The UK has voted Brexit - What now? What happens next? There are three steps that now have to happen: 1. The UK’s negotiated withdrawal from the EU, of which a key focus is likely to be transitional provisions. 2. Negotiations between the UK and the EU regarding the UK’s future relationship with the EU, of which a primary focus will be the UK’s access to the single market. 3. Free Trade Agreement (“FTA”) negotiations between the UK and non-EU countries to replicate (and perhaps go beyond) the existing FTAs between the EU and third countries from which the UK (as a member of the EU) currently benefits. On June 23 2016, the citizens of the United Kingdom (“UK”) voted to leave the European Union (“EU”) by a majority of 4% (52% Leave versus 48% Remain). This unprecedented decision will have significant implications for everyone and is likely to raise complicated and unique legal issues. mayer brown x 1 Brexit - What happens next? The single market is a key attraction for “ all foreign direct investment (“FDI”) “ Negotiating a withdrawal There is a mechanism for these negotiations set out in Article 50 of the Treaty on the EU but the provision has never been used before. It is important to note that Article 50 only deals with withdrawal not the future relationship between the UK and the EU. It is expected that steps 2 and 3 set out above will only occur after the UK has negotiated its withdrawal from the EU. The Article 50 process is triggered by a UK notification to the Council (of EU Member States) of its decision to withdraw. Withdrawal would occur once negotiations have concluded or two years after the notification to the Council. Although the two-year period can be extended, the Council would have to decide unanimously to do so and that is considered unlikely. When will the UK withdraw from the EU? It is not possible to provide a clear answer. Much depends on when the Prime Minister informs the Council of the UK’s intention to leave the EU. David Cameron has announced that his successor Theresa May, who officially became Prime Minister on Wednesday 13 July, will trigger the Article 50 process - the two-year window for withdrawal negotiations begins at this point - Mrs May has stated that she will not trigger Article 50 of the Lisbon Treaty before the end of 2016. What is the Article 50 process? Article 50 TEU provides for a Member State to notify the European Council of its intention to withdraw from the EU and for negotiations concerning its withdrawal to take place. Once the notification has been made, the Article 50 process expires when the negotiations have concluded or after the lapse of two years from the date of notification unless that period is extended by the unanimous consent of the remaining EU Member States. The Article 50 process does not provide for negotiations on the UK’s future relationship with the EU. It would make sense (from the UK’s perspective at least) for the two sets of negotiations to be handled together or for the UK not to activate Article 50 until there is some clarity as to the UK’s future relationship with the EU. The lack of a precedent, however, means that it is far from clear whether either option will be feasible1 . Thus far the desire of the UK government is to put off the Article 50 notice until there is greater clarity on the nature of the UK’s relationship with the EU post-Brexit. The EU’s position has thus far been to urge the notice to be made as soon as possible. Although the Article 50 process sets out a specific timeframe for withdrawal, it is far from certain that the UK’s rights and obligations under EU law will cease at the end of the Article 50 process. We would expect the UK to negotiate transitional provisions to bridge the gap between the UK’s exit from and the start of its new relationship with the EU as it is unlikely that negotiations about this future relationship will even commence until the Article 50 process has been completed. 1 Greenland (a Danish dependency) withdrew from the European Economic Community (a precursor to the EU) in 1985 and Algeria left upon its independence from France in 1962. Greenland’s exit was the product of three years of negotiations. It predated Article 50 TEU. 2 x mayer brown Brexit - What happens next? 2 The European Economic Area which consists of Iceland, Liechenstein and Norway plus the current 28 EU Member States 3 EFTA consists of the EEA Member States plus Switzerland. The EFTA Convention Agreement establishes the extragovernmental institutions of EFTA and the EEA. The single market One of the focuses of the UK negotiations regarding a future relationship with the EU will be the single market but this is not easy to reconcile with a desire to restrict free movement of workers, which has motivated many of those who campaigned and voted for Brexit. The single market is akin to a domestic market in that there are no internal barriers to the free movement of goods, workers, capital and services (together known as the “four freedoms”). Access to the single market is important because, for example: 1. It is the largest market in the world with almost 500 million potential customers. 2. Almost half of UK exports go to the single market. 3. The UK’s financial services industry relies on the free movement of services and capital to access EU markets. The service sector dominates the UK economy, contributing around 78% of GDP. The financial services sector itself contributes 12%. 4. The free movement of persons means that UK businesses can employ EU workers and UK workers can work in the EU. Recent studies show that there are 1.73 million EU nationals living in the UK, 79% of whom are actively employed, and that 2.2 million Britons live in the rest of the EU. 5. Between 2004 and 2014, £581 billion was invested into the UK by foreign businesses. Nearly half of this came from EU Member States. The single market is a key attraction for all foreign direct investment (“FDI”) because it enables firms from EU Member States to access the UK market and firms from non-EU Member States who set up in the UK to access the markets in the rest of the EU. What are the principal models of relationships with the EU post-Brexit? Maintaining full access to the single market is a crucial goal of the financial services industry. However, that goal may conflict with other Brexit goals including limiting the free movement of workers and ending contributions to the EU budget. Subject to the likelihood that the UK relationship will ultimately by necessity be of a bespoke nature, there are three main models for the relationship that the UK could have with the EU post-withdrawal. These are all based on existing relationships between the EU and other states and give differing rights of access to the internal market. They are as follows: 1. European Economic Area e.g. Iceland, Liechtenstein and Norway Iceland, Liechtenstein and Norway have access to the internal market as members of the EEA2 . The EEA Agreement (the “Agreement”) includes EU legislation covering the four freedoms throughout all EEA States and cooperation in various other areas, including research and development, education and social policy. The Agreement guarantees equal rights and obligations within the internal market for citizens and economic operators in the EEA. Iceland, Liechtenstein and Norway are obliged to implement all internal market rules in exchange for access to the internal market but they do not take part in the negotiation of those rules. They also contribute towards the EU budget: in Norway’s case, around 90% of Britain’s net payment per head. Further, they are obliged to accept persons migrating from EU Member States in exercise of EU free movement rights. This option is the only option that would give the financial services sector similar access to the internal market as it enjoys under EU membership, i.e., the financial services passport. In order to join the EEA, the UK would need to negotiate access to the European Free Trade Area (“EFTA”)3 and then EEA membership with EEA and EFTA members. Given the obligations of EEA membership, there seems little likelihood that Brexit supporters would accept this option. As Nikolai Astrup, a Norwegian Conservative MP stated in 2013, “If you want to run Europe, you must be in Europe. If you want to be run by Europe, feel free to join Norway in the European Economic Area.” 2. Bilateral agreements (under EFTA membership) e.g. Switzerland Switzerland is an EFTA State but is not part of the EEA Agreement. Instead it currently has around one hundred bilateral agreements with the EU that give access to the internal market for goods but not most services. Switzerland also contributes to the EU budget. In 1999 the EU and Switzerland signed an agreement on freedom of movement which gives the other’s citizens the right to enter, live and work in its territory. Switzerland is an associate member of Europe’s border-free Schengen area and a full participant in the Dublin system for dealing with asylum claims4 . The EU has closer ties with Switzerland than any other non-EEA State but bilateral relations have been severely strained since the February 2014 Swiss anti-immigration initiative, the outcome of which called into question the principles of free movement of persons and the internal market that underpin those relations. The network of agreements is complex and sometimes incoherent: they are currently managed through a structure of more than 15 joint committees. There are, however, neither proper mechanisms to adapt the agreements to evolving EU legislation nor surveillance nor efficient dispute settlement mechanisms. The EU has determined not to give Switzerland further access to the internal market until a framework agreement is established but negotiations have stagnated. It therefore seems unlikely the EU would establish a similar relationship with another non-EEA State but, if this were possible in principle, it is likely it would operate on a similar basis. The UK would have to negotiate a large range of bilateral agreements with the EU. The UK would not automatically have to implement new EU legislation and agreements would be negotiated on a case-by-case basis. Swiss financial institutions cannot benefit from the passport but the close relationship between Swiss and EU legislation on financial services, developed as a result of the bilateral agreements, has, in a number of instances, given Swiss financial institutions an advantage over institutions from other non-EEA countries as Swiss legislation is often regarded as “equivalent” to that of the EU. 3. Free Trade Area e.g. Canada, South Korea This option contemplates a single bilateral free trade arrangement. The EU is a party to trade agreements and other agreements with a trade component both in the World Trade Organisation (“WTO”) context and bilaterally with certain countries and regions. Countries, including Canada and South Korea, have free-trade deals with the EU that do not require observance of all its rules, paying into the budget or accepting persons exercising free movement rights. The EU has fifty three such deals. The EU also has, or is negotiating, free-trade deals with the US (the controversial Trans-Atlantic Trade and Investment Partnership (“TTIP”)), China and India, which would not include a post-Brexit UK. Such deals do not, however, cover all services. In withdrawing from the EU, the UK would seek a free-trade deal to gain access to the EEA. The process would be lengthy and its precise outcome uncertain. In addition, the UK would wish to agree free-trade deals with other non-EU countries to replicate the free-trade deals from which it benefits as a member of the EU. This would be challenging because the UK no longer has an extensive body of its own trade negotiators and the UK alone may not be able to command terms as favourable as those secured by the EU acting as a bloc. As Sir Nicholas Macpherson, previous Permanent Secretary to HM Treasury commented, “… you’re going to be negotiating with a whole lot of battlehardened trade negotiators and Britain does not have a department of trade full of equivalent experts.” Although not necessarily attractive, this outcome currently seems to be the model that best fits with the objectives of those who promoted and voted for Brexit. This would not, however, give financial services firms the same access to the internal market they currently enjoy: they could not use the passport. A bespoke arrangement for the UK should not be ruled out at this stage as, given that the UK is the EU and Germany’s biggest export market, there are incentives for both the UK and the EU to adopt a mutually beneficial arrangement. A bespoke arrangement would not, however, be adopted quickly nor easily. mayer brown x 3 4 The Dublin Regulation (604/2014) determines the EU Member State responsible for examining an application for asylum seekers seeking international protection under the Geneva Convention and the EU Qualification Directive. 