The UK exited the EU on 31st January 2020. By virtue of the transition period in the Withdrawal Agreement, EU law will continue to apply in and in relation to the UK only until the 31st December 2020. The EU Treaties, EU free movement rights and the general principles of EU law will then cease to apply in relation to the UK, and prior EU regulations will only continue to apply in domestic law (by virtue of the European Union (Withdrawal) Act 2018) insofar as they are not modified or revoked by regulations under that 2018 Act.
This article sets out the implications of Brexit on UK corporate law as from the end of the transition period. For an explanation of the finalised Withdrawal Agreement, please see: The Revised Draft UK/EU Withdrawal Agreement and Political Declaration (2019)
Impact on UK corporate transactions
When Britain leaves the EU, UK companies will 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 and are typically taken advantage of in reorganisations of corporate groups. 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 the end of the Brexit transition period (currently anticipated to be 31st December 2020).
UK equity capital market activity has been slowed by the uncertainties created by Brexit, but we have experienced a marked increase in recent M&A activity which may, in part, be as a result of the fall in the value of Sterling against other major currencies and the better value available to international buyers of UK businesses as a result.
Implications for overseas businesses with operations in the UK or looking to establish in the UK
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 and possible controls on immigration between the UK and other EU Member States. The uncertainty over the terms of these future arrangements may affect the choice by businesses to establish operations in the UK. It has already been a factor in the relocation of the headquarters of some non-EU firms to other EU Member States.
For EEA companies with registered UK establishments (branches), following the end of the Brexit transition period, additional information will need to be supplied to Companies House and exemptions, particularly in relation to the filing of their accounts, will no longer be available. These companies will also need to make additional trading disclosures in their business correspondence and on their websites. EEA companies that act as corporate directors of UK companies will also need to file additional information with Companies House.
Implications for UK businesses with operations in the EU
At the end of the Brexit transition period:
- UK incorporated companies will become "third country companies" and as a result their legal personality and limited liability status will no longer be recognised automatically by EU Member States under the Treaty on the Functioning of the European Union. UK incorporated companies may still be recognised in accordance with each Member State's national law or international law treaties, but this will need to be considered on a state-by-state basis. Certain EU jurisdictions (including Germany) apply a 'real seat' approach which means that UK companies which have their central administration or principal place of business in those jurisdictions may find that their separate legal personality is no longer recognised and the limited liability of their shareholders is lost. Affected companies should consider incorporating a local entity and transferring their business to that entity through a cross-border merger (see Impact on UK Corporate Transactions above) whilst that mechanism remains available, or other steps to localise their operations; and
- UK 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. This may require UK companies to supply additional information and make additional filings (particularly in relation to accounts where exemptions for EEA companies will no longer apply).
UK companies should take local law advice in relevant EEA states to confirm the impact on their operations in those jurisdictions.
Impact on UK corporate entities
Following the end of the Brexit transition period, UK companies which report under EU International Accounting Standards will need to report under the UK equivalent. UK companies with EEA parent companies may also lose applicable exemptions from filing group accounts and EEA subsidiaries of UK companies may also lose applicable accounting exemptions. Companies should discuss these changes with their accountants in advance of the end of the Brexit transition period so that they are ready to comply with the new reporting obligations after Brexit.
From the end of the Brexit transition period, the company law form of a European Company (Societas Europaea) will no longer be available in the UK.
The wider impact on English corporate law
In the longer term, Brexit 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.
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. The European Union (Withdrawal) Act 2018 will convert any directly applicable EU laws into UK law when the Brexit transition period ends.
These EU 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 and to maintain symmetry with EU laws in this area.
The continuity of passporting provisions relating to prospectuses following the end of the Brexit transition period will depend on whether agreement is reached between the UK and EU on mutual recognition.
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 typically being included.
Brexit is not expected to have a significant impact on UK company law or transactions. The greater impact on UK corporate transactions is likely to flow from the economic effects of Brexit to the UK economy and the continuing uncertainties over the terms to be agreed with the EU.
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