Among the unintended consequences of the United Kingdom’s decision to leave the European Union is that the CREST system will no longer be authorised to act as a central securities depository (“CSD”) for Irish uncertificated securities.
What is the problem?
This is because CREST’s operator, Euroclear UK & Ireland Limited (“EUI”), is a UK-incorporated company which passports its services into Ireland pursuant to European law so, as a result of Brexit, EUI will become a third country CSD. The European Commission has agreed, as a temporary measure, to recognise EUI as a third country CSD until 30 March 2021. Thereafter, the CREST system will cease to be available for the settlement of relevant Irish securities with effect from 30 March 2021.
Pursuant to European law, securities listed on a regulated market, multilateral trading facility or organised trading facility (a “Relevant Market”) must be held through and traded via a CSD. This means that a replacement CSD will be required for relevant securities previously held via CREST on or before 30 March 2021. In addition, securities held via CREST but not listed on a Relevant Market (ie, “grey market” securities) will not be able to utilise CREST from 30 March 2021.
What is the solution?
Euroclear Bank, which operates a Belgian based international CSD, has been selected to provide a replacement holding and settlement system for securities of Irish companies listed or quoted on Euronext Dublin and/or the London Stock Exchange. The Euroclear Bank model is structurally different to CREST and primary legislation is required in order to allow existing Irish listed securities to migrate to the new holding and settlement system. In particular, after migration relevant securities will be held by Euroclear’s nominee and trades in such securities will be settled in Belgian law contractual rights (rather than the underlying security).
If an issuer does not participate in the migration to Euroclear Bank its uncertificated shares must be re-materialised into certificated form and investors will no longer be able to settle trades in such securities electronically.
The Migration of Participating Securities Act 2019 (the “Act”)
The Migration of Participating Securities Act 2019 was signed into law on Christmas day 2019, and it sets out the mechanism by which relevant listed Irish securities will migrate from EUI to Euroclear Bank. The Act contemplates that the migration process will be effected for all relevant Irish securities on the same day, which is likely to be sometime in early March 2021.
The Act prescribes a number of steps to be taken by issuers prior to the migration of their relevant securities to Euroclear Bank. In particular, it will be necessary for each relevant issuer to pass certain resolutions at its next AGM or at an EGM (convened in advance of the final migration date) consenting to the migration. Currently a working group of Irish lawyers is preparing a template shareholder circular for the meeting, and Matheson’s equity capital markets team is actively engaged in the group.
Issuers should engage with their legal advisers so that the necessary corporate authorities can be sought from shareholders at their 2020 AGM (or a separate EGM). In addition, as the operation of the Euroclear Bank model is substantially different to that of CREST, issuers must amend their existing articles of association to ensure consistency with the operation of the new system. For more information, please contact David Jones or Susanne McMenamin.