jurisdiction will effectively be segmented, as the automatic recognition of approved transfers between them which applied under the Solvency II Directive will no longer have effect following the UK’s withdrawal from the EU and the conclusion of any transition period. In fact, it is proposed that Part VII of the UK’s Financial Services and Markets Act 2000, which governs the approval of UK portfolio transfers, will be amended so that it will only have application to transfers from a UK insurer to another UK insurer upon Brexit taking effect and any transitional period ending.”