The UK’s new Prime Minister Theresa May has said: “The country voted to leave the European Union, and as prime minister I will make sure that we leave the European Union.”
That seems like a clear statement, but the ultimate status of the UK outside the EU and the timing of its departure will not be known anytime soon. Nevertheless, companies of all sizes can and should be starting their Brexit planning. There are risks and opportunities to be aware of and contingency plans may need to be put in place.
The first step in the planning process is to understand the areas of a business and its operations and activities that might be impacted by Brexit. This is the case whether that business is a global multinational, a regional EU business, or trades only in the UK. Not all areas will be impacted. A structured and focused risk identification and assessment exercise is needed.
Risk Identification and Assessment
This exercise needs to consider both broad structural issues (the scope and location of a business) and its operations and activities (contracts, trading and the like). Each business is different and the process needs to be tailored, but the following issues are among those that need to be considered at the outset.
- Will your funding/credit lines be impacted (e.g., by EU lenders who are currently lending to a UK entity who will not be able to continue to rely on “passporting” rights)?
- Could market volatility impact your ability to comply with financial covenants and the like?
- Do you have internal company policies which incorporate provisions driven by EU law?
As with contracts and similar arrangements, a due diligence exercise should be carried out to identify relevant policies.
EU and UK antitrust/competition law has a significant impact on contracts and trading arrangements. Our separate guidance on key issues in the antitrust/competition law field, including EU State aid and funding, is here.
Corporate and Commercial Contracts
- Do you have a sales or distribution agreement or any other commercial contract covering all or part of Europe, including the UK?
- Have you completed any acquisitions or divestures involving assets in the UK and containing ongoing obligations?
- Do you plan to pursue any acquisition or divestiture involving assets in the UK?
Many companies will have existing contracts and trading arrangements which are affected in some way. A due diligence exercise should be carried out to identify these. Following this, consideration will need to be given to immediate steps (such as the need for amendments) and possible contingent steps (such as the use of force majeure or material adverse change clauses to terminate contracts).
Our separate guidance on key issues in the corporate and commercial contracts law field is here.
The ability of a company to (re-)structure its tax affairs post-Brexit will depend largely on where it trades and is located. Our separate guidance on key practical steps to consider in relation to corporate tax planning is here.
- Does your company transfer personal data from the UK to other EU/EEA countries or vice versa?
- Does your UK business target EU/EEA citizens outside the UK by offering services or goods or monitoring their behaviour?
- Does your UK business use a third-party service provider outside the UK to process data?
- Do you know what your “main establishment” in the EU/EEA will be, post-Brexit?
Our separate guidance on key issues in the data protection law field is here.
Employees and Staff
- Do you employ EU/EEA nationals in the UK who are not British citizens?
- Do you employ British citizens in the EU/EEA outside the UK?
In any event, even if you only employ British nationals in the UK, issues will arise due to the extent to which current UK employment legislation and case law is driven by EU rules. Contractual terms and HR policies also need to be reviewed. Our separate guidance on key issues in the employment law field is here.
General scope of business
- Which parts of your business are affected (e.g., UK-based, EU/EEA-based trading cross-border, non-EU/EEA-based but trading into the UK) and where do they operate in the UK and the rest of the EU/EEA?
Imports and Exports of Goods and Services and Supply Chain — Tariffs
- Does your business purchase or export goods or services in/from the UK from/to other EU/EEA countries?
- Is your business part of the supply chain of a company which exports goods or services from the UK to other EU/EEA countries?
- Are any of the products or services your business sells subject to EU export control, sanctions or embargoes?
- Does your company make sales into or import from non-EU countries on the basis of preferential trading agreements between the EU and those countries?
- Are any products of concern to your business currently subject to EU anti-dumping or anti-subsidy laws?
For many companies the external trade position of the UK post-Brexit will be very important (in particular, its external tariff regime and that of the EU/EEA vis-à-vis the UK). Imports and exports will likely be subject to tariffs and this may affect your business indirectly (for example, by impacting a customer downstream which uses your products or services as an input).
In addition, sales of products may be made in the EU based on general EU product safety and other rules (including using a “CE” mark). The impact on these sales needs to be considered.
