On Thursday June 23rd, a majority of the British electorate voted in favour of leaving the European Union, setting the country on an entirely new course for the next generation.

It is important to remember, of course, that overnight, nothing has changed: EU law continues to apply, as do UK laws derived from the EU.

Only in the coming weeks and months will we begin to see the real ramifications of the vote.  Indeed, the government is not legally obliged to trigger Article 50 TFEU, beginning the exit proceedings, though it will be under intense political pressure to do so.  Much will depend on how quickly it attempts to repeal EU laws.

While a great deal remains unknown at this stage, companies should begin considering which pieces of legislation and regulation are valuable – or unhelpful – in the context of your business, and ensure you have adequate provisions in place to cope with any such measures falling away.  There will also be a role for the business community to play in helping to shape Britain's future relationship with Europe.

King & Wood Mallesons has been studying the implications of Brexit over an extended period, working with clients, industry leaders, academics, heads of both the ‘in’ and ‘out’ campaigns, media influencers and others to offer a 360° view of the implications of Brexit for clients.  We have outlined below some of the key initial considerations in different areas. 

We would be happy to discuss in more detail the implications of the Brexit vote for your business. For more information, please click on your area of interest from the list below:

Dispute resolution

Parties to international commercial contracts should always be prepared in case relations turn sour and we see three key issues for those parties to consider today: jurisdiction clauses; choice of law clauses and lis pendens.

Jurisdiction clauses:  Can I still rely on an English jurisdiction clause?

  • The EU regime that supports choice of jurisdiction clauses will fall away and it is uncertain what (if anything) will take its place. 
  • The English Court is likely generally to continue to uphold jurisdiction clauses.
  • It is less certain how EU national Courts will view a choice of English jurisdiction, once freed from the shackles of EU regulation (which only applies to a choice of Court of a fellow Member State). 
  • However, we may also see the revival of English anti-suit injunctions, to attempt to bring a halt to proceedings in EU national Courts where the English Court has been chosen; which may see the English Court become more popular. 
  • So, yes, broadly you can still have confidence in an English jurisdiction clause.

Choice of law clauses:  Can I still rely on an English choice of law clause?

  • Again, the EU regime upholding these will fall away. 
  • However, EU national Courts will still be bound by the same requirement to respect a choice of English law by the regulation (which will continue to bind them). 
  • The English Court is likely to uphold choice of law clauses. 
  • So, yes, broadly you can still rely on an English choice of law clause.

Lis pendens:  Is there a risk I will be dragged into litigation in England AND the EU?

  • The intra-EU lis pendens doctrine, which helps to avoid parallel proceedings, will fall away, which may result in more overlapping litigation in England and the EU.
  • However, again, the English Court will have anti-suit injunctions at its disposal to attempt to regulate such situations.
  • So, there is a risk, but the English Court has tools to deal with this, if English jurisdiction has been provided for.  

Financial services

Although it is now largely a case of waiting to see how the exit will be negotiated and what form the future UK-EU relationship will take, firms can and should be getting their Brexit planning underway.

  • Financial services firms need to understand how various Brexit scenarios might affect their business, and be prepared to lobby for what they believe will be the best outcome.
  • Passporting and single market access are likely to be key factors for many firms and those operating across the EU need to be prepared for what they will do if those rights disappear. 
  • As negotiations can be expected to take a number of years, firms do not need to be overly anxious about immediate change. 
  • Equally, however, now is not the time to watch from the sidelines, as there may be opportunity to influence the shape of things to come, or at least to keep the pressure on the government to provide as much certainty as possible on key questions at an early stage. 
  • We do not expect Brexit to lead to a wave of deregulation, and firms certainly should not be dropping their regulatory change projects implementing EU reforms. 
  • As the situation evolves, financial service providers will need to consider whether any changes need to be made to their standard form and other documentation.

Even if it does not happen immediately, there is unlikely to be such a good opportunity to reassess and review financial services regulation in the UK.  Therefore, once essential Brexit planning has been dealt with, firms could usefully be starting to think ahead to what changes they might lobby for in future.   See our earlier publication for the potential impacts on financial services.

Private Equity

There is huge uncertainty about the future shape of private equity regulation for UK-based private equity firms, and their ability to market their funds across Europe.  On the other hand, EU-based fund managers will not want to lose access to UK investors, and may push the Commission to agree a marketing regime which secures two-way access.

It will take years to sort out the full ramifications of the vote, although of course in the short-term, nothing changes. 

  • In the longer term, we do not expect much deregulation in the UK.  Some regulation might be eased or tailored for firms that do not want to actively market in other EU member states, but for most UK-based private equity firms, any deregulatory effects will be gradual and marginal.
  • On the other hand, UK-based venture capital fund managers may lose access to the EuVECA passport, unless access to that can be negotiated as part of the leaving arrangements - but they will take many years to negotiate.  Investment from the European Investment Fund must now be in doubt.  Perhaps the British Business Bank will step into the breach.
  • Meanwhile, the negotiations over AIFMD 2, when they begin, will now look quite different, without a British seat at the table.  Any hopes that this review could yield positive results  for fund managers may now have receded somewhat.
  • On the deals front, currency movements may create some buying opportunities for non-sterling denominated funds, but uncertainty will make for a difficult investing environment in the UK for the foreseeable future.

