United States: Brexit And Other Key Issues For CFOs And Corporate Treasurers

What Has Happened?

Brexit

On June 23, 2016, the UK electorate voted to leave the European Union in an advisory Referendum. We expect the UK Government to commence negotiations to withdraw and to establish a framework for the UK's new relationship with the EU and its other trading partners. Exit is expected to be in September 2018 at the very earliest.

The Brexit vote has had an immediate impact by triggering significant volatility in the financial markets and the UK's sovereign credit rating dropped to AA/Aa1. Companies have had to respond quickly. The shape of the future relationship between the UK and the EU, which is currently subject to much speculation, will determine the future impact of Brexit, but companies are making contingency plans.

US Tax Changes

In addition, on April 4, 2016, the US proposed regulations under section 385 of the Internal Revenue Code (the "Proposed US Tax Regulations") which would reclassify certain related party debt transactions as stock for US tax purposes. If and when the Proposed US Tax Regulations are finalized, payments on a debt instrument issued by a US subsidiary to its non-US parent or a debt instrument issued by a non-US subsidiary to its US parent will be taxed as dividends if the instrument is reclassified as equity. In that circumstance, the payments would not be deductible by the payor for US tax purposes and could become subject to a higher rate of US withholding tax if the payments are US source income. Any reclassification of an instrument as equity would apply for all US tax purposes, and, therefore, the reclassification could have many other material adverse tax consequences for multinational groups. Some provisions of the Proposed US Tax Regulations would apply to debt instruments issued after April 4, 2016. Thus, instruments issued between related parties today could become subject to the Proposed US Tax Regulations after they are finalized even though the Proposed US Tax Regulations are not yet final.

What Now?

Management teams of groups with UK companies or UK trade are now assessing and prioritizing the risks and potential opportunities that Brexit introduces and reviewing their budgets. They are also considering whether to make changes to their corporate organization and funding structure in response to the Proposed US Tax Regulations to avoid adverse tax consequences.

This client note sets out a number of near-term practical considerations for CFOs and Corporate Treasurers arising from Brexit and the Proposed US Tax Regulations. We also attach a summary checklist of considerations.

We have also published a client note addressing Brexit issues in greater detail, "Brexit: What Does the Vote mean for Business,"1 and a client note on the Proposed US Tax Regulations, "Proposed Regulations on Related-Party Debt Instruments: Would Result in Dramatic Adverse Tax Consequences."2

We have a unified US, UK and Continental European team available to assist clients with an integrated solution tailored to their individual circumstances for companies facing the complex challenges arising from Brexit and the Proposed US Tax Regulations.

Immediate Considerations

What Immediate Impact Could Current Currency Volatility Have Under Financing Arrangements?

Changes to mark to market values as a result of currency volatility may require an immediate response. The changes may trigger requirements to post collateral or increase credit lines to obtain more hedging. Companies may also wish to review cash pooling and other treasury arrangements which automatically convert dollars and other currencies into euro and sterling.

Many companies will shortly face financial covenant or other financial tests by reference to their June 30 financial statements. Compliance may be affected if the company's debt in foreign currencies is calculated by reference to the spot rate at June 30 rather than an average rate. Companies may also seek to adjust their covenants to mitigate the impact of future mark to market movements or the costs of restructuring or contingency planning.

The fall in sterling and the euro may also impact financial limits in financial documentation or corporate authorizations or investment documentation. For example, thresholds for incurring debt or making disposals or acquisitions may be tied to sterling or euro rather than the dollar and it may be necessary to raise these thresholds to reflect the fx rate when the agreement was entered into or some other agreed basis. Some facilities may be tied to asset valuations of UK or EU assets in dollars (which have fallen). Other facilities (such as dollar letter of credit facilities) may be rebased periodically by reference to a base currency in euro or sterling and the change in currency may trigger a requirement to make a prepayment or provide cash collateral or agree more headroom going forward.

Downgrades of the UK and banks may also have an impact, for example, where companies are required to provide bonds from, or hold cash collateral with, banks with a minimum credit rating.

How Will Brexit and the Proposed US Tax Changes Affect Financing Structure and Treasury Functions?

Multinationals with sophisticated European corporate structures utilizing intragroup financing and/or cash pooling arrangements may wish to review the potential for tax leakage on repatriation of cash for debt service, dividend payments and other purposes. Tax leakage is likely to occur as a result of the Proposed US Tax Regulations in some corporate groups. Corporate reorganizations required to mitigate the position could also include some Brexit proofing steps.

Whether there will be increased tax leakage on the repatriation of profits between UK and EU companies as a result of the UK exiting the EU in the future will depend on whether or not the existing withholding tax arrangements between the UK and other companies within the EU are preserved as part of the deal reached between the UK and the EU. For instance, absent a full withholding exemption in the relevant bilateral tax treaty, EU subsidiaries of UK parent companies (potentially including those in Austria, Germany, Greece, Italy and Portugal) may in the future be required to withhold tax on dividends paid to their UK parent. Conversely, EU companies may incur an increased tax charge on dividends received from a UK subsidiary. Interest payments on intra-group loans between UK companies and certain EU companies (such as those in Italy and Portugal) may also be subject to withholding tax, again depending on the terms of the relevant tax treaty.

