World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Ireland. View the full guide.
Mason Hayes & Curran LLP
1) In your jurisdiction, which sectors do venture capital funds typically invest in?
Venture capital funds in Ireland (“VCs”) typically invest in the technology sector, with a strong focus on software, life sciences and FinTech.
2) Do venture capital funds require any approvals before investing in your jurisdiction?
There is generally limited regulation in respect to VCs deploying capital by investing into investee entities in Ireland. Approvals tend to be at the fund level in terms of the regulation of how VCs raise funds and how their investment activities are regulated.
Investments into investee companies operating in certain regulated industries may require regulatory approval from the relevant regulatory body for that industry (particularly if change of control thresholds are triggered as a result of the proposed investment). Specific requirements will vary from industry to industry.
Most VCs will fall within the definition of an “alternative investment fund” (commonly referred to as an “AIF”) pursuant to the European Union (Alternative Investment Fund Managers) Regulations 2013. Accordingly, the VC, or AIF, will be required to appoint an approved “alternative investment fund manager” or “AIFM”. The AIFM will be subject to the regulation and supervision of the Central Bank of Ireland.
3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
There are generally no restrictions on foreign VCs acquiring control of and influencing the business and operations of a privately held investee company in Ireland, subject to any regulatory approvals that may be granted for any change in control in respect to the investee company.
4) Would an investor be required to undertake an antitrust (competition) analysis prior to investment? When would such a requirement be triggered?
Venture capital transactions, like any corporate transaction, can be subject to the Irish (and EU) competition law and merger control rules and may be subject to review by the Irish Competition and Consumer Protection Commission (“CCPC”). Under the Irish merger control rules, a transaction requires notification when it constitutes a “concentration” and satisfies the merger control notification thresholds. A transaction is considered a “concentration” when it involves one of the following:
a. the merger of two or more previously independent undertakings;
b. the acquisition of direct/indirect control of the whole or part of one or more undertakings by one or more undertakings; or
c. the acquisition of part of an undertaking, not involving the acquisition of a corporate legal entity, but the acquisition of assets/goodwill (i.e., that constitute a business to which a turnover can be attributed).
The definition of control under the Irish Competition Acts 2002 (as amended), is based on whether as a result of the transaction ‘decisive influence’ can be exercised over the strategic commercial decisions of the target company or asset. In this regard, the CCPC typically follows the guidance of the European Commission as set out in the Consolidated Jurisdictional Notice.
In Ireland, a merger or acquisition will require notification to the CCPC when in the most recent financial year the following thresholds are exceeded:
i. the undertakings involved had a combined turnover in Ireland of at least EUR 60 million; and
ii. at least two undertakings involved had individual turnover in Ireland of at least EUR 10 million.
The waiting period for the CCPC’s assessment can be up to 30 days from the date of notification for a Phase I review (and up to 120 days for a Phase II review) and this can be extended where the CCPC issues a formal requirement for information (“RFI”) which has the effect of stopping and resetting the review period, which only restarts when the RFI is complied with.
Failure to notify a merger or acquisition that satisfies the turnover thresholds is a criminal offense in Ireland which can attract fines of up to EUR 250,000 on conviction on indictment (and EUR 3,000 on summary conviction) and a maximum daily fine or EUR 25,000 for each day that an indictable offense continues after the date of its first occurrence (and EUR 300 a day for a summary offense). Therefore, venture capital transactions involving parties with activities operating in or through Ireland should be assessed for merger control at the outset of a transaction, to avoid unnecessary delays to the deal timetable and/or possible sanction from the CCPC.
5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
The most common structure for investment in venture capital deals is an Irish Limited Partnership. Irish Limited Partnerships allow for commercial flexibility and are tax transparent. When making investments an Irish Limited Partnership will act by its General Partner, which will typically be a limited liability company.
