In the last weeks Referendum the British public has voted in favor of the UK leaving the EU. As a result the UK will enter into negotiations with the EU about the terms of the exit. If no other agreement can be reached the United Kingdom ceases to be a member of the European Union upon expiry of two years following the UK’s notice to the European Council (EC) of its intention to leave. Regardless of the future legal relationship between the European Union and the United Kingdom there will be changes of the legal framework, at least for all business activities with the United Kingdom.
The scope of such changes cannot be determined at this point as it will largely depend on the outcome of the exit negotiations and the decisions of the British legislator as to whether previously implemented European law shall continue to apply in the UK.
In the following we have identified from a current perspective, but without being conclusive, certain areas of business where changes of the legal framework may occur. In case that you have any questions in this regard or in relation to any other legal aspect of Brexit please do not hesitate to contact one of our experts.
At a glance
- Corporate Law and Capital Markets
- Contracts and Litigation
- Takeovers and M&A Transactions
- Financial Service Industry
- Capital Investments
- Tax Law
- Intellectual Property
- Data Protection
- Export Control
- International Trade
1. Corporate Law and Capital Markets
In the field of corporate law, the Brexit could especially have impact on the choice of the legal entity and the planning of a restructuring:
- The European Company, SE, is based on an EU-regulation. With the Brexit coming into effect, SEs with their seat in the UK could lose their legal basis and could be obliged to transform into an UK company.
- UK-companies might no longer be able to be party to a cross-border-merger or split.
- The possibility to transfer the seat of administration of a UK-Ltd. to Germany is based on the EU-Freedom of Establishment. With the Brexit coming into effect, a Ltd. with its seat of administration in Germany would become a partnership – with far-reaching consequences as to the liability of its shareholders.
- Following the Brexit, London as the leading financial market in Europe would no longer be subject to EU supervisory laws and authorities. EU rules, like the EU Market Abuse Regulation (MAR) which will come into force in early July, will likely no longer apply. Hence, the benefits of capital markets harmonisation would evaporate.
2. Contracts and Litigation
Following an exit from the EU, UK courts would no longer be bound by the Rome Regulations. This may lead to an uncertainty as to whether the substantive law that is applicable to a legal relationship from a German point of view will also be the substantive law applicable from a UK point of view.
Within the EU, Regulation (EU) 1215/2012 sets out uniform rules as to when the courts of a member state have jurisdiction and how competence conflicts between courts of several member states are to be dealt with. After an exit from the EU, UK courts will no longer bound by these Rules.
Further, the following simplifications could cease to exist:
- Rules regarding the automatic recognition and enforcement of judgments from courts in another member state; as well as
- Obtaining judicial assistance in cross-border court proceedings.
3. Takeovers and M&A Transactions
The takeover of listed companies is regulated by national law, although harmonised by EU directives. Should the two legal regimes begin to drift apart with time, shares, which are listed both in the UK and an EU member state could face two separate legal regimes. Legal and economic uncertainties resulting from the Brexit raise a number of questions also regarding private M&A transactions:
- Does already the Referendum vote trigger MAC clauses in existing agreements?
- Need to cover legal and economic consequences of the Brexit in current and future transactions?
- How can the economic uncertainties resulting from the Brexit be considered when entering into long term ancillary agreements?
From an employment law perspective the Brexit might have an implication for the co-determination regimes as well as a considerable impact on cross-border employment:
- UK employees respectively their trade union representatives would no longer be involved in transnational employee representation bodies unless otherwise stipulated. This could lead to re-elections and different compositions of such European bodies and eventually even to a change of the applicable co-determination regime.
- The basic EU principles of freedom of movement for workers and freedom of services as well as the European regulation (EG) 883/2004 for the coordination of social security systems would no longer apply. For internationally active businesses this constitutes a restriction in their flexibility of labour utilisation as in future the assignment of staff from and to the UK will trigger visa and working permits.
5. Financial Service Industry
The loss of the so-called European passport system for UK deposit-taking credit institutions or securities services enterprises would take away their basis to operate in the EU member states. A securities prospectus approved by the competent UK authority could no longer be used for purposes of admission to trading on a stock exchange or public offers within EU member states.
Furthermore, the following needs to be taken into consideration:
- Under the European Market Infrastructure Regulation (EMIR) a non EU-Clearing Counterparty (CCP) may only render clearing services if it has been authorised by the European Securities and Markets Authority (ESMA).
- There may be implications for, e.g., outsourcing (regulation and data protection) and finance agreements (deductions of withholding tax, extraordinary termination for illegality, choice of law and enforcement).
EU-passporting may become ineffective for insurers and intermediaries with far reaching consequences: Writing business of UK insurers within the EU, and therewith in Germany, would no longer be possible on the basis of the freedom of services. For the business through branch offices the rules of the non-EU-member states would apply and may demand changes of the corporate and capital structure, e.g. by transferring the registered seat and relocation of senior management. Further difficulties are to be expected for, e.g.
