Nobody yet knows the true likelihood of a so-called "Brexit" following Britain's "Leave" or "Remain" referendum on membership of the European Union (EU). The results of the 2015 general election suggest that relying on the results of opinion polls is a fool's errand. What is certain is that the referendum will take place – and soon, on 23 June.
Life after "Brexit"
If the British people did vote to leave the EU, the UK Government would then need to trigger the withdrawal process set out in Article 50 of the Treaty on the Functioning of the European Union (TFEU). A two-year negotiation period would follow in which the UK would try to agree its future relationship with the EU. The UK Government has published this paper on the withdrawal process.
Speculation is rife about what this future relationship might look like. However, tying up the best possible deal for the UK is unlikely to be straightforward. The UK Government must balance the desire of the British people for national sovereignty with preserving favourable trading arrangements with the single market. Membership of the European Economic Area (EEA) would provide the UK with full access to the single market. However, all relevant EU legislation in the field of the single market is integrated into the EEA Agreement (the agreement which established the EEA) so that it applies throughout the EEA. Therefore, to gain membership of the EEA the UK would have to accept certain core EU principles, some of which may have prompted the "Leave" vote in the first place, such as the free movement of goods and labour and financial regulation.
At the other end of the spectrum, a free trade agreement with the EU or reliance on the UK's membership of the World Trade Organisation are unlikely to match the trading benefits offered by membership of the EEA or EU, but would provide the UK with effective national sovereignty.
Is it all just crystal ball gazing?
Speculating about a post-Brexit UK/EU relationship amounts to crystal ball gazing at this stage. As such it is futile to try and provide detailed commentary on the legal effects of Brexit. This would depend on the post-Brexit relationship agreed between the UK and the EU, and how the UK government addressed the mass of EU law which is effective in the UK. It would seem logical for the UK Government to pass legislation deeming any existing directly effective EU law to continue to take effect in the UK, rather than shredding the EU rule book and starting again. However, it is all a big unknown.
Nonetheless, we can already identify some issues which the banking and finance industry should consider upon Brexit.
Effect on finance agreements?
In 2012 Greece's precarious economic position made the likelihood of Greece lurching out of the eurozone (and potentially the EU) overnight a real possibility. Speculation over so-called "Grexit" also resurfaced for a time in 2015. There has been much commentary on the legal effects of Grexit on finance documents.
When considering the effect of Brexit on finance documents, it is therefore tempting to try and draw parallels with "Grexit". However, Grexit and Brexit are not directly comparable because the UK is not within the eurozone, and Brexit will not be a distressed or panic exit from the EU. So, Brexit would have fewer obvious impacts on finance agreements than Grexit. Nonetheless, there are some issues we can identify:
Conflicts of laws:EU legislation currently sets out the rules which a court within the EU would apply to decide what law governs contractual or non contractual obligations, or which court has jurisdiction to hear a dispute between parties. EU legislation also sets out a framework for mutual recognition of judgments across the courts of the EU. Brexit is likely to cause some uncertainty as the courts of the EU would no longer have to play to the same rules so far as the UK is concerned. For example, the courts of an EU member state might refuse to accept the parties' choice of English jurisdiction following Brexit. However, in practice, it is unlikely that Brexit would spell complete uncertainty for parties in dispute. It is in the interests of all jurisdictions to agree a sensible way forward – particularly for matters of jurisdiction and enforcement of judgments. Switzerland, Norway and Iceland have already agreed similar rules on jurisdiction and recognition of judgments with the EU under the 2007 Lugano Convention.
Increased costs:Brexit could herald the introduction of new laws or regulations. Could these in turn result in a lender incurring increased costs in connection with its lending activities? If so, a lender might want to look to try and recover these costs using the increased costs provisions in its loan agreement.
Definition of EU and references to EU legislation in contractual terms:It is not uncommon for agreements to define "EU" as the members of the European Union from time to time. If this is the case, but the UK was obviously intended to be included in the definition, this would need to be addressed. Provisions in transaction and security documents which refer to EU legislation will also need to be considered, although any solution would be dependent on the UK's approach to EU-derived legislation.
Impact on capital raising in the debt capital markets?
EU legislation currently enables an issuer of debt securities to "passport" its prospectus offering those debt securities to other EEA member states. If the prospectus complies with the relevant European legislation and has been approved by the competent authority of an EEA member state, the issuer can use it to raise capital across the EEA without requiring further consents or approvals.
So, if the UK was unable to agree with the EU any equivalent to the EU Prospectus legislation, a UK issuer would probably find it harder, and more expensive, to market its securities across Europe.
Loss of the financial services and products passports?
A key concern across the City will be the potential loss of the ability for UK-based financial institutions to sell products and services into other EEA member states, and set up branches there without the need to seek local authorisation.
A plethora of single market directives give these "passporting" rights to, among others, banks and building societies, insurers and reinsurers, insurance and mortgage intermediaries, alternative investment fund and UCITS managers, wholesale and retail investment firms (including market operators, broker/dealers, wealth and portfolio managers and advisers) and payment services providers. Many of the largest European financial institutions are headquartered in London, as are the major subsidiaries of US and other third-country institutions – and all of these make significant use of passporting rights.
Following a Brexit, there would be no single passport. There are several possibilities for compromise, such as bilateral agreements, agreements with the EU for certain reciprocal arrangements such as Switzerland currently has in place, or the possibility that the UK could become "another Norway" and be part of the EEA, enabling it to benefit from passporting but without being part of the full EU. But will businesses want to wait? It seems likely many are already carrying out feasibility studies of potential alternative headquarter venues.
Effect on insolvency proceedings?
The UK is currently a popular and creditor-friendly restructuring and insolvency jurisdiction.
Where an insolvent entity (regardless of its jurisdiction of incorporation) has its centre of main interests (COMI) within an EU country, the EC Regulation on Insolvency Proceedings 2000 (the EC Insolvency Regulation) applies. (The "recast" Insolvency Regulation 2015 will replace the EC Insolvency Regulation for proceedings starting on or after 26 June 2017.) The EC Insolvency Regulation governs the proper jurisdiction for a debtor's insolvency proceedings, the applicable law for those proceedings and provides for automatic recognition of those proceedings in other EU member states. It has direct effect in the UK and many collective insolvency proceedings under UK law are within its scope.
There are clear benefits in having an agreed regime across the EU for dealing with the assets of an insolvent. So, could Brexit mark an end to the UK's reputation as a "go to" destination for an insolvency forum shopper? At this stage, it is impossible to say for certain whether Brexit would result in COMI migrations away from the UK to other EU member states. However, absent any alternative deal agreed between the UK and the EU, other EU member states would no longer have to recognise insolvency proceedings opened in the UK under the EC Insolvency Regulation. This would surely only create uncertainty for debtors and creditors alike.
To access Dentons' more general discussion paper "The Great Brexit Debate", click here.