This briefing note examines certain legal implications of Brexit for US and overseas investors seeking to take advantage of the exchange rate volatility.
The value of sterling is being impacted by Brexit – at times positively and other times negatively.
As the UK nears the October 31, 2019 exit date, speculation surrounding a general election and the real possibility of a "no-deal" Brexit are prime ingredients for shifts in the currency and exchange markets.
The current view is that there will be a general election in the UK before the end of the year; the Prime Minister and the make-up of the government may change. This could have a further impact on the value of the pound and the economy as a whole.
However, it is not all 'doom and gloom.' The falling pound against the US dollar – the weakest since the mid-1980s – presents an opportunity for US and overseas investors in the UK market to acquire assets at a perceived discount and on improved deal terms. It is noteworthy that there have already been significant levels of investment in the UK technology and media sectors between January and July 2019 – large parts of which are derived from the US and Asian market. In addition, CK Asset Holdings announced the takeover of UK pub group Greene King for £4.5 billion, Hasbro announced the £3.3 billion acquisition of 'Peppa Pig' owner Entertainment One, and Advent International Corporation announced the £4 billion purchase of Cobham PLC; all of the announcements occurred during Summer 2019.
Although deemed advantageous, a favorable exchange rate is not the sole driver to complete a deal in the UK, but just one of several factors. A weak pound is not always good news as it will have an effect on returns and the overall value of an investment made by US and overseas investors.
Part of the challenge for US and overseas investors will be weighing the impact of a "no-deal" or hard Brexit on a proposed investment or acquisition. While there are certain commentators who see Brexit as a negative, there are others who believe the benefits of investing in the UK outweigh the short-term negative impact of Brexit for a number of reasons including the common language, common culture, and legal structures that enable business models to be shared across the transatlantic. In addition, the competitive corporate tax rates, a highly regarded judicial system, low levels of corruption, a sophisticated employment market, and an expanding technology industry are positive reasons to make investments in the UK.
In the context of an acquisition strategy for US and overseas investors, we set out below certain issues that may need to be considered as part of a proposed investment in the UK.
Commercial and Related Matters
A "no-deal" Brexit will result in the UK becoming a "third country" with respect to the EU. If this occurs, the UK legislative landscape will be an uncertain one. The general economic climate in the UK and sector-specific issues will depend on the unfolding legal environment and ultimately, may have varying impacts on UK-based businesses. Where such impact is harmful, there may be opportunities for investors to acquire distressed companies. However, much will depend on the preparedness of individual companies and the degree of regulatory, commercial, and/or contractual exposure they face.
It will be important for businesses to monitor legal developments in order to refine their offensive or defensive commercial strategies as the situation evolves. There may, for instance, be reduced foreign direct investment (FDI) from EU businesses. This may mean that non-EU investors will face reduced competition when seeking to pick up distressed British assets.
Nevertheless, the hardening of the Euro will mean that imported components used in UK manufacturing will be more expensive, unless the components can be sourced from non-EU countries. This, combined with potential transportation difficulties, a possible additional warehousing costs, and the lack of 'just-in-time' or lean logistical arrangements, together with the added threat of tariffs, will all add to UK manufacturers’ overheads, costs that must either be borne by those businesses or passed on to customers. This may mean that businesses will wish to consider reducing their supply chains in order to focus on the UK or the EU.
Contractual issues may be revealed with a hard Brexit. Issues around the concept of territorial scope, contract choice of law and jurisdiction and the enforceability of court judgments within the UK and EU could be critical in terms of contractual enforceability. Further, force majeure, material adverse change, currency provisions, delivery, and duty clauses will need to be reviewed and drafted carefully in cross-border commercial arrangements.
Following Brexit, and without any UK government legislative intervention, all pan-EU intellectual property rights (IPRs) would cease to be applicable in the UK. IPRs are territorial, being linked to specific jurisdictions. Within the EU, the Community Trademark, the Registered Community Design and Unregistered Community Design Rights, and Unitary Patent have been developed, giving the owners of such IPRs greater jurisdictional reach across all EU Member States. The EU Enforcement Directive confers certain pan-EU remedies. Post-Brexit, companies that availed themselves of these community-wide rights will find themselves unprotected within the UK market, unless the UK expressly adopts or 'grandfathers' such rights or the companies in question re-apply for their community IPRs as UK rights. The current UK government has asserted that it will ensure that all existing registered Community Trademarks and registered Community Designs will continue to be protected and enforceable in the UK (as it will provide an equivalent trade mark or design registered in the UK) and that all EU legislation relating to patents will be retained in UK law, however there may be uncertainty from an administrative and practical standpoint.
The UK will also become a third country for the purposes of the EU General Data Protection laws, in particular the General Data Protection Regulations (GDPR). This will mean that transfers of personal data between the UK and EU could become more difficult if the existing UK data protection regime is not regarded as providing adequate levels of security for EU personal data. Absent such an adequacy decision by the European Commission, companies would need to put in place contractual clauses or implement binding corporate rules that guaranteed such security and assured data subjects of their GDPR rights.
The key change to competition law relates to merger control, where the UK already operates a slightly different control mechanism for acquisitions that do not trigger an EU notification. Overall, businesses will need to be aware of significant changes in merger control and antitrust matters to the extent applicable.
UK companies doing business across the EU will, of course, continue to be governed by EU competition law. Therefore, it may not be appropriate for UK law to diverge too much from that of the EU. However, there is the possibility that the UK's Competition and Markets Authority may take a more effects-based approach to competition law. For instance, it may turn its back on the categorization of vertical restraints as 'per se,' by object, violations. It also could allow export bans (currently prohibited by EU single market concerns).
If the UK is no longer bound by EU public procurement rules it could potentially favour local supplies in public sector contracts and/or adopt procurement rules where social or environmental considerations play a greater role.
Northern Ireland is particularly vulnerable to the negative effects of a hard Brexit, given its economic, territorial, and political connections with the Republic of Ireland and its place in the UK internal market. Republic of Ireland is the biggest export destination for Northern Irish exporters, in particular its agri-food sector. Northern Ireland could face competition with respect to its UK mainland-bound sales from cheaper overseas supplies, following the lowering of UK tariffs for imports from the rest of the world. Additionally, Northern Ireland could be challenged by export sales from the UK mainland, as those UK companies seek to replace lost EU sales.
All of these points highlight the legal issues that investors may wish to consider in the context of taking advantage of the exchange rate for their acquisition strategies. It is not intended to be an exhaustive list, but merely identifies matters that investors need to consider before acquisitions in the UK, both pre and post Brexit.