4 x mayer brown Brexit - What happens next? FTAs between the UK and non-EU countries The timings and precise outcomes of such FTAs are uncertain but they are necessary: the UK currently benefits from around 53 FTAs negotiated between the EU and other countries. Until FTAs have been negotiated, the UK would be able to trade with markets around the world based on the general rules of the World Trade Organisation (“WTO”), although, post-Brexit, the UK may have to renegotiate the terms of its WTO membership. It is unclear whether the UK alone could secure the same terms as the EU acting as a bloc but those third countries with existing profitable relationships with the UK will want those relationships to continue. Can existing rights be protected? A large part of the negotiations for the UK’s withdrawal from, and perhaps even the future relationship between, the UK and the EU would concern such acquired or “vested” rights. Greenland left the jurisdiction of the EU when it secured home rule and its negotiations for withdrawal involved the agreement of transitional provisions during which Greenlanders, non-national residents and businesses with acquired rights under EU law retained such rights. There is also an argument that international law protects rights or obligations acquired under treaties prior to withdrawal from them. As with much of what might happen post the decision to leave the EU, whether and how much such acquired rights will be protected cannot be predicted: the Greenland example does not bind the EU and it is by no means certain that the principles of international law can be applied to EU rights and obligations. What is the immediate impact? Following the vote to leave the UK, the market volatility we experienced throughout the referendum will likely continue. However, the immediate impact will be no change in the position of individuals and companies under EU law until the UK has withdrawn: there will be no change for perhaps two years following the triggering of Article 50. Post-withdrawal, it is possible that there may be some transitional / grandfathering provisions for those who currently benefit from rights obtained as a result of the UK’s membership of the EU but what they are and how long they will last depends on the UK / EU negotiation as to their future relationship. David Sahr Partner, London E: firstname.lastname@example.org T: +44 20 3130 3496 There is also an argument that international law protects rights or obligations acquired under treaties prior to withdrawal from them “ “ mayer brown x 5 Considerations and Implications • Financial Services • International Trade • UK Mobility Laws • UK Employment • Pensions Schemes • Tax • Data Protection, IP and IT • Mergers & Acquisitions • Litigation • Insurance • Environment and Planning • Energy Financial Services Nothing will change immediately but it is never too early to start scenario planning and to consider lobbying the UK government, the EU Commission and other EU Member States about the UK’s future relationship with the EU. • They should identify the activities for which they rely on the passport either to provide services or products from the UK into other European Economic Area (“EEA”)1 jurisdictions, or from other EEA jurisdictions into the UK. Since the passport may be phased out as part of the implementation of Brexit, financial institutions may need to restructure their operations, including obtaining licences in new jurisdictions, to service their customers. In addition, to the extent they are planning to expand their business or attract new customers, they may conclude they need to act quickly to adjust to Brexit.2 What steps should financial institutions be taking now? Brexit creates uncertainty concerning how financial institutions may do business in the UK and the EU which is unlikely to be clarified for many years. In the meantime, financial institutions doing business in the UK and the EU, or planning to do so, must consider the potential impact of Brexit on their business models. In this regard, the Financial Conduct Authority (“FCA”) has specifically reminded financial institutions of their risk-based obligations to have contingency plans to deal with such a significant change in the financial market place. Many firms will not be able to wait until Article 50 is triggered, withdrawal is negotiated and a new relationship between the UK and EU is agreed, before planning, and even implementing, their response to Brexit. Firms faced with the prospect of setting up and authorising a new entity in the EU and then novating contracts and moving staff, a process that could take well over a year for some firms, will need to act more quickly. Accordingly, and depending upon the time their contingency plans will take to implement, some firms may need to act before the outcome of negotiations is known. In assessing their business goals and meeting their regulatory obligations, financial institutions should consider the following, given the real risk that a full EU passport will not be available in the future. 1 The EEA consists of the EU Member States plus Iceland, Liechtenstein and Norway. 2 Some financial firms, such as insurers and reinsurers, may conclude they are not reliant on the passport to any significant degree for access to the EU market. See our Legal Update dated 7 July 2016 “Brexit: What does it mean for the insurance industry?” on the impact of Brexit on (re)insurers at https://www.mayerbrown.com/rexit-What-does-it-mean-for-the-insurance-industry-07-07-2016/. 6 x mayer brown mayer brown x 7 • To the extent that financial institutions already have licensed subsidiaries in other EEA jurisdictions, they may consider whether those subsidiaries could become vehicles for exercising the passport. For example, a US bank that has subsidiaries in the UK and in Germany may want to consider whether “passport” activities throughout the EEA should begin to be conducted from the German subsidiary rather than the UK subsidiary. By the same token, a French bank that has subsidiaries in both France and the UK may want to think about whether certain passporting services conducted from the UK should be transferred to France. Finally, non-EEA banks that have set up branch networks in the EEA based on a subsidiary in the UK should consider the likelihood that the passport may cease to be available for those branch networks and thus may need to consider establishing a presence in another EEA jurisdiction. • Depending on the nature of their business activities, some institutions may conclude that they will have a reasonable chance to continue to provide services from the UK even if the passport ceases to be available. This is because some EU legislative initiatives, such as Solvency II, Markets in Financial Instruments Directive II (“MiFID II”)/Markets in Financial Instruments Regulation (“MiFIR”) and the Alternative Investment Fund Managers Directive (“AIFMD”), contemplate permitting third country financial institutions (i.e., institutions that are not located in the EEA) to provide some cross-border services to some customers without local licences if the third country jurisdiction has laws that are “equivalent” to those of the EU. At this time, the UK has fully implemented the required EU legislation, including Solvency II and AIFMD, and is on course to fully implement MiFID II, so the UK’s laws will not only be equivalent but identical to those of the EU. It is possible that the EU will recognise that certain activities conducted from the UK pursuant to these legislative frameworks (assuming the UK does not modify them) will continue to have access to EEA markets, even in the absence of the passport. However, as discussed below the EU must decide whether or not to deem a third country’s laws equivalent and therefore, in the UK’s case, there is a risk that it may choose not to do so or may delay a decision, so this option is subject to uncertainty. In addition, not all EU legislation includes the concept of equivalence and, where it does, equivalence does not give the same access to the single market as the UK currently enjoys. • Some firms may be able to have a separate legal entity act as a booking centre in an EEA Member State which then enters into back-to-back transactions on a riskless principal basis with a UK entity that has the staff, capitalisation, and systems to hold the risk. It may also be possible for EEA entities to outsource certain activities to UK entities. These operational models, however, may not be welcomed by all EEA regulators. • Employment issues will also be a concern for firms. A large percentage of the City’s approximately three hundred and sixty thousand workers come from other EEA countries, and Ireland, France and Italy between them account for almost half of the City’s EEA-originated work force. EEA nationals seeking to live and work in the UK could face new rules incorporating a traditional visa/entry clearance as well as formal requests for work authorisation. UK workers in the EEA would be likely to face reciprocal requirements. The specific terms of any immigration requirements will be subject to the negotiated terms for withdrawal and any domestic arrangements with other EU member states. At a minimum, the current free movement terms are expected to remain in place for the two years the Article 50 process is anticipated to last. Those workers who are legacy beneficiaries of the free movement of workers should consider whether to exercise the right to obtain permanent residency to protect against any future change. Financial Services - What happens next? ...depending upon the time their contingency plans will take to implement, some firms may need to act before the outcome of negotiations is known. “ “ 8 x mayer brown Financial Services - What happens next? • Firms will need to give consideration to how they handle data within the EEA, and in particular, where customer data is located. Currently firms are free to transfer data within a firm in the EEA with little restriction. Depending upon whether the UK adopts the General Data Protection Regulation (due to come into force in May 2018) and the terms of any exit, firms may face restrictions on the transfer of customer data between the UK and the rest of the EEA and should consider whether steps need to be taken to obtain appropriate consents from customers or relocate the hosting of data. • Firms should also not forget the practical implications of the options they are considering. The costs involved in shifting significant numbers of employees from the UK to other jurisdictions will be large and many staff may have developed ties to the UK that make them resistant to relocation. Hiring new adequately trained staff in alternative locations may be an issue for a variety of reasons. Tax implications will be a consideration, especially given the UK Chancellor’s announcement that he will lower UK corporation tax. The UK’s legal system is considered by many to be the most favourable for financial services business in the EEA. Finally, the availability of infrastructure (office buildings, services, and a well-staffed and experienced regulator) in other jurisdictions, will be an additional factor. • Thus, while all institutions should be planning for Brexit, a decision to take concrete steps now to modify business models should take into account a number of factors since the actual legal