So, the UK has voted to leave the EU. Everyone has their own opinion and we've all seen the news reports and various viewpoints but what does this result mean for you in practical terms and where do we go from here? Orrick's EU-UK Working Group is ready and waiting to answer any questions you may have (see contacts above) and in the meantime, here's our overview of the key issues for your business:-
The Exit Process
- Clearly and as predicted, the result has triggered significant market turmoil and initial currency depreciation BUT the result itself does not trigger any eviction or desertion from the EU – the UK remains a part of the EU and from a legal perspective nothing will change immediately.
- Nothing will happen in particular until the formal notification (the Article 50 notification) is served and at the moment, the prediction is that this will not be served until at least the next leader of the Conservative party and Prime Minister is decided: likely to be September or October 2016 – and even then there may be further delay, despite initial pressure from other EU heads.
- Post-notification, the UK will need to negotiate the terms of its exit from the EU and its ongoing relationship with the EU. Trade agreements will have to be negotiated with the EU/ individual EU countries. This is unchartered territory and the lack of campaign detail as to proposed post-exit plans has led to much speculation but, while the EU is unlikely to make things easy for the UK, there have been suggestions that the UK will remain a key trading partner and business centre and so will not be 'frozen out'.
- Some in the Leave campaign have indicated that there are alternatives to using Article 50, by for example amending the EU treaties - but the details are unclear and the latest feedback from Germany and France suggests a reluctance to engage in anything other than the formal notification and negotiation process.
- Neither the vote nor, when it happens, the formal notification (or alternative) will trigger any automatic change to EU or UK Law. All UK laws which are derived from EU Directives and incorporated into UK law will remain in force unless and until the UK parliament passes legislation to revoke them and even after notification and exit negotiations, it is likely to take years to unpick these laws and put replacements in place.
Key Business and Legal Areas
- Freedom of Movement: One of the first questions we received was: what happens to the EU citizens working in the UK? The immediate answer is nothing; freedom of movement remains until exit terms come into effect – but it has been suggested that those with a right to apply for permanent residency should consider doing so, to shore up their position as and when we leave the EU. Certainly and although nothing is guaranteed, there have been many reassuring noises from government (and, dare we say it, future government…) since the initial shockwaves, to the effect that these individuals will remain protected and that immigration changes are likely to be focussed on future applications, probably to be considered under an Australian-style points system. Freedom of movement will be a key topic in exit negotiations, on a number of levels.
- M&A: Whilst M&A transactions may be impacted by many of the changes in the policy areas described in this alert, the terms of an English law governed M&A transaction are largely derived from English common law and statute and are therefore unlikely to be directly affected by a Brexit. Pan-European legislation such as the cross border mergers Directive and the Directive on takeover bids, which seek to harmonise substantive takeover legislation across the European Economic Area (EEA), may be impacted but it is too early to say what these changes might be.
- Technology: London is one of several thriving tech start-up hubs in Europe and the possibility or reality of Brexit may make cities like Berlin seem more attractive. However, a major strength of the UK's tech sector comes from our globally recognised and respected thriving universities and the innovation culture which that spawns and there is little question of the continuing strength of the UK's universities, irrespective of an in or out vote (although what happens with freedom of movement and immigration generally, will clearly be an issue). While the extent of change won't be known until the UK settles its post-Brexit policies, in or out of the EU, London remains the single largest economic centre in Europe, with nearly 14 million consumers in its metropolitan area, including some of Europe's wealthiest. Businesses who seek to have direct access to this incomparable marketplace, will continue to need and want to be in London irrespective of our now evolving relationship with the EU.
