In June 2016, the UK public voted to leave the EU. The Supreme Court has decided that Parliamentary approval will be required to serve the formal notice required to leave. That approval is expected to be given but the notice period required means that the actual British exit (or 'Brexit') date cannot be before 2019. Negotiation of a new trade agreement with the EU could take several years beyond 2019 although the Prime Minister has declared the objective of achieving such an agreement within the two-year period.
This briefing note advises readers on the immediate considerations and anticipates how a Brexit will impact on English corporate law and transactions more widely.
Practical steps to take now
While the precise details of the terms of a Brexit will be negotiated in the coming months and years, businesses likely to be affected by a Brexit should start to identify potential areas of risk and impact and plan staff and customer communications. Those businesses will need to set aside time and resources for further analysing how they will be impacted as the picture becomes clearer.
Aspects to consider include:
- Impact on UK corporate transactions
- Implications for overseas businesses
- The wider impact on English corporate law
When Britain leaves the EU, UK companies are unlikely to be able to take advantage of the process for effecting the merger of European companies pursuant to the Cross-Border Mergers Directive and the associated implementing UK Regulations. These regulations allow mergers of EEA companies, provided that the merger includes at least one UK company and at least one company from another EEA member state. Aside from the impact on cross-border mergers, the greatest impact on international corporate transactions is likely to result from changes to Sterling exchange rates since the Brexit referendum. This is discussed further below.
Overseas businesses often establish operations in the UK as a stepping stone to trading with other EU countries. Government analysis in 2013 found that half of all European headquarters of non-EU firms are in the UK. In a speech on the Brexit process in January 2017, Prime Minister Theresa May indicated that:
- The UK will not remain a member of the EU single market or Customs Union but would instead seek to negotiate separate trade and customs agreements with the EU, including the greatest possible access to the single market on a reciprocal basis.
- The UK would look to negotiate new trade deals with other international countries that are not EU member states.
- Guaranteeing the rights of EU nationals living in the UK is a priority, but that not every other EU member state favours such an agreement.
- Controls will be introduced on immigration from the EU (removing the existing freedom of movement for EU nationals).
The uncertainty over the terms of these future arrangements may affect decisions to establish in the UK and could lead to a relocation of the headquarters of some non-EU firms to other member states.
The value of Sterling has fallen significantly since the referendum relative to a number of other key currencies, including the US dollar, and we continue to see significant exchange rate fluctuations.
A fall in the value of Sterling is good news for overseas businesses importing from the UK, but not for overseas businesses exporting to the UK. For overseas businesses considering an investment in the UK, the fall in the value of Sterling may offer significant opportunities to acquire UK firms cheaply. There has been a marked increase in the value of foreign company acquisitions of British firms since the Brexit referendum.
The current intention of the UK Government is that EU law will cease to apply directly to the UK, but will be transposed into UK law upon a Brexit under what is being called the 'Great Repeal Bill'. Parliament can then determine which elements of that law to retain, modify, replace or remove from UK law. When the UK leaves the EU, it is likely to lead to less regulation of UK companies. However, this was not one of the priority areas in the UK’s pre-referendum negotiations with the EU and we would not expect changes in this area to be significant or a high priority.
The majority of English corporate law is not derived from EU legislation. The Companies Act 2006 is the core legislation affecting the incorporation and operation of UK companies. Some parts of the Companies Act 2006 have been derived from EU Directives. These include provisions relating to accounts, disclosure of information and shareholder rights. The most significant provisions apply to UK companies with shares listed on a regulated market such as the Main Market of the London Stock Exchange. We would expect these provisions to be reviewed by the Government in the coming months and years, but would not expect significant changes in this area.
The UK equity capital markets are in part governed by EU Directives and Regulations, implemented or having direct effect in the UK, including in relation to the requirements to prepare a prospectus, obligations of disclosure and transparency and provisions to prevent market abuse. These Directives and Regulations provide a uniform legal framework for the operation of EU capital markets. We do not expect changes to these provisions to be a high priority. We also expect that the Financial Conduct Authority and the London Stock Exchange will want to see obligations of this type remain in force.
We intend to update our guidance in this area as the corporate implications of the Brexit vote become clearer.
This article is part of our Brexit series