As the Brexit referendum hangover lifts (and in some cases Brexiters are wondering what they have done), Britain and the EU are contemplating their future together ‒ and apart. And although we're on the other side of the world, Australian businesses trading with EU member states will still be affected, although how much is still unclear.
With all the uncertainty, one thing is clear: the timing during which exit negotiations take place, and (after the exit notice is issued) the exit model and how it will engage with the EU, will be crucial issues. It will affect how much EU law is still in force in the UK, the UK's access to the single market and freedom of movement between the EU and the UK.
Having said that, even with the UK exiting the EU, it will still trade with the EU and continue to be part of international bodies such as the WTO and the Basel Committee. This means that even if it goes it alone, its freedom to enact its own regulatory regimes will be curtailed not only by other obligations, but the reality that it must still trade with EU businesses and within EU markets.
In this briefing note we set out the legal framework for Brexit, its effect on key business issues, and some steps you should be considering now.
Pulling the Article 50 trigger
The Brexit referendum might have started the political and diplomatic discussions, but it has no legally binding effect. Until the UK officially leaves the EU, it is bound by its treaty obligations, and also enjoys its treaty rights. All EU laws/directives that apply in the UK will remain in force until the exit is formalised.
The legal method for extricating the UK from the EU starts with the service of a notice under Article 50 of the Lisbon Treaty. This is purely within the hands of the British Government; it can choose when (and, of course, if) it serves this notice. However before that notice can be given, an Act of the UK Parliament is required; with the majority of parliamentarians opposed to Brexit, that process of itself raises interesting possibilities...
Currently the speculation is that an Article 50 notice will be issued later this year, at the earliest, but it could be postponed until after the French and German elections in 2017, notwithstanding some desire in Europe for a quicker timetable.
Once the Article 50 notice is served, the clock begins ticking. The UK and the EU have two years to negotiate the exit. An extension can be granted if the other 27 nations in the EU unanimously agree to it. Given the current mood, this appears unlikely. Assuming no extension is granted, both sides must try to make what arrangements they can but, even if no agreement has been concluded, the UK will exit the EU automatically at the end of that two-year period.
That's the EU's process. On the other side of the Channel, any withdrawal agreement must be laid before Parliament before the Government can ratify it. If it ratifies this, then legislation would be needed to implement it. The Government would also have to embark on a massive program of reviewing current regulatory arrangements affecting multiple sectors, which could include repealing legislation implementing EU law / directives and creating replacement regimes.
Britain-EU relations post Brexit: three exit models
This is the $64,000 question. There are three possible models being discussed at the moment:
The Norway model: This would see the UK joining the European Economic Area (EEA) and European Free Trade Association, giving it access to the single market. This comes at a price: the UK would still have to allow free movement, be bound by certain parts of EU law, and make financial contributions, but lose any ability to shape policy or law binding it, including competition law, corporate law, and financial services.
The Swiss model: Rather than getting access across the board to the single market via the EEA, the UK could join the European Free Trade Association only, and enter bilateral agreements with the EU for specific sectors. This would not only be a lengthy and complex process, but the price would most likely be the same as joining the EEA.
Totally out: Under this model, the UK would be in the same position as any other member of the WTO. Its options include negotiating a Free Trade Agreement with the EU, or joining the EU Customs Union.
Mergers, capital markets, and corporate law
Mergers in the EU are governed by the UK Takeovers Code, which was the basis for the EU Takeovers Directive, so the substantive law is unlikely to change much, at least in the short term, particularly for share sales. Where complications could arise, depending upon the exit model, are in:
- asset or business sales;
- cross-border mergers;
- the rules affecting employee entitlements and status; and
- merger clearance.
Capital markets and capital raisings may be harder to implement when the UK exits the EU. Currently, in the EU context, a prospectus must comply with the EU Prospectus Directive and be approved in one member State. Once this compliance hurdle is overcome (ie. once approved by the UK) the prospectus can be used across the EU without further regulatory interference. Post-Brexit, an EU member State's approval will be needed if the offer by a UK entity has relevance in that State. Given this need for a dual compliance process, we imagine it somewhat likely that the UK would not relax its prospectus rules greatly post-Brexit, to ensure an easy EU compliance process.
Finally, the UK's corporate laws could change (again, this will depend on the exit model). Under the Norway model, it must comply with much EU corporate law; under the other two models, compliance would be subject to negotiation. Again, the UK might have less room to manoeuvre than some Brexiters might have thought, given the role robust corporate governance plays in attracting foreign capital.
This is a very complex area, and Brexit poses some obvious risks.
Even if the Norway exit model was adopted, and the UK joined the EEA, it would still not get full access to the single European market for financial services. This is because the EEA has to incorporate any new EU laws into the Agreement, and financial services law is an area in which the EEA is generally regarded to be lagging. Again, in the EEA the UK would not be able to lead policy development as it currently does as a member of the EU.
The implications of a total exit would be more severe. Generally, financial services regulation in the UK is done mostly via EU directives and regulations. That means that if the enabling legislation, the European Communities Act, is repealed, those directives will not apply in the UK, so new legislation would be required, if only to incorporate those directives and regulations. Along with the Swiss model, any freedom to create a dramatically different regulatory model would be curtailed by international standards (such as Basel III) and the need to negotiate with the EU to get access to its market. At the same time, UK financial services firms would lose their passport to operate across borders, and would need local approval to set up a subsidiary in the EU.
EU competition and antitrust laws will still apply to activity within the EU, whether the market participant is domiciled in the EU or not, and Brexit will not affect this.
Brexit will however mean the UK loses the chance to shape the law, whatever exit model is adopted, and possibly also the one-stop-shop for merger clearance and investigations (so its companies could be subject to parallel processes on either side of the Channel).
One of the contenders for Number 10, Boris Johnson, has previously argued for a “free mobility labour zone” between Commonwealth countries. Any change which could benefit Australians would be years away, as the priority for the UK Government must be its exit negotiations.
The Brexit process will be lengthy and complex, and will probably force Australia's planned FTA negotiations with the EU onto the backburner. Likewise, any FTA with the UK would be many years away, given that as part of the exit process the UK will have to renegotiate around 32 trade agreements in force in the EU (and so the UK currently) enjoys with trading partners.
Brexit and Australian businesses: what you should do now
As the Article 50 trigger is yet to be pulled, and with so much uncertainty in the future shape of UK-EU relations, the only sure current course is to watch and wait.
Even if an Article 50 notice is served, the UK will remain within the EU for another two years, and there is a strong possibility that much UK law will not change quickly, if at all, post-Brexit.
Nonetheless, now is the time to assess what exposure you might have under the three exit models.
If you are currently in, or negotiating, contracts with a link to the EU or the UK, you should review them now, particularly terms dealing with:
- cross-border operations;
- forum or law for disputes, or seat of arbitration;
- tax; or
- any terms dealing with force majeure, frustration, or material adverse effect.
You could also consider Brexit as a risk factor in contracts, but this must be done very carefully, to avoid unintended consequences given the current uncertainty and the likely complexity as possible solutions start to emerge.