Nerves of steel: Ireland

As little as five years ago, the consensus was that Ireland was a mature legal market. In a failed experiment, UK firm Masons (legacy firm of Pinsent Masons) had packed in its projects and construction boutique after a mere six years, citing fierce market competition.

Certainly, despite the construction boom, the Irish legal market was an unlikely place for an international firm to launch: it already had its Big Five — Ireland’s Magic Circle — plus several more entrepreneurial firms sitting below them getting ready to pounce. With a population of less than five million, it was inconceivable that a newcomer could threaten their domination. Who would want to move into such a tightly held monopoly? Nobody seemed surprised when Masons moved out in 2004.

Against such a backdrop, the decision of local firm O’Donnell Sweeney to associate with Eversheds in 2006 was met with bemusement, as was Maples and Calder’s Dublin launch in the same year. ‘There’s been little international entry because Irish firms know that a merger means losing its referral relationships with other international firms,’ says Peter Astleford, co-chair of Dechert’s global financial services group. ‘That realisation is going to depress movement.’

Start-ups are also difficult. Hiring is a significant barrier to entry, because top-tier partners are notoriously loyal at the Big Five firms. So one would expect that Dechert’s recent announcement that it had managed to secure the services of alternative funds specialist Declan O’Sullivan from William Fry would raise more eyebrows. Certainly the move is on everyone’s lips, but thanks to Maples there’s little sense of surprise. Through a veritable raft of Big Five hires, including the brightest funds and finance names in the market, the largest offshore firm in the world has delved into its deep pockets and shown that a Dublin entry can be executed with style. Dechert may be the latest international name to launch, but it won’t be the last. Offshore firm Walkers is currently manoeuvring behind the scenes to acquire a Dublin team, and Simmons & Simmons has announced its ambitions to open in Ireland through a recruitment advert in the Irish Times.

Despite the flurry, indigenous firms are far from quaking in their boots. ‘The Irish legal market is competitive already,’ says Julian Yarr, managing partner at A&L Goodbody. ‘Furthermore, Ireland is a facilitating jurisdiction and we see international firms and other advisory services all the time, so we are already used to operating at the top level.’ The internationalisation of the market is indisputable. In 2009 ten out of the top-15 legal advisers to Irish M&A by value did not have an office in the country (see box, ‘Legal advisers to Irish M&A by value’, page 106), and the downturn is having little effect on the practice areas that are attracting them to the market.

The big draw

The main prize for the new entrants is undoubtedly a slice of Ireland’s flourishing funds industry, which, according to the Irish Funds Industry Association, services assets of E1.6trn held in over 10,500 funds. ‘We wanted to be open in all of the major onshore funds jurisdictions,’ says Astleford. ‘We’re in the US, London and Luxembourg already, so Dublin was an obvious choice. Simply put, if you’re a serious funds player you can’t not be there.’ Of course, Dublin has been a major funds centre for some years, but there are several significant reasons why firms are moving now.

‘A lot of the international firms have probably thought about moving into this market for a while,’ says LK Shields Solicitors banking and financial services partner David Williams. ‘But it’s cheaper now: rents are down, salaries are down – it makes sense for them to move now.’ Aside from the practical reasons, there is also a more ideological reason for the movement. ‘There is a drift in investment funds from offshore to European countries and particularly to Ireland. The writing is on the wall for Cayman firms,’ Williams adds. The ‘drift’ has been predicted for some time, as offshore jurisdictions continue to attract scrutiny due to implications of financial secrecy and tax avoidance. At the April 2009 G20 meeting, the decision was taken to act against non-co-operative jurisdictions, which effectively led to stricter regulatory controls to target money laundering and other ‘tax haven’-type activities. Despite their eventual compliance with the reforms, the consensus is that parts of the offshore market have been badly burnt.

‘For my profession the EU AIFM Directive is good news, but personally I’m worried about its wider effects.’
Peter Astleford, Dechert

‘We are hearing that many European institutional investors don’t want to invest in Cayman anymore,’ says Donnacha O’Connor, financial investment partner at funds specialist Dillon Eustace. ‘I don’t think it’s so much the Organisation for Economic Co-operation and Development (OECD) black listing or the US administration’s position as much as the recent financial scandals – I think there’s a strong association between Madoff and Cayman in the minds of some investors.’

