UK: Brexit - Key Issues For The Regulation Of Companies And Corporate M&A Transactions

Last Updated: 1 February 2019
Article by David Collins, Richard Barham and Candice Chapman

Although the regulation of companies and corporate M&A transactions will remain largely unchanged by Brexit, a UK withdrawal from the EU will see some changes to the regulatory framework.

Without a UK-EU withdrawal agreement in place by 11.00pm on 29 March 2019 (exit day) the changes will, as matters stand, take effect on exit day.

Any political solution which provides for UK withdrawal is likely to see the effective date of exit day postponed to allow for a transition period. The UK-EU withdrawal agreement agreed in principle in November 2018 provides for a transition period until 31 December 2020. This would defer exit day until that date (or such other date as may be agreed during a transition period). References to exit day in this article should be read in that light.

Company law in the UK

The establishment and regulation of companies in the UK has, throughout the UK's membership of the EU, remained primarily a matter for domestic law, albeit subject to EU minimum harmonisation directives (for example, covering incorporation, capital maintenance and disclosure).

The UK Companies Act 2006 (the Act) and related secondary legislation will, in the short term at least, remain largely unaffected by the UK's departure from the EU, though a small number of changes will be necessary from exit day to:

  • address the position of EEA companies with registered establishments in the UK;
  • revoke legislation which relates to participation in pan-EEA entities; 
  • ensure that the legislation does not otherwise provide preferential treatment to EEA companies or EEA states which would breach WTO Most-Favoured-Nation rules; and
  • correct technical drafting deficiencies resulting from the UK's withdrawal from the EU. 

Legislation1 applicable from exit day will address these issues. Key points to note are as follows.

  • The various registration, filing and disclosure requirements on companies incorporated outside the UK that have opened a UK establishment (branch or place of business) are currently less onerous in respect of EEA-incorporated companies as compared with non-EEA-incorporated companies. From exit day EEA-incorporated companies will be subject to the same requirements as non-EEA-incorporated companies, subject to a three-month transition period to enable them to comply with the additional requirements.
  • The company name checks applied to an EEA-incorporated company that wishes to register a UK establishment will, from exit day, be the same as for all other overseas companies.
  • The filing requirements for the appointment of an EEA-incorporated company as a corporate director or secretary of a UK-incorporated company currently require less information to be provided to Companies House as compared with the appointment of a non-EEA-incorporated company. Again, this distinction will cease from exit day, subject to a three-month transition period.
  • Current companies legislation gives preferential treatment to EEA (including UK) credit reference agencies, credit and financial institutions to access protected information (date of birth and address of company directors) from Companies House. It also sets out that only EEA data processors can be used by these businesses for processing that protected information. From exit day, subject to a one-year transitional period, this will be restricted to those agencies and institutions carrying on business in the UK, to avoid giving preferential treatment to those carrying on business in the EEA.
  • The rules regarding the shareholder authorisation required for a UK-incorporated company's political donations and expenditure will, from exit day, only apply to UK donations and expenditure.
  • Current references to "regulated market" include all EEA regulated markets (including the UK). From exit day, they will generally be changed to "UK regulated market or EU regulated market", i.e. only a technical drafting change. However, there will be substantive changes in sections 141 of the Act (Subsidiary acting as authorised dealer in securities) and 832 (Distributions by investment companies out of accumulated revenue profits) of the Act. In those sections, the current reference to "regulated market" will be amended to refer to "UK regulated market" only. 
  • Any Societas Europaea (SE) (a European public limited-liability company which can be created and registered in any EEA member state) registered in the UK will, on exit day, automatically convert to a new UK corporate form: a UK Societas. As much of the existing SE framework as possible will be retained for this domestic entity. However, those parts of the framework that no longer have practical application (for example because they relate to reciprocity between EEA member states) or are otherwise no longer appropriate have been removed. The intention is that a UK Societas will be a temporary stage for entities rather than a long-term corporate UK choice. SEs will be able to convert to UK public limited companies without the current need to wait two years. It will not be possible to create and register any new UK Societas.
  • A European Economic Interest Grouping (EEIG) is a form of association between companies or other legal bodies, firms or individuals from different EEA member states wanting to operate together across national frontiers. An EEIG can be set up in any EEA member state. To ensure that any EEIG registered in the UK continues to have a clear legal identity, any EEIGs registered in the UK immediately before exit day will be automatically converted to a new UK corporate form: a UK Economic Interest Grouping (UKEIG). The new corporate form preserves the current framework, unchanged as far as possible and appropriate, on a UK-only basis. It will not be possible to create and register any new UKEIGs.

