The UK's vote to leave the European Union in June was just the first step in a process that is likely to be unparalleled in scale and complexity. Several months after the event, it is difficult to predict exactly how or on what terms the exit will be effected. However what is clear is that Brexit will have an impact on the rights and obligations of commercial parties in all sectors.
The UK's new Prime Minister, Theresa May, has made it very clear that Brexit means Brexit, and the UK will withdraw from the EU. It is a question not of "if" but "when." The time-frame is now becoming clearer.
In a speech to the Conservative Party conference in October 2016, May pledged to trigger the exit process in March 2017 and also announced plans to introduce a bill to repeal the UK's 1972 European Communities Act, to come into force at the end of the period of exit negotiations. The bill will also convert the body of existing EU law into UK law, with a view to establishing initial certainty.
A process of amendment, repeal or improvement as appropriate will then begin. A new Department for Exiting the EU has also been set up, along with a new Department for International Trade. The UK has also said that it will give up its Presidency of the Council of the EU (this was to have been in second half of 2017).
Challenges for business
The UK has yet to give formal notice of its intention to leave the EU, and is unlikely to do so before March 2017. Once it does give notice, a two year exit negotiation will begin, the outcome of which is unpredictable. The only certainty for the foreseeable future is uncertainty. This is, understandably, frustrating for businesses, whether they operate in the UK, in the rest of the EU or indeed outside the EU. However, there is plenty they can do now to ensure a smoother transition in the years to come. In the rest of this article, we review the priority areas on which UK businesses are currently focussed.
Many businesses have set up a Brexit committee to co-ordinate all Brexit-related issues and communications and prepare an overview of the potential impact of Brexit and the business response. Some businesses also need to consider their public reporting obligations, and what, if anything, they need to say in public statements or disclosures, or in their annual report.
A top level review to assess which EU regulations currently affect the business is essential for all businesses operating in the UK. These regulations vary from sector to sector, but every business will be affected to some degree.
This is proving to be an enormous exercise. The UK's regulatory framework has become increasingly entwined with that of the EU over several decades and the unwinding process is going to be enormously complex. For the time being, it is 'business as usual' - at present the UK remains a member of the EU and must continue to abide by European laws and regulations.
Going forward, we may see parties who want to escape their contractual obligations, for whatever reason, employing Brexit-related legal arguments founded in "force majeure" (which entitles a party to contract relief and/or termination because of unforeseen events) or "frustration" (which allows termination because of impossibility of performance). These are not easy arguments to win, but we are advising businesses to review force majeure, termination and material adverse change clauses in contracts carefully. Cautious parties should consider express carve-outs for any Brexit related circumstances.
Defined terms should also be checked, such as references to the "EU" and EU regulatory bodies. These may not work as intended post-Brexit.
If Brexit might cause a counterparty financial difficulties, it is also important to include contractual provisions that will flag up financial issues at an early stage.
Other points to consider include: the possibility of future corporate reorganisation by either party to a contract, e.g. to ensure certain business functions stay within the EU; how exchange rate fluctuations might affect pricing; how costs of compliance are going to be borne between the parties; and the most appropriate means of dispute resolution.
We are advising businesses to review loan and other financing agreements to check whether the effect of Brexit - whether it manifests in reduced consumer confidence, slowing investment or a further downgrade to the UK's credit rating - might put them in breach of financial covenants, financial ratios or material adverse change clauses. In some circumstances, a business' ability to borrow might ultimately be affected.
UK businesses are also assessing what sources of EU funding are relevant to them, what the impact of losing that funding might be and how the loss can be mitigated.
Supply chain management
It is also key to analyse the extent to which a business involves supplies of goods or services between the UK and (a) other EU Member States and (b) other countries with which the EU has concluded or is currently negotiating trade agreements. The impact of the imposition of tariffs or non-tariff barriers and the increased administrative burden needs to be considered, though realistically it is difficult to assess at this stage.
Some businesses are considering relocation in order to maintain free access to the EU market. This is a particular issue in the financial services sector, where certain UK-authorised financial institutions (banks, investment firms, fund managers, insurers, insurance intermediaries, payment institutions and e-money issuers) benefit from passporting rules. These rules allow them to carry out their activities across the EEA without setting up a separate entity and having to obtain authorisation in each EEA state. Passporting rights derive from a range of EU directives. Post-Brexit, assuming no agreement to the contrary is reached, UK-based businesses will no longer be able to rely on these passporting rules.
Relocation carries with it a number of challenges, not least assessing the relative merits of alternative locations. What authorisations would a new operation need to obtain? What would the implications be for headcount? What are the lead times for having discussions with the local regulator, obtaining floor space and relocating or hiring necessary staff? To what extent could operations then be delegated back to the UK?
Personnel issues and relationship management
Free movement is one of the core elements of EU membership. If this is curtailed, some businesses may be affected significantly. The costs should be analysed. Visa requirements for example could make it difficult to recruit UK-based employees from the remaining EU Member States (and vice versa). Individuals may also prefer to be located in the EU where their movement would remain unrestricted. UK employees currently working in the EU might also need assistance with visas in due course.
Businesses should consider what messaging to give to employees about the potential impact, although this (like so much else Brexit-related) is difficult to assess in a relative vacuum.
Pension trustees also need to monitor risk from market volatility.
The process initiated by the UK’s decision to leave the EU raises significant challenges and potential opportunities. While there is much uncertainty regarding the shape of the UK’s future relationship with the EU post-Brexit, it is clear that Brexit will affect the rights and obligations of all parties to commercial activity in the UK, the wider EU and beyond. Therefore, consideration should be given now to the strategic action that businesses may wish to take in a number of areas, including contractual relationships, financing and supply chain management, to manage the risks and maximise the opportunities presented by Brexit. Proactive businesses will be best placed to meet the challenges of the coming years.
This article will be published shortly in a special Brexit-issue of Kluwer's Nieuwsbrief Bedrijfsjuridische berichten.