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December 15, 2016

CORPORATE IMPLICATIONS OF BREXIT

In this article, Gemma Davies, our corporate commercial executive discusses the impact of Brexit at home and abroad.

The possible extent of the impact of Brexit is yet to be understood as we are entering into a period of flux and ambiguity. The exact details of the terms will be worked out in the impending months and years.

Impact on legislation

The Companies Act 2006 is the core legislation moving the incorporation and operation of UK companies. Little is derived from EU legislation so the direct impact of Brexit will be insignificant. The parts of the Companies Act 2006 derived from EU Directives include provisions connecting to accounts, disclosure of information and shareholder rights. This has the most impact on UK businesses with shares listed on a regulated market such as the London Stock Exchange.

Outcome of Brexit

The effect on listed companies is unlikely to be great, legislation will need to be reviewed and significant changes are doubtful to follow Brexit as the Financial Conduct Authority and London Stock Exchange will want to see commitments of this nature remain in force.

The extent to which the UK would be able to amend or remove corporate law derived from EU regulation will depend on the outcome of its discussions with the EU and the nature of its future relationship with the EU.  

Effect on UK Deals

The immediate aftermath of the vote to leave the EU led to claims that some M&As were delayed or cancelled. This is sector specific as some markets remain strong but it can be likely to remain to see a slowdown in activity as parties, including funders, assess the impact of Brexit. Sectors most affected would be those with most EU exports and EU regulation, and example of which being the pharmaceutical sector with nearly half (43 per cent) of the sector's total exports going to the EU.

Long-Term Outcome

The long-term impact will be determined by clarity provided from the ultimate Brexit terms, investor confidence and market conditions, including the force of Sterling which may create openings for overseas acquirers.

The legal framework for domestic and cross border dealings is unlikely to change post Brexit as English contract law is largely unaffected by EU regulations. As this is a mode commonly used to govern international M&A transactions, the main concern would be the EU parties’ willingness to use English law following Brexit.

Key areas of concern:

 

  • Merger clearances - Post Brexit, both UK and EU notifications will likely be required ensuing in more time and costs.
  • Personal data - variations on the use of personal data may effect how employee and other due diligence is commenced, resulting in a more all-encompassing and onerous process.
  • Employee protections – if the present protections afforded to employees on business sales are altered, assets sales may be disturbed - although a wholesale repeal is unlikely, to determine the extent of such changes, the terms from negotiations will need to be measured. 
  • Dispute resolution - with indecision of the enforceability of English judgements in EU member states and vice versa, this may result in an increase use of arbitration.

 

Brexit Effect on Overseas Businesses

Following the choice of the Court of Justice of the European Union in Centros, Überseering, and Inspire Art, overseas companies have decided to establish operations in the UK to gain a foothold into the European market. Government analysis in 2013 found that half of all European headquarters of non-EU firms are in the UK. Brexit may touch choices to establish in the UK and could lead to a relocation to other member states.

An additional major factor with overseas companies is the value of Sterling falling meaningfully since the referendum comparative to a number of other key currencies, including the Euro and US dollar.  A fall in the value of Sterling is positive news for overseas companies importing from the UK, but not for overseas companies exporting to the UK. For overseas companies considering an investment in the UK, the fall in the value of Sterling may offer important chances to acquire UK companies inexpensively.

Result of Brexit for UK Companies

As a UK business owner, if you are suggesting to buy or sell a business, careful thought will be required with the wider effects of Brexit on the target company and its value. An issue for a seller may be the adverse impact on valuation due to the drop in the value of the Sterling. Those businesses operating in heavily regulated sectors may be more drastically affected.

This article was first published by Business Insider. Read the full article here.

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