United States: Brexit, Here We Come (Or Go)

The UK people have voted to leave the European Union. Although there is no constitutional duty to leave the Union as a result, politically this is likely going to happen. Change will not be immediate and happen over time.

Companies are well advised to react quickly to assess the impact Brexit might have on their business and current commercial decisions involving the UK if they have not already done so.

The Process to Exit

Britain's exit from the EU will be triggered by notice the UK submits under Article 50 of the Treaty on the European Union. That notice will start a two year period within which the EU and UK will negotiate the UK exit. That period can be extended by unanimous decision by all remaining Member States. Once the two sides reach an agreement, or when the two-year period expires, the UK will lose its rights and obligations under EU Treaties. Undoubtedly, the biggest impact on global business will be that the rules of free trade between the UK and the remaining twenty-seven EU Member States will be terminated. This will occur unless the two sides negotiate a special deal and that deal is approved by the unanimous consent of all remaining member states.

Companies in the UK, as well as those doing business with the UK, will use that time of negotiation to assess carefully what Brexit will mean for their businesses. Below, we address six of the questions those companies may face.

Changes to Competition Law Compliance Obligations

In terms of European competition law this will only so long apply directly in the UK as the UK is bound by the European Treaties. This will end with a complete Brexit. Currently, the UK competition rules, are already modelled to a large extent on the equivalent EU rules. There will unlikely be a major change in the near future. However, because the UK will no longer be bound by European Union treaties after it exits the EU, UK competition law will no longer be obligated to conform to the EU system. When the UK law is decoupled from that of the EU, but with both systems running in parallel the two systems are bound to diverge. With EU law no longer being superior, any decisions taken in Brussels will no longer have a binding effect in the UK, nor will precedents set by European Courts.

Enforcement of competition law in the UK will be the sole responsibility of the Competition and Markets Authority which will only apply UK law. For cartel or abuse of dominance investigations there will no longer be a one-stop shop for companies, which might have to respond to both the UK and the European authorities. This will increase those companies' regulatory burden and costs. In the worst case, that separation could trigger two sets of fines.

There is also a possibility that transactions will have to be notified in the EU as well as the UK and commercial activity will have to be assessed under both the EU merger rules and as well as the UK rules if both jurisdictions are equally affected. This might mean two different sets of waiting periods and/or remedies.

Additionally, claimants in antitrust damages actions may no longer be able to rely on Commission enforcement decisions to prove the infringement in front of UK courts. That change may make  the UK courts a less attractive forum in the post-Brexit world.

In order to advise on European law lawyers have to be qualified in one of the EU Members States (which all our attorneys are). Obtaining advice from a UK lawyer will not necessarily give you attorney-advice privilege under the European rules.

The UK would be free to provide grants and state funding to companies without being subject to the constraints of EU State aid rules as there is no equivalent at UK national level. Of course, there could be changes to existing frameworks for EU economic support for agriculture, business start-up or regeneration of regions in the UK. In the absence of detailed regulation this could lead to less ability to challenge a state aid in the UK and we would expect new, potentially different rules to be put in place which again require parallel proceedings.

Potential Barriers to Business Between Europe and the UK

Businesses in the UK may face further restrictions if the free movement rules of the EU, those that apply to goods, workers, services, capital and establishment, no longer apply in the UK. For example, after the exit, UK workers may no longer have a guaranteed right to freely work in Europe on the basis of the free movement rules formerly applicable to services and persons. It is also possible that EU citizens, in turn, will lose their right to establish themselves in the UK: to take up a job or offer their services without a form of work permit or visa.

There is some chance that an EU-UK trade deal includes new rights of free movement of services and persons. However, unless and until such a trade deal is signed, businesses in the EU and UK should prepare for the restrictions.

Currently English law is often used as the governing law in commercial contracts. UK courts have a strong reputation for resolving international disputes and, therefore, are often the venue of choice for such contracts. The exit of Britain from the EU raises uncertainty as to whether and to what extent English law will be based on or derived from EU regulations and rules. A disconnect between English law and EU regulations may mean that companies find a new forum in which to settle their contract disagreements. English is now also widely spoken across the EU. However, the attraction of the long tradition of the English legal system will not disappear overnight.

Effects on Product Qualification and Industry

The EU comprises the world's largest single market. In order to maintain its access and to  trade goods in that market, however, the UK must remain subscribed to the relevant legal frameworks. For instance, companies in the UK may not sell electrical goods or pharmaceuticals into the EU unless those products meet the EU product standards for electrical goods and pharmaceuticals. Brexit will not change that. Conversely, EU companies selling into the UK could continue to do so on the basis of common EU standards unless the UK decides to develop its own (stricter) product specifications. Businesses will likely produce their products along the stricter standards of the UK or (more likely) the EU and only adjust where this makes commercial sense.

Far-reaching EU regulatory harmonization is apparent in relation to certain industries such as financial services, digital, energy or chemicals. After the exit is finalized, that harmonized regulation would cease to apply in the UK and a review process would need to be put in place to determine which laws (implementing sector-specific rules) the UK chooses to keep, remove or modify. That review may lead to legal uncertainty in the interim period and finally to different regulatory regimes of EU and UK. While less regulation in the UK might be beneficial for certain businesses it will likely increase the burden on compliance departments and in-house lawyers.

Potential Responses for Global Business

To assess the potential impacts of Brexit in terms of possible risks and opportunities, your company should ask itself:

  • Is there any business action involving the EU and the UK which we want to push through before any major changes take place?

    • How can we obtain maximum legal certainty in doing so (e.g. reps & warranties or force majeure clause in contractual arrangements)?
  • Does Brexit potentially give me more freedom to do business in the UK?
  • Can my business remain competitive and attractive in the EU? in the UK?
  • Will I have access to finance in a UK if the country's debt loses its AAA rating?
  • Will I be able to travel, work, and employ as before in the UK?

    • Is our workforce active in EU member states?
    • From where can I now recruit the best people?
  • Do I want to hedge the risk of the UK becoming more isolated and open a subsidiary in the EU?
  • Who are our customers and suppliers?

    • Where are they based?
    • What effect will their location have on my supply and delivery chains?
  • Which EU technical standards apply to my products or sector?
  • Are businesses we are considering for purchase or sale active in the UK? In the EU? In both?
  • To what extent do we rely on EU grants or subsidies?
  • Which regulatory regimes and reporting requirements will be impacted?

We recommend that companies seek competent advice as they sift through these questions in the coming weeks and months. The planning they do now may keep their businesses steady as the shockwaves from yesterday's vote ripple through the world economy.

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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