Employment

While it remains ‘business as usual’ pending exit negotiations, inevitably over the longer term, significant and wide-ranging legislative change is likely.

  • Employers may wish to communicate with their workforce about the referendum outcome and its impact on them, as the leave vote will no doubt cause significant anxiety within some businesses and sectors.
  • Businesses who anticipate a negative impact from Brexit may wish to review their redundancy and restructuring policies at an early stage. 
  • Employers that rely on non-UK EU nationals for a significant proportion of their workforce will need to make contingency plans for the longer term in anticipation of changes to immigration rules.

EU, Competition and Regulatory

In the short term the status will remain unchanged – at least as far as the legal parameters of doing business are concerned: EU law will continue to apply and UK law based on EU law will remain applicable.

This means that current cases before competition authorities, such as mergers or cartel investigations, and before courts, such as appeals of infringement decisions or claims for cartel damages, will continue, based on the laws and procedures applicable before the Brexit vote.

Even in the long-term, British companies trading with Continental Europe will in practice need to continue to comply with EU regulation to secure access to the market and comply with the EU’s laws on merger control and the EU cartel prohibition.

For example, the EU Commission routinely reviews mergers between non-EU parties where the parties have significant EU turnover, and fines non-EU cartelists where they have sold their products into the EU.

However, with respect to mergers and cartels, following an exit from the EU, companies may face parallel merger control reviews and cartel investigations in both the EU – by the European Commission – and in the UK – by the Competition & Markets Authority.

The business community should remember that the substantive competition law of the EU and the UK are basically identical, for all practical purposes.  As such, they should maintain the same level of vigilance and procedures to ensure continuous compliance with competition law and readiness for a “dawn” raid: only the nationality of the unsuspected visitors may change!

Real Estate

After months of uncertainty in anticipation of the referendum, we now have decision and can look to areas where we may see growth as a result of Brexit.

The civil service will need to expand to cope with the implementation of regulation that had previously been handled at an EU-level.  It will also be occupied with negotiating the terms of our exit and any future free trade deals.  The government will need to work hard to ensure passporting rights are maintained, and logic dictates that this must be high on the City’s agenda.  If we maintain our passporting provisions, then we won’t see the exodus from the City that some have predicted.

If companies do decide, or are forced, to relocate to the EU following a Brexit, our continental real estate practice is poised to assist clients.

Energy

It is far too early to determine the full impact of Brexit on the energy and infrastructure sector. Much rests on how the UK positions itself after Brexit.  We look at considerations for firms operating within the energy and infrastructure sector.

What is the effect of a Brexit on national renewable targets?

  • The EU has imposed on the UK a target to source 15% of its energy from renewables by 2020 under Directive 2009/28/EC, to fit within the EU's overall target of 20% by 2020.
  • The UK also has its own domestic climate change targets established by the Climate Change Act 2008 (‘the Act’), therefore the UK would still need to reduce emissions, unless the Act were repealed.
  • Outside of the EU, the Government may choose to allow longer lifetimes for coal fired power plants given falling capacity margins. This is unlikely to occur, however, as closure of these plants could be a condition of a post-Brexit deal with the EU.

Will the UK still be a member of the EU Emissions Trading Scheme?

  • Being a member of the EU is not compulsory for membership of the EU Emissions Trading Scheme ('EU ETS’). Norway was the first non-European Union country to become a member of the EU ETS and Switzerland is currently in negotiations to link the Swiss ETS with the EU ETS.
  • It remains to be seen if the UK will end participation in the EU ETS, which in turn could mean removal of emissions taxes, or more likely the development of an alternative taxation regime.
  • What impact there will be on trading and transferring EU emission allowances between UK and EU entities is also unknown.

Will there be EU Funding for energy and infrastructure investment in the UK?

  • It is unclear if the European Investment Bank (‘EIB’) will continue to provide loans for infrastructure projects in the UK. The EIB increased lending to the UK in 2015 to €7.7 billion, of which two thirds (€5.5 billion) was provided to infrastructure.
  • The UK is a big recipient of the EIB’s Climate Awareness Bond Project, it is unknown if the UK would still continue to receive EIB funding if it left the EU.
  • Investors will seek to know under what conditions they will continue to have access to EU financial support if their investment in energy infrastructure has any connection to the UK.

Will the UK benefit from not being subject to State Aid rules?  

  • Leaving the EU would mean that the UK will not be subjected to the need for State Aid approval. This can increase the speed by which the UK government approves major industrial policy and infrastructure projects.
  • For existing schemes, such as the Contracts for Difference (‘CFD’) or Feed-in Tariffs (‘FIT’), it is anticipated there will be little impact. However new infrastructure projects may face less regulatory burden.

Access to and operating transmission networks 

  • It is unclear on what terms UK energy suppliers will have access to European transmission networks and how Brexit would affect any ongoing energy supply contracts.
  • Brexit may slow the cross-border trading of electricity across interconnectors between the UK and the EU.