It’s a trend that Maples appears to have anticipated; it was the first offshore firm to open in both Dublin and Dubai, and its growing commitment to onshore centres demonstrates the need for a toehold in both markets.

‘There is obviously interest in where funds are to be domiciled and Maples, with offices in both traditional hedge fund centres and onshore, is in a unique position to see both sides of the debate,’ says Peter Stapleton, an investment funds partner who joined Maples from Dillon Eustace earlier this year. ‘While we expect some managers with certain types of European investors to look at redomiciling in EU member states, particularly Ireland, it possibly won’t be in the huge volumes some people are predicting and European-regulated products will complement rather than fully replace existing offshore platforms.’

Nevertheless, the trend towards stricter regulation is clear and that is having significant implications for certain funds products. In particular, Undertakings for Collective Investment in Transferable Securities (UCITS) have become more attractive; these are funds that have been established in accordance with the EU UCITS Directive and effectively award funds a passport – once registered in one EU country, a UCITS fund can be freely marketed across the EU. ‘Ireland is primarily UCITS focused,’ says O’Connor. ‘Though there is a strong hedge fund servicing tradition here. Hedge fund promoters are pushing the UCITS regulatory boundaries and UCITS platforms set up by the investment banks are bringing more and more of these managers into the UCITS space.’

As if that wasn’t enough to draw investors towards Irish markets, there is another development on the horizon that could be a game-changer.

A bad Directive?

The EU’s proposed Directive on Alternative Investment Fund Managers (AIFM) is attracting comment from every quarter. The basic premise is to provide greater and more harmonised regulatory standards for AIFM (basically hedge funds and private equity funds), but the key point for Irish lawyers is the suggestion that only AIFM established in Europe will have access to the European markets.

‘The third country rules in the Directive are going to be critical from an Irish point of view,’ says O’Connor. ‘Selling a non-EU fund to EU investors could become quite difficult, which would be a major advantage for Ireland.’ Despite the obvious benefits for Ireland, most lawyers are critical of the proposed changes. ‘The new directive is bad for investors and contrary to the principles of free trade,’ says Astleford. ‘For my profession it’s good news, but personally I’m worried about its wider effects.’ Nevertheless, as a European funds hub, Ireland is expected to fare well under the proposals and this is also working to encourage more international interest. That business is growing is doing much to ensure that the domestic firms remain pragmatic in the face of the new funds-focused entrants, who, after all, will be providing more targeted services.

‘The arrival of Dechert, Walkers and Simmons & Simmons to establish funds practices underlines the substantial growth and critical mass of the Irish funds industry, as well as the migration of funds from offshore jurisdictions onshore to Ireland,’ points out Pádraig Ó Ríordáin, Arthur Cox managing partner. ‘This is positive for all firms and presents marked new opportunities for us. The depth of our abilities in funds in conjunction with capital markets, Irish taxation and Irish regulation gives us a substantial competitive advantage over the new entrants.’ Interestingly, Arthur Cox’s investment funds team had been linked with Walkers’ office launch. The team’s decision to stay at the Big Five firm shows that the indigenous Irish firms are ready to compete with new entrants and, as Ó Ríordáin suggests, will be able to capitalise on the lack of support services offered by the smaller outfits – particularly tax, which remains a significant driver of Irish corporate and finance work.

The holy grail

There is no overstating how important Ireland’s headline 12.5% corporate tax rate has been to the establishment of the country’s financial services sector, and how integral it will be to the recovery of its economy. ‘Tax is the single biggest focus for the international economy,’ says John Gulliver, head of tax at Mason Hayes + Curran. ‘There is no prospect that Ireland will withdraw tax incentives that affect multinationals – even if there’s a change of government, because all parties realise how important it is to Ireland.’

