The United Kingdom public voted to leave the European Union (popularly called a ‘British Exit’ or ‘Brexit’) in a referendum held on June 23, 2016. The notice period required means that an actual Brexit date is unlikely to be before the summer of 2018. In the meantime, there will be a great deal of uncertainty which is likely to continue to affect market conditions, Sterling exchange rates and the levels of financial market and transactional activity in the UK.
There has been no change as yet to Britain's trading relationships with the EU and the rest of the World or to English law. However, the Brexit vote has created a range of uncertainties, which include:
- Will Britain definitely leave the EU? The referendum result is advisory and not mandatory and so, whilst the Brexit vote has created strong political pressure on the UK Government to carry through the referendum result, it is not absolutely certain and there may be further political manoeuvring which affects the decision. For example, some are arguing that further Parliamentary action will be necessary before Britain can give notice to leave the EU.
- What will be Britain's future relationship with the EU? There are a range of possible outcomes but these will depend on negotiations. For a Member State to leave the EU the required notice period is two years but this can be extended by agreement with all EU Member States. An earlier exit could be negotiated but this is unlikely as the notice period would allow time for the UK to negotiate the terms of its future trading relationship with the EU and other countries and for other EU member states to negotiate changes to their relationship to take account of the UK withdrawal.
- What will be Britain's future relationship with non-EU countries? Some of the possible outcomes will mean that Britain would lose the benefit of EU trade agreements with non-EU nations, although it would then have the freedom to negotiate new terms of trade.
- What will be the impact on the United Kingdom? A majority of voters in Scotland and Northern Ireland voted to remain in the EU. The Scottish First Minister, Nicola Sturgeon, has indicated that a new vote on Scottish independence is 'highly likely', to allow Scotland the opportunity to seek to remain in the EU.
- What will be the impact on the wider EU? As well as new trading relations with Britain, a Brexit may also lead to public pressure in other EU member states for a referendum on their continued membership of the EU. Opinion polls in the Netherlands have shown support for an EU referendum and the Czech Republic Prime Minister Bohuslav Sobotka has indicated that a ‘Czexit’ could follow a Brexit.
Market and currency implications
The Brexit vote has already impacted on global stock markets and caused a significant fall in the value of Sterling against certain key currencies, including the US dollar.
Between the date of the referendum and early July 2016, Sterling had fallen by around 14% against the US dollar. Prior to the referendum vote, analysts at Goldman Sachs warned that Sterling could fall by 20% against the US dollar if the UK were to vote to leave the EU.
Further weakening of Sterling against the US dollar is likely if future economic indicators and business surveys show that the Brexit vote has adversely impacted on the UK economy. Since the result of the referendum was announced, credit agency Standard & Poor's has reduced Britain's credit rating by two grades from AAA to AA and warned more downgrades could follow. Fitch Ratings has also downgraded its rating by one grade from AA+ to AA, and similarly said that more reductions could follow.
A fall in the value of Sterling against the US dollar is good news for US businesses importing from the UK, but not for US businesses exporting to the UK. The use and cost of hedging arrangements is likely to increase. There may also be an impact on the numbers of UK visitors to the US, with trips becoming more expensive for them.
It will be interesting to see whether the fall in the value of Sterling will encourage US businesses to make acquisitions in the UK.
For US businesses that do not currently trade with or have investments in the UK, there may be little impact other than any contribution the uncertainty created by the Brexit vote adds to global market volatility. However, plans for future trade and investment in the UK and EU may be impacted. US businesses often establish operations in the UK as a stepping stone to trading with other EU countries. Will they still do so if the UK’s trade agreements with the US and EU are less enabling or in a state of flux?
In the longer term, trading between the US and UK will depend upon the terms of any applicable trade agreement. The US is currently negotiating a new trade agreement, the Transatlantic Trade and Investment Partnership, with the EU. The UK might be excluded from this arrangement if it leaves the EU. In October 2015, US Trade Representative Michael Froman said that there was no guarantee that Washington would seek a separate US-UK trade agreement if the UK leaves the EU and warned that British firms could face Chinese-style tariffs.
A Brexit may impact on contracts between US and UK businesses governed by English law. A Brexit may lead to the unpicking of UK legislation which is currently dependent on EU regulation.
A Brexit may affect disputes over contracts between a party based in the UK, such as a subsidiary of a US company, and a party in another EU Member State or where the subject matter of the contract has some connection to a Member State. EU regulations impact on the choice of forum, recognition and enforcement of judgments, service of legal process and the choice of governing law of contracts. Britain's participation in these arrangements may be affected by a Brexit but this will depend upon the results of negotiations. For new contracts, we may see parties opting for arbitration clauses on the basis that enforcement is through the New York Convention of 1958 rather than EU regulations.
In terms of existing contracts between US and UK entities, the question may arise whether these could be terminated as a result of a Brexit. This would depend on the terms of the relevant contract, such as the terms of any material adverse change clauses and whether the implications of the Brexit vote or an ultimate Brexit, such as market and currency fluctuations, are sufficient to trigger the relevant clause.
The concern over immigration from the EU to the UK was one of the major campaign issues of the 'Leave' camp in the Brexit referendum. US companies with subsidiaries or operations in the EU which employ citizens from other EU Member States in the UK or vice versa, will be concerned about any change to the freedom of movement of EU nationals. An audit of the workforce will help to identify individuals who may be affected, including those who may be able to apply for citizenship or permanent residence and to target communications to employees who may be most affected. Plans for recruitment and secondment of staff may also be impacted.
Intellectual property implications
The effects of a Brexit on intellectual property law are likely to be significant as many EU regulations have been transposed into domestic law and the future of the long awaited Unitary Patent and Unified Patent Court is uncertain given that the UK needs to ratify the relevant Convention before it comes into effect. US companies or groups of companies with community intellectual property rights (such as the EUTM) will need to be ready to respond if those rights cease to have effect in the UK. IP owners should identify which of their rights are likely to be affected and may need further application or registration to be protected.
Other implications for US businesses will depend on the sector in which they operate and will remain uncertain until negotiations are concluded.
This is an amended and updated version of articles previously published in the California Daily Journal and insidecounsel.com.