Canada: The Tech Sector One Month On From Brexit - Doomed? Growing? Business As Usual?

Last Updated: July 25 2016
Article by Alexandra Brodie

Most Read Contributor in Canada, October 2018

Brexit has spawned endless alerts, tweets, articles and webinars speculating on the possible outcome and effect of the vote on all areas of our lives including the tech sector. No one knows what will happen and some appear to doubt that Article 50 will even be triggered.

In the meantime, SoftBank has acquired ARM for £24 billion, which is an indication that some international businesses are still in an expansionist phase re investing in UK tech. But at the other end of the spectrum the BBC, the Guardian and Gartner are all predicting a slowdown, or worse, for the UK tech sector should free movement of people be limited, such that skilled workers are not so plentiful in the UK. Some are predicting a rise in the fortune of the Irish and German tech sectors as a result.

Here, we collate the experience of our tech sector lawyers working across all of our disciplines, from employment to private equity, from banking & finance to ECM, and from IP, data protection and IT, to give you a snapshot of the first month post the Brexit vote and its impact on tech.

So, are we doomed? No. Are we growing? In a few cases, yes. Is it business as usual? Mostly, it is.

Does this chime with your experience? Do comment as we want to know what the world looks like post-Brexit for you.

Deal activity

Since 23 June, our tech deal lawyers have been involved in matters focused on VR, FinTech, Telco, business services software, biotech and comms infrastructure, to name but a few areas. All are reporting business as usual, save for a slight pause or slowing of interest on the ECM side, but noting that this could, of course, be the typical summer slowdown.

US and Asian investor side clients are active as they seek to leverage the exchange rate, and the likelihood of being able to drive a good price given current economic uncertainty in the UK is delivering a certain amount of deal activity. We are also seeing investors/acquirers seeking to accelerate current deals prior to any recovery in sterling, which is resulting in an aggressive timetable for a number of deals.

Those areas of business which are particularly sensitive to EU regulation, such as autonomous vehicles (or smart metering or similar) are not, for one moment, faltering, but there is a steely recognition that any such vehicles will have to be created to be compliant with EU/US frameworks and that by removing itself from the EU, the UK will have less scope to influence the content of any such frameworks.

Banking & Finance

Our network of corporate, sponsor, financial institution and non-bank financial institution clients and contacts reports an increase in caution, but that has been present since the early part of 2016 as the vote came into view. Otherwise, it appears to be "business as usual".

This means the money flow remains positive across the tech desks at the banks, as evidenced by a range of smaller growth debt deals and mid-market corporate financings completing in the last month within our team. Those deals have spanned media, e-commerce and various software offerings in particular.

The caution arises in the increased due diligence and requirement for waivers, amendments and covenant resets to finance documentation. This is to be expected as businesses seek to hedge against financial risk.

Data centre & cloud providers

Tech/property businesses such as data centre operators are seeing both continued interest from their usual array of business partners, albeit with a reported surge in interest from Asia-based customers, and new interest from "classic" real estate businesses looking to diversify into tech/property given the continued and increasing need for data centres and cloud providers.

There is, of course, no technical reason why a UK company or UK consumers need to locate their data centres in the UK, but there is a strong emotional desire that this be the case. There was some suggestion that cloud providers would not wish to be located in the UK post-Brexit if we exit both the EU and the EEA, due to the potential issues with data protection, but that doesn't seem to be having the impact predicted.  

Consequently, this subsector of tech is looking healthy both now and into the future.

Data protection

The new EU General Data Protection Regulation (GDPR) is due to come into force on 25 May 2018. It is very unlikely that the UK will have negotiated its new existence ex-EU by that date, and therefore companies still need to comply with the provisions of the GDPR.

In the long term, this is probably positive as, depending on what shape the UK's relationship with the EU takes post-Brexit, UK companies will either be directly affected by the GDPR or the UK will have to negotiate its own version of the EU/US Privacy Shield, which will no doubt look and feel very similar to the GDPR.

Therefore, while we are seeing a lot of queries in this area, the situation is most definitely "as you were" i.e. preparing for the GDPR.

Tech litigation

Whether this is contract based or patent based, there is currently no change to business as usual, given that the negotiations required to effect Brexit will take longer than the lifespan of any litigation, and consequently most businesses cannot wait.

The big theoretical issue is what might happen to the unitary patent and unified patents court due to come into force shortly and whether the UK can (or wishes to) remain a party to these edifices post-Brexit - but those issues are all for discussion rather than direct action at present.

Again, it's business as usual. In any event, the tech businesses large enough to be concerned with litigation tend to be of a multi-jurisdictional nature, and so Brexit is merely one of their concerns. For example, China-based companies are far more concerned with the situation in the South China Sea, and US companies seem more preoccupied with the outcome of the presidential race and its impact on trade.

All businesses

A common thread is that, while investors and fully-funded companies are pursuing aggressive strategies to leverage the weak pound and take advantage of the ability to negotiate on price, all companies are taking a cautious approach on recruitment and other internal investment spend. This is likely to continue while they wait to see how the economy shakes down in light of the continued post-Brexit uncertainties and appointment of Theresa May as PM.

For strong tech companies with a compelling offering, it is most definitely business as usual, albeit with the weak pound potentially delivering more acquisition interest from overseas. We are yet to see companies implementing "Post-Brexit" plans - whether this is because it's too soon given everything is uncertain, or because everyone believed the bookies and are only now making their plans, is, of course, anyone's guess!

In summary, the UK tech market is still a very positive place with good deal-flow, despite the heatwave encouraging everyone to kick back in the park.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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