- cross-border mergers and portfolio transfers
- management of long term cross-border contracts (regulation, choice of law and enforcement)
- outsourcing (regulation and data protection)
- investments in UK-assets and government bonds
Directly applicable EU-regulations of Solvency II would have to be transferred into UK-law. It is questionable whether these will be recognised as equivalent in case of differing standards of regulation.
7. Capital Investments
The European passport for alternative investment fund managers based in the UK may become ineffective. Management of funds as well as marketing of fund units within the EU would become more complex. The Brexit could influence existing investments, as for example:
- Restrictions regarding the location of assets (e.g. restricted assets of insurance companies with in the EEA).
- May give rise to extraordinary termination (e.g. illegality).
- Influence on investment contracts regarding (refund of) deductions of withholding tax according to European regulations.
8. Tax Law
Benefits under EU directives could lapse for business relations across UK borders. This would result in an increased withholding tax exposure on distributions made between affiliates either from the UK to an EU member state or vice-versa, which will no longer be exempt from withholding tax. Instead, tax rates under the respective double tax treaties would apply. Also, tax neutral cross-border mergers from or to the UK would no longer be available. This would also affect past reorganisations, where holding periods are still open. Here, the requirement to maintain assets within the EU will no longer be met if assets remain in the UK.
Amongst others, the Brexit could further have an impact on the following areas of tax law:
- The UK will likely have to re-think its VAT laws. Also, privileges such as the one-stop-shop VAT filing within the EU will no longer be available in the UK.
- The UK will also have to negotiate free trade agreements, as these are currently concluded at EU level. UK companies will also need an EU representative in future in order to have access to privileged customs procedures.
- For individuals, the Brexit could trigger payment obligations under exit tax rules. As exit taxes are subject to a deferral of payment only for the time that an individual remains resident in the EU, the Brexit itself can cause previously assessed exit taxes to fall due.
9. Intellectual Property
With regard to intellectual and industrial property rights, a concern particularly arises concerning the future of these rights:
- Regarding trademarks, for example, problems may appear for those who focused on the European Union trademark to the detriment of national English trademarks, i.e. who neglected such national marks or did not even bother to register them – it is unclear what significance the European Union trademark will play in the UK in the future.
- Furthermore, it is uncertain whether or not the European patent system will be established as planned.
- Besides, especially contractual questions will become relevant, for example with regard to license agreements: Will a license for the European Union continue to apply to the UK after the Brexit?
After the Brexit, companies from the UK will still have to observe the European antitrust law if actions have an impact within the EU. Also, companies from EU-Member States will have to observe the national UK-antitrust law regarding measures which have an impact in the UK.
Further impacts are likely in the following areas:
- In future, transactions that reach both the EU and the British thresholds, will likely have to be notified to both the EU Commission and the British Competition Authority.
- Since the EU state aid control will no longer apply, the UK will possibly have the opportunity to set less demanding standards.
- It cannot be excluded that different procedural rules could be implemented in the UK in relation to follow-on-claims for antitrust violations than in the rest of the EU.
11. Data Protection
Currently, until the Brexit becomes effective, the UK is still subject to EU data protection laws and any data procession and data transfers to the UK can continue on the basis of the normal rules applicable in Germany or elsewhere in Europe. However, starting with the effective date of the Brexit, the UK will be considered to become an “unsafe third country” in the meaning of the current European Data Protection Directive, as well as the upcoming General Data Protection Regulation. That would mean:
- All transfers of personal data to the UK will become subject to additional safeguards, such as the EU model clauses.
- Simpler solutions would require an agreement between the EU and the UK, such as the recognition of the UK as a “safe country” by the EU Commission, or an EU-UK Privacy Shield.
12. Export control
After the Brexit the export of dual-use items will likely no longer be feasable without an export license. This would affect a lot of different goods (e.g. export controlled machine tools, chemical substances, semi conductors, high end computers, sensors, lasers) as well as related software and technology. Finally, it will be under the UK legislative competence to regulate exports from the UK to EU-Member states. However, the UK is party to many international export control regimes, which continue to set the framework.
Challenges could apply to certain areas of Environmental Law, e.g.:
- With regard to the cross border shipment of waste it would have to be taken into consideration that the UK will be regarded as a “third country“. As a consequence the notification and licensing procedures will become more cumbersome.
- Regarding the import of chemical substances into the EU, manufactured by a company outside the EU, it needs to be considered that import requires the appointment of a sole representative of the manufacturer, who takes on all the obligations for importers under the REACH-Regulation.
14. International Trade
There will likely be a significant impact on international free trade:
- All (Free) Trade Agreements concluded between the EU and third countries need to be renegotiated by the UK, if UK wants to benefit from the respective regulations in the future.
- Security policy aspects of International Trade are addressed at EU level through the institution of the Authorised Economic Operator (AEO). The AEO Status has evolved into a general industry standard, very often requested by business partners as well. Apart therefrom the AEO Status facilitates various security related customs controls. The UK could not benefit any more from the AEO status and its benefits after the Brexit.