However, the UK has relatively low corporate tax rates, and may introduce further tax incentives for businesses which may provide opportunities to develop more efficient structures using the UK, so it is worth having flexible contingency plans.

We suggest that financing documentation be reviewed to check for any impediments to a corporate reorganization (such as requirements to maintain residence or other restrictions) and other restrictions on early prepayment, transferring or disposing of assets, cash extraction or the incurrence of debt. Similarly, any tax gross-up clause and withholding rules in the borrower jurisdiction should be reviewed.

Could Lenders Refuse to Fund Under a Commitment Letter Signed Prior to the Brexit Vote for an Upcoming Financing Because There Was a Leave Vote?

Whether lenders can refuse to fund under an open commitment depends on the specific wording of the commitment letter. We would not generally expect that the vote would trigger a material adverse effect/material adverse change, termination event or force majeure under market standard English law commitment documentation. However, some commitments entered into prior to the Brexit vote included provisions (flexits) allowing upward changes to the pricing and other changes to be made following a leave vote. It is also important to check documentation to make sure there are no conditions a lender could use to avoid funding.

Could the Brexit Vote Cause a Drawstop or Termination Event Under an English Law Loan Agreement?

Whether a Brexit vote causes a drawstop or termination event under an existing English law loan agreement will depend on the wording of the loan agreement. However, generally we would not expect that the vote itself would cause a drawstop or termination event. The market volatility may lead to a failure to meet financial tests or asset values or make prepayments. In the future, a borrower's business could be impacted when the UK exits through the loss of a key EU-wide license or authorization should EU-wide arrangements cease to apply and this may trigger a termination event. This could be a particular risk in industries which are highly regulated in the EU, such as financial services, life sciences, energy and transport. It is also possible that companies will not be able to obtain hedging to meet contractual requirements on terms that they consider acceptable. Future loan agreements may start to contain provisions tailored for Brexit.

Will Brexit Have Consequences for Derivatives Documentation?

We would not expect that the Brexit vote itself will have triggered a termination event or event of default under an International Swaps and Derivatives Association (ISDA) Master Agreement but the specific terms negotiated should be reviewed. It is possible that in the future some banks may wish to use subsidiaries or branches within the EU as counterparties to derivatives contracts and may also look to make some amendments to ISDAs for this or other Brexit related matters. In due course, companies may also want to consider what flexibility they need under their ISDA documentation to reorganize corporate groups and treasury arrangements and transfer derivatives, including under the provisions relating to mergers and tax events.

Near Term Considerations

Will the Brexit Vote Make it More Difficult to Raise Finance for European Businesses in the Near Term?

Lenders may have less appetite to lend in sterling or to companies with significant UK business. Pricing is increasing and tenors may shorten and we expect deals to take longer. It will be difficult for companies and finance providers to assess budgets and projections until more information is available on the deal the UK and the EU are likely to reach. There may also be a dampening effect on lending to businesses in continental Europe but it is early days. Capital markets issuance in Europe in the run up to the Brexit vote has been light and the capital markets are expected to remain choppy. Companies may use techniques used during the market dislocation following the financial crash, such as raising incremental debt under uncommitted lines or through tap issues under existing finance documentation or to amend and extend existing financing rather than to attempt a full refinancing. Companies may wish to review their financing documentation to check for flexibility to amend and extend their facilities and/or incur more debt.

European companies may choose to raise finance in the US (providing hedging costs are cost-effective) or from the many non-bank alternative lenders that have emerged following the financial crash.

The Bank of England has indicated it will keep interest rates low in the near future and the current market conditions may present opportunities to make acquisitions at favorable pricing or to do debt buybacks below par and other liability management.

Will Brexit Affect My Choice of Relationship Lending Banks?

At present, corporate loans to companies in the UK and some other EU member states can be made by entities without a banking license. However, certain loans to borrowers in some EU member states can only be made by a lender regulated there or a lender regulated in another EU member state which has a "passport" to lend to companies in countries within the EU. Absent a negotiated post-Brexit arrangement, non-EU lenders, such as US banks lending to EU borrowers from UK branches or subsidiaries, may no longer be able to continue to make loans to companies in certain EU member states. Under standard documentation, a lender is usually required to take steps to mitigate the position by transferring the loan(s) to another branch, affiliate or another lender, failing which a borrower may be required to repay the portion of any loan provided by the lender.

We expect that many banks, including US and UK banks, will make contingency plans so that they will be able to continue to lend to borrowers in the EU, possibly by transferring the loan to an affiliate in the EU. We suggest that companies in affected EU jurisdictions discuss contingency plans with their lenders and ensure they will be involved in any decisions by lenders to restructure loans and build in flexibility to restructure lending arrangements before loans become repayable.

Loans and grants by the European Investment Bank and other EU bodies to UK companies may become repayable on Brexit unless transitional arrangements are agreed because it is often the policy of such bodies not to lend to entities outside the EU.

