Brexit: English corporate law and transaction implications

On June 23, 2016, the United Kingdom public voted to leave the EU. The two years’ notice period required by the Treaty of Lisbon, for the government to implement this decision, means that an actual UK exit (or ‘Brexit’) date is very unlikely to be before June 2018. This briefing note advises readers on the immediate considerations and anticipates how a Brexit will impact on English corporate law and transactions more widely.

Practical steps to take now

While the precise details of the terms of a Brexit will be worked out in the coming months and years, businesses likely to be affected by a Brexit should start to identify potential areas of risk and impact and plan staff and customer communications. Those businesses will need to set aside time and resources for further analyzing how they will be impacted as the picture becomes clearer.

Corporate implications

Aspects to consider include:

• Impact on UK corporate transactions
• Implications for overseas businesses
• The wider impact on English corporate law
• Impact on UK corporate transactions

If Britain leaves the EU, UK companies may find that they are unable to take advantage of the process for effecting the merger of European companies pursuant to the Cross-Border Mergers Directive and the associated implementing UK Regulations. These regulations allow mergers of EEA companies, provided that the merger includes at least one UK company and at least one company from another EEA member state.

Aside from the impact on cross-border mergers, the greatest impact on corporate transactions is likely to result from changes to market conditions and currency exchange rates caused by the Brexit referendum, the vote to ‘leave’ and the uncertainty created by these events. This is discussed further below.

Implications for overseas businesses

Overseas businesses often establish operations in the UK as a stepping stone to trading with other EU countries. Government analysis in 2013 found that half of all European headquarters of non-EU firms are in the UK. The vote for a Brexit may affect decisions to establish in the UK and could lead to a relocation of the headquarters of some non-EU firms to other member states.

The value of Sterling fell in the year leading up to the referendum relative to a number of other key currencies, including the Euro and US dollar. Analysts at Goldman Sachs have predicted that the pound could fall by a further 20% against the dollar as a result of the vote to leave the EU.

A fall in the value of Sterling is good news for overseas businesses importing from the UK, but not for overseas businesses exporting to the UK. For overseas businesses considering an investment in the UK, the fall in the value of Sterling may offer significant opportunities to acquire UK firms cheaply.

The wider impact on English corporate law

If the UK leaves the EU and does not remain as an EEA or EFTA state, it is likely to lead to less regulation of UK companies. However, this has not been one of the priority areas in the UK’s recent negotiations with the EU and we would not expect changes in this area to be significant or a high priority.

The majority of English corporate law is not derived from EU legislation. The Companies Act 2006 is the core legislation affecting the incorporation and operation of UK companies. Some parts of the Companies Act 2006 have been derived from EU Directives. These include provisions relating to accounts, disclosure of information and shareholder rights. The most significant provisions apply to UK companies with shares listed on a regulated market such as the Main Market of the London Stock Exchange. We would expect these provisions to be reviewed by the Government in the coming months, but would not expect significant changes to follow a Brexit.

The UK equity capital markets are in part governed by EU Directives implemented in the UK, including in relation to the requirements to prepare a prospectus, obligations of disclosure and transparency and provisions to prevent market abuse. These provisions provide a uniform legal framework for the operation of EU capital markets. We do not expect changes to these provisions to be a high priority. We also expect that the Financial Conduct Authority and the London Stock Exchange will want to see obligations of this type remain in force.

We intend to update our guidance in this area as the corporate implications of the Brexit vote become clearer.