Mona Patel Partner
Brexit Q&A: Corporate
In this Brexit Q&A Mona Patel provides commentary on the impact of Brexit on corporate law and transactions.
Brexit and the transition period - What next?
The UK left the European Union at 11pm on Friday, 31 January after more than 40 years of membership. The UK has now entered into a Brexit ‘transition period’ (also coined the Brexit ‘implementation period’) until 31 December 2020, during which time (assuming there is no extension) the UK and the EU will seek to negotiate the future relationship between the UK and the EU - with a trade deal at the top of the agenda. During the transition period EU rules and regulations will continue to apply to the UK as though it remains an EU member. However, the UK shall have no longer have the right to contribute to EU governance and the determination of decisions undertaken. Any new EU laws that come into force during the Brexit transition period will also apply in the UK (despite the UK having no part in negotiating them).
Will Brexit effect English company law?
Although we cannot be entirely certain, it is unlikely that company law will be fundamentally effected by Brexit related events. The Companies Act 2006 (CA 2006) is the primary source of company law in England and Wales and commentators appear to agree that it will remain largely untouched and will continue. However if a no (or limited) Brexit deal arises at the end of the Brexit transition period (where the UK and EU are unable agree a trade deal or a limited deal is agreed) this could result in a number of practical changes to the CA2006 and the framework of corporate law and accounting and audit regulation. In most cases the changes will only impact businesses who have a cross border relationship with the EU through (i) conducting business operations in the EU; (ii) an EU company or individual operating in the UK; or (iii) a UK subsidiary or branch with an EEA parent. Also, for the most part the changes are expected to be minimal.
What about the CA 2006 and other corporate regulatory provisions which have their origins from EU law?
It is true that certain provisions such as shareholders rights, disclosure of rights and accounts are EU derived. Following the negotiations during the Brexit transition period it may be the case that the UK government reviews these provisions and attempts to reduce the regulatory burden it places on companies. However we cannot be sure at this stage and much will depend on how negotiations between the UK and the EU fare over the Brexit transition period. However, we know that any directly applicable and operative EU laws (for example those relating to equity capital markets), will, at the end of the Brexit transition period be incorporated into UK law in their current form.
Will Brexit have an impact on the regulation of UK mergers and acquisitions?
Again it is unlikely that the parts of CA 2006 that address mergers and acquisitions will be dramatically impacted. In fact it is more likely that the M&A market will face some volatility as the markets react to the outcome of Brexit transition period. We could see overseas investors take advantage of political uncertainty and embark on acquisitions. It is also likely that we may see more focus being placed on Brexit related risks in due diligence exercises. Long term planning to hedge against possible down turn is likely to be more carefully considered with earn out mechanisms and post-sale adjustments being more heavily negotiated in transaction documents.
How will cross border mergers be impacted by Brexit?
Companies looking to rely on the Cross-Border Mergers Directive and the associated UK Regulations which allows the merger of EEA companies (a UK company and another EEA member state) will not be able to take advantage of this regime upon expiry of the Brexit transition period (unless such process is specifically secured during the Brexit transition period). We advise clients considering a reorganisation of their corporate group using such merger process to do so prior to the end of the Brexit transition period.
Can we rely on Brexit related risks or consequences to enforce certain provisions within transaction documents?
We have been asked by clients to consider provisions such as force majeure, change of control and material adverse change clauses to see whether relief may be sought from Brexit related risk. Unfortunately the legal position is far from clear. Whilst it is very unlikely that a force majeure would be triggered by a Brexit related event a material adverse change provision might well be relied upon if a party suffers a particular financial consequence as a result of Brexit. However the clause would need to be considered against the facts and interpreted following the outcome of the negotiations during the Brexit transition period. The same approach will be taken with Brexit clauses themselves they will have to be considered carefully against the eventual outcome of the Brexit transition period.
What should traded companies consider?
The existing legal and regulatory obligations which originate from EU law, under the Prospectus Regulation and the Market Abuse Regulation and UK legislation implementing the Transparency Directive, will remain in place during the Brexit transition period, so there should be no practical change for traded companies during this time.
However companies that have publicly traded securities ought to carefully consider any impact its Brexit preparations may have under the Market Abuse Regulation. For example will the companies actions comprise inside information and require an announcement obligation?
Also, where a company expects to issue a prospectus or an AIM Admission Document it will need to include suitable Brexit disclosures and risk elements.