- Does your company own EU intellectual property which may be affected (such as EU trademarks and registered community designs)?
- Might Brexit have an impact on litigation in which your company is currently engaged or is contemplating (e.g., due to jurisdictional issues or the need to enforce a judgment post-Brexit)?
Our separate guidance on key issues in the litigation law field is here.
- Does any part of your EU/EEA business operate in a sector subject to specific sectoral regulation or legislation (e.g., financial services, banking/finance, insurance, pharmaceutical, energy, medical devices, food & beverage, airlines, road transport)?
In this situation, specific consideration needs to be given to the impact of changes to the regulatory framework, post-Brexit.
Tendering for Public Contracts
- Does your UK-based business make sales in other EU/EEA countries based on public tendering under the EU public procurement rules?
- Does your business in the EU/EEA outside the UK make sales in the UK based on public tendering under the EU public procurement rules?
These rules may change and limit the ability of companies to rely on fair and transparent rules for tendering.
More From McGuireWoods
McGuireWoods is monitoring developments closely and will keep you fully informed and updated as the Brexit process unfolds. This will include further consideration of the practical steps which businesses need to be taking as part of their Brexit planning. We are currently discussing specific Brexit planning risk identification and assessment exercises with a number of U.S., UK and other clients.
It is impossible to determine the precise impact of Brexit on UK tax laws.
The main reason is that most of the EU tax legislation has been incorporated into UK legislation through directives and local laws (mainly Finance Acts).
It is arguable that where the legislation is already entrenched in UK law, and benefits UK businesses, the Government of the day may wish to leave the laws as they are. However, this will not be of benefit to businesses with a more pan-European focus, unless the UK is able to join or negotiate a reasonable trade agreement.
The main tax implications which businesses should consider are as follows:
1. Parent subsidiary directive
This is not an issue for UK subsidiaries as the UK has limited dividend withholding restrictions. However, most European countries do. Leaving the EU may mean the removal of the benefit that UK holding companies currently profit from under the directive. This will mean that UK businesses will need to consider applicable double tax agreements with countries in which subsidiaries are present, or rely on the Government to negotiate new terms.
2. Interest and royalties directive
This will be highly divisive for businesses relying on favourable interest and royalties tax treatments. Again, while the UK Government may wish to assist UK businesses, by leaving the favourable tax treatment for interest and royalties received from other EU countries, the EU may look to withhold tax on payments of interest and royalties to UK companies. This could be a major blow to businesses which set up in the UK relying on the favourable patent box regime and the advantages received by royalties laws to export across the EU.
3. Capital duties directive
This may no longer apply, giving the UK freedom to impose stamp duty on new share issues, should the Government so wish.
4. Corporate tax
As corporate tax is decided by individual member states, Brexit is unlikely to affect the corporate tax rate, although the government may wish to reduce the corporate tax rate to stimulate investment in the UK.
5. Value-added tax (VAT)
Once the UK leaves the EU, the UK will no longer need to give effect to the VAT directive and so it could be repealed. However, with a large amount of revenue coming from VAT, the Government is likely to leave it unchanged, with only small modifications being made, such as excluding certain products.
UK importers’ and exporters’ cash flow would be at a disadvantage because of the delay between payment of custom charges and the recovery of VAT.
6. Customs union
The EU is a customs union so there are no barriers to trade. With Brexit, the UK will no longer be part of the customs union and new customs duties will have to be put in place. This results in UK businesses being at a competitive disadvantage, both due to potential custom fees and clearance issues. New trade agreements will need to be negotiated, both with the EU and with other countries signed to 34 EU free-trade agreements.
Brexit will affect business across the board, from businesses trading with Europe, to businesses structured across Europe (either due to holding/subsidiary arrangements or businesses relying on passporting rights), to businesses relying on debts or royalties arrangements and businesses with internationally mobile employees.
Employment law is another area where change is likely, given the extent to which current UK legislation and English case law is driven by the EU. Although the precise nature and magnitude of change is difficult to predict at present, there are some steps at this stage that employers can take to ensure that they identify areas of potential risk and position themselves to react in the way that best suits their businesses as and when change comes. For example, identifying and monitoring categories of workers who may be impacted by change following Brexit (e.g., EU nationals, UK nationals working abroad, agency workers), identifying contractual terms and HR policies that contain provisions vulnerable to change, and identifying important business assets requiring cross-border legal protection.