- Energy: The basic structure of the regulatory regime governing the UK energy sector is largely home-grown, although EU requirements have driven amendments to that sector, and therefore the effect of Brexit on that aspect of the sector is likely to be relatively minimal, at least in the short term. However, trading operations across the continent involving physical and virtual products will inevitably still have to be carried out under EU rules. No matter how absolute the separation from the EU turns out to be, the idea that we would be completely free to do as we please in areas such as State Aid is at best an over-simplification. When it comes to exports and imports, and certainly for piped gas and power, there is no immediately obvious alternative market to the EU with which we could trade. Even if we were to abandon all compliance with EU rules (and thereby any trade with the EU), the UK is a signatory to the World Trade Organisation (WTO) which has its own prohibitions on government subsidies that adversely affect the trading interest of the other 160 odd WTO members. Investors will still want to be sure that the WTO rules are not being breached, particularly as, at least according to some commentators, they are less lenient than those of the EU.
- Financial Services: The financial services sector is regulated and works across the EU by virtue of EU wide financial services Directives (including passporting). If the UK does not become part of the EEA on exit from the EU (and thereby continue to apply this regulatory system) the mechanism which enables this seamless approach will need to be replaced by specific legislation and application for regulatory authorisation and permission in separate member states.
- Finance: Although Brexit has inevitably resulted in significant uncertainty and volatility in the equity and debt markets, it is too early to assess its effects on many areas of finance. There is however likely to be a further slowdown in transacting new financings, as funders will need to analyse potential credit risks arising from Brexit, and the costs of finance may also increase to compensate funders for any such additional (actual or perceived) risks. Pricing for cross-border transactions in particular and the availability of FX hedging will inevitably be key factors for any new finance transactions. Existing borrowers will also need to consider the terms of their current financings: whilst the contractual terms of debt instruments may not be significantly impacted by Brexit, borrowers will need to consider the likely impact of Brexit on their businesses and their ability to meet financial tests under their debt instruments. Funders may also seek to invoke increased cost provisions under their current agreements to the extent that their costs of funding are directly increased by Brexit.
- Restructuring/Insolvency: In recent years there has been a trend for many European restructuring deals to have been implemented using UK insolvency tools and schemes of arrangement. Once the UK leaves the EU, and absent any new treaties coming into place, insolvency proceedings opened in the UK would not be recognised automatically across the EU under the European Insolvency Regulation (EIR). The EIR, which has direct effect in the UK currently, governs where insolvency proceedings should be opened within the EU and ensures that an insolvency in one Member State is recognised across the EU (although Denmark opted out of the application of the EIR). We would expect the UK to seek to come to an agreement with the EU regarding automatic recognition of its insolvency proceedings, and conversely we would also expect the EU to require that insolvencies in EU member states will be recognised in the UK.
- Tax: This is another obvious area of concern and uncertainty. For example: Will other provisions apply (or be introduced) in respect of the EU Directives that prevent withholding taxes for certain cross-border payments (the Interest and Royalties Directive and the Parent-Subsidiary Directive)? Will imports to and from the EU become subject to customs duties following exit? Will the UK have more flexibility to increase or reduce certain rates of VAT? Will exit lead to positive implications in terms of the UK tax regime's ability to act as an incentive to investment without the restrictions of EU state aid rules and freedoms? These questions will need to form part of the exit negotiations.
- Competition Law: The EU Commission has exclusive jurisdiction, under the EU Merger Regulation (EUMR), to investigate mergers and acquisitions exceeding certain turnover thresholds. If the EUMR ceases to apply to the UK, many transactions will require notification both to the Commission and the UK's Competition and Markets Authority (CMA). In addition, if the UK decides not to recognise the binding effect of EU cartel or abuse of dominance decisions, the CMA would have to launch its own investigations to ensure cartel members and other antitrust infringers are penalised and cease engaging in illegal conduct in the UK. In sum: more red tape for business in the antitrust arena.
