This article was originally published by the California Daily Journal on 2 March 2016.
The United Kingdom referendum on leaving the European Union (popularly called a ‘British Exit’ or ‘Brexit’) is to be held in June this year. The notice period required will mean that, if the vote is to 'leave', the actual date of cessation of membership is unlikely to be before 2018. In the meantime, there will be great deal of uncertainty which may affect market conditions.
What are the implications of a Brexit for US businesses? The effects are unclear but are most likely to be felt by US businesses that have operations or trading relationships in the UK or other European countries.
Background to the Brexit referendum
In the British elections in May 2015, the Conservative Party, led by Prime Minister David Cameron, won a majority of seats in the House of Commons.
The Conservative Party election manifesto included a promise to renegotiate Britain’s relationship with the EU and to hold a public referendum on Britain’s membership of the EU.
Behind the scenes negotiations have been taking place for months leading to meetings between the leaders of the EU member nations in Brussels in February 2016. The areas for negotiation included avoiding discrimination against members of the EU that have not adopted the Euro, benefit entitlements for EU migrants working in the UK and whether the EU treaty concept of “ever-closer union” should apply to the UK.
A provisional deal was agreed between the EU and the UK which David Cameron (but not all members of his party or party leadership) supports as the basis for the campaign he is leading for Britain to remain in the EU. The date for the referendum has been set for 23rd June 2016. Recent opinion polls show no clear majority in favour of remaining in the EU or leaving the EU.
A vote to leave the EU would not mean that the UK's membership ceased immediately. The UK must give two years' notice of its intention to exit. An earlier exit could be negotiated but this is unlikely as the notice period would allow time for the UK to negotiate the terms of its future trading relationship with the EU and other countries and for other EU member states to negotiate changes to their relationship to take account of the UK withdrawal.
All of this means that the UK and the wider EU is entering a period of considerable uncertainty. Uncertainty until the result of the referendum is known and, if the vote is to leave the EU, continued uncertainty over the terms of the UK’s future trading relationship with the EU and other countries.
A vote for Britain to leave the EU might have wider implications for the UK and EU. A vote in favour of a Brexit could lead to a break-up of the UK. In particular, Scotland came close to voting for secession in 2014 and a Brexit where a majority of voters in Scotland wished to remain in the EU might lead to calls for another referendum on Scottish independence, to allow Scotland the opportunity to remain in the EU.
A Brexit may also lead to public pressure in other EU member states for a referendum on their continued membership of the EU, with the possibility of a wider break-up of the EU.
Implications for US businesses
In the longer term, trading between the US and UK will depend upon the terms of any trade agreement between the UK and US. The US is set to conclude a trade agreement, the Transatlantic Trade and Investment Partnership, with the EU in the next few years. The UK would be excluded from this arrangement if it leaves the EU. In October 2015, US Trade Representative Michael Froman said that there was no guarantee that Washington would seek a separate US-UK trade agreement if the UK leaves the EU and warned that British firms could face Chinese-style tariffs.
The uncertainties created by the UK's EU referendum may have already contributed to the weakness of sterling against the US dollar – sterling recently fell to its lowest levels for seven years. Analysts at Goldman Sachs have warned that the pound could fall by another 20% against the dollar if the UK were to vote to leave the EU.
A fall in the value of sterling against the dollar would be good news for US businesses importing from the UK, but not for US businesses exporting to the UK. There may also be an impact on the numbers of UK visitors to the US, with trips becoming more expensive for them.
For US businesses considering an investment in the UK, the fall in the value of sterling may offer significant opportunities to acquire UK firms cheaply. Apple's acquisition of British music analytics start-up Semetric in January 2015 for a reputed $50m, would have been nearly 10% cheaper in dollar terms if done today.
For US businesses with contracts with UK entities, if those contracts are governed by English law, a vote for the UK to leave the EU will ultimately impact on English law.
A vote for a Brexit would involve an unpicking of UK legislation which is currently dependent on EU legislation.
In terms of existing contracts between US and UK entities, the question may arise whether these could be terminated as a result of a Brexit. This would depend on the terms of the relevant contract, such as the terms of any force majeure or material adverse change clauses.
For new contracts, parties may seek to include a specific provision dealing with the consequences of a UK exit from the EU. For example, a term may be added to confirm that a UK exit from the EU will not give rise to any right of termination under a material adverse change clause.
Other implications for US businesses will depend on the sector in which they operate and will remain uncertain until the result of the Brexit vote is known and the resulting negotiations are concluded.