framework is not expected to change for at least two years. Some institutions with expansion plans may decide they want to change their structure now to “put Brexit behind them.” Others may be able to take a “wait and see” attitude, given the other complexities and factors involved, including uncertainty with regard to developments in the EU. Passporting Many financial institutions established in, or doing business with, the UK regard access to the EU single market as key to their operational models. The single market is akin to a domestic market: it means that there are no internal barriers to the free movement of goods, workers, capital and services (see previous section for further detail). Financial institutions rely on the free movement of services and capital to do business across the EEA. They benefit from a ‘passport’ which enables them to access the markets of other EEA Member States without having to set up a subsidiary and obtain a licence to operate as a financial institution in those Member States. The passport is only available to financial institutions established in the EEA. Accordingly, UK financial institutions (including UK subsidiaries of non-EEA firms) that use the passport to access EEA markets and EEA financial institutions that use the passport to access the UK market will want to know both when the UK will withdraw from the EU and the nature of the UK’s post-Brexit relationship with the EU. Of the three most often mentioned options for a future relationship (see previous section), only one (the Norwegian model) would permit the passporting system to continue. Firms should, therefore, identify the extent of their reliance on passports “ “ Alexandria Carr Of Counsel, London E: email@example.com T: +44 20 3130 3398 How can the financial services industry preserve the passport? Given that the only existing model that will preserve the passport is the EEA option, which appears unlikely to be adopted, there is a distinct possibility that financial institutions may have to restructure their operations to rely on a subsidiary in another EU Member State for EU passport purposes. The loss of the passport means that financial institutions established in the UK (UK headquartered groups, branches of other EEA-headquartered groups and subsidiaries of non-UK headquartered groups) could not provide services to customers in the EEA from the UK. Equally, financial institutions established in the EEA could not provide services to UK customers from the EEA. UCITS and AIFs could not be managed, marketed and sold in cross-border scenarios involving the UK. Prospectuses could not be passported from nor into the UK. If existing passports were revoked and new/extended passports were not available, financial institutions would be required to seek a new or additional EEA or UK base for operations if they wished to provide cross-border services. Thus, a financial institution established in the UK would require an establishment in an EEA country if it wished to service clients in a number of EEA Member States, as that establishment would enable it to obtain another passport. Equally, EEA financial institutions which wished to service UK clients would need a UK establishment. A financial services institution which establishes itself in a jurisdiction has to apply for a licence to operate as a provider of financial services and subject itself to the regulation of and supervision by the competent authority in the State in which it establishes itself. Accordingly, establishment in a jurisdiction is a costly and time-consuming exercise with far-ranging consequences: hence the value of a passport. Can the financial services industry rely on “equivalence” in lieu of the passport? Given the likely loss of the passport, the UK financial services sector is likely to be best served by the UK mirroring EU law as closely as possible. There is a mechanism for recognition of non-EEA Member States in some pieces of EU legislation which gives financial services institutions established in their jurisdictions certain rights within the EEA as long as the legislation in that non-EEA state is deemed equivalent to the EU’s. These rights vary and are unique to each piece of legislation. For example, equivalence under the European Market Infrastructure Regulation (“EMIR”) allows avoidance of conflicting obligations in cross border transactions while equivalence under the AIFMD and MiFID II/MiFIR allows a quasi-passport specific to the activities regulated by those laws. These rights are not equivalent to the current passport, but are still highly advantageous. There is not a prescribed process but it typically involves an assessment of whether the third country legal regime is equivalent to that in the EEA. mayer brown x 9 Brexit - What happens next? 10 x mayer brown International Trade While the economic effects of Britain’s decision to exit the EU are already being witnessed, the legal consequences are, for the most part, likely to develop and materialise over a longer period of time. mayer brown x 11 International Trade - What happens next? Impact on International Trade Rights and duties incurred by the UK as a member state of the EU will not vanish overnight, as emphasised by the Joint Statement on the outcome of the UK referendum by Donald Tusk, president of the European Council; Martin Schulz, president of the European Parliament; Mark Rutte, holder of the rotating Presidency of the Council of the EU; and Jean-Claude Juncker, president of the European Commission. Although the rights and obligations of the UK are likely to be phased out over a transition period, the UK will continue to benefit from the free trade provisions of the EU until it is officially no longer a member state. Intense negotiations are expected to begin shortly between the EU and the UK, and the outcome of such negotiations will define the future of the EU-UK relationship. It will also shed light on the actual trade impact of Brexit. Will there be a re-negotiation of WTO concessions and commitments? Although not definitive yet, WTO Director General Roberto Azevêdo has hinted that the UK would likely need to undergo the negotiations process with all WTO members again in order to adjust its schedule of concessions and commitments and thereby benefit from the trade provisions and guarantees of the multilateral institution. Regardless of how this process plays itself out, it is almost certain that the UK will remain a Member of the WTO and, as such, remain subject to WTO commitments and obligations. What scenarios can be foreseen regarding the EU-UK trade relationship following Brexit? The UK withdraws from the EU but maintains its membership in the European Economic Area (“EEA”) between the EU, Norway, Liechtenstein and Iceland. From a customs point of view, by participating in the EEA, the UK would remain competent to establish its own, independent customs provisions, including its own external customs tariff, valuation and preferential origin rules, which may differ from that of other EEA members. It would also be able to maintain its own trade defense legislation and would be allowed to apply antidumping and anti-subsidy measures against other EEA members. Goods customs cleared in the UK will not benefit automatically from free movement within the EU. Similarly, goods from the EU that are customs cleared in the UK would only be imported free of any duty or other measures that may apply if they satisfy the preferential rules of origin set forth in the EEA Agreement. EEA members have access to the Single Market, to the extent that they have incorporated into their domestic law the relevant acquis communautaire. Consequently, from a regulatory standpoint, the UK, by participating in the EEA, would be required to implement the relevant EU provisions and standards pertaining to the Single Market in order to participate in the Single Market. Hence, regulatory harmonisation would be more significant under this scenario. The UK would be able to benefit from the free-trade agreements (“FTAs”) concluded by the EEA Members, although it would need to abide by the rules set forth therein, notably on preferential origin of goods and services. The UK becomes a member of the European Free Trade Agreement (“EFTA”) with Norway, Liechtenstein, Iceland and Switzerland. There are two major differences between the UK becoming a member of the EFTA and the UK’s participation in the EEA. First, re-joining the EFTA would permit the UK to ensure duty-free access for goods between the EU and the UK, although the freedom of movement of people and free trade in services would not be covered. Second, the UK would not be compelled to adopt the acquis communautaire, which may lead to greater regulatory divergence, thus creating greater risks of additional non-tariff barriers to trade. 12 x mayer brown International Trade - What happens next? The EU and the UK negotiate a customs union, similar to that with Turkey. Another possibility would see the UK negotiate a customs union with the EU, similar to the one enjoyed by Turkey. This would lead to a convergence of customs provisions with the UK applying the EU’s Common Customs Tariff and the EU’s tariff nomenclature and also generally most, if not all, of the customs legislation of the EU. Goods would benefit from circulation between the EU and Turkey, once customs cleared in one of the two countries. Regulatory requirements of the EU would likely need to be implemented into the UK. The UK would, however, remain free to adopt its own trade defense measures, including against the EU. Moreover, the UK would be competent to enter into FTAs with third countries independently but would not benefit from those concluded by the EU. This, however, may create additional complications. The UK negotiates a FTA with the EU, similar to that with South Korea or Canada. A fourth possibility is that the UK negotiates a FTA with the EU, similar to the ones the EU has with South Korea and Canada. Depending on the scope of the negotiations, the situation would be similar to that of being part of the EEA or EFTA. In general, however, the UK would maintain its independence in terms of customs provisions. The free circulation of goods between the EU and the UK would only be granted to goods benefiting from preferential origin under the provisions of the FTA. The UK would thus, here also, be able to adopt its own trade defense measures and also to conclude its own FTAs. In terms of regulatory convergence, the extent to which the UK would adopt the EU’s standards would depend largely on the content of the negotiations and cannot be foreseen at the present stage. The UK withdraws from the EU without any specific trade agreement with the EU. Finally, the UK may withdraw from the EU without any specific trade agreement or relationship with the EU. In such a scenario the UK would regain an absolute customs sovereignty, meaning that goods would be customs cleared in the UK based on their own external tariff, classification, valuation and other customs rules. Moreover, the UK would be able to adopt anti-dumping or anti-subsidy measures against imports from the EU, and vice-versa. However, there would be no free circulation into the EU of goods customs cleared in the UK, and UK goods would be subject, upon importation into the EU, to the external tariff of the EU. Similarly, the UK would no longer be able to benefit from the provisions of the free trade agreements concluded by the EU and would have to negotiate new agreements on its own. From a regulatory point of view, the EU’s decisions, directives and regulations would no longer apply in the UK, provided that they are not previously incorporated into national legislation. If the UK remains a member of the WTO, the sole provisions governing trade between the EU and the UK would, under this scenario, be those of the WTO agreements. Nikolay Mizulin Partner, Brussels E: firstname.lastname@example.org T: +32 2 551 5967 Brexit - What happens next? mayer brown x mayer brown x 13 UK Mobility Laws Although the “Leave” vote prevails, UK mobility laws will not change immediately. 