the most innovative law firm in europe brexit: create your ... · pdf filehave indicated that...

Brexit: Create your own certainty

The Most Innovative Law Firm in Europe

The decision on whether or not the United Kingdom should leave the European Union is now less than two months away.

On June 23 the British public will make a choice on one of the most controversial and strongly debated issues in British political and economic history; a debate that has recently drawn Barack Obama to visit the UK.

Why does this matter to the USA?

Many US businesses have customers, suppliers, operations or investments in the UK and Europe. If the vote is in favor of leaving the EU, in a so-called Brexit, there will be profound implications for all businesses operating or trading in or with the UK, and they should plan accordingly. In addition any business trading with a UK entity whether or not directly or through an international office, has a vested interest to ensure that any trading partners or suppliers have planned ahead and are properly equipped for the future.

In this briefing, we have summarized some of the practical issues that businesses could face if there is a vote in favor of Brexit.

The uncertainties in a Brexit scenario are so great that there may be a temptation to do nothing until the referendum result emerges on 24 June. However, our advice to international businesses with UK subsidiaries, or those doing business with or investing in the UK, is to start planning now, and not to lose sight of the potential opportunity as well as challenge that comes with change. In an environment where the only certainty is uncertainty, we can help you create a greater sense of clarity around what issues truly matter to your organization.

If the UK votes to leave, we will be into unprecedented territory. No member state has ever withdrawn from the EU under the rules that currently exist. The exit of two territories – Greenland and Algeria – offer proximate but not altogether helpful precedents.

There also remains a question as to whether ‘no means no’. One school of thought has been that a ‘no’ vote would encourage the EU to offer more concessions – an idea that the British Prime Minister David Cameron and others have been keen to discourage. Adding to the uncertainty is the question of whether a vote to leave the EU would trigger a further referendum on Scottish independence. A referendum vote in favor of Brexit could also precipitate a change in the composition and leadership of the UK government.

What should be on business leaders’ agendas?Let’s assume that the British public does head for the Brexit on the basis that this represents the most immediately impactful challenge. What should be on the agenda of business leaders now to prepare for that event? The following are the key issues to be considering now with reference to their UK businesses, or if considering expansion into Europe for the first time.• Capitalization and an increase in the cost of

capital• Managing the costs of trade • Managing regulatory uncertainty• The impact of a hiatus in investment• Protecting key contracts• Managing the impact of limitations

on Freedom of Movement• Ensuring data availability• Reviewing cross-border insurance• Safeguarding Intellectual Property• Changes to tax• EU & Antitrust obligations• Share plans and executive pay • Commercial opportunities arising from change

A final point which some business leaders may wish to consider is whether they feel the risks posed by change are material enough that they should engage with a full range of stakeholders

to make that position known.

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For sector specific updates and further insights see www.out-law.com/brexit

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Capitalization and an increase in the cost of capitalIt has been widely predicted that a vote to leave Europe would lead to an almost instant depreciation in the value of the British Pound and significant stock market volatility. Some economists have estimated drops of 20-30% in the currency and stock markets. The major credit rating agencies have indicated that the UK voting in favor of Brexit would likely have a negative impact on their ratings of UK financial institutions in the short-term.

This, of course, could lead to an increase in the cost of borrowing. Businesses whose plans rely on increasing or renegotiating their borrowing around the time of the referendum or in the months immediately after may want to consider negotiating facilities ahead of the vote.

Businesses may also wish to review documentation agreed with their funders now to remind themselves what covenants are in place, what impact fluctuations in currency or market capitalization might have upon those, and begin conversations with funders around their attitudes to short term market volatility and currency risk.


No member state has ever

withdrawn from the EU under the

rules that currently exist. The exit of two territories –

Greenland and Algeria – offer

proximate but not altogether helpful

precedents.

The EU is the UK’s largest export market, and indeed the UK is a significant market for many European businesses. For a GDP-damaging slowdown in trade to be avoided, a swift alternative trade agreement will be required.

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Cost of tradeThe EU is the UK’s largest export market, and indeed the UK is a significant market for many European businesses. For a GDP-damaging slowdown in trade to be avoided, a swift alternative trade agreement will be required. That will not be easy however.