The extent to which UK corporate law and EU corporate law may diverge over the long term (from their relatively harmonised position) will, of course, depend on multiple political and other factors.

Law applicable to UK companies in other EEA member states

Whereas domestic law in the UK recognises the limited liability of companies incorporated in other jurisdictions, regardless of whether that jurisdiction is in the EEA or not, this may not be the case under the local law of other EEA member states.

Currently, for UK-incorporated companies, Article 54 of the Treaty on the Functioning of the European Union overrides any such local law rules. However, after exit day, UK-incorporated companies will no longer have the Treaty right to freedom of establishment in other member states. Local law rules will then determine the treatment of UK companies in each EEA member state. In a member state that applies the "real seat" principle, local law may provide that a UK-incorporated company with its central administration or principal place of business in that country is not locally incorporated. Local law may therefore treat the entity not as a company with separate legal personality but as a partnership, and consequently its shareholders may have personal liability for its debts.

Similarly, a branch of a UK-incorporated company in an EEA member state will become a branch of a "third" country (i.e. non-EEA member state) company in that jurisdiction. A member state's domestic company law for third country companies (e.g. on branch registration) may differ from EU law, which it must apply to any branch of a company incorporated in another EEA member state.

More generally, UK businesses that own or run business operations in EU member states may face changes to the law under which they operate, depending on the sector and EU member state as the result of the UK becoming a "third", i.e. non-EEA, country.

Corporate M&A transactions

The vast majority of corporate M&A transactions, whether domestic or cross-border, are primarily governed by private contractual arrangements. That will remain the case regardless of the UK's departure from the EU. English contract law is often chosen to govern both domestic and cross-border M&A transactions and is largely unaffected by EU regulation. However, parties should obviously ensure that any relevant provisions (e.g. dispute resolution, references to EU legislation) are drafted to provide maximum certainty after exit day. Any changes to the regulatory environment on exit day which may impact on closing a contractual transaction (for example, the need for regulatory clearances) must also be considered, particularly if that environment may change during the negotiation of the transaction. 

Since the result of the UK's 2016 referendum was announced, buyers will have been considering the potential commercial, fiscal and regulatory impact of Brexit on a potential target company as part of their due diligence. Such considerations will remain relevant both in the short term and the longer term, as the new relationship between the UK and the EU unfolds. 

Although the vast majority of corporate M&A transactions are governed primarily by private contractual arrangements, there are two EU directives which have an impact in this area.

Cross-Border Mergers Directive: The EU cross-border merger regime provides a mechanism for mergers between limited liability companies established in different EEA member states. It was implemented in the UK by the Companies (Cross-Border Mergers) Regulations 2007 (2007 Regulations). After exit day, the UK will no longer have access to the regime and EEA member states will no longer be required to give effect to mergers involving a UK company. The 2007 Regulations will be revoked from exit day and mergers under the regime involving UK companies will no longer be possible.

Takeovers Directive: This established the legal framework through which company takeovers are regulated in the EEA. The Takeovers Directive will, from exit day, cease to apply in the UK and section 943(1) of the Act, which requires the Takeover Panel to make rules giving effect to certain Articles of the Takeovers Directive, will be amended to require the Takeover Panel to make rules in accordance with a new Schedule to the Act (which will replicate the relevant requirements of the Directive). This amendment, and certain other amendments to the Act, will be made by regulations2. The Takeover Panel is also proposing to update the Takeover Code to reflect the UK's exit from the EU.

The main practical consequence for takeovers regulated by the Takeover Code is that the "shared jurisdiction" regime established by the Takeovers Directive will, from exit day, fall away as far as the UK is concerned. Shared jurisdiction applies where the target of an offer has its registered office in one EEA member state and its shares are admitted to trading on a regulated market in another EEA member state (but not the member state where it has its registered office). From exit day, offers for companies that have their registered office in the UK and that satisfy the "residency" test within the Takeover Code will fall fully within the jurisdiction of the Takeover Panel. Offers for companies that have their registered office in an EEA member state and their securities admitted to trading on a regulated market in the UK will no longer be regulated by the Takeover Panel. A small number of companies may fall outside any takeover regime as a result.

Footnotes

1 The Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019; the European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2018; and the European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018. This note does not cover the position in relation to accounts and audit matters, which are the subject of separate draft regulations

2 The Takeovers (Amendment)(EU Exit) Regulations 2019

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