February 24, 2016

Brexit: Implications for Your Business if the U.K. Leaves the European Union

The United Kingdom government will hold a referendum on June 23, 2016, determining whether the U.K. should remain in the European Union — of which it has been a member since 1973. Opinion polls suggest that the result of the referendum is far from certain, meaning it is important to consider now how a British exit (popularly known as “Brexit”) could affect your business and what steps can be taken to minimize the impact.

The European Union

The EU is a single legal, political and economic order comprising 28 member states from across the continent of Europe. The EU in its current form is the culmination of a series of agreements and treaties between European nations following World War II. The EU has exclusive competency to act in areas relating to customs union, competition law, monetary policy (for the member states whose currency is the euro) and commercial policy. There are also areas of shared competency between the EU and its member states. Such areas include the internal market, social policy and consumer protection. In joining the EU, member states thus agree to limit and pool their sovereignty in these areas.

The Current Union

As part of the European Union, the U.K. currently benefits from harmonized trading rules across the European Economic Area (EEA) — the 28 EU countries plus Norway, Iceland and Liechtenstein. The basis of this ‘internal market’ is the four fundamental freedoms of movement of goods, services, capital and labor. This means that businesses situated in the U.K. and trading within Europe are able to move and sell goods and services throughout the European Economic Area without incurring trading tariffs. There is also a harmonized set of minimum regulatory and product standards, meaning companies often only have to comply with one set of rules. In addition, the free movement of people throughout the EU means that companies can select from a wide pool of skilled labor and redeploy employees in different member states without restrictions.

The EU and International Trade

Trade policy is an exclusive competence of the EU. The EU conducts trade agreement negotiations on behalf of member states. Accordingly, the EU has a common international trade policy. The EU has international trade agreements with many countries across the world including Mexico, South Africa and South Korea. The EU is currently in the process of negotiating the Transatlantic Trade and Investment Partnership (TTIP) with the United States to reduce tariffs and regulatory burdens between the two economic blocs.

The Arguments to Leave

  • The EU is too large, bureaucratic, and slow to deal with the complex geopolitical, economic and technological challenges of the 21st century.
  • The U.K.’s net contribution of approximately £9 billion can be invested more productively.
  • The EU is undemocratic, is out of touch with U.K. political and legal traditions, and has increasingly eroded the sovereignty of nation states over time.
  • The prospect of further political and economic union between eurozone countries highlights the divergence of U.K. and EU interests and will further isolate the U.K.

The Arguments to Stay

  • The U.K. benefits economically from EU membership by virtue of access to the internal market.
  • Leaving the EU would lead to significant economic and political instability in the short to medium term.
  • The U.K. has a greater influence both within Europe and the wider world through its membership of the EU.
  • The combined strength of the EU provides much greater leverage in trade and other agreements with larger powerful nations such as the U.S. and China.
  • Many of the threats the U.K. faces are global in nature. EU membership facilitates close cooperation with European countries that enhances the U.K.’s security.

A New Relationship

Following a “leave” vote, the U.K. would have two years to negotiate the terms of its departure from the EU. The extent to which any of the current privileges enjoyed by the U.K. as part of the EU would continue to apply would depend upon the results of this negotiation process. To begin to understand what form a new relationship between the U.K. and the EU could take, it is necessary to look at some of the models in place between the EU and other non-EU states. In the table below we explore some of these options and the potential impacts they could have on your business.

Sector-Specific Advice

At Faegre Baker Daniels we have knowledgeable attorneys in multiple sectors who are able to provide tailored advice for your business. Included below is an overview of some of the main issues you should be aware of whatever your sector. We are currently working with clients to discuss and implement strategies to ensure their businesses are prepared, whatever the result of the referendum.

Potential Models of a New Relationship Between the U.K. and EU

View Chart.

Brexit: Impact on Key Legal and Compliance Issues

Corporate

  • The U.K.’s equity capital markets will no longer be subject to EU legislation. However, as the London Stock Exchange is a leading international trading platform, it is likely that the U.K. would not significantly change the existing regime but may streamline regulation instead.
  • At present, U.K. companies wanting to issue shares to investors in an EEA ‘regulated market’ can do so with a prospectus approved in the U.K. It is unclear whether this reciprocal recognition would continue following a Brexit.
  • Currently, the EU Cross-Border Directive enables mergers between U.K. companies and companies in other EEA states. Whether EEA states would continue to allow EEA companies to merge with U.K. companies following a Brexit would be a subject of negotiation.