VCs typically invest in Irish limited companies and usually acquire a minority stake in these investee companies by way of preference shares. The preference shares generally have superior rights to the existing classes of shares in relation to liquidation preference, veto rights, dividend rights and participation / anti-dilution rights on future funding rounds.
VCs often also invest in Irish limited companies by way of a convertible loan note instrument enabling the VC to convert the convertible loan notes into shares in the investee company at a discount when a conversion trigger (typically the next equity financing round) occurs.
6) Is there any restriction on rights available to venture capital investors in public companies?
There are no specific restrictions imposed on VCs under Irish company or securities laws in respect of interests in listed companies.
7) What protections are generally available to venture capital investors in your jurisdiction?
VCs typically negotiate considerable contractual protections when investing, usually by way of shareholder and subscription agreements and amendments to the constitution of the investee company. These documents will typically incorporate the VCs liquidation preference, veto rights, dividend rights and participation / anti-dilution rights on future funding rounds along with information rights and often the right to appoint a VC director / observer to the board of the investee company.
As shareholders of the investee company, VCs have statutory protections under the Companies Act 2014 and contractual protections under the constitution of the investee company, the terms of which are negotiated on a deal-by-deal basis.
Other statutory protections include the shareholders’ right to take court proceedings where the directors of an investee company are exercising their powers or conducting the affairs of the company in a manner oppressive to the shareholders or in disregard of their interests.
8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
Warranty and indemnity insurance has become increasingly prevalent on M&A transactions in Ireland. Consideration as to its use may be particularly relevant in transactions where VCs are seeking an exit (given that such investors will, most likely, not give warranties to buyers).
Warranty and indemnity insurance will therefore tend to be a feature on exits that involve a venture capital investor selling shareholder (as opposed to being a feature of the initial investment).
The need for the insurer to review due diligence reports for the buying entity and transaction documents (typically the sale and purchase agreement, and the disclosure letter) should be considered in the transaction timetable. As a minimum guideline, a two-week period is generally required in order to put such a policy in place.
It should also be noted that warranty and indemnity insurance will typically not cover all liability under the sale and purchase agreement – matters disclosed by the warrantors in the disclosure letter and warranties relating to tax and pensions, for example, will most likely not be covered. Warranty and indemnity insurance is therefore not a substitute for a complete due diligence, disclosure exercise and negotiation with regard to the warranties.
9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
The most commonly utilized exit mechanism for VCs in Ireland is a share sale (either by way of a trade sale or a buyout by a private equity firm focused on later stage majority acquisitions).
There are a number of common risks associated with trade sales and buyouts. In particular, there is a risk that management time and external cost is expended trying to complete a transaction which ultimately does not proceed. Further, there is a risk when undertaking a trade sale, that during the sale process, competitors could access sensitive information which, if the transaction aborts (and notwithstanding that confidentiality arrangements have been entered into), will have been disclosed.
IPOs, though much less common, are another exit mechanism. Some of the challenges specific to IPOs are explored below.
10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
Venture capital backed IPOs are not common in Ireland. While an IPO gives credibility to a company and raises the public profile of the investee company, IPOs are a comparatively risky route to exit, being affected by prevailing market conditions and taking significant management time and effort, even in the event that initial marketing of the investee company shares does not result in sufficient interest to proceed to an IPO.
Shareholders of companies which exit through an IPO are often required to enter into lock-in agreements, where it is agreed that they cannot sell their shares for a set period of time.
Mason Hayes & Curran LLP
Conall Geraghty, Partner
David O’Donnell, Partner
Sarah Cardiff, Associate
Want to Learn More?
The objective of this publication is to serve as a Q&A-style multi-jurisdictional guide to venture capital law in countries where WLG member firms have offices. The guide intends to provide a high level overview of the venture capital market, including key sectors, preferred investment structures, regulatory approval requirements, limitations on acquisition of control in portfolio companies, restrictions on investment, investor protection, and exits; and hopes to provide readers the benefit of the shared global knowledge and local insights among the WLG member firms.