It’s also very important to law firms. Tax has long been a niche specialism at Matheson Ormsby Prentice (MOP) and that continues to garner substantial rewards for its corporate practice: in 2009 MOP topped mergermarket’s ‘Legal advisers to Irish M&A’ table by volume of deals (27) and came second by value ($1,745m). The firm agrees that the corporate tax rate continues to be seen as a pillar of Ireland’s business regime. ‘A number of jurisdictions are looking to increase their tax rate to pay for infrastructure development,’ says Turlough Galvin, head of tax and structured finance at MOP. ‘But the government here has stated that it is not going to touch the ‘holy grail’ 12.5% rate – especially at a time when there aren’t that many companies investing outside their home territories.’ Cuts in public spending have been severe, with public sector jobs bearing the brunt, but some infrastructure projects have been ringfenced. On 26 July the government announced its ‘Infrastructure Investment Priorities’ plan, which announced the projects it will prioritise for investment until 2016, including Dublin’s new metro system. The plan earmarks E39bn for capital investment, revealing a significant dip in capital spending from the earlier E75bn National Development Plan, but shows that Ireland can bankroll major capital investment works while maintaining the corporate tax rate.

‘The government here has stated that it is not going to touch the ‘holy grail’ 12.5% tax rate.’
Turlough Galvin, Matheson Ormsby Prentice

The government maintains that keeping jobs in Ireland is its number one focus. However, as unemployment rises, tax receipts are falling and it needs to plug that gap. ‘The phrase being used here is “broadening the tax base”,’ says Galvin. ‘Currently 6% of people in Ireland pay 50% of the tax. There is concern at the increasing domestic income tax rate, which can be over 55% in total. The government is looking at introducing other forms of tax, such as water rates and property taxes. The proposals amount to imposing taxes on the less well off.’

The importance of keeping jobs in Ireland through the corporate tax rate is seen as an important differentiator between its main financial centre competitors, because if there is one fact that remains troubling for the Irish legal market on the tax side, it is the idea that Dublin could be seen by some as a ‘tax haven’. ‘Ireland is not an offshore location. Any suggestion from the entrance of offshore firms that Ireland is considered by them as an offshore jurisdiction is not useful,’ says John Cronin, managing partner at McCann FitzGerald. ‘Just because Ireland conducts the types of business that may have been traditionally associated with offshore jurisdictions does not make it an offshore jurisdiction.’

It is a necessary point to make because Ireland’s main advantage over its rival ‘offshore’ jurisdictions, are its EU membership and the robust regulatory standards which that status implies.

‘You can put substance into Ireland,’ says Gulliver. ‘Like offshore jurisdictions, Ireland is small and flexible, but there is substance here; hundreds if not thousands of people are employed in the EMEA hubs established here – that’s the distinction between Ireland and a tax haven. The G20 respect that and the OECD respects that.’

Get smart

The government also realises that demonstrating that substance is crucial if Ireland is to retain public approval for the corporate tax rate. Luckily the figures speak for themselves. ‘Foreign direct investment increased by 10% last year and multinationals contributed to 73% of all business research and development (R&D) spend,’ says Philip Nolan, head of commercial at Mason Hayes. ‘The government should be commended for that drive in success: they’ve devised a very successful tax regime and they’re out there really pushing Ireland overseas.’

The government’s continuing progress towards transforming Ireland into a ‘smart economy’ is evidenced through the number of multinationals based in the country, which has now reached almost 1,000, according to IDA Ireland. Also, eight of the world’s top-ten software companies and 13 of the world’s top-15 pharmaceutical companies have substantial operations in Ireland, according to research compiled by A&L Goodbody.

‘Cloud computing is a key trend and in the past 18 to 24 months, we’ve seen Ireland becoming a global hub for the industry.’
Philip Nolan, Mason Hayes + Curran

‘We have an educated workforce, a good entry into Europe and, importantly, we have a track record – numerous multinationals have their headquarters here,’ says John Whelan, IP and technology head at A&L Goodbody. That track record is particularly useful in selling Ireland to new brands and new technologies, and the marketing is working. ‘Cloud computing is a key trend and in the past 18 to 24 months, we’ve seen Ireland attempting to become a global hub for the industry,’ says Nolan. ‘Google is currently the biggest cloud computing operator here and it has nearly 2,000 personnel.’ As Nolan points out, these are not just call centre jobs but positions in R&D, graphic design and marketing. The presence of these multinationals alongside its business-friendly tax rate is enabling Ireland to become a conduit for major deals and in nowhere is this clearer than in the IT sector. The recent E1.1bn sale of SkillSoft to a private equity consortium was a global headline deal. Boston-headquartered Ropes & Gray, and Mason Hayes advised Berkshire Partners, the consortium acquiring the Dublin-based company, while WilmerHale acted alongside William Fry to advise SkillSoft. Latham & Watkins advised the banks, with A&L Goodbody advising on Irish law. ‘The increase of international firms in the market shows that Ireland is being seen as an international business venue,’ says John Kettle, head of Mason Hayes’ London office. ‘It means that firms are telling their clients about Ireland. If I can get onto a beauty parade that might not otherwise have invited an Irish firm because Ireland is being touted as a good place to do business, well that’s excellent news; the more work we pitch for the more we win.’ It also means that the government’s ‘smart economy’ is coming together. But there is no room in the current financial climate for complacency, hence it’s recent introduction of a new IP tax regime.