- Employment: Many areas of employment law in the UK are influenced by EU Directives but equally, much is driven by domestic influence. Unfair dismissal, whistleblowing and redundancy pay, for example, are not affected by EU regulation. Discrimination and equal pay laws have been influenced and consolidated following successive EU Directives but are still long-enshrined in national law. It is possible that some of these areas will be watered down in some form by the future conservative government but extremely unlikely that they will disappear altogether or in any material way. Of course, if we see a labour (or even liberal democrat!) government by the time Brexit is fully upon us, they are unlikely to unpick them to any material extent. In the short term following Brexit, the areas we think are most likely to be targeted for review are the more heavily EU-influenced collective consultation rules, working time and holiday pay issues and TUPE Regulations (protection of employment upon transfers of undertakings) – although it's worth noting that both Switzerland and Norway have national rules broadly implementing the EU Directive which brought us TUPE and that the UK TUPE rules actually go further than the Directive.
- Privacy: The Data Protection Act remains UK law. The status of the General Data Protection Regulation framework which is due to be implemented in 2018 is unclear and would likely depend on the outcome of the exit negotiations between the EU and UK. However, the unhindered flow of data across borders is an important part of international trade in today's information economy and, to facilitate this, we would expect the UK's data protection standards to be equivalent to the EU's standards.
- Dispute Resolution: The extent to which the courts or authorities of EU member states will recognise and/or uphold English law relating to legal professional privilege in certain situations involving only English qualified lawyers, has been questioned. Also, the continuation of the EU regime on mutual recognition and enforcement of court judgments in EU member states will be up for negotiation, as will the applicability of the EU Regulations relating to the determination of governing law and jurisdiction for contractual and non-contractual disputes. Specifically, in relation to disputes relating to financial services involving financial instruments under the MiFIR, there will be a question as to whether the requirement for arbitration and dispute resolution clauses that specify English law and/or seat of arbitration in England will be recognised and enforced in EU member states once the UK is a non-EU or a 'third State' under those Regulations;
- Real Estate: The EU procurement rules which have to be followed by public and quasi public bodies when putting contracts out to tender add complexity and delay and therefore cost. Post exit, there is scope for these rules to be overturned or at least made simpler. Likewise State Aid rules as applied to real estate projects where government grants are involved (e.g. where registered social landlords or other housing providers obtain government grants for developments to provide housing) may be removed or amended post exit. And the removal of the exemption for land contracts from the competition regime opened up a large area of commercial property practice to challenge – for instance tenant mix policies in shopping centres; exclusivity arrangements for new operators or retailers – all of which could now be removed from the scope.
We will be following all of these developments closely and will report on key areas as and when more detail becomes available but for now, here is a roundup of our advice on the practical steps you should consider taking until then:
- Don't take any precipitous action while the markets work through the effect of the vote and the likely next steps.
- Consider whether you would benefit from having your own working group (or person(s) depending on the size and nature of your business) in place to monitor developments and reactions and to filter the necessary communications to staff and management.
- Monitor currency and interest rates.
- Review and seek advice on existing arrangements for:
- Financial covenant testing, particularly if currency dependent;
- Force-majeure clauses;
- Events of default/ material adverse change clauses;
- Continue to monitor legislative developments (and watch out for our alerts and blog posts) as the picture becomes clearer over the coming months.
- Consider issuing a message to all staff as to your intentions and position – if you are considering a restructuring, you will need to start a consultation process of some sort (for now, those EU-derived obligations still exist…) and if you are not planning any immediate changes, it will help stabilise your workforce to let them know that.
- Identify those non UK-EU nationals who work in the UK and those UK nationals who work in the EU outside the UK and communicate with them specifically to reassure them of their position in the immediate term at least.
- Examine group structures, and any relevant double tax treaties which would have an impact on your business.
- Review any regulatory requirements, authorisation or permissions affecting your business which are dependent on EU law.
- And finally, one thing which is certainly clear about this process is that it has sparked widespread heated debate and set social media on fire: make sure your workforce know what they can and can't say and do in terms of social media accounts (whether personal or business) and the parameters of acceptable behaviour towards each other generally.