Ireland remains a popular jurisdiction for incorporating Special Purpose Vehicles (SPVs) for the purpose of issuing debt securities. The recent European Union (Dematerialised Securities) Regulations 2023 (Dematerialised Securities Regulations) address technical aspects of dematerialisation in Ireland. This is done by providing for adjustments to Irish company law to facilitate the implementation of the Central Securities Depositories Regulation (CSDR).
While unlikely to have significant practical implications for Irish issuers of debt securities, the Regulations do provide some clarity, but do not resolve all the questions that remain concerning the formalities of transferring dematerialised securities in Ireland.
What is dematerialisation?
Dematerialisation is the move from physical certificates to electronic records of ownership with the aim of increased safety, efficiency and flexibility.
CSDR – promoting the safety and efficiency of securities settlement
CSDR is an EU regulation which aims to harmonise within the EU aspects of the settlement process for financial instruments (as defined in MiFID 2). It also seeks to harmonise activities and governance of central securities depositories (CSDs) which, amongst other things, operate securities settlement systems. CSDR introduced certain measures applicable to CSDs, including a common regulatory framework and requirements for authorisation, governance and risk management processes. These measures are intended to promote investor protection and reduce systemic risk.
CSDR also introduced measures to increase the safety and efficiency of securities settlement. Article 3 targets paper certificates, requiring issuers of transferable securities, including shares and bonds, which are admitted to trading in the EEA to arrange for such securities to be represented in book-entry form. This can be done by immobilisation or by direct issuance in demateralised form.
Dematerialised Securities Regulations
The Dematerialised Securities Regulations complement CSDR by facilitating the elimination of paper-based certificates in Irish securities transactions and promoting the move to electronic book-entry. Amendments made to the Companies Act 2014 have the effect of abolishing the obligation to issue paper certificates in respect of applicable securities and nullifying the legal effect for those in issue. The scope of applicable securities for these purposes is derived from the definition of transferable securities in Article 4(1) of MiFID 2.
It is worth noting that CSDR contains a saver which allows for paper certificates to be used provided they are then immobilised. This saver is restated in the Dematerialised Securities Regulations. This prevents the full abolition of paper certificates, with some issuers still electing to issue (and thereafter immobilise) a global note. Notwithstanding the introduction of the Dematerialised Securities Regulations, such securities should be unaffected and existing procedures should remain the same.
For any outstanding securities issued by private limited companies, changes take effect from 1 January 2025. For PLCs and DACs, the changes take effect:
- From 1 January 2023 to applicable securities issued after that date, and
- From 1 January 2025 to any applicable securities issued on or before 1 January 2023
Any provisions in the constitutional documents of a company (including DACs and PLCs) that would otherwise require a certificate are automatically disapplied. A written instrument of transfer will not be necessary in respect of any applicable securities that are transfers (i) between a CSD and any holder in the rights or interests or (ii) from one CSD to another.
Although traditionally debt securities in Ireland have been issued in paper form, and many issuers continue to do so to be held in immobilised form, this is not a legal requirement. For this reason, the introduction of the Dematerialised Securities Regulations does not move the needle significantly for Irish issuers of debt securities.
While the Dematerialised Securities Regulations do address the rules regarding transfers, the extent to which they do so is limited to transfers in the clearing system. Clarification on transfers generally would have been beneficial for market participants. Notably, it does not address transfers where securities have been originally issued in demateralised form. This is of interest to those considering the use of distributed ledger technology (DLT), which is currently the subject of an EU pilot regime.
Further clarity would be welcome regarding transfers for those issuing in dematerialised form. In addition, there are potentially significant benefits in the use of DLT infrastructure, but the legal position on transfers of debt securities issued in this form is currently unclear. Irish legislation dealing specifically with DLT in the context of debt securities would be welcome.
For more information, contact a member of our Debt Capital Markets & Listing team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.