When processing an M&A transaction, a Brexit will affect both general subjects that require regulation in any contractual relationship (e.g. choice of applicable law, place of jurisdiction - see Sections 1 and 3) - as well as the specific subjects that have to be regulated when acquiring or selling a company, because, as a market player, the target company is exposed in many ways to the economic and political changes caused by Brexit.

The choice of the legal system to be applied to a Transaction

The criterion for the choice of the applicable legal system is that the chosen legal system must be the most favorable at the time of occurrence of a future legal dispute. With M&A transactions, disputes frequently do not arise until years after conclusion of the contract, e.g. in connection with the assertion of warranty claims by the acquirer. By contrast, differences concerning the valuation of the object of purchase as at an agreed cut-off date arise just weeks or months following closing. The parties must keep an eye on these respective periods when choosing the legal system. If English law is agreed - a widespread choice in international corporate transactions - uncertainty will prevail up until Brexit concerning which standards, of relevance for a future legal dispute, will be part of the English legal system following a Brexit. Because, for example, all EU Regulations that are directly applicable law within the EU will no longer automatically be part of English law post-Brexit, and further standards, previously based on EU law, may be altered by the English lawmaker. This uncertainty should be taken into account when choosing the legal system for transaction contracts to be concluded before Brexit, and regulated specifically where possible.

It remains to be noted that the area of in-rem consummation of an M&A transaction cannot be part of an agreement on choice of law. As a rule for example, the transfer of company shares is normally governed by the company statute (the law applicable at the head office/real seat of the target company or the law chosen at the time of its formation), and the transfer of movable or immovable assets is governed by the law of the place at which they are located. In the case of target companies with registered office in the UK, the transfer processes, as well as any subsequent restructuring measures, are therefore mandatorily governed by the (English) law applicable there. This means that they will be burdened with the said uncertainties post-Brexit.

Material Adverse Change (MAC) clauses

Seen from the perspective of the acquirer, negative changes can occur in the target company or its market environment during the - frequently months-long - period between agreement of a transaction and its execution. So-called MAC clauses grant the acquirer the right to withdraw from or renegotiate the contract in the event of a more or less precisely defined Material Adverse Change prior to execution.

In view of the uncertainties triggered by the Brexit referendum, every acquirer of a company should agree a withdrawal option in the form of an MAC clause, if they believe that the target company could be noticeably exposed to the consequences of a Brexit, and will therefore also be impaired by ongoing developments up until a future Brexit. This will also make it possible to take account of major changes in the value of the GBP compared to the EUR or USD. This type of withdrawal option is, by its nature, of lesser importance in cases in which the period up until consummation of the transaction is manageably short, i.e. just a few days or weeks.

Due diligence examinations

Acquirers are of course well advised to take account of the status of UK negotiations concerning leaving the EU when conducting a due diligence examination on the target company, and also when formulating the warranty and indemnification obligations of the seller. Depending on how strongly the target company will be affected by Brexit, the acquirer should pay attention not only to the potential effects of Brexit on the business model of the target company as well as on the legal framework of the target company, but should also check possible MAC clauses in the main contracts, or even check and evaluate the internal Brexit preparations of the target company.

Merger control

The amalgamation of companies with registered office in different EU member states requires antitrust approval by the EU Commission if the market importance of the companies involved exceeds a specific limit. There is no need for further approval by the respective national authorities of the parties involved. This "one-stop-shop" principle has resulted in major practical facilitation of cross-border amalgamation projects within the EU.

Post-Brexit, the amalgamation of companies with registered office in the UK and in the EU will require anti-trust approval by the EU Commission and by the UK Competition and Market Authority. This will presumably increase the time and financial burden, and reduce the security of the transactions accordingly. On top of this, the shifting of the approval decision from the supranational EU level to the national level in the UK can make the approval decision more exposed to political influences than has previously been the case with the EU Commission. This too can reduce the security of the transactions, and increase the burden on the parties involved in terms of the political preparations for the transaction.

Transfer of undertakings or businesses to another employer

As already mentioned in Section 4 above, UK withdrawal from the EU could result in repeal - or renegotiation with unforeseeable content - of the British regulations on transfer of undertakings or businesses to another employer based on the Transfer of Undertakings Directive. Companies planning an asset deal in the UK must take account of this uncertainty.