News and Publications

The long farewell: analysing the key legal issues

Posted: 20/07/2017


While the ultimate consequences of Brexit remain unclear, businesses and individuals can take steps now to maximise commercial opportunities and guard against potential risks.

Theresa May triggered Article 50 of the Lisbon Treaty on 29 March 2017. The UK and the EU therefore have until 29 March 2019 to negotiate the terms of the UK’s withdrawal, unless transitional arrangements are agreed that enable discussions for longer. It is important to remember that until then, EU law will continue to apply in the UK and there will be no immediate change in the way that people move or trade.

It has been confirmed that the UK’s negotiating team will follow the EU’s suggested protocol in discussing the Divorce Bill and the status of citizens’ rights, along with the Ireland/Northern Ireland border issue first, before moving on to negotiating any free trade deal. Negotiation rounds will take place every four weeks and where possible, both parties will seek to agree public statements relating to negotiating rounds.

Reaching agreement on every area required before the exit date is highly unlikely. It is therefore essential that transitional arrangements are agreed with the EU to prevent the UK falling into World Trade Organisation (WTO) rules. That said, the Government has repeatedly said that it would rather fall into WTO rules than agree a bad deal for the UK on exit.

The five major UK business bodies, British Chambers of Commerce, Confederation of British Industry, EEF, Federation of Small Businesses and Institute of Directors have written an open letter to the Government asking it to: ‘put the economy first’ in Brexit negotiations; negotiate a bespoke agreement that grants barrier-free access to the EU’s single market, and prioritise negotiating a transitional agreement to provide certainty to business by immediately ruling out the WTO option under any circumstances.

Time will tell whether the Government can (or wants to) deliver this wish list.

Strict statutes and most biting laws

The areas governed by EU law and regulation are complex and wide ranging. Many of them will be discussed as part of the negotiation process. Whatever agreements are reached between the UK and the EU, the UK Government is making its own legislative preparations for withdrawal; and has announced that there will be a ‘Great Repeal Bill’ to help the transition following the UK’s exit from the EU. This will remove the European Communities Act 1972 from the UK’s statute books and convert the body of European law into domestic law to preserve the status quo while the Government picks which aspects it wants to change. In theory, at the time of exit, there should be no change in laws that apply in the UK.

In practice the situation is more complicated. Many EU laws depend on an EU institutional framework or require EU membership to have full effect within a country, neither of which will apply in the UK after withdrawal. There are, therefore still areas of uncertainty, particularly around intellectual property and financial regulation that will need to be smoothed out before the exit. We have touched upon some of the key areas that may be affected below.

Post Brexit we are told that there will also be primary legislation for other areas—immigration and customs being specifically mentioned. In addition, the final UK-EU deal will be put to Parliament for approval (although it is difficult to see what scope for renegotiation there might be by that stage).

Corporate entities

The UK’s equity capital markets derive much of their regulatory framework from EU legislation, including the Prospectus Directive, the Transparency Directive and the Market Abuse Regulations. Once outside the EU, the UK’s capital markets regime would need to be deemed ‘equivalent’ for UK prospectuses to benefit from mutual recognition in EU member states. If the market is not recognised as equivalent, a multi-jurisdictional company wishing to issue shares in the UK and the EU will have the additional burden of getting the prospectus approved both in the UK and an EU member state. It remains to be seen how Brexit will affect the implementation of the EU’s Capital Markets Union Action Plan, including the new Prospectus Regulation.

Generally, company directors should be identifying risks and uncertainties associated with the UK’s renegotiation of its EU position. Considerations may include future business performance, increased market volatility and the impact Brexit may have on specific industry sectors.

In relation to transactional deals, companies need to factor Brexit issues into the due diligence process. The due diligence process needs to be more tailored so that acquirers and investors can evaluate how European legislation affects the target business and can identify strategic planning measures that need to be dealt with post-completion.

Commercial contracts

Businesses should review their commercial contracts in light of the current climate, especially where they could be affected by changes in taxes, standards or currency fluctuations. Particular focus is being given to termination rights and other aspects of commercial deals to help manage risk. Businesses should consider whether to negotiate material adverse change clauses that have a ‘Brexit’ related aspect to them.

Dispute resolution

Clearly drafted clauses in contracts that specify the English courts and English law are likely to be enforced by the UK courts post Brexit, irrespective of changes made to the EU regime. England should therefore remain a jurisdiction of choice for dispute resolution.

There are, however, several areas of uncertainty for those involved in disputes. For example, if we lose the benefits of the Recast Brussels Regulation, questions arise over how jurisdiction may be decided between EU member states and the UK. Equally, how will English judgments be enforced against assets located in other EU states once we have lost the streamlined, reciprocal method of recognising and enforcing judgments in civil and commercial matters contained within the Brussels Regulation?

When negotiating contractual dispute resolution mechanisms, businesses should consider adopting a ‘conditional’ dispute resolution clause that allows a degree of flexibility as the UK’s position becomes clearer. They should also consider arbitration, which is likely to be largely unaffected by Brexit and could therefore afford greater certainty.

Data protection

The new General Data Protection Regulation (GDPR) will come into force in the UK irrespective of the exit from the EU. Businesses are already putting measures in place to deal with the revised standards under the GPDR.

Intellectual property

While there is still uncertainty about the IP regime post Brexit, businesses should be examining their portfolios of EU trademarks and registered Community designs and assessing whether new applications should be made for equivalent UK rights to ensure protection post exit. Anyone applying for a new EU trademark or registered Community design should also consider making a separate UK application as well. The future of the unitary patent and unified patent court (part of which was set to be in London) is currently uncertain.

Immigration

Following the referendum, EU nationals residing in the UK and companies which employ them are considering their position. With free movement as we know it set to come to an end, businesses will have to deal with new legislation as and when it comes into force. Immigration and employment support will be needed to ease the transition.

Real estate

The property market remains uneven. Many investors are probably waiting to see how the political negotiations progress as there is no immediate sign of capital flight. In this environment, entrepreneurs are finding well priced opportunities, particularly outside of London. Overseas investors are also increasingly coming to the UK market, disregarding inconclusive elections and the short term uncertainties of Brexit, but taking a long term view and attracted by the weakness of sterling.

Life’s uncertain voyage

Michel Barnier, David Davis and their colleagues have a daunting task ahead of them, unpicking 46 years of collaboration and seeking to balance competing but equally important interests which affect each and every European citizen in the most fundamental way. It is to be hoped that the negotiating period can be extended, while at the same time providing as much certainty as possible for businesses and individuals: as a famous playwright once said: ‘Wisely and slow; they stumble that run fast.’


Return to news headlines

Penningtons Manches LLP

Penningtons Manches LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority. San Francisco is an associated office.

Penningtons Manches LLP