Patently obvious

‘The government has been dealing with the economic crisis for more than 18 months; it is implementing a definite plan and there is an acceptance that certain tax reliefs need to be ringfenced as part of the overall strategy,’ says David Hackett, head of corporate and IP at Eugene F. Collins. ‘The 12.5% tax rate is important but there’s been a growing realisation that you need IP tax relief to get companies to base R&D here.’

The main aim for the Irish government continues to be to increase the job-intensive nature of businesses based in Ireland. By attracting the R&D functions of major multinationals, the plan is to attract quality, as well as quantity, so to encourage that process the government has introduced substantial tax incentives for companies that transport their IP work into Ireland.

‘The Finance Act 2009 introduced wide-ranging tax relief on capital expenditure incurred by companies on the acquisition of intangible assets in order to enhance Ireland’s appeal as a location for the development and exploitation of intellectual property,’ says Aoife Murphy, contentious IP specialist at WhitneyMoore. ‘A wide range of IP now falls within the scope of Ireland’s tax incentive regime for the acquisition of intangible assets, enabling companies previously not entitled to tax relief on intangible assets to avail themselves of a tax write-off.’ It’s the next obvious step in the creation of a smart economy; ensuring that companies look to develop and exploit intangible assets in Ireland.

‘The revised IP tax regime will bring a new dimension to the area, similar to what was done with the financial services sector,’ believes Patricia McGovern, chairman of DFMG Solicitors. ‘Although there are many regimes around the world that are attractive, clients have to consider not just the incentives but all the implications of moving from another jurisdiction.’ Certainly, Ireland has been trying to position itself as an IP hub for some time now, so the implications are more favourable than they would have been ten years ago. The creation of the Commercial Court in 2004 has been an especially welcome benefit; the judges are seen as technically strong on all areas of commercial litigation, including IP issues. The commercial responsiveness shown by Ireland’s quick-thinking ministers is also attractive.

‘The government has announced a new E500m venture capital fund, as well as indicating that banks are going to be obliged to release capital into the SME sector,’ highlights Whelan. In tough times, such measures are invaluable symbols of industry support. It will be interesting to see how, and if, the banks can respond to the request.

Don’t bank on it

Following Ireland’s official announcement that it was in recession in September 2008, the Irish banking sector continues to be assisted through its recovery. The bank most exposed to the country’s property bubble, Anglo Irish Bank, has been nationalised, while Allied Irish Banks (AIB) and the Bank of Ireland (BOI) have been recapitalised – all continue to be vulnerable. In July, the EU gave its permission for the Irish government to continue supporting the main Irish banks but with conditions. ‘The European Competition Commissioner, Joaquin Almunia, has requested that the BOI customer database and back-office systems be made available to BOI competitors,’ says Robert Ryan, banking partner at Doherty Ryan & Associates. ‘This raises an interesting question regarding existing laws on data protection and bank/customer confidentiality.’ It also suggests that competition curbs could be more of a feature of the global regulatory climate going forward. Ryan, who advises all of the main representative bodies of the Irish banking sector, adds: ‘The difficulty now is that the scope for the banking sector to influence new regulation, both Irish and EU, is much diminished, if not close to zero.’ While sympathy for the main banks remains low, it is the National Asset Management Agency (NAMA) that has taken the biggest hammering from a PR point of view. The ‘bad bank’ approach continues to attract controversy, with economists and politicians alike divided over its possibility of success, and the public unimpressed with the figures that are being published. Incorrect information provided to NAMA by some banks has led to reduced profit estimations: in July NAMA chairman Frank Daly reduced the sum that NAMA could deliver over a seven to ten-year period from E4.8bn to E1bn. Despite the error, the Minister for Finance Brian Lenihan stated even if the worst case scenario was realised and NAMA lost E800m, there will be no loss to the taxpayer – the banks would cover any shortfall. In the short term, firms are advising on NAMA’s second tranche, which saw it acquire loans with a face value of E5.2bn from AIB, BOI, and Irish Nationwide Building Society for a total of E2.7bn – an average discount of 48% – demonstrating the sheer scale of the project.