Withdrawal from the EU is not common and the process set out in Article 50 of the Treaty on European Union has never been used.

The indications are that Britain would promptly invoke Article 50 following a referendum vote in favor of Brexit. This would trigger a two year time frame for the UK to negotiate an orderly exit from the EU. This timeline could only be extended with the unanimous approval of all 27 remaining EU States. During that time the UK would also need to seek to negotiate a new trade deal with Europe, and reach bilateral arrangements with Third Party countries with which it already trades under EU negotiated-terms. The UK would also need to conclude new agreements with those intergovernmental organizations to which the EU is currently a signatory on the UK’s behalf.

Those timelines are extremely challenging given that it has taken over five years for other countries to agree such deals with the EU. It is notable that the Canadian Free Trade Agreement comparatively limited in scope but with unlimited goodwill – took a number of years to agree. The UK’s position as a competitor for inward investment may make negotiations

more challenging, as will the UK government’s aim to protect the City of London’s competitive position and upcoming elections in France and Germany. No Presidential candidate will want to be seen as having strengthened the UK through a generous trade deal.

Some commentators have suggested that the UK could seek to adopt a Norwegian model whereby it has access to EU markets through an European Economic Area (EEA)1 framework. That would allow access to the EU single market but would still require the UK to make payments into the EU and UK businesses would remain subject to the full range of EU regulations, which the UK government would have less ability to influence. It would also require the UK government to accept free movement of EU citizens, which could well be politically unpalatable.

If a deal could not be reached within two years, trade between the UK and the EU would take place on the basis of World Trade Organization rules which would mean significant tariffs on the sale of goods (for instance 50% import duty on dairy products and 20% on whiskey).

Organizations would be well-advised to consider what impact uncertainty and additional costs could have on their commercial arrangements, and begin building contractual flexibility into existing and future arrangements with purchasers and suppliers where possible (see protecting key contracts).

The UK’s position as a competitor for inward investment

may make negotiations more challenging, as will

the UK government’s aim to protect the

City of London’s competitive position

and upcoming elections in France

and Germany


1 The EEA comprises the EU member states and Iceland, Lichtenstein and Norway but does not include Switzerland. The European Free Trade Area (EFTA) comprises those countries in the EEA and Switzerland.

A hiatus in investmentShould the UK vote in favor of exiting the EU, from that point until the UK is fully independent and demonstrably functioning as such, most commentators indicate that investors’ interest in the UK will wane as they wait to gain a fuller understanding of the changes Brexit will bring. It is thought that this will be the case across capital markets (including in the US) and private investors. In light of this expectation, it may be prudent for businesses to consider their timetable for any plans for seeking investment. Consideration should be given to whether seeking investment ahead of the referendum, or how the impact of delayed or deferred investment, would be managed. However, the time involved in undertaking transactions in the capital markets may make this difficult, given that the referendum is fixed for 23 June. Equally, the uncertainty over the referendum’s outcome may discourage investors and banks from committing to negotiations before 23 June.

Managing regulatory uncertaintyThe UK government could give effect to its withdrawal from the EU by passing domestic legislation (the Exit Act) repealing the European Communities Act 1972. It is anticipated that transitional provisions would be included to ensure that all UK Regulations made under the 1972 Act and all directly effective EU Regulations extant at the time of the Exit Act remained in force, unless and until revoked or amended. EU Regulations could be deemed to be UK Regulations made under the Exit Act, effectively repatriating them (allowing them to be amended in the future by the domestic government).

Having said that, it should be recognized that in the event of a ‘leave’ vote there could be considerable pressure on the UK Government

immediately to repeal some aspects of EU law that certain pressure groups identify as problematic or a repeal of which might give the UK a competitive advantage, for example the rules against state aid, aspects of VAT and some of the detail of the rules on public procurement.