14 x mayer brown UK Mobility Laws - What happens next? Key questions for consideration How many workers currently take advantage of the free movement provisions into and out of Britain? According to the April–June 2014 Labour Force Survey, there are 1.73 million EU nationals living in the UK, 79 percent of whom are actively employed. Recent reports from British consular authorities estimate that 2.2 million Britons live in the other 26 EU countries, excluding Croatia, which joined in 2013. Of the reported 624,000 people who immigrated to the UK in the year prior to September 2014, about 251,000 people moved to Britain under the EU free movement rules. The remainder entered pursuant to the governing visa restrictions of the UK’s points-based immigration system. Now British citizens have voted to exit the EU, will British citizens immediately lose the right to move and work across EU borders freely? The short answer is no; the vote will have no impact until the British government fully negotiates its exit from the EU. Accordingly, while the British government may take other actions regarding immigration control independent of Brexit, the decision to leave the EU will not of itself restrict workers’ freedom of movement immediately. What terms will govern the movement of such workers now the UK has voted for Brexit? As the leave campaign was particularly concerned about visa-free travel into Britain, EU nationals seeking to live and work in the UK ultimately could face new rules incorporating a traditional visa/entry clearance as well as formal requests for work authorisation. The leave campaign has indicated its preference for a system akin to the Tier 2 system within the UK’s current points-based scheme. The specific terms of any immigration requirements will be subject to the negotiated terms for withdrawal and any domestic arrangements with other EU member states. What free movement benefits are at risk now the Brexit leave vote prevails? Currently, British citizens can move easily to another EU country, with citizens of EU countries equally free to move to the UK. Both of these free movement benefits are subject to the negotiation of the terms of withdrawal and, potentially, new agreements between Britain and individual member states. The current free movement benefits: • EU workers hired to work in Britain - Under Article 45 of the Treaty on the Functioning of the EU(“EU Treaty”), passport holders from any EU member state currently may work for an employer in another member state—including the UK—freely. Employers operating within the EU accordingly benefit from the ability to staff their operations with “visa free” nationals from any EU member state—they do not have to undertake immigration processes to apply for and obtain work permits. While those EU workers must still comply with validation of their legal right to work, such as the UK’s “day one validation” requirements, they face no immigration work permit filing or registration requirement. • British citizens hired to work in the European Union - Conversely, British citizens seeking to work in other EU states currently are authorised to undertake employment in other EU and European Economic Area (“EEA”) member states without first having to file for a work permit. Now the United Kingdom has voted for Brexit, how long will the current benefits remain in place? At a minimum, the current free movement terms are expected to remain in place for two years following the Brexit vote. The Prime Minister had indicated that the British government would invoke its right, under Article 50 of the EU Treaty, to notify the EUof its withdrawal, which would then require the EU to attempt negotiation of a “withdrawal agreement.” The EU Treaty terms cease to apply to a member state from the date the withdrawal agreement takes effect, or, failing that, two years after the notification (or longer if the European Council makes a unanimous decision, in agreement with the member state, to extend this period). What should employers advise their workers to do now the UK has voted to Brexit? Workers should not panic, as the terms of Brexit will be subject to the withdrawal negotiation, which as noted will delay any changes to the EU freedom of movement benefits for at least two years, or to the development of negotiated concessions and a potential second referendum. But those workers who are legacy beneficiaries of the EU terms should consider whether to exercise the right to obtain permanent residency to protect against any future change. Specifically, permanent residency should be considered for two groups: • EU nationals who have exercised treaty rights (by working, studying or being self-sufficient) in the UK for a period of at least five years are entitled to permanent residence in the UK under EU law. • British nationals who have exercised treaty rights in other parts of the EU by working for at least five years similarly may apply for permanent residency in that other EU state. That residency benefit would give them rights not only in the EU state where they apply for residency but throughout the remaining EU treaty region. mayer brown x 15 Elizabeth (Liz) Espín Stern Partner, Washington DC E: email@example.com T: +1 202 263 3825 The leave campaign has indicated its preference for a system akin to the Tier 2 system within the UK’s current points-based scheme “ “ 16 x mayer brown UK Employment Few changes are likely in the short term, and wholesale changes to employment law are unlikely in the medium term. mayer brown x 17 How will UK employment law be affected? While a significant amount of UK employment legislation is derived from EU laws, including rights and protections relating to discrimination, working hours, holidays, atypical workers and family friendly leave, at this stage it is not clear how much of this law would be reconsidered or removed. This is partly because much may depend on the terms of any trade deal done between the UK and the remaining EU countries. Whether David Cameron’s successor will seek to unpick the above laws remains to be seen. In the short term, there is unlikely to be significant change. In the longer term, however, once Britain leaves the EU key areas of employment rights, may be up for discussion: • Working time - The UK’s opposition to the 48 hour working week is well known, so this might be a contender for abolition. There may also be some scope to reverse key holiday cases (e.g. accruing holiday during long-term sick leave). Recent ECJ rulings that a ‘week’s pay’ includes commission may also be revisited. • TUPE - The current TUPE Regulations, which protect employees in connection with business transfers and service provision changes, may be subject to a degree of change. For example, we may see the removal of the restriction on harmonising terms and conditions post-transfer. We think parties to outsourcing arrangements may want to insert clauses expressly dealing with what will happen if there is a significant change in this area of the law during the lifetime of the contract. • Discrimination - The UK has had established discrimination laws for a number of protected characteristics prior to the EU. It is unlikely our discrimination laws would be removed in their entirety. However, we may see renewed calls for a cap on discrimination compensation. • Collective redundancy consultation - This could be watered down or scrapped completely but is unlikely to be prioritised. • Agency workers - The regulations protecting agency workers, which implement a EU Directive, may be repealed. Few changes are likely in the short term, and wholesale changes to employment law are unlikely in the medium term, but it is only once the terms of our negotiated exit become clearer that we will know the true implications for UK employment law and any timescale for change. The UK has had established discrimination laws for a number of protected characteristics prior to the EU “ “ UK Employment - What happens next? Nicholas Robertson Partner, London E: firstname.lastname@example.org T: +44 20 3130 3919 Brexit - What happens next? Pension Schemes Now that the UK vote for Brexit has been confirmed, the immediate impact is likely to be felt in the investment sphere. From a legal perspective, little is likely to change in the short to medium term. Philippa James Partner, London E: email@example.com T: +44 20 3130 3700 18 x mayer brown mayer brown x 19 Pensions schemes - What happens next? Implications for UK occupational pension schemes The legal impact of Brexit A number of pieces of EU legislation, including the IORP (Institutions for Occupational Retirement Provision) Directive affect occupational pension schemes in the UK. The continuing application of this legislation to the UK will depend on exactly how Brexit is handled and the withdrawal terms agreed, including any transitional measures. EU law gives an exiting member state two years from the date of formal notification of its decision to leave to negotiate the terms of its withdrawal. This period can be extended if all the other member states agree. That said, the relevant EU legislative provisions have largely been incorporated into UK legislation and will not therefore fall away automatically following Brexit in any event. Given that much of the legislation in question deals with equal treatment and wider member protection principles, it is unlikely that there will be significant appetite within Government or Parliament to undertake a complete repeal or reform of this legislation. In the longer term, however, it is possible that there could be less wide-ranging adjustments in some areas. Looking at some areas that are most directly impacted by EU legislation: • Equal treatment – the Government’s current view that GMP equalisation is required derives, at least in part, from EU law. The Government might feel able to specifically exclude GMPs from the general requirement to equalise benefits. • Scheme funding – the scheme-specific funding regime derives from the IORP Directive. The fundamental requirement for employers to fund schemes to a level which enables them to provide member benefits is unlikely to be changed, but adjustments might be made to the technical requirements on how assets and liabilities are valued for funding purposes. • TUPE – occupational pensions are excluded from the scope of TUPE, but EU case law (the Beckmann and Martin cases) has eroded the scope of this exclusion. The impact of these cases could be reduced following Brexit as UK courts might no longer feel bound to follow EU case law. • Investment – the current scheme investment restrictions derive in large part from the IORP Directive. While it is unlikely that most, especially those on employer-related investment, would be removed, some adjustments might be made in future. • Data protection – although the new EU General Data Protection Regulation will not automatically have direct effect in the UK, it is likely that schemes would still need to comply with its requirements in order to transfer data to the EU. In any event, the Data Protection Act 1998 (which implements the EU Data Protection Directive) will most likely continue to apply. • Cross-border schemes – the more stringent funding requirements that currently apply to cross-border schemes derive from the IORP Directive, and it is possible that these could be lifted following Brexit. However, UK schemes wishing to operate cross-border in more than one other EU member state will still be subject to the EU legislative requirements. The non-legal impact of Brexit The most significant immediate impact of Brexit for UK occupational pension schemes is likely to be felt in the investment arena. Views differ as to exactly what the investment impact will be, but a period of financial volatility seems likely, with consequential impacts on areas such as asset values, gilt yields and credit ratings. For DB schemes, the impact on scheme investments will have knock-on consequences for scheme funding and the employer covenant (in addition to any more general impact of Brexit on the employer’s business and therefore its covenant). Trustees will need to review their investment and funding strategies and their view of the employer covenant to ensure that they remain appropriate