‘The increase of international firms in the market shows that Ireland is seen as an international business venue.’
John Kettle, Mason Hayes + Curran

‘NAMA will become the biggest property owning company in the world,’ says Patrick Spicer, corporate partner at MOP. ‘For a country the size of Ireland that will present a challenge and it will be interesting to see how they manage their portfolio.’

The plan is to drip feed property assets back on to the market, but it is clearly a tricky balancing act. While NAMA will want to perform its duty as quickly as possible, if too many assets are released at once prices will fall. ‘Unless there’s some recovery in the Irish property market, the first sales by NAMA could be difficult because unless properties are being sold by NAMA at a profit, the government is going to be seen as frittering money away,’ explains Spicer. ‘It is expected that NAMA won’t sell the first tranche of assets until next year at the earliest. Potential buyers, particularly international players, are wondering “if we buy these assets, will there be a domestic market to sell them to in two to three years time? How long will the NAMA hangover last?”

It is certainly no quick-fix solution. The timescales involved are lengthy and bank liquidity isn’t expected to be unlocked for some time. The theory was that once NAMA started to come on-stream, the banks would be quicker to pull the plug on underperforming loans. That hasn’t happened. ‘We’re starting to see murmurings of appointing receivers by the two largest banks involved in NAMA (AIB and BOI), but they are moving very slowly,’ says Michael Lavelle, insolvency specialist at Lavelle Coleman. ‘It won’t be until 2011 before things will start to happen. NAMA is a relatively small administration, it has recruited about 45 people, so it will be a slow process.’

Nevertheless, the transfer of loans to NAMA is keeping plenty of law firms busy in the interim (there are 64 firms on the agency’s legal panel, with Arthur Cox heading up advice to the state), and there is a sense that its presence has worked to stabilise the economy. ‘There is a far greater sense of clarity in the market now,’ points out Ó Ríordáin. ‘And the balance sheets of the banks are being progressively restored and de-risked, allowing them to become more active again. These two factors are strong indicators of greater deal flow.’

‘The revised IP tax regime will bring a new dimension to the area, similar to the current financial services sector.’
Patricia McGovern, DFMG Solicitors

Hope springs

‘The economic indicators are good; we’re officially out of recession,’ says Gerry Halpenny, M&A head at LK Shields. ‘But it’s a bit early to see the green shoots yet, we’re still very deep in a hole.’ The Irish economy remains a mixed bag: manufacturing output continued to rise in June according to the NCB Purchasing Manager’s Index, but with slower rises in output and new business, sharp rises in input costs and a slight drop in employment – the unemployment rate climbed to 13.4% in June. Nevertheless, there are signs that Ireland has begun to move away from its reliance on debt. ‘Tax has increased and public spending has decreased – generally there’s a lot less money,’ Halpenny adds. ‘So people are investing their finances a lot more conservatively. We’re a fairly pragmatic nation and we’ve become a nation of savers – there’s far more money in the deposits now. So there is recovery, but it’s fragile.’

Mergermarket’s half-year tables for 2010 show that the European markets are picking up. European M&A jumped by 24% from H1 in 2009 to reach $240.3bn in H1 2010 and Irish firms have secured a sizeable chunk of that work. By value, Arthur Cox heads the list of indigenous firms advising on Irish M&A, advising on E3.2bn worth of deals in H1. Its value share alone increased by 887% from H1 last year.

The more vulnerable mid-size firms have also felt their practices begin to steady. ‘Deal value has held up over the past six months – things aren’t getting any worse. There’s a sense that the bottom has been reached and that there is now a more measurable platform from where you can plan and budget,’ says Hackett. ‘On the corporate side, there is a greater sense of confidence in the market today than there was 18 months ago. Both as a firm, and as a country, I think we’ve managed it very well under the circumstances.’

