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BREXIT BECOMING A REALITY

2016-07-07

The UK referendum that took place on 23 June 2016 marked a very important day in the history of the European Union. UK’s departure is a significant junction in the history of Europe – and one where the potential political, legal and economic consequences will be hard to predict.

From a legal point of view, European businesses, corporates and citizens carrying on business with or in the UK and elsewhere will have to plan for the realities of Brexit.

They should make contingency plans and start to communicate Brexit to their employees and the press and include their Brexit strategy in board meetings and in annual rapports. Businesses should budget for fluctuations in exchange rates (if they haven´t already started to do so) and should consider revising import and export agreements they have entered into with the UK.

Other issues to consider are contracts, the retention of employees, tax, financing, derivatives, pension schemes, procurement, and intellectual property and data protection issues.

The following is a list of specific legal issues to consider on Brexit

Contracts

European corporates should consider contracts they have entered into and whether their rights and obligations will remain the same, as well as whether Brexit has triggered “material adverse change” clauses in M&A agreements and debt financing agreements. Furthermore, they should consider whether governing law clauses in the legal contracts they enter into in the future with UK as a party, should be governed by EU territory law and not UK law as has previously been the common case.

Governing law

European corporates should be aware that standard English language contracts may no longer be used to the same extent as before and that contracts entered into between the UK and EU parties may no longer continue to refer to English law as the governing law but rather to European legislation, European legal concepts or be governed by the “Territory” of the European Union. EU corporates should consider updating their legal contracts and should bear this in mind when entering into contracts for the future and in light of the new political situation.

Employer/employee contracts

EU corporates should begin discussions with their in-house HR departments in the UK if they plan to relocate employees, restructure or downsize their business, or implement employment strategy and in general speak to them about their concerns over Brexit. They should communicate the potential consequences of Brexit to their workforce; carry out internal audits of UK/EU nationals, expatriates, secondments, immigration issues and future recruitment policies. They should review their standard employment contracts and they should pay attention to restrictive covenants, confidentiality and pension scheme clauses as well as specific clauses relating to UK law. In addition, standard employment contracts may need to be amended as a consequence of Brexit.

Tax issues

Brexit will impact customs, value added tax, withholding tax and corporate tax levels in the UK, which in turn will effect business operations in the EU. Contract clauses relating to customs procedures as well as import and export of goods to and from the UK will need to be amended and this should be borne in mind by EU corporates operating in the UK. Levels of value added tax will change although any such change will take place only gradually. Other tax issues to consider are head office/subsidiary issues and royalty and dividend payments to and from the UK and EU. Lastly UK´s double tax treaties may fall away or be amended depending on the exit conditions chosen by the UK government, and this will in turn impact future tax levels. UK corporates should review their internal tax plans and pay particular attention to group structures and parent/subsidiary issues, interests and royalty payments etc.

Patent registrations/IP issues

EU corporates operating in the UK, should consider that the new EU patent courts will no longer apply to the UK now that Brexit is a reality and they may need to obtain separate judgements in relation to their patent registrations in the future. Furthermore, harmonisation of IP registrations may become blocked and they may find it harder to provide cross border services and settle disputes. Trademark and design holders with UK registered rights may lose priority and may face being granted new or equivalent priority rights on Brexit.

Pension schemes

Fundamental principles with respect to pensions and pension schemes in the UK and EU may not change due to Brexit. However, EU corporates are advised to consider whether changes in the wake of Brexit will trigger reporting or funding requirements under existing pension scheme arrangements. They should also consider liaising with their trustees with regards to investments and hedging arrangements contained within pension schemes and pension scheme provisions in general.

Banking/insurance

EU corporates operating in the banking and insurance sector in the UK should be aware that the current financial passport system may be amended or abolished now that the UK has stepped out of the EU. Approval processes for local business units may become required. Head offices or subsidiaries may need to be relocated and business models and group structures restructured. Consideration should also be given to the provision of derivatives and fund management and whether Brexit will cause changes to market infrastructures. Furthermore, the rules on capital requirements may or may not become more onerous now that Brexit is a reality, which in turn will affect corporates operating in this sector.

Data protection

The consequences of Brexit for corporates in terms of data protection may have minor effect. The present data protection regime in the UK is likely to continue in a similar form to the current regime.

Securitisations, insolvencies, debt and equity financing issues

Brexit is not expected to materially change UK securitisation structures from a regulatory point of view; however, any change will depend on the precise exit structure decided upon by the UK government and the EU. Generally speaking, this also applies to insolvencies and debt and equity financing issues.

Conclusion

Brexit is a complex issue and a great number of uncertainties exist now that the referendum has taken place. The uncertainty is bound to exist for a long period and no one knows for how long and when the UK and the EU will reach a decision on the final exit conditions for the UK. European corporates with operations in the UK should prepare for these consequences. Some UK businesses have been preparing for Brexit for a while and European corporates operating in the UK should be doing the same and should consider the areas, contracts and clauses suggested above as a minimum.

Brexit is a potential “risk factor” and a “material change” and has been referred to as a specific term in legal agreements across Europe in the months leading up to the referendum. Now that Brexit is a reality, it is a question of whether Brexit as a “risk factor” has been triggered or not. One could argue that nothing has changed in constitutional terms in the UK. The EU, furthermore is not in a position to force the UK to leave the EU. It is a domestic matter for the UK when the notification to step out, is sent to Brussels.

The consequences of Brexit overall therefore, are as stated, very unpredictable, added to the fact that no one in Westminster with any power wants the UK to leave the EU. In addition, prominent UK leave campaigners appear to be changing their minds on the EU. So the prospects of a substantial delay are real, adding to further uncertainty. The only certainty is that the aftermath of the referendum appear to impact financial markets and the English pound greatly, and EU corporates with any exposure to the UK should plan ahead in the best possible manner.

Magnusson´s role

Magnusson offers seamless legal services in all countries across the Baltic Sea Region and beyond. The consequences of Brexit stretches across borders and involve complex investigations on how Brexit impacts in different countries as well as which countries should be chosen as potential alternative sites to the UK.

Magnusson can provide cross-border project management in relation to the consequences of Brexit across all of our geographies. 

Please feel free to contact us if you have any questions in relation to any of the specific legal issues raised in this newsletter. We would be more than happy to provide you with our assistance. We advise you to plan for the issues raised herein, if you consider that Brexit is going to affect your business operations in any of the countries in which we have an office. We are also happy to assist you with any ongoing legal requirements that you may have in the future or otherwise.

Contact

To learn more, we encourage you to contact your usual Magnusson contact, Per Magnusson or Tina Ravn.

 

Related People: Per Magnusson, Tina Ravn
Related Service Areas: Banking and Finance, Commercial, Corporate and M&A, Employment, EU and Competition, Intellectual Property, Tax
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