1. Prepare for possible changes to free movement of workers.
We do not yet know what, if any, changes will be made to the free movement of workers following Brexit. However, given that this was a cornerstone of the Leave campaign, it is likely that there will be changes in this area. Employers should begin preparing for these possible changes by establishing the number and roles of affected employees so that as and when new rules are introduced, the nature and scale of the issues are already identified and can be monitored during the period until the UK actually leaves the EU, and solutions can be found once details of the new rules become known.
- Do you have employees who are nationals of EU member states?
- Do you have UK nationals living and working in other EU member states?
- How many, where are they, and what are their roles?
- Do you have roles or functions that may need to be relocated?
2. Review contracts of employment and policies for EU-specific or -driven terms.
Many contractual terms and employment policies and practices are currently driven by the need to comply with EU-originated law. There may be changes in these areas and employers should prepare, so that they are ready to respond to any changes in order to ensure that their contracts are best suited to their businesses. As a first step, it may be worthwhile ensuring that the business is aware of its terms and conditions and policy provisions that are EU-originated and potentially vulnerable to change. Consider, for example, terms and provisions dealing with:
- Working time
- Holiday entitlement
- Leaves and accrued rights (e.g., holiday during sickness and maternity leave)
- Commission, overtime and holiday pay
- Data protection issues
- Bonus caps pursuant to the Capital Requirements Directive
- Collective redundancy consultation
- Jurisdiction and choice of law
3. Consider agency workers.
Agency worker protections emanate from the EU Agency Workers Directive and may be a candidate for repeal or reform in the interests of maintaining flexibility in the workforce. Employers should prepare for changes and be ready to respond or take advantage of those changes if in the interests of their businesses.
- Do you have agency workers?
- But for the regulations, are there roles suitable for agency workers if the regulations were not in force?
- How many?
- Which roles?
- What are the actual or preferred terms and conditions for these workers?
4. Consider collective consultation.
Works councils, transnational works councils, consultation obligations on redundancy, and TUPE transfers are all EU-originated laws, so change to these laws is a possibility. Employers should consider what mechanisms are currently in place as regards UK employees and the extent to which those mechanisms are desirable in the context of the employer’s business.
- What collective consultation arrangements are in place?
- Which are solely domestic, and which cover more than one jurisdiction?
- Which are effective and suit the needs of the business, and which are not?
5. Protect business assets.
As in the case of any commercial disputes, employers will need to keep under review whether there are any changes to jurisdiction and choice of law rules, currently harmonized across the EU. If, as a consequence, there are changes to the applicability of these rules, this may impact the ability of employers to protect business assets through, for example, the enforcement of post-termination restrictive covenants.
- Where are your business assets and the employees with access to them located?
- In which jurisdictions could they be at risk?
- Do you have contractual and practical protections in place?
- Do those protections deal adequately with the potential need for cross-border enforcement?
Corporate and Commercial Contracts
Whilst the uncertainty of Brexit lingers, now is the time for businesses to get their ducks in a row. Here are some initial practical steps businesses can take to identify the effect Brexit will have on their rights and obligations under both existing and proposed new corporate and commercial contracts.
With respect to existing contracts, particularly those with entities within the EU, businesses should undertake a due diligence exercise to, firstly, identify their key contracts and, secondly, consider the terms of such contracts. When performing this due diligence exercise, it is important to consider the following:
1. Territorial scope. Identify if any agreements have the EU as their territorial scope. Once the UK leaves the EU, it will no longer be covered by any such territorial descriptions. Consideration will need to be given to whether an amendment to the contract is required or if instead you can invoke a force majeure or material adverse change clause to terminate the contract.
2. Reference to EU legislation. Many existing contracts will refer to a raft of EU legislation. Whilst a laborious task, an analysis of the clauses dealing with the applicable laws, compliance with such laws and changes to such laws will be critical. Many contracts referring to EU legislation, particularly where it was assumed that the UK was included within the EU or that EU legislation applied, may need to be amended to deal with such references that will no longer work.