A significant amount of UK law pertaining to business is derived from EU law, either through EU Regulations or by way of EU Directives which the UK government has itself had to implement. It seems unlikely that the UK would seek to repeal all legislation which originated in the EU. However to be seen to be delivering the supposed benefits of exiting the EU, the UK government might axe some legislation to demonstrate the cutting of ‘red tape’. However, for regulated businesses, there is still likely to be a certain degree of difficulty in the short- to medium-term. For example, the UK government may well need to set up new UK regulators or extend powers of existing ones to replace EU regulators. Even in industries where regulation is overseen by UK regulators, there is likely to be significant uncertainty on the part of the regulators during the exit negotiation period and in the early period thereafter.

Regulated businesses therefore need to consider the impact a temporary lack of regulatory clarity and/or unwillingness on the part of regulators to make decisions might have. Are there new products in the pipeline requiring regulatory approval to come to market? How will meeting regulatory capital requirements be affected during a period of instability? Are changes planned to the business which will require regulatory sign off? Businesses should be looking at their business plans to understand where regulatory engagement is required and consider how a regulatory hiatus might affect these plans. Can regulatory approval be sought ahead of the referendum? How would the business manage if it had to wait significantly longer than planned for regulatory approvals?

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It seems unlikely that the UK would seek to repeal all legislation which originated in the EU. However to be seen to be delivering the supposed benefits of exiting the EU, the UK government might axe some legislation to demonstrate the cutting of ‘red tape’.


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Protecting key contractsContracts may be affected by Brexit in a number of ways. Firstly, any contract which specifically references the EU as the territory governed by the contract may lack clarity. Would the contract still cover the UK because it formed a part of the EU at the time it was signed; or would the departure of the UK essentially redefine the meaning of EU in the contract? Also, if following Brexit goods were exported on the basis of the WTO rules, who would be liable to pay for any tariffs that may be due? It is unlikely that a blanket answer to such questions could be handed down by either the EU or the UK government and so each contract will potentially be open to interpretation.

In addition to this lack of clarity, there may be cases where a contracted party would wish to argue that the exit of the UK should trigger a ‘Material Adverse Change’ clause included in the contract on the basis that the agreement is substantially altered without the inclusion of the UK territory or because additional tariffs may be payable. Looking ahead, businesses should be able to insulate themselves from these inherent contract risks by ensuring that any new contracts signed are worded to give clarity in the event of a Brexit and through reviewing key business contracts and considering whether renegotiation or agreed amendment ahead of the referendum would be helpful. Also, if there was a Brexit vote, new contracts would need to address the possibility that UK companies might not in the future be able to continue benefitting from the current free movement of goods and services principles within the EU, impacting both pricing and the speed with which physical products can be delivered.

Managing the impact of limitations on Freedom of MovementCurrently UK businesses may employ staff from any EU member state. Furthermore, they are free to move staff between their operations in different EU countries. There is no clarity as to exactly what would happen in the event that the UK left the EU - in particular there is no clarity as to whether there would be an amnesty on UK workers working in other EU countries and/or vice versa. It remains a possibility

therefore that such workers might be forced to return to their country of origin. Businesses with multi-national operations need to consider how they would manage the challenges such a scenario might present. Are there staff of local nationality on the ground who could manage the business on an interim basis if key individuals had to relocate? How might you mitigate any parts of your business particularly vulnerable or reliant on the EU principal of Freedom of Movement?

For any key employees currently in the UK on the basis of EU nationality, it may be worth exploring with them if/when they might be eligible to apply for a permanent right to remain in the UK, or citizenship. If they are eligible, it is up to the employee to decide whether they wish to progress this, however employers can encourage their staff to think ahead and consider potential contingency plans.

Ensuring data availabilityMuch like the movement of people, the movement of data following Brexit is not assured. While the protections in law in the UK are unlikely to change significantly, there is no clarity as to whether the ability to share and move data between the UK and EU member states would continue. As a short-term precaution, businesses should consider whether they need to ensure key data such as important mailing lists and customer management information is available locally in the UK following the referendum.

