See below for a roundup of recent Brexit news. Please let us know if you’d like to speak about any of this in further detail.

Key Developments:

  • Legal challenges to Brexit without an Act of Parliament begin, and are expected to be resolved by early 2017.
  • Economic forecasts show only mild downturn as a result of Brexit – provided that the UK’s departure is an orderly one.

UK:

Legal challenge to Article 50 process

  • On Tuesday a hearing took place in the High Court of England and Wales related to the legality of an Article 50 notification without an Act of Parliament (i.e., as an exercise of the UK Government’s Royal Prerogative powers). There are likely to be at least seven such claims, and the court determined that Gina Miller, an investment manager, and Deir Dos Santos, a hairdresser, would act as lead claimants. The defendant (named as the Secretary of State for Exiting the EU) has until September 2, 2016 to file a defense, and the hearing is expected to take place in mid-October 2016.
  • The UK Government appears unlikely to attempt to issue an Article 50 notice before the case is resolved (likely on an appeal to the UK Supreme Court, which could be decided by early 2017).

Impact of Brexit

  • UK Prime Minster Theresa May has clarified in a written statement to the House of Commons the changes to the “Machinery of Government” following her creation of the Department for Exiting the European Union (DEEU) and the Department for International Trade (DIT). The Government has also announced the full list of Ministerial appointments to the DEEU and the DIT to support the Secretaries of State in both departments. May has also announced that she will personally chair the cabinet committee responsible for exiting the EU and international trade.
  • Predictions regarding the long-term impact of Brexit on the UK, EU and world economies continued to come in this week:
    • The UK’s vote to leave the EU has “thrown a spanner in the works,” said Maurice Obstfeld, IMF Chief Economist and Economic Counsellor. Obstfeld made the comments as the IMF reduced its forecast for the growth of the UK economy for 2017 by 0.9% to 1.3%. Crucially, the IMF noted that its forecasts were contingent on the “benign” assumptions that uncertainty following the UK referendum would gradually wane, the EU and UK would manage to avoid a large increase in economic barriers, and that financial market fallout would be limited.
    • Andrew Bailey, the new Chief Executive of the UK’s Financial Conduct Authority (FCA) has said that the FCA “will support the Government’s work to put in place new arrangements, and I would include in that, alongside access to the Single Market, seeking to have in place trade agreements with other countries.” He added that “[f]rom an FCA perspective, there is, for instance, no doubt that our objective of ensuring healthy competition in UK financial markets is supported by cross-border trade in these financial services. More so than for trade in goods, for internationally traded services of the type we regulate the key to sustained international trade is robust global standards of regulation. These can operate simultaneously at both EU and global levels.”
    • The Bank of England has said in its Agents’ summary of business conditions (July 2016 update) that there has been “no clear evidence of a sharp general slowing in activity” in the economy following the UK’s vote to leave the EU. The Bank did, however, comment that “[m]any firms had only just begun to formulate new business strategies in response to the vote and, for the time being, were seeking to maintain ‘business as usual.’”
    • A group of small retail banks has written to Parliament’s Treasury Select Committee to highlight some of the potential advantages that the UK’s exit from the EU may have on the banking sector.
      • They said: “The EU referendum result, once implemented, means HM Government and the Bank of England will have the discretion to determine which aspects of legislation derived from the EU they wish to be maintained in the UK and which they wish to reform. We hope that will result in a more proportionate approach to the regulation of smaller banks, particularly in respect of capital. This will help smaller banks and building societies compete more effectively and provide more credit to the economy which will be useful especially should the dominant incumbents reduce their lending appetite in a post Brexit environment.”
      • Commenting on the letter, Andrew Tyrie MP (the Chair of the Treasury Select Committee) added “Brexit poses risks; it may also create opportunities. Current EU legislation could be placing smaller banks at a disadvantage. This is because it risks imposing a ‘one size fits all’ approach to banking regulation. The Bank of England and the Government both now need to consider whether the opportunity afforded by Brexit could enable the development of a regulatory regime less prejudicial to small and challenger banks.”
  • At a joint Freshfields and China Chamber of Commerce event held in London on Thursday, the sentiment was very much that the UK remains open for business.
    • The Government was quick to reaffirm the country’s position as a leading center for business, innovation and opportunity reinforced by recent visits by senior members of Cabinet to China and the United States, as well as May’s visits to Scotland, Germany and France.
    • Furthermore, the selection of Philip Hammond as Chancellor of the Exchequer is seen as a positive move given the UK’s renewed focus on trade links beyond the EU (he was previously Foreign Secretary).

UK takeovers

  • The UK Takeover Panel’s 2016 Annual Report notes that the impact of Brexit on the framework of UK takeover regulation will depend upon the form of exit that the UK negotiates.
    • If the UK remains a member of the EEA, the Takeovers Directive will continue to apply, but if not, the Panel will discuss with the Government the extent to which the provisions that implemented the Directive in the UK should be amended.
    • Other than in certain limited provisions, for example those regulating “shared jurisdiction” cases with takeover regulators in other EEA member states, the Panel confirmed that there are likely to be relatively few direct consequences for the Rules of the Takeover Code.
  • The referendum vote did not deter SoftBank’s £24.3bn takeover of ARM Holdings plc, which was announced on Monday and represents the largest UK takeover this year (Freshfields acted for SoftBank on the transaction).
    • The offer will incorporate a binding “post-offer undertaking” to double the employee headcount of ARM in the UK in the five years after the deal completes. This will be the first time undertakings of this nature have been made under Takeover Code rules introduced in January 2015 in the wake of controversial public commitments made by Pfizer during its attempt to secure a deal with AstraZeneca.
    • The deal was referred to by May in her recent speech which hinted at a larger role for national interest considerations in takeover policy. Noting the promise of investment and new jobs, the UK Government welcomed the deal – May said “it is a clear demonstration that Britain is open for business – as attractive to international investment as ever.”