3. Force majeure provisions. Where a force majeure provision is drafted sufficiently wide (for example, drafted to include reference to acts of government or regulatory body), it can potentially be relied on to trigger termination of such contract. In deciding whether a party is entitled to terminate as a result of Brexit, the court is likely look at the circumstances in which the contract was made, and ask questions such as whether Brexit was foreseeable or whether membership of the EU is essential to performance of the contract. The court is unlikely to terminate on the basis of Brexit where a contract was entered into after the possibility of an EU referendum became public knowledge.
4. Material adverse change provisions. In a similar fashion to force majeure provisions, if a contract has the benefit of a “material adverse change” provision, this could potentially allow for a contract to be terminated. Whether this is to be the case, will heavily depend on the specific wording of the provision in the contract. However, it is important to bear in mind that a court is unlikely to allow a party to rely on a material adverse change provision to terminate a contract where the party entered into such contract knowing of the possibility of a vote to leave the EU.
5. Currency. Where payments under a contract are made or received in a foreign currency or fixed to a particular exchange rate, consideration should be given as to whether the currency used is amended to reflect the recent drop in the GBP or other activities in the marketplace as a consequence.
1. Potential impact. Consider including specific provisions relating to the potential impact of prolonged negotiations to implement the exit and/or the impact of the new trade agreements once negotiated.
2. Termination rights. Consider whether to include termination rights in case the new trade agreements will result in an increased burden or negative effects on the intended business transaction.
3. Force majeure provisions. Consider whether to expressly include or exclude Brexit from force majeure provisions. Such provisions should include suitable notice terms and detailed explanation of the consequences of the right to terminate, and more importantly, ensure that the Brexit definition and when it can be triggered is sufficiently wide to cover your concerns.
4. Material adverse change provisions. In a similar fashion to force majeure provisions, consider whether to carve out Brexit from the material adverse change definition depending on the outcome you are looking to achieve. Similar considerations will need to be given to how the Brexit definition is drafted and when it can be triggered.
How can we help?
Our corporate and commercial lawyers can advise you on the implications of Brexit:
- High-level due diligence exercise on existing contracts
- Interpretation of clauses such as termination, force majeure, compliance with law, territorial restrictions and material adverse change
- Strategic advice for dealing with existing contracts
- Strategic advice for drafting new contracts
Competition (or antitrust) law in the UK will be impacted by Brexit. The changes will not be immediate (and there will likely be transitional provisions dealing with Brexit itself and the UK’s new trading arrangements with the EU), but there are steps which we recommend companies take now in relation to competition law.
1. Reinforce the message that competition law continues to apply in the UK.
This has been said frequently, but it’s important to remember that EU law continues to apply in the UK. In any event, substantive UK competition law is, in effect, the same as EU competition law. Therefore, competition law continues to apply in the UK in exactly the same way today as it did before the referendum vote.
We recommend that businesses disseminate this message to all relevant staff. They should be reminded that competition law compliance messages, including from training sessions, still apply and that this will be the case going forward (including after Brexit).
2. Be careful with discussions on the impact of Brexit.
Brexit raises significant commercial, legal and other issues for businesses, and therefore, there may be a desire to discuss it with competitors (either directly or in a trade association or elsewhere). However, if they involve confidential commercial information, these discussions are dangerous.
We recommend that no discussions with competitors take place in relation to Brexit without competition law guidance being provided in advance.
3. Consider the post-Brexit options but take care with joint lobbying.
We recommend that every business consider which of the likely post-Brexit arrangements between the EU and the UK is appropriate for it and consider lobbying for that option.
Relevant here is the general direction of EU competition law, post-Brexit. There have already been calls for changes to EU competition law, particularly so as to allow “national champions” to be created in the EU (through more lenient application of the merger control rules) and to allow greater state intervention (through a relaxation of the State aid rules).
Joint lobbying by competitors is in principle permissible under EU competition law, but again we recommend that competition law guidance be provided in advance.
4. Review trading agreements.
The form of many agreements (or at least certain clauses within them) is driven by competition law considerations. For many businesses, the most obvious example is distribution agreements, in particular, limitations on the ability to impose restrictions on distributors concerning pricing and cross-border sales in the EU and EEA.