in light of Brexit. Any contingency plans should also be reviewed and updated as necessary. Trustees should also ensure that they continue to monitor these areas as negotiations for, and the actual implementation of, Brexit progress. DC schemes will need to monitor the impact of Brexit on the investment options available under the scheme on an ongoing basis and consider whether any changes are required. Tax Consider reviewing international tax structures. Tax is collected in the UK on the basis of domestic legislation, enacted by the UK Parliament. Therefore, the UK’s corporate tax code will most likely remain highly competitive and attractive for international businesses. The EU has, however, exerted some influence on the development of the UK tax code – several features of the UK’s current tax system are derived from EU law, and decisions of the European Court of Justice have resulted in further changes to the UK tax system. Any such changes are unlikely to occur until the UK’s negotiated withdrawal from the EU is complete (or, at least, well advanced). That process will take at least 2 years from the date of the UK’s notification to the EU Council of its decision to withdraw, and finalising the negotiations between the UK and the EU as regards the UK’s future relationship with the EU will likely take much longer. Until the 2 year period is over, the UK tax code continues to be subject to EU law. 20 x mayer brown mayer brown x 21 Direct taxes Direct taxes are imposed by UK law. The majority of the UK’s current domestic body of direct tax law will remain in place – the UK’s low corporate tax rate (currently 20%, planned to reduce to 17% by 2020, and possibly even lower given George Osborne’s recent announcement), the exemptions related to dividends received from subsidiaries and gains made on sales of trading subsidiaries, the branch profits exemption, etc. However, the UK’s direct tax rules must be compatible with EU laws (such as free movement of capital, services, goods and people) and whilst UK tax law may no longer be constrained by EU laws, some EU Directives would no longer apply to UK companies. Clients may want to consider, for example: • The Parent Subsidiary Directive - This provides relief from withholding taxes on the payment of dividends between associated companies in different EU states, and relieves the double taxation of parent companies on the profits of their subsidiaries. On the UK leaving the EU, UK parent companies will no longer benefit from this Directive, and will therefore need to rely on the terms of bilateral double tax treaties (“DTT”) between the UK and each member state to receive payments gross. The UK has the largest DTT network in the world (including with all EU member states), and relief is available in many (but not all) cases under the relevant DTT with EU members states. UK parent companies will in most cases benefit from the UK’s domestic tax exemption for dividends received from subsidiaries. Because the UK does not impose withholding taxes on dividend payments, the UK tax position for dividends paid from UK companies to EU parent companies should not deteriorate as a result of the Parent Subsidiary Directive ceasing to apply; tax could, however, become due on receipt in the relevant member state. • The Interest and Royalties Directive - Once the UK leaves the EU, the Interest and Royalties Directive will no longer relieve withholding taxes on royalty and interest payments between UK companies and associated companies in the EU. Unlike dividend payments, under UK domestic law withholding taxes may arise on interest and royalties, so payments to EU companies as well as from EU companies may be affected. It will therefore become necessary to consider what relief from interest and royalty withholding is available under the relevant DTT. Again, whilst relief is likely to be available in many cases due to the UK’s extensive DTT network, full relief may not always be available. There are, however, a number of domestic exemptions on which Brexit should have little or no effect, such as the “quoted Eurobond exemption” (which relieves interest withholding on certain listed debt). • The Merger Directive - The Merger Directive removes fiscal obstacles and offers tax relief to cross-border reorganisations. This may have a detrimental impact on companies and could give rise to increased tax charges on transfers of assets to and from the UK. The regime is enacted in UK law (e.g. TCGA 1992 s.140A). However, once the UK leaves the EU, any reference in the legislation to an EU Member State would not apply to the UK. The legislation would therefore, at the very least, need to be adapted. It could be removed entirely, which could add increased tax costs for UK businesses that are a party to merger transactions. It should be noted, however, that many of the UK’s reorganisation provisions (e.g. TCGA 1992 s.135) are domestic law based, will not be impacted by Brexit and can apply in cross border situations, provided the relevant conditions are met. Tax - What happens next? Until the 2 year period is over, the UK tax “ code continues to be subject to EU law “ International investment and cross-border matters The UK tax environment is most likely to remain attractive to international investors, given (as referred to above) the UK’s low corporate tax rate, and the dividend and substantial shareholdings exemptions. There are however some areas which international investors should review and/or monitor as the Brexit negotiations progress. Investors should consider, for example: • Cross border tax cooperation - There are a number of EU-wide tax programmes under development. For example, the introduction of a package of changes to tackle perceived tax avoidance; the introduction of a financial transaction tax on trades in financial instruments; and the possibility of a “Common Consolidated Corporate Tax Base”. Post Brexit, the UK will not be involved in the discussion or implementation of these projects. However, the UK’s exit from the EU should not directly affect other cross-border tax initiatives in which the UK is involved, such as the OECD’s “Base Erosion and Profit Shifting” (“BEPS”) programme and reporting regimes such as the OECD’s common reporting standard (“CRS”) and the US’s Foreign Account Tax Compliance Act (“FATCA”). Indirect taxes Indirect taxes are also imposed by UK law, but UK law in this area derives from EU Directives and/or Regulations to a far greater extent than UK law related to direct tax. Clients may want to consider, for example: • VAT - VAT is unlikely to be replaced or significantly changed in respect of domestic transactions immediately following the UK’s departure from the EU. There is, however, likely to be a more significant impact on VAT for cross-border transactions within the EU. For example, current EU-wide principles mean that no UK VAT is imposed on cross-border supplies of goods or B2B services from the UK to a recipient in another EU member state. How VAT will work in cross border scenarios will be a key item to be negotiated as part of the UK’s Brexit. • Customs duties - Similarly to VAT, customs duties currently do not apply to trade within the EU; rates for imports from outside the EU are set at the EU level. Since (unlike VAT) these duties are largely governed by EU law, new legislation will be needed, both in relation to trade with EU member states and in relation to trade with non-EU countries (trade between those countries and the UK is currently governed by the agreements between those countries and the EU). • Excise duties - UK excise duties are at present not fully harmonised with the EU; excise duties on goods such as tobacco are bound by minimum rates set by EU Directives (although the UK can set the rates above those thresholds). After the UK leaves the EU, it will be possible to vary the rates of excise duties without EU law restraints. • The Capital Duty Directive - This imposes restrictions on member states imposing tax on the raising of capital by companies, such as share issues. The UK has, as a member of the EU, restricted the scope of its 1.5% stamp duty reserve tax (“SDRT”) charge on shares issues into a depository receipt issuers and clearance services. In principle, following Brexit, the UK could extend the scope of this charge without being constrained by EU law, though this is considered unlikely. 22 x mayer brown • Withholding taxes - as mentioned above, the UK has a domestic exemption from withholding tax on dividends paid. So far as interest is concerned, there are a number of domestic exemptions that are available from withholding tax on interest paid subject to certain conditions being met. It is likely that these exemptions will continue to be available, albeit that some changes may be required – for example, whilst the “quoted Eurobond exemption” may require some changes, it has long been available for bonds in non-euro currencies (such as UK sterling or US dollars) that are listed in recognised stock exchanges in the UK, in the EU, or outside of the EU (such as NYSE, Nasdaq, the Canadian Stock Exchange, the Channel Islands Stock Exchange, etc). There is a UK withholding tax on royalties paid from the UK, and here investors should consider applicable DTTs if they have previously relied upon the Interest and Royalties Directive – see above. Further, the loss of the benefit of the Parent Subsidiary Directive and the Interest and Royalties Directive may mean that UK recipients of payments from EU members states may need to rely on the terms of the relevant DTT with the UK. • DTTs (UK and non-UK) - the UK’s large network of DTTs will remain in place and in force. But depending on the outcome of the Brexit negotiations, international investors should consider the impact of Brexit on whether they satisfy LOB provisions in DTTs generally, not just the UK’s DTTs. For example, many treaties have an “equivalent beneficiaries” or similar concept, whereby a company can claim treaty benefits if it is owned as to a certain percentage by equivalent beneficiaries and certain other tests are met. Equivalent beneficiaries residents in member states of the EU (and the UK will cease to be such a member state), but it may also include member states of the EEA or the EFTA (and the UK may remain or become such a member state). • Domestic provisions related to international tax - the UK’s domestic law related to international direct tax – such as the UK transfer pricing code, the UK’s CFC rules, and the new diverted profits tax – will most likely be unaffected by Brexit in material terms. Likewise, the taxation of non-resident investors in (for example) UK real estate is unlikely to be materially impacted. As stated above, in relation to indirect tax, and particularly for clients that have considerable trade in goods or services with EU counterparties from or via the UK, much will depend on the Brexit negotiations. James Hill Partner, London E: firstname.lastname@example.org T: +44 20 3130 3227 Clients should consider reviewing their international tax structures (and, if necessary, whether any restructuring may be required). mayer brown x 23 24 x mayer brown Data Protection, IP and IT How to plan and address the developments that may occur in this area. mayer brown x 25 Data Protection, IP and IT - What happens next? Data protection and privacy • The Data Protection Act 1998 (which implements the European Data Protection Directive 95/46) will remain in force in the UK and will continue to apply as it does today unless it is repealed by the UK Parliament or replaced by the General Data Protection Regulation (“GDPR”). • The GDPR (which replaces the Data Protection Directive 95/46) was adopted by the EU in May 2016 and will come into force throughout the EU in May 2018. • If the UK is still a member of the EU by May 2018, or has withdrawn from the EU but has become a member of the EEA, the GDPR will come into force in the UK and organisations conducting business in the UK will have to comply with it. • Irrespective of when the UK withdraws from the EU, the UK Parliament is unlikely to pass legislation that would significantly diverge from European data protection