The Irish Minister for Finance published the General Scheme of the Irish Collective Asset-management Vehicle (ICAV) Bill 2014, shortly before Christmas (20 December).
The ICAV is a new corporate vehicle designed specifically for Irish investment funds, both UCITS and AIFs.
Background to the introduction of ICAVs
The Funds industry in Ireland has sought to be very innovative in terms of the availability of fund structures.
The longest established fund structure has been the unit trust, however, when the Irish funds industry was established in the late 1980’s, the key innovation was the introduction of the variable capital investment company (“VCC”), structured as a public limited company (“PLC”).
The investment limited partnership structure was subsequently introduced in 1994, followed by the common contractual fund in 2003.
Since the introduction of the VCC, the underpinning legislation has been updated on a number of occasions, principally to disapply some of the more onerous company law provisions that apply to PLCs whose shares are publically traded. The most notable change was perhaps the change to permit segregated liability between sub-funds of VCCs in 2005.
However, whilst the VCC structure has served the Irish Funds industry well since its introduction and remains the structure of choice for funds domiciled in Ireland, the ICAV structure offers a number of enhancements.
The ICAV Edge
(i) Ticking the Right Boxes – an Irish Master Feeder Structure
Facilitating investment by US investors is a key objective of many fund promoters and the Irish PLC structure has suffered in that regard as PLCs are considered to be corporations “per se” for US tax purposes.
The main competing structures – the Luxembourg SICAV and the Cayman Islands Company do not have the same “per se” corporate designation and may elect by “ticking the box” to be treated as a partnership for US tax purposes, thereby allowing US taxpayers the benefit of a flow-through vehicle that is not subject to the more onerous “passive foreign investment company” and “controlled foreign corporation” anti-deferral regimes applicable to shareholdings in non-US corporate fund vehicles.
As a result, Irish master feeder structures tended to use a unit trust as the master fund in a master feeder structure. However, corporate master funds are preferred and the ICAV structure will facilitate this.
(ii) Company Law Compliance Burden
In common with most European countries, Ireland has a very complex company law code, particularly with regard to public companies. As indicated, many of the more onerous provisions have been disapplied in the case of VCCs, but this process has proven to be burdensome over the years and has exposed VCCs to company law requirements which should not really apply to fund vehicles.
The ICAV legislation will essentially provide for a customised corporate fund vehicle, meaning that legislators will no longer need to consider unintended consequences for fund vehicles when drafting company law legislation and corporate fund vehicles will have one piece of discrete and relatively straightforward legislation covering their activities.
(iii) Risk-Spreading
One significant consequence of the VCC operating under European company law is the requirement for VCCs to observe the principle of risk-spreading. This requirement does not arise for other fund structures such as unit trusts and the removal of this requirement under the ICAV proposal will assist managers in terms of product structuring.
(iv) Redomiciliation
One of the most significant changes to Irish company law relating to fund vehicles was the introduction of redomiciliation legislation which enabled fund companies to change their domicile to Ireland from another fund domicile by way of a “continuation”, allowing the company to preserve its track record and ensuring that the redomicilation would not be considered to be a taxable event for shareholders.
The redomiciliation legislation did not get the traction that it otherwise might have because of the fact that the redomiciled Irish company was unable to make a “tick the box” election. The ICAV proposal will remedy this.
Converting to an ICAV
Given the very significant advantages attaching to the new ICAV structure, the decision to elect for the ICAV structure will be relatively straightforward for promoters of new fund vehicles.
The ICAV proposal will also permit existing VCCs to convert to ICAV status. The process is quite straightforward and somewhat similar to the process for redomicilation of companies and therefore it has been tested.
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Board Considerations
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Marketing/distribution advantages, particularly if U.S. taxable investors are a target.
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Analysis of any impact on shareholders’ rights.
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Reduced costs of a company law compliance.
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The benefits of the non-application of risk spreading requirements.
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Reduced compliance risk arising from a more streamlined corporate fund regime.
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The likelihood of obtaining shareholder approval.
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The costs of conversion against the costs of not converting.
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Attitude of contractual counterparties.
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Common Features of ICAVs and VCCs
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May be established as an umbrella structure.
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Will have a board of directors.
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Segregated liability will apply.
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May not have corporate directors.
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May be listed on a stock exchange.
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Will be subject to the powers of the Director of Corporate Enforcement.
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May issue and redeem shares.
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Will be subject to similar depositary requirements to those which currently apply to investment companies.
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May either be managed by an external management company or exist as a self-managed entity.
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Novel Features of ICAVs
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The Central Bank will assume the role currently undertaken by the Companies Registration office with regard to registration.
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The ICAV Proposal does not provide for meetings other than AGMs, but mechanisms to obtain shareholder approval will still need to be provided for.
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While ICAVs will have limited liability, they will not be required to be designated as such.
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Directors are required to have regard to the interests of employees, although ICAVs are generally unlikely to have employees.
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An ICAV’s constitutional document will be an “Instrument of Incorporation”.
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Detail in relation to the format and content of the ICAV’s annual accounts and directors’ report.
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The Central Bank application must include details of the depositary which must be a body corporate incorporated in Ireland or another EEA State.
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The ICAV proposal will permit the preparation of separate sub-fund accounts.
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It would appear that the requirement for subscriber shareholders will no longer apply and that the ICAV may be incorporated without having any shareholders.
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Provision to prepare a revised annual report to correct errors or non-compliance.
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While the ICAV proposal does provide for the holding of AGMs for open-ended funds, the directors may dispense with them on notice to shareholders.
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Fund mergers and amalgamations are to be put on a statutory footing.
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The final version of the ICAV Bill is expected to be published at the end of Q1 2014.