Commercial/Intellectual Property

  • Potential de-harmonization of product standards and consumer protection laws could lead to the removal of some burdensome regulations but could mean that businesses have to meet multiple sets of specifications.
  • The U.K. may no longer have to implement equivalent competition law to the EU. Many elements of enacted legislation are likely to survive but potential changes include reform of the laws on territorial exclusivity, which is outlawed by the EU.
  • The ability for the U.K. to move data across EU borders, for example for processing in another member state, may no longer apply.
  • The current regime for compensation of commercial agents on the termination of an agency agreement may no longer continue following a Brexit, meaning reduced costs for principals but greater exposure for agents.
  • Contracts drafted to be EU compliant may no longer function efficiently post Brexit. Parties may try to terminate agreements or even claim that the contract is no longer valid. You should consider now how your agreements would function in a post-Brexit landscape and whether specific provisions dealing with this are appropriate.

Employment

  • Much U.K. employment law is derived from EU law. Although much of this would survive, it is possible the U.K. would seek to make certain employer-friendly reforms.
  • It is thought likely that the U.K. will relax the TUPE 2006 rules and the protection it affords workers in the event of a transfer of business, particularly the rules surrounding the ability to change the terms and conditions of employment following a transfer. Any such alteration has to date been very difficult to effect due to existing EU case law.
  • The regulatory burden currently placed on employers by EU legislation — for example the Working Time Directive and the Agency Workers Directive, which have been criticized for undermining the flexibility of the U.K.’s labor market and increasing the costs of hiring staff — may well be disbanded following a Brexit.
  • The obligation to inform and consult in a collective redundancy situation could be relaxed or repealed, particularly in the context of changes to terms and conditions of employment, which could be excluded from the consultation obligation.
  • U.K. employers may lose the ability to easily move employees throughout Europe and to take advantage of the European labor market. Staff may need to be relocated in offices around the EU if workers no longer have the right to work freely across the EU following a Brexit — of particular concern for multinational employers with workforces across Europe. Transitional arrangements to deal with such workers would very likely form part of any exit negotiations.
  • The Equality Act 2010, maternity and paternity rights and parental leave, as well as the entitlement for part-time workers and fixed-term employees not to be treated less favorably than comparable full-time or permanent staff are all unlikely to change following a Brexit. These provisions are either well-entrenched in U.K. law and politically popular or unproblematic, and so there will be little appetite for reform in these areas.

Real Estate

  • Property transactions and obligations in the U.K. are primarily governed by national legislation, not EU-derived legislation.
  • The U.K. may relax some areas of EU-derived environmental law, such as energy efficiency requirements and environmental impact assessments.
  • The property industry and U.K. real estate market as a whole may be affected by general economic instability and the potential reduction in the flow of foreign capital into London.
  • The U.K. (and London in particular) can remain an attractive prospect for real estate investment because of London’s global city status, the U.K.’s transparency and ease of doing business, the security and sophistication of the English legal system, the U.K.’s population growth (particularly in London), the U.K.’s safe haven status relative to other jurisdictions, and the U.K.’s well-developed and mature real estate market and ancillary services.

Financial Services

  • The current ‘passporting’ system allows financial services firms located and regulated in one member state to provide financial products in another member state, without the need for direct authorization in each state. For example this system may no longer be relied on by:
    • U.K. asset managers to market to EU investors under the Alternative Investment Fund Managers Directive.
    • EEA banks to offer certain products or services in the U.K. (for example mortgage and other lending services), and direct authorization may be required from the U.K.’s Financial Conduct Authority.
  • It is unclear whether this system would continue following a Brexit. Much would depend upon the form of the new relationship between the EU and U.K. and whether the U.K. government would retain the EU financial services framework that has already been implemented into U.K. law.
  • If the passporting system is no longer available, U.K.-based firms (including non- EU institutions that have established subsidiaries in the U.K.) would face having to obtain direct authorization in each EU country in which they operated. Similarly, EU banks and firms may be forced to obtain additional authorization and registration to carry on business in the U.K.

Litigation

  • EU rules on conflict of laws may cease to apply, causing uncertainty as to where cross-border disputes should be tried.
  • It would become more difficult to serve proceedings on defendants in other EU states and to enforce judgments there.
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