Protecting Intellectual Property

Soft IP Soft IP rights are well-harmonised by EU law. Unitary registered rights are available (i.e. the Community Trade Mark and the Community Registered Design) and are administered by EU organs, and unregistered rights such as design rights and copyright are protected by European Directives and Regulations. EU-wide IP protection would not be available in the UK if the UK voted to leave the EU. While the core scheme of protection for these rights is unlikely to change, one profound impact will be that IP rights (especially registered rights) will need to be transitioned to a new regime which either transposes EU rights into national

If the UK did not join the EEA or EFTA, it would

return complete sovereignty over the

UK tax system to the UK government,

reversing years of challenges to the

UK tax system based on EU law

principles.


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rights or requires rights holders to begin afresh the process of securing IP protection in the UK and other member states.

Patents The UK is part of the European Patent Convention, a system which allows applicants to secure pan-European patent protection via a single application. The European Patent Convention (EPC) is a separate entity from the EU and thus, a UK exit from the EU would not impact upon the UK’s continued membership of the EPC. Indeed, there are already numerous member states of the EPC which are non-EU member states.

The more significant impact is upon the forthcoming Unified Patent system, which unlike the EPC, is only accessible to EU member states. Brexit would mean that the UK could no longer be part of this new system.

Additionally, the impact of Brexit on the Unified Patent system would be felt more widely across Europe. In order for the new regime to come into force, one requirement is that the Agreement establishing that regime is ratified into national law of the three territories which held the highest number of patents in 2012, currently the UK, France and Germany. However, the UK is unlikely to ratify before the referendum on 23 June 2016. Assuming that this does not happen and the UK voted to leave the EU, this would not derail the system completely. The UPC Agreement is carefully drafted so that the participating country in which the next highest number of European patents had effect in 2012 can step up to ratify if Brexit takes place. It looks like Italy would replace the UK as the third country.

If this were to happen, the new unitary patent system would probably still launch but in a

different format and the currently envisaged start date of spring 2017 would probably need to be pushed back in the event of Brexit. Further, Germany and France may need to be persuaded that the unitary patent package is still viable without the UK’s involvement. The London seat of the Court which has jurisdiction to hear cases centered on unitary patents would most likely be lost. The new location would need to be agreed which could add further delay to the opening of the court, and thus, the new regime coming into effect across Europe.

Once the new system does come into effect, although businesses would be able to obtain unitary patents covering the other EU member states there may be a lack of appetite for doing so due to the loss of the UK from its coverage.

Cross-border insuranceWhere business is carried out cross-border, UK insurers may in any case need to comply substantially with EU legislation in order to continue to do business in those countries remaining in the EU. It would no longer be possible to rely on Freedom of Establishment principles. This could be particularly problematic for UK insurers that are also established in the rest of the EU, but use the UK as a hub and “passport” into other EU states based on their UK regulatory approvals. These insurers may need to relocate their corporate center to ensure that they can still benefit from the passporting regime based on an EU member state’s regulatory permission, or to establish regulated entities in each jurisdiction in which they operate.

If the UK were to leave the EEA entirely, insurers would not be able to rely on the requirement of other EEA states to recognize transfers of any insurance business based in

Much like the movement of people, the movement of data following Brexit is not assured. While the protections in law in the UK are unlikely to change significantly, there is no clarity as to whether the ability to share and move data between the UK and EU member states would continue.


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other EEA jurisdictions. This would lead to separate processes in the different jurisdictions being required where that insurance business was held.

EU & Antitrust obligations In the event of Brexit the UK would cease to be subject to the EU’s State aid rules, potentially allowing the UK government to support ailing companies and/or to try and invest in creating ‘national champions’ or supporting important sectors of the economy. For example, in the energy sector an independent UK would have more flexibility to support investment in nuclear and renewables power generation. In addition, preferential tax rulings granted by the UK in relation to transfer pricing could no longer be attacked by the European Commission as is currently the case. The UK would also cease to be subject to EU public procurement legislation, potentially allowing it to streamline how contracts are awarded by Government bodies and those utilities who are currently subject to EU procurement law.

If Brexit occurs, companies operating in the UK will need to deal with parallel UK and EU antitrust regimes. As a result, businesses may need to notify transactions for merger clearances to, and may face antitrust investigations by, both EU and UK antitrust authorities. There would be added cost implications and a greater risk of different enforcement approaches being taken by the EU and UK antitrust authorities.