law requirements. The European Data Protection Directive and upcoming GDPR prohibit the transfer of personal data to countries that do not offer adequate data protection unless certain conditions are met. Because of the UK’s extensive trading relationships with other members of the EU, it is highly likely that the UK Parliament will seek to retain current or enact new legislation that will ensure that the UK remains an “adequate” country to transfer personal data to in the opinion of the European Commission. What should my organisation do now? • It is likely that European data protection law requirements will continue to apply in substantially (if not completely) the same form as they do now in the short to medium term following the UK’s withdrawal from the EU. Organisations should continue their preparations for the implementation of the GDPR as it relates to their businesses in the UK. • Should the UK cease to be determined an “adequate” country by the European Commission, organisations should examine the flows of personal data from the EU to the UKand beyond, and take steps to ensure that those transfers of personal data can take place in accordance with European data protection law requirements. Organisations should continue their preparations for the implementation of the GDPR as it relates to their businesses in the UK “ “ Intellectual property and information technology • Many contracts under which an organisation is permitted to use or permits others to use certain goods, services, data, software, materials etc and their related intellectual property rights will define the scope by which the organisation and its third parties can use or benefit from these by reference to territory (including that of the EU or EEA). Depending on how contracts are drafted, the UK’s withdrawal from the EU may lead to the UK being removed from the territorial scope of the software licences, service agreements, distribution agreements etc under which an organisation is entitled to use goods and services or exploit data, software, materials and the intellectual property rights in them and/or appoint third parties to do so. Other terms of the contract that may be affected include the organisation’s and third party’s obligations to comply with changes to applicable laws, import/export charges, taxes and controls, the affect of force majeure and the interpretation of jurisdiction, governing law and dispute resolution clauses. The use of change control procedures to agree and implement necessary changes as a result of Brexit may result in additional costs being incurred by the parties. • The UK will no longer be able to participate in the Unified Patent system and the Unified Patent Court as this is only open to EU member states. Brexit will likely delay the introduction of the Unified Patent system and the current agreement will need to be re-written if the unitary rights are to include the UK. • If the UK is a member of the EEA, there should be no change to exhaustion rules that stop trade mark owners from preventing the sale of goods that have been put onto the market in the EEA with their consent. However, if the UK does not participate in the EEA, trade mark owners could use exhaustion rules to prevent the import of goods from the UK into the EU. • The Trade Secrets Directive has already been adopted and member states of the EU are required to implement it by 2018. It is currently unclear if the UK will in fact implement national law to enforce it in the UK by 2018. • If the UK remains part of the EEA, most UK intellectual property laws are likely to stay closely aligned with EU law. However, if the UK’s future relationship with the EU is outside of the EEA, UK national laws may begin to diverge from EU law over time. • European community rights, such as design rights and EU trade marks, are unlikely to remain effective in the UK. It is uncertain what will happen to the UK parts of such rights that were secured before Brexit, for example, whether the “UK portion” of EU trade marks will continue to apply in the UK or a new, national right will need to be obtained. This could lead to issues relating to the validity of security registered against intellectual property, the terms of licences and the enforcement of rights. 26 x mayer brown mayer brown x 27 What should my organisation do now? • Consider setting up an internal working group to monitor the Brexit discussion and negotiations in relation to intellectual property rights and associated issues. • Start taking steps to identify contracts under which your organisation is permitted or permits others to provide or receive material goods, services, data, software, materials and the intellectual property rights in them, so that you can be ready to review them and consider whether Brexit is likely to cause any problems. If you are in the process of negotiating new contracts, consider whether any provisions should be included to cover the transitional period and implementing changes post-Brexit. • Consider whether you need to develop a communications strategy both internally and externally, in respect of your customers and/or suppliers. • Consider the impact on any pending business planning /investment decisions. For example, if you are in the process of acquiring or disposing of a business, consider the terms of any licences and the impact on registrations of security over intellectual property of the target. • If your organisation relies on community rights, you will need to be ready to respond to changes in this area. You can begin by identifying your key intellectual property rights and in particular those which are protected on a community basis. • Consider whether you need to take steps to make new registrations to ensure that rights are protected in both the UK and the EU upon Brexit. Data Protection, IP and IT - What happens next? Mark Prinsley Partner, London E: email@example.com T: +44 20 3130 3900 The UK will no longer be able to participate in the Unified Patent system and the Unified Patent Court as this is only open to EU member states “ “ Mergers & Aquisitions The UK’s decision to leave the EU will of course have implications for corporate activity in the UK. The immediate consequence is uncertainty, which has led to some transactions being delayed or put on hold indefinitely. 28 x mayer brown mayer brown x 29 Mergers & Aquisitions - What happens next? Practical considerations for M&A transactions It is too early to say with any certainty what the long term impact of Brexit will be on M&A transactions involving the UK. However, there are some important practical considerations for those active in the M&A markets both in the interim period and the longer term. Due diligence The substantive laws and regulations governing the principal agreements used to effect UK private M&A transactions (i.e. UK contract law and company law) are unlikely to be materially affected by Brexit. There are, however, certain aspects of M&A transactions which are currently governed by EU law that would be impacted once the UK leaves the EU. In the interim period, buyers should consider widening the scope of due diligence to identify matters which may become problematic, depending on the nature of the UK’s relationship with the EU going forward. These include: • Illegality/change in law provisions which may give a counterparty rights to terminate existing arrangements • Grants and investments made by EU bodies where eligibility criteria limit availability to recipients within the EU/EEA • Employment and contractor arrangements for UK nationals working within the EU, as well nationals from other EU member states working in the UK • Licences which define territorial rights by reference to the “EU” or “EEA” Completing transactions In the short term, volatility in the markets and lack of confidence in sterling may result in an increased use of financing conditions, commitment letters and provisions allocating the risk of exchange rate movements in the period between exchange and completion. On a long term basis, changes to merger control regimes could mean that the current “one-stop-shop” will cease to apply between the UK and EU. If that proves to be the case, where a transaction exceeds both the UK and EU filing thresholds, filings will potentially need to be made with both the UK and the EU competition authorities. Similar issues may arise in relation to “change of control” filings required under certain regulatory regimes. Post-completion integration Post-completion integration activities may become more cumbersome depending on the changes made to current registration regimes. For example, if pan-European IP rights such as Community Trademarks and Community Design Rights cease to apply, separate registrations may be needed for IP rights in the UK, increasing the cost and administrative burden of integration. On-going and historic transactions It is unlikely that events over the last few weeks will trigger standard “Material Adverse Change” provisions for transactions that have signed but not yet completed. However, MAC clauses should be checked to confirm if a party has the right to walk away. Where deals have completed in the last 12 -24 months, market volatility and fluctuations in foreign exchange rates may impact post-completion price adjustments which fall to be determined in the short term. Kate Ball-Dodd Partner, London E: firstname.lastname@example.org T: +44 20 3130 3611 Brexit - What happens next? Litigation What will be the immediate and future impact of the UK’s vote to leave the EU. 30 x mayer brown mayer brown x 31 Litigation - What happens next? Impact on the UK’s cross-border litigation rules Although there is a degree of future uncertainty about the detail (including because much may depend upon trade negotiations), the short point is that the UK’s decision to leave will not have an immediate effect on cross-border litigation, and any future impact is unlikely to be considerable. Key questions for consideration We are currently involved in litigation with an entity in another EU Member State. What happens now? There should be no immediate change. The UK’s exit from the EU will not take place immediately. The procedure for a Member State’s withdrawal from the EU is set out in Article 50 of the Treaty on European Union. It provides for the UK to negotiate a withdrawal agreement with the EU and for the Treaties to cease to apply to the withdrawing State after two years, unless there is unanimous agreement to extend that period. We are currently in dispute with an entity in another EU Member State. We are expecting proceedings to be issued within a year. What happens now? Please see answer to Question 1 above. As we would normally do, we will advise you on issues such as the law governing your dispute, in which country/jurisdiction the litigation should be heard. If litigation is commenced under the existing rules, the likelihood is that it will be allowed to continue under them: when new legislation is introduced which makes changes to litigation procedure, transitional provisions in the new legislation usually stipulate that the new rules apply only to proceedings commenced on or after a date in the future. What are the rules in relation to cross-border litigation likely to look like after the UK’s withdrawal from the EU? It is unclear from the terms of Article 50 (summarised above) how far the arrangements for the UK’s future relationship with the EU would be included in the Article 50 withdrawal agreement. One of the decisions to be made will be the extent to which existing EU legislation should continue to form part of UK law. Many commentators believe that most of the existing EU Regulations governing cross-border litigation would be transposed into UK law (albeit that some would also require continued compliance by the current EU Member States, to the extent that the rules envisage interaction and/or reciprocity). Some of those Regulations are listed in the box below. • Regulation (EC) No 593/2008 of the European Parliament and of the Council on the law applicable to contractual obligations (“Rome I”) • Regulation (EC) No 864/2007 of the European Parliament and of the Council on