The era of the euro has commenced. On 1st January, 1999, Ireland, along with 10 other EU member states, will substitute the euro for its existing currency. The Economic and Monetary Union Act, 1998, permits the redenomination of outstanding debt and share capital in euro terms during the "transitional period" for the introduction of the euro between 1st January, 1999 and 31st December, 2001.
Redenomination is the redesignation and translation of an outstanding obligation from Irish pounds (or other currency of a participating member state) into the euro, with no increase or decrease in the total value of the obligation. For those who take no action, such redenomination will occur automatically at the end of the transitional period.
Availing of the Act may result in some treasury advantages and also encourage primary and secondary market dealings in debt securities.
But care is required to ensure that early redenomination of debt obligations does not upset related hedging arrangements or lead to unintended mismatch costs for the issuer.
What type of debt may be redenominated?
State debt: Irish Government debt denominated in Irish pounds and issued under Irish law may be redenominated into the euro upon such terms as determined by the Minister for Finance.
Irish Government debt denominated in the currency of another participating member state may also be redenominated into the euro but only where the relevant member state has itself redenominated its government debt denominated in the same currency. Any such redenomination will be on the terms laid down in the law of the relevant member state.
State Bodies: Any body whose borrowing is subject to the consent of any Minister may agree with its lenders to redenominate the currency of the borrowing into the euro provided that the original currency is that of a participating Member State. The consent of the Minister for Finance is not required provided that the aggregate borrowed amount does not exceed any agreed limit.
Similarly, subject to agreed limits not being exceeded, the consent of the Minister for Finance to an equivalent change in any State guarantee of such debt is not be required.
Other Issuers: Corporates may redenominate debt issued by them in Irish pounds or other participating currencies into the euro. The redenomination of Irish pound debt may only be effected under the terms for redenomination of Government debt issued in Irish pounds.
The redenomination of debt in another currency may only be effected after the relevant Member State has itself redenominated all or part of its Government debt.
Sterling denominated debt issued by Irish corporates may not be denominated into the euro. The Act will have to be amended to facilitate the redenomination of sterling bonds and those issued in the currencies of other member states who participate in the euro at a later stage.
Debt which is not redenominated on or prior to 31st December, 2001, will be redenominated automatically into the euro on 1st January, 2002. Redenomination of Share Capital:
The Act also applies to the redenomination of share capital from Irish pounds into euros during the "transitional period". Redenomination is simply the redesignation and translation of the existing share capital from Irish pounds into euros. There is no increase or decrease to the total value of the shares.
During the transitional period - the shareholders of an Irish company whose share capital is expressed in Irish pounds or in the currency of another participating member state may by ordinary resolution determine that the whole or part of the total authorised share capital of the company, the total issued share capital or to be issued share capital of the company, including any class of the share capital, be redenominated into the euro.
After the transitional period under the Act and the relevant EU legislation, the authorised, issued and to be issued share capital of all classes is redenominated automatically. In each case, the redenomination into the euro will be at the irrevocably fixed conversion rate and rounded in accordance with the relevant EU regulation. The redenominated nominal share par value is to be calculated using the formula: total redenominated amount (as determined above) divided by the total number of shares authorised, issued or to be issued.
The nominal value is expressed in unrounded euro amounts. Redenomination of any share capital will generally produce unwieldy figures. Companies may wish to readjust their share capital for the sake of convenience to avoid awkward nominal value.
Renominalisation involves an increase or decrease in the total value of the shares. The share capital of a company may be renominalised by:
ordinary resolution, with an appropriate adjustment in distributable reserves or through the introduction of additional capital;
special resolution, where the result of the renominalisation would be a decrease in the whole or part of the authorised and issued share capital, by transferring to a fund to be known as the `Capital Conversion Reserve Fund' an amount equal to the aggregate amount reduced as a result of the renominalisation. The amount so transferred must not represent 10% or more of the reduced share capital.
Separate resolutions are needed to renominalise and redenominate the share capital. The resolutions must be filed within 15 days in the Companies Office.
The provisions of the Act regarding renominalisation of shares cease to have effect from 30th June, 2003, or 18 months after the termination of the transitional period.
A redenomination or renominalisation of share capital is deemed not to be a reduction of share capital within the meaning of the Companies Acts and shall not in any way change the rights or obligations of shareholders in relation to dividends, voting at meetings or other matters.
John Cronin is a partner at McCann FitzGerald, Solicitors
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