On 23 June 2016, the UK held a referendum in which the British people voted for the UK to leave the European Union. But what does this mean in practical terms?
Who will BREXIT affect?
- Any business or financial institution based in, with a subsidiary in, trading in or with any presence in the UK
- Any business or financial institution trading with the UK
- Any business or financial institution investing in the UK
What will happen immediately following the vote for BREXIT?
For the time being, it's business as usual, despite likely initial volatility in the global FX, debt and equity markets. The UK is still a member of the EU and no legal change arises immediately on the outcome of this decision. However, clearly businesses (inside and outside the UK) need to start preparing now for the new reality of a UK outside the EU and monitor the negotiations. We are in a period of uncertainty whilst the process of exiting the EU unfolds.
When can we expect to see any changes following the "yes" to BREXIT?
Broadly speaking, there are three stages to BREXIT:
- Negotiations on the EU/UK withdrawal agreement
- Negotiations on future arrangements between the UK and the EU
- Negotiations on trade deals between the UK and countries outside of the EU
There is a minimum two-year period during which an EU/UK withdrawal agreement will be negotiated (though the UK government has suggested it could take many years to finish all three stages of the process). This two-year negotiating period can be extended, but any such extension will require the unanimous consent of the remaining 27 members of the EU, meaning that in practice it is unlikely that an extension will be achievable.
What is the position during the withdrawal agreement negotiation period?
During the negotiation period on the withdrawal agreement, the UK will remain a member of the EU and EU laws will continue to apply to the UK. The UK will continue to participate in EU business, voting and meetings as normal. Without an extension, if after two years no withdrawal agreement is reached (which could be because the UK Parliament ultimately rejects it) or the UK is not able to accept the deal that is offered, exit will take place automatically. This would leave a large number of important questions unresolved.
What will be the likely effects of a vote for BREXIT?
Although these will be very significant, it's impossible to predict the timing and scope of the legal changes that will result from the decision to exit the EU and the implementation of the various agreements outlined above. In particular, there are various possible models for the UK's on-going relationship with the EU once exit actually takes place, but there is no precedent and everything is up for negotiation.
McGuireWoods will monitor developments closely and will keep you fully informed and updated as the BREXIT process unfolds. As a start, we outline here some of the areas likely to be impacted by BREXIT, which affected organisations need to be considering now.
BANKING & FINANCE
There are a number of considerations to take into account if you are a financial institution or have agreements in place with financial institutions:
EU Passporting. Banks headquartered outside of the EU, but providing investment banking services through a subsidiary in the UK with no other presence in the EU, risk losing access to European markets and will no longer be able to rely on the EU "passporting" regime.
Documentation terms. An extensive due diligence exercise will need to be undertaken in relation to all English-lawgoverned documentation and trading arrangements, to ensure that any potential issues have been identified and eliminated. Industry bodies such as the Loan Market Association (LMA) and the International Swaps and Derivatives Association (ISDA) will likely assist with this exercise by publishing additional industry protocols or standard form amendment agreements.
Contractual recognition of bail-in. Under Article 55 of the Banking Recovery and Resolution Directive (BRRD), any contract which is governed by the law of a non-EU country and which contains a liability of an entity subject to the BRRD must include a provision through which the counterparty acknowledges that such liability may be subject to bail-in by the applicable regulator. Banks will need to include this provision in relevant English-law-governed contracts. This is likely to give rise to an extensive documentation amendment exercise.
Re-enactment of EU-derived legislation into English law. As a result of BREXIT, the European Communities Act 1972 will need to be repealed. This will result in the effective repeal in the UK of all directly and indirectly applicable EU legislation. "Saving legislation" will need to be enacted by the UK in order to replace that EU legislation. Until enactment, this could give rise to uncertainty in relation to many pieces of EU legislation important to the banking industry.
CORPORATE & COMMERCIAL
With respect to existing contracts, companies need to verify if such contracts contain territorial restrictions referencing the EU. The decision to leave the EU means the UK will no longer be covered by any such territorial description. Consideration will need to be given to whether an amendment to the contract is required or if instead a party can attempt to invoke a force majeure or material adverse change clause to terminate the contract.