Given the uncertainty as to the shape of post-Brexit arrangements, it is not possible to make changes at this stage in order to ensure compliance with competition law going forward (or indeed to make sure that a business is not unnecessarily limited in its activities). We recommend that instead businesses review their existing agreements, precedents and new agreements to determine the impact of Brexit on relevant terms.
5. Consider litigation strategy.
Private competition law litigation (damages and other claims, particularly for injunctions) is expanding rapidly in the UK and the rest of the EU. This is now a genuine commercial weapon for businesses of all sizes.
We recommend that, as with other types of litigation, the impact of Brexit on private competition litigation be considered when planning strategy.
6. Use legal advisers to ensure privilege protection.
Post-Brexit, EU competition law will continue to apply to any company active in the EU (including UK or U.S. businesses which have no physical or legal presence there but only trade). The European Commission will continue to be the lead competition law regulator for the EU.
For the purposes of EU competition law investigations by the European Commission, only advice from external EU/EEA-qualified lawyers is privileged. This will have an impact on how companies seek legal advice. McGuireWoods has undertaken its own contingency planning and its EU and UK competition law partner Matthew Hall (an English lawyer) is now also qualified in the Republic of Ireland (an EU member state).
7. Consider State aid and EU funding.
EU State aid law bans aid in all forms from EU member state governments and public bodies to companies, unless a market investor would have done the same thing or the aid is exempted.
It’s not known what the position will be concerning EU State aid law post-Brexit, but we recommend that businesses consider whether they have received aid in the past in the UK, whether they might be able to receive it in the future under a looser post-Brexit regime (and indeed in the run up to Brexit if the UK government already starts to provide aid), and also whether competitors might similarly benefit. This can impact investment and other decisions.
8. Consider leniency.
This is really a point for external advisers, but a company which applies for leniency at EU level (protection against regulatory fines in return for whistleblowing about a competition law infringement) should consider very carefully whether to do so in the UK at the same time. This is often done anyway, but could become a crucial issue post-Brexit, when the UK competition regulator is likely to run parallel investigations with the European Commission concerning the same behaviour.
Whilst we wait to see what the Brexit result will mean for the UK’s data protection regime, it is important to recognise that the result will not change anything immediately. The exact nature of the post-Brexit UK-EU relationship will influence any UK data protection reform, and it is highly likely that the UK will continue to be heavily influenced by EU laws. Indeed, the Information Commissioner’s Office (ICO, the UK’s data protection authority) has emphasised this and also highlighted that the UK’s Data Protection Act 1998 (DPA) remains the law for the time being, irrespective of the referendum result.
1. Prepare for the GDPR and changes to UK data protection laws.
Data controllers established in the UK processing personal data in the context of that establishment are currently subject to DPA. Once the EU’s General Data Protection Regulation (GDPR) comes into effect on 25 May 2018, the UK will still be a member of the EU and so the GDPR will automatically replace the DPA. UK companies will then need to comply with the new regime until Brexit occurs. Following that, the GDPR will fall away but we do not yet know what form any replacement legislation will take. If the UK wants to continue trading with other EU member states, it will likely need to adopt legislation similar to the GDPR. With this in mind, businesses should continue with their GDPR compliance preparations.
- Determine what steps are being taken to prepare for the GDPR.
- Document what personal data the business holds, where the data originated, and with whom the data is shared.
- Review current privacy notices, and determine what changes are required.
- Check current data protection procedures, and determine what changes are required.
- Monitor the ICO’s guidance on Brexit and the GDPR, and update organisational plans as and when new guidance is released.
2. Consider whether EU citizens are targeted.
The GDPR will apply not only to businesses established in the EU, but also to businesses outside the EU that process personal data of EU citizens, either by offering services or goods or from monitoring behavior. Therefore, following Brexit, the GDPR will still apply to UK-based businesses trading with the EU or targeting EU citizens. Such businesses therefore should continue their GDPR compliance efforts.
- Identify those activities that involve processing of personal data of citizens in other EU member states.
- Establish and commence a compliance plan for the GDPR.