the law applicable to non-contractual obligations (“Rome II”) • Regulation (EU) No 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (“the Recast Brussels Regulation”) • Regulation (EC) No 805/2004 of the European Parliament and of the Council creating a European Enforcement Order for uncontested claims (“the European Enforcement Order Regulation”) • Regulation (EC) No 1896/2006 of the European Parliament and of the Council creating a European order for payment procedure (“the European Order for Payment Regulation”) • Regulation (EU) No 1393/2007 of the European Parliament and of the Council on the service in the Member States of judicial and extra-judicial documents in civil or commercial matters (“the Service Regulation”) • Council Regulation (EU) 1206/2001 on co-operation between the courts of the Member States in the taking of evidence in civil and commercial matters (“the Evidence Regulation”) What might the cross-border litigation framework be if the existing EU Regulations listed above are not transposed into UK law? Rules on which law will govern contractual obligations One option is for the English Courts to revert to the rules which were in force before Rome I. The regime pursuant to the Rome Convention on the law applicable to contractual obligations 1980 is similar to that set out in Rome I, although there are some differences. Rules on which law will govern non-contractual obligations One option is for the English Courts to revert to the rules which were in force before Rome II, in this case the Private International Law (Miscellaneous Provisions) Act 1995. This regime is not the same as Rome II. One particular difference is that, unlike Rome II, it does not give the parties an express right to choose the law applicable to non-contractual relationships between them. It seems unlikely that a backward step would be taken however. Rules concerning which country’s courts would have jurisdiction to resolve disputes with a UK and EU connection, and rules about what happens when there are parallel proceedings in the UK and an EU Member State One option is for the UK to be bound by the Lugano Convention. The Lugano regime is similar to that under the Recast Brussels Regulation, although it does not yet include the greater benefits and clarity for parties which were recently incorporated in to the Recast Regulation. (It is unclear whether the UK, as a former EU Member State, would in fact already be bound by Lugano or would have to accede to it separately.) Rules on enforcement of English court judgments in EU Member State courts and judgments from the courts of EU Member States in England & Wales The Lugano Convention mentioned above contains a similar (albeit less streamlined) regime for the enforcement of judgments within the EU to the Recast Brussels Regulation. There is, however, currently no non-EU equivalent to the European Enforcement Order Regulation, nor to the European Order for Payment Regulation. If litigation is commenced under the existing rules, the likelihood is that it will be allowed to continue under them “ “ 32 x mayer brown Rules relating to service of English proceedings abroad and service of foreign proceedings in the UK At present, there is no requirement to apply for court permission to serve English proceedings out of the jurisdiction if the English courts have jurisdiction under the Recast Brussels Regulation. A similar exemption from having to apply for permission to serve out of the jurisdiction applies to parties to the Lugano Convention. Service of UK proceedings (and proceedings in a Member State) can currently be effected within the EU using methods pursuant to the Service Regulation. If that Regulation were to cease to apply, the UK is a party to the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters (1965). As at 24 June 2016, there were 71 Contracting States including most, but not all, of the current EU Member States (and, in respect of the others, service could still be effected using methods which accorded with a bilateral treaty or local law). Rules on obtaining evidence in EU Member States for UK proceedings or in the UK for proceedings in a Member State Such evidence can currently be obtained pursuant to the Evidence Regulation. If that Regulation were to cease to apply, the UK is a party to the Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters (1970) which provides for the taking of evidence by means of letters of request and by diplomatic or consular agents and commissioners. As at 24 June 2016, there were 59 Contracting States, including most, but not all, of the current EU Member States (and, in respect of the others, such evidence might still be obtained via a bilateral treaty or local law). David Allen Partner, London E: email@example.com T: +44 20 3130 3813 mayer brown x 33 The UK insurance industry is the largest in Europe and the third largest globally, contributing over £25 billion annually to the UK GDP. Insurers have been and continue to be engaged in formulating contingency plans, with Lloyd’s of London (“Lloyd’s”) already publically restating its commitment to plan for a post-Brexit scenario. In addition to contingency planning, insurance industry participants need to protect their interests by having their voices heard in discussions with politicians and policy makers ahead of, and during, the upcoming negotiations with the EU. In this Legal Update we seek to identify the challenges, risks and opportunities for the insurance industry. The impact on the insurance industry The impact on underwriting The impact that leaving the EU will have on the insurance industry will vary depending on the type of insurance business underwritten and, crucially, the method of distributing the product to market. General insurers, who have a large retail customer base, are likely to rely more heavily on the EU passport for crossborder transactions, and continued access to the EU insurance market will be one of their main concerns. The reverse is equally true for European Economic Area (“EEA”) insurers wishing to access the UK market. The loss of easy access to the EEA market may also make investment in such UK based insurance firms less attractive, though a weaker sterling may go some way to offset that sentiment. Insurance The decision to leave the EU will have specific effects on the insurance industry depending upon the terms of exit to be negotiated with the EU. 34 x mayer brown Alongside losing access to five hundred million potential customers in the EU, if UK insurers lost the ability to use the passporting system, such as the Solvency II passport, they may have to make changes to their group structure to provide for a presence in both the EEA and the UK. Insurers based in the UK may need to set up a subsidiary in the EEA and insurers based in the EEA may have to set up a subsidiary in the UK to perform cross-border transactions. Many of the larger pan-European businesses already have authorised carriers in places such as Dublin (which as a jurisdiction, sees the post-Brexit world as an opportunity, quite understandably) and those that don’t are probably making plans. ...even (re)insurers with little exposure to the EU can be affected by Brexit. “ “ mayer brown x 35 For other more specialist insurance businesses, the UK’s withdrawal from the EU will likely be less significant. Lloyd’s has released a statement stating that only 4% of its global gross written premium (“GWP”) is at risk with the UK outside the EU single market. The EEA only accounts for 11% of Lloyd’s total GWP and almost half of this is reinsurance. The loss of the EU passport will likely not significantly impact pure reinsurance business. Generally, the insurance sector is far less reliant on EU passporting than other financial services, relying more on trading with non-EEA countries. To that extent, it is often claimed that the specialist insurance industry is truly global and London remains at the heart of the market. The challenge is to maintain that position going forward. The UK insurance industry carries out a large proportion of its cross border transactions with Canada, the United States (which together account for 47% of Lloyd’s total GWP) and Bermuda. Losing the EU passport will likely have no direct effect on this business. However, even (re)insurers with little exposure to the EU can be affected by Brexit. The value of the pound against the dollar and euro has fallen and this may impact claims exposures denominated in foreign currencies and capital denominated in pounds. Additionally, S&P has cut the UK’s credit rating from AAA to AA, citing that the referendum could lead to a drop in economic performance. Moody’s has downgraded the credit rating of some UK insurers due to market uncertainty and the effect of the referendum on capitalisation. The impact on investments Insurers are major investors and market participants (one major insurer announced that it was expected to generate 37% of its revenues from global market investment in 2016 prior to the vote) and market uncertainty and volatility following the referendum may have a significant impact on returns on these investments. Moreover, with interest rates now forecast to stay at record low levels, bond yields are at rock bottom and likely to languish there. Since the announcement of the referendum result early on 24 June, the severe volatility across all markets, including fixed income, equities and currencies has the potential to impact solvency capital ratios and has already attracted the attention of rating agencies, particularly with respect to the life sector. The UK’s Prudential Regulation Authority (“PRA”) has sensibly adopted rules recently to ease compliance with Solvency II capital ratios as a transitional matter to relieve the immediate pressure on insurance companies to sell investment assets at a time when market values are depressed. Investment activities are also subject to EU legislation such as the European Market Infrastructure Regulation (“EMIR”), the Markets in Financial Instruments Directive II (“MiFID II”) and the Market Abuse Regulation (“MAR”). Even firms that are not reliant on an EU passport for their (re)insurance business may find that they rely on the passport to conduct their investment business. Colin Scagell Partner, London E: firstname.lastname@example.org T: +44 20 3130 3315 36 x mayer brown mayer brown Environment and Planning Assessing the impact. Environment & Planning - What happens next? mayer brown x 37 The impact on environment and planning Most environmental law is EU-derived, and implemented via UK law. Technically, therefore, Brexit will make no difference to the applicability of these laws to UK business. That is less true of planning law, which is largely, though by no means entirely, UK-based. That said, for both political and practical reasons, the UK Government is likely to be under pressure to, at least, simplify some of the current rules. Even some Remainers (including George Osborne) have criticised EU environment and planning rules, for instance, describing rules on the protection of habitats as placing a “ridiculous” cost on business. However, there are two factors that would restrict the UK’s ability to initiate a major retreat across the board in environmental and planning laws: first, any deal with the EU which involved continued access for the UK to the single market will mean that EU rules on product safety and waste (amongst others) would continue to apply to businesses exporting to the EU and secondly, the UK’s international treaty obligations on public participation in environmental decisions and access to environmental information would continue to apply to the UK, thus meaning rules on environmental impact assessment in particular will survive in some form. The extent and manner of the UK’s participation in the EU ETS will be an area of some uncertainty, however given the UK’s historical leadership in this area, and its signing of the 2015 Paris Agreement, a substantial watering down of emissions-related commitments is highly unlikely. Depending on these matters, we might see some softening in the UK environmental and planning rules through the emergence of mirror