What is Brexit’s impact on the legal and regulatory side of business?

in Legal, Tax, 25.07.2016

In the aftermath of the historic vote, politicians – particularly in the UK – are struggling to gain control over Brexit’s consequences. A great deal of uncertainty about how Brexit will affect business and society still exists weeks after the UK’s vote to leave the EU.

Article 50 of the Lisbon Treaty does stipulate a two-year period for negotiating the terms of the UK’s exit. However, such a two-year window is triggered once the UK government formally notifies the EU. From a theoretical point of view, notification could be delayed until after a leave-agreement has been negotiated – potentially extending market uncertainty well beyond two years.

Despite the unpredictable time frame, companies currently doing business in the UK need to assess Brexit’s impact on their business now in order to develop a strategy to deal with it.

How do you assess Brexit’s future impact on the regulatory environment from today’s point of view? From a legal perspective, depending on the exact terms negotiated post-Brexit, the following areas may be particularly affected:

Cross-border mergers/relocation

Following Brexit, the UK will no longer benefit from any EU measures that facilitate cross-border transactions such as the Directive on Cross-Border Mergers of Limited Liability Companies. Depending on the outcome of negotiations with the EU, therefore, further challenges may be expected in this area.

If a company’s management decides to leave the UK in light of Brexit, they should consider the timing and consequences. Since the local UK legal framework does not allow for relocation without liquidation, such relocation projects and any cross-border transactions will become more cumbersome once the UK ceases to be a member state of the EU.

Commercial/contracts

Contracts and their content are issues of a more minor nature, but still important to consider as a great number of contracts concluded by UK legal entities contain references to EU law. Since Brexit was out of the question at the time such contracts were concluded, they do not provide guidance regarding the interpretation of such references to EU law. Furthermore, force majeure and material adverse change provisions may be affected because of a change in the circumstances (e.g. import duties imposed following Brexit or no longer applicable principles such as the EU’s free movement of goods). As a consequence, parties might try to avoid certain obligations and renegotiate contractual agreements.

A further issue concerns the execution of foreign judgments, be it judgments of a foreign state in the UK or a UK judgment abroad. After Brexit, it may be more difficult to enforce such judgments abroad, which may have an impact on the wording of jurisdiction clauses as well as on the decision on where to sue a defendant.

As a result, it may be wise for parties to contracts with a term beyond the date of the exit of the UK (i.e. the two-year window before the UK formally leaves the EU) to review their contracts in order to assess whether Brexit may have an unplanned (and unwanted) effect on their contractual arrangements. Regarding new contracts, parties may consider including a “Brexit clause” in order to agree in advance what will happen once Brexit takes effect.

Corporate/Societas Europaea

A European company (Societas Europaea) is a public limited company registered in accordance with the corporate law of the EU, introduced in 2004 with the Council Regulation on the Statute for a European Company. Such a company may more easily transfer to, or merge with companies in other EU member states.

If your organization has set up a Societas Europaea in the UK, you have to evaluate Brexit’s impact on such a structure because once Brexit takes effect, the EU legislation governing Societates Europaea will no longer exist. Therefore, closely monitoring the Brexit negotiations early on is important in order to identify how the UK is going to deal with such structures and to make the right decision as early as possible – which may be relocating to a EU member state.

Data protection

The EU has one of the highest data privacy standards in the world. Since most local jurisdictions allow data transfer abroad only if the destination offers an equivalent level of protection, data transfer within the EU is comparatively easy. If the local UK data privacy standards currently imposed by the UK Data Protection Act diverge, cross-border transfers into and out of the UK could be impeded. Therefore, companies transferring data into and out of the UK have to assess the way they handle data transfers and may have to adjust procedures.

Financial Services/Passporting

Before Brexit, the UK was the EU’s largest financial center and many financial institutions have adopted a business model based on passporting their services from the UK to the EU member states. Brexit basically results in the loss of the free movement of services. Depending on the exact terms negotiated post-Brexit, this means that UK firms would no longer be able to passport their services across the EU and EU firms may not be able to passport their services into the UK. As a consequence, many UK based firms would have to carefully consider where to base their business operations, i.e. new business structures would need to be adopted or new licenses negotiated.

Highly regulated industries like banking, insurance or collective investment schemes are most likely to be affected by the above described scenario. Since there is limited third country regime for non-EU equivalent, passporting on MiFID2/MIFIR, EMIR, CSDR, etc. – companies with a presence in the UK have to ask themselves if they have a “natural hedge” such as a significant presence in one of the remaining EU member states; and to what extent do operations need to be moved to other jurisdictions in order to, for example, satisfy the European Central Bank (ECB).

In this context, all product terms, distribution agreements and marketing material will need to be reviewed.

Commercial / Exports and Imports

Exiting the EU means the loss of the free movement of goods and, as far as UK companies are concerned, less access to EU Free Trade Agreements. EU companies exporting goods to the UK will face customs duty as UK firms will potentially face with their exports, not to mention possible differences on the regulations governing consumer protection, unfair commercial practices and the security of goods.

Trade out and into the UK will become more difficult particularly for the pharmaceutical industry and it may lead such companies to reassess their business model.

While Brexit’s purely legal impact on companies located in the UK or doing business in the UK may seem to be controllable, the challenges stemming from the regulatory changes may be more difficult to address. This is particularly true for the finance industry and the pharmaceutical sector, which both operate in a highly regulated environment. Thus, every potential change of the setup in place leads to uncertainty and potential threat to the business model.

Taking into account possible major impacts on the employment and tax side, companies should focus on developing a clear picture of the regulations and free trade agreements that are crucial to their business, understanding how they might change, and assessing not only the risks but also the opportunities available if those regulations were to change.

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