Companies may like to check their loan agreements, in particular gross-up, increased costs and transfer provisions, to see to what extent banks can pass on the cost of any regulatory change or make transfers to affiliates as a result of Brexit.

What Public Disclosure, if any, Should Be Made in Light of the Brexit Vote? Can I Speak with Securities Analysts?

In light of the economic and political impact of the Brexit vote, both on the UK and the EU, securities regulators will be focused on how companies with a significant nexus to those jurisdictions evaluate and discuss any potential material impact on their business. Public companies should evaluate the potential impact of the UK's exit from the EU and consider whether their risk factors and forward-looking statements adequately address the circumstances to date. To the extent companies have not already done so, it is advisable to consider including a general risk factor relating to the impact of the Brexit vote on economic conditions or more specific risks about how a potential withdrawal of the UK from the EU and any follow-on effects might impact their particular business in the UK and the EU. In our previous client note, we provided suggested drafting for such a risk factor. See our client note "Brexit Q&A: Business Implications."3

Getting ahead of analysts' questions about the impact of the Brexit vote may make sense for companies with operations in the UK or Eurozone. Companies that wish to do so should be mindful of avoiding selective disclosure and should evaluate whether any part of the proposed discussion could be considered material non- public information. If so, they should consider issuing a press release or current report so that the information is broadly disseminated to comply with the applicable disclosure rules (including Regulation FD, if applicable) and as a best practice.

Will I Still Be Able to Offer Securities in the EU?

For most US corporates, accessing either the UK or the EU capital markets should remain relatively straightforward.

For US corporates that wish to continue to offer their securities in the UK, we do not foresee Brexit creating material additional regulatory burdens for doing so. The existing requirements are reasonably straightforward and we perceive no impetus for changing that.

US corporates accessing EU capital markets (apart from the UK) generally do so on an exempt basis and we do not anticipate this approach changing as a result of Brexit.

For those US corporates that carry out non-exempt EU securities offerings within the EU (other than the UK), there is an open question as to how much of an additional burden may be imposed by the European Securities and Markets Authority post-Brexit when it reviews a prospectus drawn up under UK rules. We examined this issue in greater detail in our previous client note.4

Should I Expect Significant Changes in Documentation Relating to Equity and Debt Offerings Due to the Brexit Vote?

We do not expect significant changes in documentation relating to equity or debt offerings. We do expect, however, to see underwriters adding questions concerning the impact of the Brexit vote on issuers to their due diligence questionnaires and expect them to conduct due diligence on Brexit related risk factors, particularly for companies with significant business in the UK or the Eurozone.

Do I Need to Change my Financing Agreements Before Brexit Happens?

It is likely that some financing agreements will need to change before the UK exits the EU whichever law governs them. This is because there may be references to the EU territories, regulators and laws that will no longer include the UK. For example, if a borrower is permitted to conduct activities so long as they are in the EU, the permission would need to be extended to the UK post-Brexit. We recommend a review of financing agreements to identify such issues.

Should I Continue to Use English Law for my Financing Arrangements?

We believe that there will generally be no compelling reason to switch from English law as a result of Brexit and this is covered in more detail in our earlier client publication.5 The UK will withdraw in accordance with an orderly process maintaining certainty of law rather than the emergency exit threatened by Greece in recent times. English law and New York law are the "common denominator" for financing agreements used throughout the world.

Under EU law, the courts of EU member states are required to respect the choice of law made by the parties to a contract, whether it is New York law, English law or another law.

Nearly all high yield bond documents entered into by European issuers and many other financing agreements for European financings are governed by New York law and contain a New York law jurisdiction clause although there is no special deal between the US and the EU for recognizing choice of law or enforcing judgments. The use of New York law for European financings is not generally considered to present any material legal risk. If arrangements between the UK and other parts of the EU for fast track enforcement of judgments do not continue post-Brexit, contracts governed by English law and containing English jurisdiction clauses would be treated in the same way by the courts of an EU country as contracts governed by New York law and containing New York law jurisdiction clauses.

If there is a particular concern with enforcement of a judgment on a contract, then we recommend that specific legal advice is taken and a decision is taken on the choice of courts or even arbitration following that advice.

Market standard loan documentation exists for syndicated loans governed by French, Spanish and German law, although this is typically used for smaller local deals where the borrower is in France, Spain or Germany.6

To view the full report please click here.

Footnotes

1.http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/06/Brexit__The_Resul t__Client_Note_FIA062416.pdf

2.http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/06/Proposed-Regulations -on-RelatedParty-Debt-Instruments-Would- Result-in-Dramatic-Adverse-Tax-Consequences-TX-060316.pdf

3. http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/06/BrexitWhatDoesthe VoteMeanforBusinessFIAFR062816.pdf

4.http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/06/BrexitWhatDoesthe VoteMeanforBusinessFIAFR062816.pdf

5.http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/06/BrexitWhatDoesthe VoteMeanforBusinessFIAFR062816.pdf

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Barnabas W.B. Reynolds
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions