Brexit: commercial and corporate concerns
On 23 June 2016, UK voters will go to the polls to decide whether the UK will exit the EU. While it is difficult to… Read more
On 23 June 2016, UK voters will go to the polls to decide whether the UK will exit the EU. While it is difficult to predict the precise corporate and commercial implications of a Brexit, it is clear that there will be a period of legal uncertainty for commercial parties in the lead up to the referendum and following any vote in favour of Brexit (while the details of Brexit are negotiated and implemented). Financial institutions, corporates and investors will need to keep pace with and respond to Brexit developments.
Essentially there are two key concerns raised by the Brexit referendum. First, the fact that for corporates operating across multiple jurisdictions in Europe, including the UK, the cost of doing business will increase and that such costs will be passed on to employees, shareholders and indeed other stakeholders—this would be an unwelcome development. Second, corporates may decide to set up operations outside of the UK as a result of the UK not being a member of the EU. Naturally, much will depend on the precise terms of any Brexit settlement. For example, the UK may be able to negotiate commercially favourable access to the EU market such that firms would not feel compelled to re-consider the viability of their existing and putative investments and operations in the UK.
Much of UK company and financial services law is based on EU company law directives. Therefore, the main issue that commercial parties will need to contend with in the context of Brexit is the potential for UK company and financial services legislation and regulation to become increasingly divergent from that of Europe. While it is hoped that these hugely important areas will continue to be harmonised on a pan-European basis, this cannot be guaranteed. This uncertainty is a great concern, particularly for the financial services sector which would be greatly impacted by a UK exit.
Mergers and Acquisitions (M&A)
Brexit is unlikely to have a major technical impact on share sale transactions which are not typically subject to a lot of EU law or regulation (except where affected by EU merger clearance). Asset sales may be simplified if the implementation of a Brexit involved scaling back the EU employee protection regulations relating to business sales, although, a wholesale repeal of such laws is unlikely.
While Brexit is not likely to have a great technical impact on M&A transactions, the uncertainty created by the referendum is likely to cause a general drop in inbound and outbound European M&A activity. In particular, for in-bound acquisitions of UK targets. UK bidders will need to think more carefully about the commercial implications of acquiring target businesses based in the EU without the benefit of the harmonised legal and regulatory regime that currently applies. Increased emphasis is likely to be placed on commercial risk allocation between vendors and sellers with respect to the unforeseen consequences of the Brexit referendum.
It may be that Brexit—in whatever form it may take—would have no bearing on the rights and obligations arising under contracts, but it is incumbent on corporates to undertake a detailed analysis of how customer and supplier contracts may be affected by Brexit (with a particular focus on material adverse change, Force Majeure and other termination provisions), at least in respect of their most material relationships. Post-Brexit all commercial contracts would need to be reviewed and amended for references to the EU and EU legislation. To the extent possible, clients should consider building in Brexit contingencies and protections where new contracts are entered into, for example:
- Providing termination rights on Brexit
- Expressly including or excluding Brexit in a Force Majeure provision
- Making provision for alternative mechanisms in the case of Brexit