systems to those of the EU but a wholesale retreat from environmental and planning protections seems unlikely. mayer brown x 37 Michael Hutchinson Partner, London E: email@example.com T: +44 20 3130 3164 Environment & Planning - What happens next? Energy Possible post-Brexit scenarios. Over the years, the UK has exercised a significant influence over energy policy and has been at the forefront of liberalisation initiatives. Key aspects of the Third Energy Package • Unbundling energy suppliers from network operators, i.e., the separation of energy supply and generation from the operation of transmission networks. • Strengthening the independence of national regulatory authorities (“NRAs”), e.g., by ensuring that they are free from influence of both industry and government. • Establishing the Agency for the Cooperation of Energy Regulators (“ACER”), an independent EU agency established to help cooperation between NRAs and to ensure the smooth functioning of the internal energy market. • Cross-border cooperation between transmission system operators and the creation of the European Network for Transmission System Operators for Electricity (“ENTSO-E”) and the European Network for Transmission System Operators for Gas (“ENTSO-G”), which (i) develop standards and draft pan-European network codes to help harmonise the flow of electricity and gas across different transmission systems and (ii) coordinate the planning of new network investments and monitor the development of new transmission capabilities. • The UK signing bilateral agreements (under EFTA membership), following the model of Switzerland, an EFTA State which is not part of the EEA. There are ongoing negotiations between Switzerland and the EU to conclude an energy agreement which would regulate cross-border electricity trading, harmonise safety standards, secure free market access and guarantee Switzerland’s membership in the various committees. The negotiation mandate encompasses the latest legal developments in the EU, including the Third Energy Package. Nevertheless, the danger of such a relationship is highlighted by the fact that the deal remains blocked after Switzerland’s referendum on immigration, and the EU refuses to give Switzerland further access to the internal market until a framework agreement is established. It is therefore doubtful that the EU would be willing to establish a similar relationship with the UK. 38 x mayer brown 1 An intergovernmetal organisation set up for the promotion of free trade and economic integration to the benefit of its four Member States: Iceland, Liechenstein, Norweay and Switzerland. mayer brown x 39 Energy - What happens next? • The UK negotiating a single bilateral free trade arrangement with the EU (as for example, South Korea or Canada). As with South Korea, the deal could involve cooperation with regard to climate change and energy security. In the last two scenarios, the UK could specify that the EU Energy rules no longer apply to it and would have increased power to devise its own rules. Some commentators fear, if the UK were to lose its influence over the EU energy legislation, that the EU single energy market could move away from further liberalisation, restructuring and transparency. However, the current UK Government has been reported as being unlikely to want to reverse the trend for more transparency and a level playing field at EU level, which is currently being implemented by the Commission’s Third Energy Package and by the 2015 Framework for Energy Union,1 even if the UK were to exit the EU. Impact of Brexit on each individual aspect of EU Energy Policy The possible impact of Brexit must, in reality, be examined for each aspect of the EU energy policy. Under all three scenarios mentioned above, several sources, including a study conducted by Vivideconomics for National Grid in the UK, 2 stress that the uncertainty created by Brexit risks giving rise to higher costs of investment in energy infrastructure and/or to the deferral of such investments. Under the last two scenarios mentioned above, where the UK exits the IEM, each of the following aspects of EU Energy policy is likely to be affected: • Regulatory bodies: after a Brexit, the UK would exit the two EU regulatory bodies dealing with energy markets, i.e., the Council of European Energy Regulators (“CEER”) (a not-for-profit organisation through which national regulators cooperate and exchange best practices) and ACER. In order to retain influence over Energy Policy in the internal market, the UK would have to negotiate to remain part of those bodies. It could also reach an agreement to remain in ENTSO-E and ENTSO-G, which would enable UK transmission system operators to be able to influence the development of network codices. • Availability of EU funds: a substantial number of British energy infrastructure plans are currently listed as eligible for financial support as projects of common interest (“PCIs”), i.e., a list of key infrastructure projects which may benefit from an accelerated procedure and access to financial support from the EU. Brexit may lead to those projects being reviewed as PCIs and/or receiving lower priority, and may impact the deployment of such projects (e.g., offshore wind projects). 1 UK House of Commons Briefing Paper dated 12 February 2016 “Exiting the EU: impact in key UK policy areas” p.73, accessible at : http://researchbriefings.parliament.uk/ResearchBriefing /Summary/CBP-7213#fullreport 2 Study by Vivideconomics “The impact of Brexit on the UK energy sector” dated 29 March 2016, accessible at: http://www.vivideconomics.com/wp-content/uploads/2016/03/ VE-note-on-impact-of-Brexit-on-the-UK-energy-system.pdf Brexit may affect the UK’s negotiating strength with external countries, as it will no longer be able to negotiate as a bloc “ “ 40 x mayer brown • State aid: State aid rules would no longer apply to the UK. Therefore, subsidies granted by the UK government would not fall foul of EU State aid rules and the UK would have greater independence and freedom with regard to its energy policy. Nevertheless, with regard to exports, the UK would still need to comply with the WTO subsidy regime. • Market integration: if the UK remains outside the IEM, it could be, to some extent, excluded from market integration initiatives, such as market coupling (i.e., selling electricity together with interconnection capacity, instead of separately, in order to integrate electricity markets in different areas), cross-border balancing (i.e.,the process through which transmission system operators ensure that they are able to access a sufficient amount of energy to balance the differences between supply and demand that occur in every electricity transmission system) and cross-border participation in capacity mechanisms (i.e., measures taken by Member States to ensure the availability of sufficient electric energy resources). Leaving the single market could also open the UK to new import taxes and increase the cost of imports (when selling into EU Member States), for example as a result of currency devaluation, restrictions on the movement of people, or differing rules and regulations. In any case, Brexit may affect the UK’s negotiating strength with external countries, as it will no longer be able to negotiate as a bloc. • Energy security: although it seems that Brexit would not, in principle, affect existing gas and power interconnections with EU Member States, which are subject to bilateral contractual agreements, it might create uncertainty about the future development of these interconnections. Investment in new interconnectors may also be affected and some of the contract/ deal terms may have to be renegotiated. In addition, as one terminal of such interconnectors will be in the EU, EU policy and requirements may still be applicable. There will be difficult questions as to whether or not interconnectors continue to be bound by, for example, restrictions on selling capacity on a long-term basis. – Concerning electricity, if investments in interconnectors between the UK and its neighbours are affected, alternative and more costly options to maintain electricity supply security may have to be explored. – Concerning gas, the Vivideconomics study stresses that Brexit may have a lesser impact in the short term, as the UK has domestic production of gas, gas markets are already well integrated between the UK and Europe and price differentials are small. In addition, the UK has excess storage capacity and a diversified source of supply with many import facilities (e.g., pipeline gas from Norway and liquefied natural gas (“LNG”) from Qatar and potentially the USA). Nevertheless, there could be supply security risks in the longer term, where the UK could find itself excluded from EU “solidarity principles” or when additional gas is needed for peak demand (e.g., cold weather). There may be a need for investment in new indigenous sources of gas (e.g., shale gas), new UK gas storage and LNG facilities. Similarly such investment, which may prove difficult without significant changes in UK Government policy as in recent years as climate change policy has driven investment in renewable and nuclear energies. Investment in new interconnectors may also be affected and some of the contract/deal terms may have to be renegotiated “ “ Energy - What happens next? • Renewables and emissions policy: the EU Renewable Energy Directive (“RED”) requires the UK to generate 15% of its energy from renewable sources by 2020. In addition, the EU has agreed a target for cutting carbon emissions across the continent by at least 40% from 1990 levels by 2030. If not part of the IEM, the UK would be released from EU renewable targets and emissions limits. This would in principle, give the UK more flexibility with regard its energy policy and its choice of technologies. Nevertheless, the UK would still be bound by national and international obligations: – First, the UK would be subject to the United Nations Framework Convention on Climate Change (“UNFCCC”) and the Paris agreement, and will need to submit its own national emissions target. As a consequence, a new (lower), EU-wide target for 2030 will probably need to be adopted as the UK is today largely contributing to the EU’s target to bring emissions down by 40% by 2030. Alternatively, other Member States may have to agree to make greater emission cuts. – Second, at the national level, the Climate Change Act 2008 states that the UK must cut its carbon emissions by 80% on 1990 levels by 2050 and is required to set “carbon budgets” every five years. There could be, however, a lower emphasis on renewables as a means to cutting emissions. • EU Emissions Trading System (“ETS”): if the UK is outside the IEM, it may not directly participate in the ETS. However, transitional arrangements and arrangements linking a UK scheme to the ETS could be negotiated. • The EU Industrial Emissions Directive 2010 (“IED”) requires new power plants to comply with stricter emission limits on pollutants, while older plants have to close or clean up. This has an impact on UK coal-fired power plants and older gas plants which are expected to close by 2023. The UK government has indicated that, if outside the EU, it may choose to allow longer lifetimes for some older plants. However, it has recently announced plans to close all coal-fired power stations by 2025. mayer brown x 41 Kieron Dwyer Partner, London E: firstname.lastname@example.org T: +44 20 3130 3230 Americas | Asia | Europe | Middle East | www.mayerbrown.com About Mayer Brown Mayer Brown is a global legal services organization advising clients across the Americas, Asia, Europe and the Middle East. Our presence in the world’s leading markets enables us to offer clients access to local market knowledge combined with global reach. We are noted for our commitment to client service and our ability to assist clients with their most complex and demanding legal and business challenges worldwide. We serve many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, CAC 40, DAX, Hang Seng and Nikkei index companies and more than half of the world’s largest banks. 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