United States: What Brexit Means For U.S. Company Boards

What Should You Review With Management?
Last Updated: September 8 2016
Article by Eric S. Siegel and Sarah Kupferman

The United Kingdom's unprecedented vote to leave the European Union (Brexit) has dramatically upended global markets. It may take months, if not years, before the UK redefines its relationship with the EU and the rest of the world. And the outcome is far from certain--whether and in what form the UK actually exits the EU remains to be seen.

Many U.S. companies, even those without a UK presence, will be touched by Brexit directly or from the impact on competitors, customers or suppliers. In fulfilling their fiduciary duties, particularly in their role overseeing disclosure, enterprise risk management and compliance functions, boards should not wait for implementation to consider the consequences for their companies. Directors of these companies, should ensure that management is monitoring, evaluating and responding to the threats (and opportunities) presented by Brexit, particularly in the following key areas:

  • Trade Regulation. Many U.S. companies rely on a presence in the UK as a "passport" into Europe. Post-Brexit, a corporate presence in the UK may no longer provide unfettered access to the European market. The UK may be required to negotiate new trade agreements with the EU and other trading partners. Other countries may seek to renegotiate trade agreements with the EU. Companies providing goods or services into or out of the UK, or other European countries, should evaluate potential changes to tariffs, sanctions measures and export controls, with consideration given to changes desired in operating locations, the structure of internal and external supply chains and contractual pricing terms.
  • Labor Regulation. There may be changes in labor regulation that affect U.S. companies with a UK labor force. For example, it is possible that EU nationals will need to re-apply for work visas with more stringent application requirements, like those presently required for non-EU workers in the UK. As a practical matter, it may become more difficult to attract and retain workers from outside the UK.
  • Other Regulations. Companies should assess whether there are other ways in which their business in the UK is regulated by the EU regime. They should be prepared to deal with changes to the extent that regime is supplanted by a different scheme post-Brexit.
  • Currency Hedging. The British pound has already fallen steeply against the U.S. dollar and further volatility is likely. Companies should consider whether to implement or make changes to hedging programs.
  • Counterparty Credit Risk. Weakness in the UK economy and elsewhere as a result of the Brexit upheaval could leave customers, suppliers and other business partners unable to fulfil their contractual obligations. Companies should assess exposure to default risk under contracts with UK counterparties (or counterparties that are exposed to the UK) and consider credit enhancements, hedging programs and other ways to mitigate this risk.
  • Contractual Arrangements. In addition, companies should undertake a general review of existing UK contracts, as well as forms used for future contracts. References to the EU and UK may need to be updated to reflect the desired result. For example, references to English governing law may no longer automatically incorporate EU law. And it may be prudent to modify provisions to deal with changes in the areas noted above such as trade and labor regulation and volatility in currency exchange and credit risk.
  • Intellectual Property Protection. Although current UK patent protection is likely to stay the same, companies should evaluate whether their other intellectual property protections depend on any EU or Madrid system protections that might become unenforceable in the UK post-Brexit unless they shift registration to the UK national system.
  • M&A Activity. The Brexit dislocation may create attractive acquisition opportunities. A weaker British pound and a weaker UK economy might increase the number of UK targets available on relatively cheaper terms for US companies pursuing an m&a strategy.
  • Domino Effects. While reviewing the areas noted above in light of Brexit, companies should consider also reviewing potential exposure in other EU nations that have suggested movement toward an exit. For example, referendums have been suggested by political party leaders in the Netherlands, France, Italy and Austria.
  • SEC Reporting. Companies with SEC reporting obligations should consider whether additional disclosure is warranted. For example, it may be prudent to add disclosure in the risk factors, forward-looking statements and MD&A sections regarding the areas noted above, or other ways Brexit may impact the company.

As events unfold and bring the post-Brexit landscape into sharper relief, boards should ensure they are receiving updated reports from management reflecting the latest developments and their potential impact on the companies.

Originally published by Directors & Boards.

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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