Some practices will obviously take longer to recover. Traditional real estate specialists, for example, have managed to find new markets to compete in. Beauchamps Solicitors, historically strong on the property side, has made a real play for renewable energy projects, advising RES Group, Wavebob and Wind Prospect on green energy matters. ‘The government target is that 40% of Ireland’s electricity should come from renewable sources by 2020 – that’s approximately 5,000 MW,’ says Ainsley Heffernan, property partner and head of the renewable energy group at Beauchamps. Heffernan points to the growth of offshore wind, wave and tidal projects as an important part of the green energy mix, but also highlights biofuels as a growth area. ‘Biofuels fall within the road transport fuel mix but targets are relatively small – 4% by volume per annum,’ he says. ‘Ireland has a huge agri-industry, and there is already a shift towards farmers growing crops for biofuels and biomass. Globally the push towards energy crops has been criticised but with such a large agri-sector in Ireland there’s significant potential here, not just for domestic use, but for export.’ However, despite the growth in emerging sectors and the sense that Ireland’s economy is getting back on track, Dublin is still a relatively small financial centre in a country with a population of only 4.5 million – are there too many mouths to feed?

Finding a niche

By and large, the new entrants are niche specialists, each looking to cream off the top-tier transactions in its field: Beachcroft is focusing on insurance, while Dechert, Walkers and Simmons will be looking specifically at investment funds.

‘A focus on niche areas is long overdue in the Irish market,’ says Katie da Gama, professional risk specialist at Beachcroft. ‘It’s what clients expect, especially international clients. They want to instruct lawyers that do this work day in and day out – clients have become more sophisticated.’

Aisling Gannon, head of health at Beauchamps, agrees: ‘Two years ago the Irish financial and property markets collapsed, and that impacted significantly on the insurance market. The key insurers in the market responded by reviewing the services provided to them by external advisers – including law firms. Many of them are no longer happy to use generalists.’ It’s not just the insurance market that is eschewing generalists, it is becoming clearer that corporate clients are spreading their work about a bit too. Examples are plentiful. For instance, MOP advised Setanta Sports on a E315m financing to fund its acquisition of Premiership football rights, but the company turned to Eugene F. Collins to advise it on its restructuring. ‘I think the days are gone when one client gives one firm all of its legal work,’ says McGovern. In this light, it is clear that niche players could do well in Ireland.

‘You can’t be a “one-trick-pony” when you’re handling significant corporate and finance deals.’
Andrew Doyle, Maples and Calder

The niche model was one that the market expected Maples to follow when it launched in Dublin, and rivals were surprised by the firm’s decision to add corporate and litigation to its funds offering. ‘Our business model is full service because you can’t be a “one-trick-pony” when you’re handling significant corporate and finance deals,’ says Andrew Doyle, managing partner of Maples’ Dublin office. The firm, which has always viewed its smaller size compared to the Big Five as an asset, also denies that the entrance of new, more nimble, players will put pressure on the firm to slimline. ‘We see no need to change our business model at all,’ he adds. ‘We have Maples Finance, which is an important differentiator, and we have critical mass.’

The ‘one-trick-pony’ issue is important to note. The size of the Irish market makes choosing a niche difficult, because there are very few practice areas that could support a whole firm. Simon McAleese Solicitors is a defamation-focused boutique that broke away from MOP in 2002. ‘We have the bulk of the Irish media law market but it’s a tiny market relative to the UK,’ says managing partner Simon McAleese. ‘You need to have another string to your bow. In our case it’s commercial litigation, which makes up the other 50% of the practice.’ The firm puts its success down to its longstanding reputation in the market. ‘We launched fully formed into the Irish market as an existing specialist team from a Big Five firm, which gave us immediate presence and credibility,’ says Tony Williams, litigation partner at the firm. Launching with a ready-made team is a model that other new entrants are trying to achieve, but even the success story, Maples, had to wait a couple of years before the hires came in. It wasn’t until the July 2008 appointments of leading financial services partners Nollaig Murphy and Barry McGrath that the firm was made in the eyes of the market. The behind-the-scenes wrangling of Walkers to try to secure a ready-made team is currently a source of much market speculation in Dublin and it is a crucial step. If the firm is to compete with the longstanding reputations of funds teams at Dillon Eustace and A&L Goodbody, as well as the new entrants, securing those top-tier names is essential because, as Cronin points out: ‘The currency at the moment is quality and experience.’ LB