Share plans & executive payThere are a number of potential issues in the area of share plans and executive pay:

• Short term – will there be volatility in stock markets which could impact the outcome of performance targets for executive incentive awards.

• Longer term - impact on legislation emanating from the EU if the UK votes to leave. This covers a number of areas from CRD IV, the Prospectus Directive, through to data protection.

Specifically for US providers of services in the financial services arena (share dealing, brokerage etc) there is a view that a UK exit from the EU will in the longer term lead to more complex compliance requirements – for example the loss of the passporting regime within the EU could result in the need to comply with regimes in the UK and EU separately (and potentially in multiple jurisdictions if the UK’s exit signals a more general breakup of EU systems, if not of the EU itself).

Changes to taxCorporate Tax

If the UK did not join the EEA or EFTA, it would return complete sovereignty over the UK tax system to the UK government, reversing years of challenges to the UK tax system based on EU law principles. The UK would be free to make changes to its corporate tax system (provided existing bilateral double tax treaties are respected), including offering additional incentives without having to seek EU State aid clearances. However, it would still be bound by its commitments, as a member of the G20 and the OECD, in respect of the OECD’s base erosion and profit shifting (BEPS) recommendations to prevent tax avoidance by multinationals. The UK government has been keen to be an ‘early adopter’ of BEPS recommendations, with restrictions on interest deductibility due to come into force in 2017. It also introduced a new ‘diverted profits tax’ in 2015, which was expected to impact particularly on US multinationals operating in the UK. Leaving the EU is unlikely to have any


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effect on the UK’s approach to clamping down on tax avoidance by multinationals.

The EU’s free movement principles also protect UK businesses from unfavorable treatment when investing and operating in the EU and EEA. In particular, current EU Directives on interest, royalties and dividends help to make the UK an attractive location for EU holding companies, by eliminating withholding taxes in most situations. If the UK did not join the EEA, it would have to rely on bilateral double tax treaties, which are less generous in some situations. This may have a negative impact, particularly for US companies who might currently consider the UK as a holding company jurisdiction to invest into Europe. Equally, UK companies who currently use the tried and tested Luxembourg holding company route for European investments might find additional tax payable on repatriation of profits to the UK, leading to a need to incur restructuring costs.

Indirect Tax

In relation to indirect taxes, if it left the EU the UK would be likely to keep the system of VAT given the large fiscal contribution it makes to the UK Treasury. Whilst the tax would be exclusively governed just by UK law, the UK is unlikely to want to depart heavily from the EU rules and legal principals since businesses would suffer the additional compliance burden of maintaining a different system from that used by our main trading partners.

If the UK left the EU and did not join EFTA, it would need to negotiate bespoke customs tariffs with the EU as a whole.

Corporate LawAlthough much UK corporate law is derived from EU legislation, the UK may be reluctant to deregulate in this area.

Commercial opportunities arising from changeChange can bring opportunity for those who seek it out. While it will doubtless be tempting – and indeed important – for organizations to focus hard on the manifest material risks arising from change in Europe, business leaders should also ensure time is set aside to consider the commercial opportunities that may arise.

If the UK did not join the EEA or EFTA, it would return complete sovereignty over the UK tax system to the UK government, reversing years of challenges to the UK tax system based on EU law principles

Pinsent Masons has formed a multidisciplinary Brexit Advisory Team to consult with businesses upon the issues touched upon in this paper. We also deliver, in collaboration with industry recognized consultants, structured scenario planning sessions which allow you to identify risk and develop a plan for action in the event of both a ‘leave’ and ‘remain’ vote. For more details please contact Guy Lougher or your regular Pinsent Masons relationship partner.


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Pinsent Masons team

John TyermanPartnerT: +44 (0)121 626 5774M: +44 (0)7810 556354E: [email protected]

Andrew BlackPartnerT: +44 (0)113 225 542M: +44 (0)7711 064812E: [email protected]

Guy LougherPartner, Head of EU & CompetitionT: +44 (0)20 7490 6102M: +44 (0)7825 160146E: [email protected]

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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2016.For a full list of our locations around the globe please visit our websites: www.pinsentmasons.com and www.Out-Law.com.

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