Brexit: English corporate law and transaction implications

29 November 2017

Neil Blundell, David Gent

On 29 March 2017, the UK government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties will cease to apply to the UK and the UK exit will take effect in March 2019 (subject to the unlikely possibility of the withdrawal agreement being concluded sooner and unless all Member States agree to extend the period). Negotiation of a new trade agreement with the EU could take several years beyond 2019 although the Prime Minister has declared the objective of achieving such an agreement within the two-year period.

This briefing note advises readers on the immediate considerations and anticipates how a British exit (Brexit) will impact on English corporate law and transactions more widely.

Practical steps to take now

While the precise details of the terms of a Brexit will be negotiated in the coming months and years, businesses likely to be affected by a Brexit should identify potential areas of risk and impact and plan staff and customer communications. Those businesses will need to set aside time and resources for further analysing how they will be impacted as the picture becomes clearer.

Corporate implications

Aspects to consider include:

Impact on UK corporate transactions

When Britain leaves the EU, UK companies may no longer be able to take advantage of the process for effecting the merger of European companies pursuant to the Cross-Border Mergers Directive and the associated implementing UK Regulations. These regulations allow mergers of EEA companies, provided that the merger includes at least one UK company and at least one company from another EEA member state. Corporate groups looking to undertake a European cross-border merger, pursuant to the Directive, which involves one or more UK companies, should plan to complete these transactions prior to Britain leaving the EU.

Aside from the impact on cross-border mergers, the greatest impact on international corporate transactions is likely to result from the general uncertainties created by Brexit (particularly to the extent that those uncertainties remain unresolved as the actual Brexit date nears) and changes to Sterling exchange rates since the Brexit referendum. These points are discussed further below.

Implications for overseas businesses

Overseas businesses often establish operations in the UK as a stepping stone to trading with other EU countries. Government analysis in 2013 found that half of all European headquarters of non-EU firms are in the UK.

A number of key issues arising from Brexit remain to be negotiated or determined, including the nature of the UK's future trading relationship with the EU, the rights of EU nationals living in the UK and possible controls on immigration between the UK and other EU Member States. The uncertainty over these terms of these future arrangements may affect the choice by businesses to establish operations in the UK and could lead to a relocation of the headquarters of some non-EU firms to other Mmember Sstates or the establishment by them of new subsidiaries in other EU Member States to maintain their single market access.

The value of Sterling has fallen significantly since the referendum relative to a number of other key currencies, including the US dollar, and we continue to see significant exchange rate fluctuations.

A fall in the value of Sterling is good news for overseas businesses importing from the UK, but not for overseas businesses exporting to the UK. For overseas businesses considering an investment in the UK, the fall in the value of Sterling may offer significant opportunities to acquire UK firms cheaply. There was a marked increase in the value of foreign company acquisitions of British firms following the Brexit referendum.

The wider impact on English corporate law

The current intention of the UK Government is that EU law will cease to apply directly to the UK, but will be transposed into UK law upon a Brexit under the European Union (Withdrawal) Bill. Parliament can then determine which elements of that law to retain, modify, replace or remove from UK law.

When the UK leaves the EU, it is likely to lead to less regulation of UK companies. However, this was not one of the priority areas in the UK’s pre-referendum negotiations with the EU and we would not expect changes in this area to be significant or a high priority.

The majority of English company law is not derived from EU legislation. The Companies Act 2006 is the core legislation affecting the incorporation and operation of UK companies. Some parts of the Companies Act 2006 have been derived from EU Directives. These include provisions relating to accounts, disclosure of information and shareholder rights. The most significant provisions apply to UK companies with shares listed on a regulated market such as the Main Market of the London Stock Exchange. We would expect these provisions to be reviewed by the Government in the coming months and years, but would not expect significant changes in this area.

In November 2017, the EU released a notice to prepare stakeholders for company law changes post-Brexit. This notice identified some important legal repercussions including:

  • UK incorporated companies will become "third country companies" and as result will no longer be recognised by EU Member States. This means, for example, that other Member States will not be obliged to recognise the separate legal personality and limited liability status of companies incorporated in the UK which have their central administration or principal place of business in another EU Member State. UK incorporated companies may still be recognised in accordance with each Member State's national law or international law treaties.
  • UK incorporated companies with branches in other EU Members States will no longer benefit from favourable rules applicable to branches of other EU incorporated companies but will be subject to the rules applicable to branches of third country companies.
  • EU law on disclosure, incorporation, capital maintenance and alteration, and cross-border mergers will no longer apply to the UK. The impact on cross-border mergers is discussed above, but these other EU rules form part of UK company law and are expected to be retained, at least initially, as part of the European Union (Withdrawal) Bill.
  • The company law form of a European Company (Societas Europaea) will no longer be available in the UK. 

The UK equity capital markets are, in part, governed by EU Directives and Regulations, implemented or having direct effect in the UK, including in relation to the requirements to prepare a prospectus, obligations of disclosure and transparency and provisions to prevent market abuse. These Directives and Regulations provide a uniform legal framework for the operation of EU capital markets. We do not expect changes to these provisions to be a high priority. We also expect that the Financial Conduct Authority and the London Stock Exchange will want to see obligations of this type remain in force. As a practical matter, where risk factors are included in prospectuses and other offer documents published by UK companies, additional risk factors relating to Brexit are likely to be included.

We intend to update our guidance in this area as the corporate implications of the Brexit vote become clearer.

Please contact us if you would like to discuss the corporate implications of a Brexit for your business.

This article is part of our Brexit series