The United Kingdom is holding a referendum on leaving the European Union (popularly called a ‘British Exit’ or ‘Brexit’) on June 23, 2016. If the vote is to 'leave' the EU, the notice period required means that the actual Brexit date is unlikely to be before 2018. This briefing note considers how a Brexit would impact on English corporate law, UK corporate transactions, UK companies and overseas businesses trading with the UK.
- Impact on English corporate law
- Impact on UK corporate transactions
- Implications for overseas businesses
- Practical steps leading up to the referrendum
- Contingency planning following a vote for a Brexit
Impact on English corporate law
If the UK was to leave the EU and did not remain as an EEA or EFTA state, it is likely to lead to less regulation of UK companies. However, this has not been one of the priority areas in the UK’s recent negotiations with the EU and we would not expect changes in this area to be significant or a high priority.
The majority of English corporate law is not derived from EU legislation. The Companies Act 2006 is the core legislation affecting the incorporation and operation of UK companies. Some parts of the Companies Act 2006 have been derived from EU Directives. These include provisions relating to accounts, disclosure of information and shareholder rights. The most significant provisions apply to UK companies with shares listed on a regulated market such as the Main Market of the London Stock Exchange. We would expect these provisions to be reviewed by the Government following a vote for the UK to leave the EU, but would not expect significant changes to follow.
The UK equity capital markets are in part governed by EU Directives implemented in the UK, including in relation to the requirements to prepare a prospectus, obligations of disclosure and transparency and provisions to prevent market abuse. These provisions provide a uniform legal framework for the operation of EU capital markets. We would not expect changes to these provisions to be a high priority on a Brexit. We also expect that the Financial Conduct Authority and the London Stock Exchange would want to see obligations of this type remain in force.
Another EU corporate Directive is the Cross-Border Mergers Directive which has been separately implemented in the UK. These regulations allow mergers of EEA companies, provided that the merger includes at least one UK company and at least one company from another EEA member state. The availability of this procedure will be affected if the UK ceases to be an EEA member state. However, the process here is highly regulated and most cross–border M&A transactions of EEA companies are not done by way of cross-border merger.
Impact on UK corporate transactions
Aside from the impact on cross-border mergers, the greatest impact on corporate transactions is likely to result from changes to market conditions and currency exchange rates caused by the Brexit referendum and any vote for the UK to leave the EU. This is discussed further below.
Following a vote for a Brexit, changes to English law in other areas may impact on corporate transactions. For example, competition law, environmental law and financial services law are expected to be significantly affected if the UK were to cease to be a member of the EU and corporate transactions involving these areas are likely to be affected as a result.
Implications for overseas businesses
Overseas businesses often establish operations in the UK as a stepping stone to trading with other EU countries. Government analysis in 2013 found that half of all European headquarters of non-EU firms are in the UK. A vote for a Brexit may affect decisions to establish in the UK and could lead to a relocation of the headquarters of non-EU firms to other member states.
The value of Sterling has fallen significantly in the last six months relative to a number of other key currencies, including the Euro and US dollar. Analysts at Goldman Sachs have warned that the pound could fall by another 20% against the dollar if the UK were to vote to leave the EU.
A fall in the value of Sterling would be good news for overseas businesses importing from the UK, but not for overseas businesses exporting to the UK. For overseas businesses considering an investment in the UK, the fall in the value of Sterling may offer significant opportunities to acquire UK firms cheaply. Apple's acquisition of British music analytics start-up Semetric in January 2015 for a reputed $50m, would have been nearly 10% cheaper in dollar terms if done today.
Practical steps leading up to the referendum
The required notice period for an exit if the UK votes to leave the EU allows most businesses to adopt a ‘wait and see’ approach, with the full implications of a Brexit only considered if the vote is for the UK to leave the EU. In the meantime, businesses should consider putting together a working group to identify potential areas of risk and impact and co-ordinate any staff and customer communications.
Contingency planning following a vote for a Brexit
A vote for the UK to leave the EU will create more uncertainty, and detailed long-term planning will not be feasible until the post-Brexit regime becomes clear. However, businesses potentially affected by a Brexit should plan to devote time and resources to analysing the potential implications as the picture becomes clearer.
This article is part of our Brexit series