Tensions are rising ahead of the UK’s planned referendum on whether or not to stay in the EU, causing a new set of issues for investors and buyers to take into account when deciding whether to acquire or invest in a company with a UK business.
We have produced a short practical guide to the issues while we wait for a conclusion to the Brexit debate.
When considering an acquisition or investment, detailed due diligence is always key. With a potential exit from the EU looming in the distance, due diligence is even more important and should focus on the potential legal implications of a Brexit on the type of business being acquired or invested in.
Due diligence considerations
It is likely that any company with a UK business will have entered into a number of contracts that are governed by English law. A Brexit will not have any impact on the choice of jurisdiction of these contracts. However, such contracts may contain a number of issues in them that are affected by European law, some of which are discussed below.
- Employees – employment law could be substantially affected by a Brexit as much of the UK's employment law derives from EU legislation. Discrimination rights, holiday entitlement, working time regulations, rules relating to paid annual leave and the regulations relating to the transfer of undertakings (TUPE) all derive from EU legislation and could therefore be affected. In addition, the EU principle of free movement has led to individuals from all over Europe being employed in the UK. If the UK exits the EU, such principles would no longer apply. It is unclear how existing EU citizens working in the UK would be treated. Careful due diligence should be undertaken on employees who are EU citizens and a strategy put in place for how to deal with them if the UK does exit the EU.
- Intellectual property – the UK’s intellectual property laws are largely driven by European law. If a company has European Community Trademarks, for example, they are valid in every country in the EU. Following an exit from the EU, companies may need to re-register their marks to ensure that they have protection in the UK (unless the UK introduces laws to enable existing Community Trademarks to continue to benefit from protection in the UK, or unless they otherwise already have UK protection). When undertaking due diligence, an intellectual property audit should be carried out to establish the types of trademarks and design rights held by a company, and consideration given as to whether further protection would be required in respect of that intellectual property following a Brexit.
- Data protection – the EU data protection rules restrict the transfer of personal data to countries outside the EEA. If the UK were to cease to be a part of the EEA, the UK would be considered a non-EU destination that may need to be approved as providing adequate protection for personal data by the European Commission. It remains to be seen how this would be dealt with by the European Commission if there is an exit. Any due diligence questionnaire should specifically ask whether data is transferred to the business being acquired/invested in from another EEA state.
- Financial services regulation – most legislation governing financial institutions and regulating funds derives from EU law. If the UK leaves the EU, it will have to determine which laws it will keep and which it will replace. As the finance industry is so heavily regulated, this is likely to have a big impact on financial institutions, funds and other regulated entities. If the core business of the entity being acquired/invested in is financial services, consideration should be given as to how an exit from the EU is likely to affect that particular business.
- Competition law – if the UK were to leave the EU, it is unlikely that much will change in terms of competition law. The UK already has primary legislation that deals with anti-competitive practice (Competition Act 1998). Further, if you are looking to acquire a company that trades within the EU (or what remains of it), that company will still be bound by European law relating to competition as it is trading within the EU. The normal due diligence questions relating to anti-competitive practices and details of trading arrangements within the EU will still be important in the due diligence process.
- Environmental law – the UK has implemented a number of EU directives on environmental issues from matters relating to water treatment to waste management. Depending on the business being acquired or invested in, advice should be taken at the due diligence stage on the relevant environmental issues that could be affected.
While a decision relating to a Brexit may not be that far away, it is still extremely unclear how the Government would amend, repeal, replace or supplement EU-derived law in the UK and deal with any European legislation that currently has direct effect.
No state has ever withdrawn from the EU before so, if the UK opts to leave, we will be in unchartered territory. Upon serving notice to leave, the UK would need to start negotiations for a 'withdrawal agreement', the terms of which would have to be agreed by a qualifying majority of the remaining EU states. This is a high hurdle.
During the two years the UK would have to negotiate the withdrawal agreement, the UK would need to decide how to disentangle our national laws from EU laws and start the difficult process of deciding what should be kept and what should change - not an easy task!
There is no doubt that the current state of affairs creates uncertainty for business and only time will tell how the Government will provide clarity over which laws will still apply and which will be changed. No doubt this will be a slow process.
In the meantime, our multi-disciplinary team will be able to provide guidance on each of the areas outlined above and assist with the formulation of revised due diligence requests designed to uncover the degree of a target's potential Brexit exposure.