3. Consider where personal data is processed and transferred.
EU data protection laws prohibit transfers of personal data to countries outside the European Economic Area (EEA), unless they have been recognised as providing “adequate protection” to personal data. Companies need to consider whether they receive data in the UK from global regions which are currently compliant, based on the UK being within the EU or EEA. If the UK is not classified as “adequate” post-Brexit, UK companies receiving data from the EEA will need to rethink their data protection compliance strategy and put in place adequate safeguards, such as model clauses, and binding corporate rules.
In addition, the converse (transfers outside the UK) may also be an issue, so companies should consider whether they send personal data from the UK and what compliance measures they may need to put in place. The new EU/U.S. Privacy Shield is due to be adopted. Following Brexit, the Privacy Shield will not cover transfers from the UK to the U.S. However, the ICO could approve the Privacy Shield as an adequate means of data transfer from the UK to the U.S., or it could establish a similar framework (e.g., one like the U.S.-Swiss Safe Harbor framework).
- What are the organisation’s data flows?
- Where is personal data collected?
- Where is personal data stored? Where are systems or servers located?
- Is personal data received in the UK from other EU member states?
- Is personal data transferred outside the UK? If so, where? Do global operations access personal data housed in the UK?
- Are model clauses or binding corporate rules currently in place? If so, what data transfers do they cover?
4. Consider third-party service providers.
Again, it is likely that if the business uses third-party service providers located outside the UK, personal data will be transferred outside the jurisdiction and subject to the international data transfer principle.
- Does the business engage third-party service providers?
- Where are those service providers located?
- Is personal data transferred to those service providers?
- What documentation is currently in place with third-party service providers?
5. Determine where the organisation’s main EU establishment will be.
Some GDPR provisions are dependent on the “main establishment” of a business being in the EU. Once the UK leaves the EU, a company with UK-based headquarters will no longer count as the main establishment under the GDPR following Brexit. This will affect a company’s lead data protection supervisory authority under GDPR for the purpose of enforcement and other reasons such as approval of binding corporate rules.
- Where is the company’s main EU establishment?
- If the main establishment is the UK, where will the company’s main establishment be once the UK leaves the EU?
- Is the business in the process of obtaining BCRs? If so, through which supervisory authority?
It is hard to predict at the moment precisely the timing and scope of legal changes to the UK’s data protection regime resulting from Brexit. We will continue to monitor developments closely and keep you fully informed as the post-Brexit process unfolds.
The Court of Justice of the European Union (CJEU) is responsible for the rule of law within the EU. The UK’s right to appear in all cases and to appoint judges to the CJEU will no longer exist when Brexit is implemented. This should not be confused with the European Convention on Human Rights, its council and its court ( the ECHR). The UK’s membership of the Council of Europe will not be altered by Brexit. The Convention has been incorporated into UK law through the Human Rights Act and there has been no suggestion that the UK will leave the Council of Europe.
Accordingly it appears that from the date Brexit takes effect, litigants will no longer be able to appeal cases to the CJEU and UK judges will no longer be required to follow CJEU decisions (although they may decide to do so), but they will continue to follow ECHR decisions. Litigants would likely no longer be able to challenge UK legislation on the basis of incompatibility with EU law, although they would retain the ability to mount such challenges based on human rights issues.
In other respects, the court system in the UK is likely to remain unchanged, with the UK Supreme Court as the final Court of Appeal.
Brexit is unlikely to affect the recognition and enforcement of judgments between the UK and EU member states, as the relevant countries are signatories to the Lugano and Brussels Conventions. However, these conventions are more limited than the Brussels Regulation, which currently governs jurisdictional issues between courts of EU member states. Brexit may mean that the UK falls outside the scope of the Brussels Regulation which — most significantly — created a requirement of judicial comity, i.e., that courts relinquish cases if they are already being heard in another EU member state. Without this restriction, the English courts would be able to accept jurisdiction over more cases and, in appropriate cases, could provide anti-suit relief to restrain parties from pursuing proceedings in the courts of other EU member states.
We will continue to recommend that commercial parties select the English courts and English law for the jurisdiction and choice of law clauses in their agreements, for a variety of reasons which we will be happy to discuss, notwithstanding any Brexit.
Where commercial parties prefer an arbitration clause with a London seat, we will recommend no change as a result of any Brexit as the UK will continue to be a party to the New York Convention on the enforcement of arbitral awards.