Similarly, the freedom of movement of goods and/or people will be affected by leaving the EU, and contracts will need to be analysed for the potential impact of any future restrictions as well as any increased costs (be it through the imposition of tariffs or otherwise).
Regarding future contracts to be entered into, parties should consider including specific provisions relating to the potential impact of prolonged negotiations to implement the exit and/or the impact of the new trade agreements once finally negotiated. Similarly, parties may want to include termination rights in case any such new trade agreements will result in an increased burden or negative effects on the intended business transaction.
DATA PRIVACY & SECURITY
The UK government will need to update and strengthen the current data protection laws. Whilst we do not yet know what form any new legislation will take, it is expected that such laws will be similar, and at least equivalent, to the EU's General Data Protection Regulation (GDPR) that will come into force in 2018.
The reason for this is that the UK still needs to be able to transfer data across borders and in accordance with the GDPR. In order to be able to do this, the UK's data protection laws will need to provide an "adequate level of protection" essentially equivalent to that guaranteed by the GDPR.
In addition, UK companies operating in EU countries or processing data of EU citizens will still need to comply with the GDPR. That means that a company in the U.S. operating in the EU or processing information about EU citizens will be subject to the GDPR, and the UK will be no different.
Much UK employment legislation derives from the UK's EU obligations, and the rationale for most EU-based employment law is the protection of workers' rights. Historically, UK employment legislation has been a domestic political battlefield and, if anything, membership in the EU has inhibited successive UK governments' abilities to implement politically driven change.
Therefore, whilst it is difficult to predict the extent and pace of change to UK employment law following the UK's separation from the EU, it is inevitable there will be some change. For example, we may see changes in relation to recent EU case law around overtime and commission payments during holiday pay, other changes to the Working Time Regulations, Transfer of Undertakings (Protection of Employment) Regulations (particularly in relation to harmonising terms and conditions following a transfer) and collective consultation obligations. However, the EU will likely require the UK to retain the majority of its EU-derived employment law legislation, as part of any new trade agreement.
EUROPEAN COMPETITION LAW
Although the position will depend on the results of EU/UK negotiations, the following is an outline of the possible position:
Substantive competition law will remain very similar in the UK and the EU, at least immediately after exit. However, there will likely be a divergence over time and less certainty. For example, EU "block exemptions" exempting certain agreements from competition law (such as certain distribution, licensing and R&D agreements) may not continue to apply to the UK. EU state aid law may cease to apply in the UK, which will be a significant change and may give greater scope to the UK government to intervene in industry. In procedural terms, it is likely that there will be two separate competition law regimes in the UK and EU, giving rise to extra expense and uncertainty during investigations and when merger filings need to be made.
There is one certainty: EU competition law will still apply to UK-based and other companies trading in the EU (as it does now, for example, to U.S. companies trading in the EU).
Commercial parties may need to review the jurisdiction (choice of court) clauses in their contracts in the light of the harmonisation of jurisdiction, recognition and enforcement rules within the EU.
They may also wish to review the governing law (choice of law) clauses in their contracts in the light of harmonisation of the rules applied within the EU to determine what law should apply to most commercial disputes (whereby party autonomy is, for the most part, respected).
Tax policy in the EU has two components: direct taxation, which remains the sole responsibility of Member States, and indirect taxation, which affects free movement of goods and the freedom to provide services in the single market.
With regard to direct taxation, the EU has established some harmonised standards for company and personal taxation, and member countries have taken joint measures to prevent tax avoidance and double taxation, including parent/subsidiary rules, taxation of financial transactions and common systems relating to the taxation of interest and royalties and elimination of double taxation.
On indirect taxation, the EU coordinates and harmonises law on value-added tax (VAT) and excise duties. It ensures that competition on the internal market is not distorted by variations in indirect taxation rates and systems giving businesses in one country an unfair advantage over others.
Leaving the EU will mean that most of these laws will need to be renegotiated with the EU and international corporates and structures will need to be audited to make sure there are no new tax leakages.
We are likely to see international corporates restructuring their UK investments, or leaving the UK, and restructuring their debts.
Non-EU investment, which may have used the UK as a base into the EU, may need to reconsider the impact of the new tax leakages and look at relocation if the UK is not necessarily a substantial market.