Labour Party leadership fight continues

  • Owen Smith will now be the sole challenger to Jeremy Corbyn for the leadership of the Labour Party following Angela Eagle’s withdrawal from the race. Smith has said that if he beats Corbyn in the contest, he would make him President of the Labour Party.

EU:

  • Valdis Dombrovskis, who replaced Lord Johnathan Hill as the new EU financial services commissioner on July 15, has said that:
    • due to the different factors at play, it is too early to draw conclusions on the future of London’s position as the main trading hub for euros, which will be an important part of the UK’s exit negotiations; and
    • there is no easy solution to preserve an international firm’s ability to trade across the EU from its UK headquarters, suggesting that London may have to rely on existing EU law provisions that grant overseas firms some rights to operate in the EU.
  • Lee Foulger and Mette Grolleman, who were in Hill’s cabinet, have joined Dombrovskis’ team to ensure continuity on financial regulation, including the Capital Markets Union. However, the fate of British workers in the EU institutions, such as Foulger, is unclear. Parliament Secretary-General Klaus Welle pushed for British officials to maintain their positions, but they have been told that they will not be promoted to the level of director or above.
  • May informed Council President Donald Tusk on July 19 that the UK would relinquish its Presidency of the European Council in order to prioritize exit negotiations. Estonia will now hold the Presidency in the second half of 2017. May explained that careful preparations need to be made before Article 50 is triggered and Tusk confirmed that he would help to make the process as smooth as possible, so as to facilitate “a velvet divorce.”
  • The European Central Bank (ECB) announced Thursday at its first monetary policy meeting following the UK referendum that it will leave interest rates and other stimulus measures untouched pending further economic information on the UK referendum’s impact. ECB President Mario Draghi said that it was too early to assess the full economic impact and that, while there had not yet been any major disruptions in financial markets or the banking sector, he warned that “the risk has materialized, and it’s a downside risk.” Additional stimulus measures may be announced at the ECB’s next monetary policy meeting on September 8.
  • The Commission published its first assessment of the economic outlook for the euro area and the EU after the UK referendum, which was presented during the Council summit last week. The Commission found that the referendum result has led to increased uncertainty, financial market volatility and abrupt exchange rate movements. The Commission is due to publish its official economic forecast in November 2016.
  • Polls in Germany, France, Italy and Spain have shown that a majority in each country wish to remain in the EU. A survey carried out by a French polling agency, Ifop, showed that 53% of French people want to remain in the EU and 26% wish to leave.

Germany:

  • On her first foreign trip as Prime Minister, May visited Berlin to meet Chancellor Angela Merkel, stating:
    • “[T]he nature of our relationship is going to change as the UK leaves the EU, but we both want to maintain the closest possible economic relationship between our countries”; and
    • that she wants to work with Merkel and the European Council to make it an orderly departure and that Article 50 will not be triggered before the end of the year, as everyone needs time to prepare for the negotiations.
  • Merkel assured May that the relationship of the two countries will be “close and amicable.” German President Joachim Gauck also said that the EU “must take no hard stand” against the UK and that the country should not be punished, as that would harm future generations.
  • Meanwhile, the Berlin Senator for Economic Affairs travelled to London to invite start-ups to move to Berlin, announcing that she has “sent hundreds of letters to UK firms” and that the Berlin Government would open a relocation office in London in September.
  • German Vice-Chancellor Sigmar Gabriel has spoken in favor of extending European Parliament President Martin Schulz’s term beyond January 1, 2017 and reportedly hinted that Tusk would have to go if Schulz’s presidency were not extended, as this would potentially undermine the political balance between the two biggest parties in the EU.

France:

  • May will meet with French President Francois Hollande Thursday night to talk “frankly and openly about the issues we face [which] will be an important part of a successful negotiation.” Hollande said that he would like to hear the justifications for delaying the triggering of Article 50 and has said that single market access cannot be guaranteed unless free movement of workers is respected.

United States:

  • US Secretary of State John Kerry said on Tuesday that it would be “physically impossible” for the United States to strike a trade deal with the UK before the UK left the EU, but that “informal” discussions could begin earlier.

Next steps:

  • End of August: Hollande, Merkel and Renzi meeting to discuss way forward after UK referendum result.
  • September 4-5: Gathering of world leaders at the G20 Summit in China.
  • September 8: ECB monetary policy meeting.
  • September 16: EU Summit meeting on new EU priorities anld Brexit negotiations (without the UK).
  • October 2-5: Conservative Party Conference.
  • October 20: EU Council meeting.

Freshfields Brexit Publications:

To access our previous Brexit publications, please click here.