Corporate analysis: A referendum on whether the UK should remain a member of the EU is scheduled to take place by the end of 2017. Glafkos Tombolis, corporate partner at Kemp Little, and Simon Charles, corporate partner at Marriott Harrison, look at the possible impact of the referendum on corporate lawyers and their clients.
How could the corporate area be affected by the EU referendum?
Glafkos Tombolis (GT): It is likely to have a negative impact on inbound and outbound European M&A activity. In particular, UK bidders will think more carefully about acquiring a target business based in the EU without the benefit of the legal and regulatory regime that currently applies. A good example of a sector where the impact of a UK exit would be strongly felt is financial services.
Simon Charles (SC): The Companies Act 2006 (CA 2006) and the secondary legislation made under it have been hugely dictated by various directives coming out of Brussels. The Company Law Directives, the Accounting Directives (78/660/EEC and 83/349/EEC) and the Shareholder Rights Directive 2007/36/EC are all highly relevant. I cannot see the government rushing to bring out a new Companies Act were the UK to withdraw from Europe, however. Perhaps the more burdensome and uncertain provisions of CA 2006 might be amended to move away from the European social model of drafting (for example, in relation to directors’ duties) and back to more familiar black letter law which better reflects the operation of companies in England and Wales. However, CA 2006 was widely consulted on before it was enacted so perhaps there would be fewer changes as to the statutory directors’ duties than people might be forgiven for hoping for.
I can’t see basic matters such as shareholder rights and audit and accounts sections being rolled back. Financial services regulation has been the subject of significant harmonisation efforts across the EU and indeed the EEA—to roll back from that would be a challenge. Passporting of UK authorised firms into the EEA where there is compliance with the single market directive is of tremendous importance. The consequences for UK companies under the Markets in Financial Instruments Directive 2004/39/EC could be considerable as they would potentially become ‘third country’ status companies. The effect on insurers, investment firms, asset managers, banks, payment services companies, and the like, would be significant and really should not be underestimated.
What issues currently arise in corporate law in relation to the UK’s relationship with Europe?
GT: Much of UK company and financial services law is based on EU company law directives. The main issue to contend with in the context of a Brexit is the potential for UK company and financial services legislation and regulation to become increasingly divergent from that of Europe. While it is hoped that pre-Brexit legislation and regulation will remain in place, this cannot be guaranteed. This uncertainty is a great concern.
SC: There is a far greater reliance on single market advantages for UK businesses than has, perhaps, been aired in the press. The tabloids have largely given up their complaints about the EU seeking to standardise the size of a European cucumber and all the rest of it, but there are some massive commercial advantages for financial services firms trading across the EEA and the EU which are rarely aired. I refer to the financial services section above and would repeat that here.
What are your key concerns about a future EU referendum?
GT: Essentially there are two. First, the fact that for corporates operating across multiple jurisdictions in Europe, including the UK, the cost of doing business will increase and that such costs will be passed on to employees, shareholders and indeed other stakeholders—this would be an unwelcome development.
Second, corporates may decide to set up operations outside of the UK as a result of the UK not being a member of the EU. Naturally, much will depend on the precise terms of any Brexit settlement. For example, the UK may be able to negotiate commercially favourable access to the EU market such that firms would not feel compelled to re-consider the viability of their existing and putative investments and operations in the UK.
SC: My worry is that the debate shall not be a fully informed one. It must focus on the consequences (commercial, legal and practical) of an in/out situation, and my worry is that noisy tabloid jingoism drowns out valid and real concerns about the consequences of disentangling ourselves from the EU. For all the criticism of Brussels’ intervention in our domestic legislation and operations, there must be a concern that to depart from existing standards would lead to the UK being perceived and indeed becoming a second-class regulatory citizen. That may follow in circumstances where regulations are relaxed after an exit, in which case the issue is whether that would be harmful to UK trade or would free it up. If it were felt that additional regulations were needed to keep up with those coming out of Brussels then the purpose of an exit must be questioned.
In relation to funds, for example, most investments which are managed by UK based managers are subject to the Undertakings for the Collective Investment in Transferable Securities Directive 2009/65/EC (UCITS)—which enjoy a single European passport to operate. The Alternative Investment Fund Managers Directive 2011/61/EU also allows UK-based investment managers which are not UCITS funds to enjoy a similar passport. The ability to access investors in the EU is likely to be of importance to many of these funds so any impediment to that would be harmful to that trade. The contrary argument is that the nature of the regulatory regimes which enable these passports to exist is now so burdensome on business that other venues are becoming attractive.
Are there any areas of EU law that you would like to keep/expect the UK to implement identical laws?
GT: I believe the body of UK company law and financial services law should remain entirely aligned with equivalent EU law. The harmonisation of laws relating to these hugely important areas on a pan-European basis will only benefit businesses and the countries in which they operate.
SC: Perhaps the greatest integration we have seen from the European project is the convergence of EU financial services regulation and operations. Most of our domestic financial services legislation emanates from Brussels, and many EU rules have direct applicability in the UK under the European Single Rulebook. I can’t see the government revisiting wholesale our financial services regime, but there would need to be amendments to the Financial Conduct Authority and Prudential Regulation Authority Handbooks, and there may be some particular issues which cause concern, such as the circumstances where a prospectus must be published (which might be looked at).
As to capital markets, the Prospectus Directive 2003/71/EC, Transparency Directive 2004/109/EC and Market Abuse Directive 2003/6/EC are well known to practitioners and the government may seek to reduce their scope and requirements and perhaps move to a more principles based regime than a rules based one. Before rushing to revert to a simpler regulatory age, however, the government would no doubt be mindful of a perceived departure from internationally accepted and recognised standards and whether that would have adverse consequences for UK companies seeking to raise capital.
Do you think there are any issues that may not receive enough attention or consideration?
GT: I think that a detailed analysis of how customer and supplier contracts would be affected by a Brexit should probably be given more attention. It may be that a Brexit—in whatever form this takes—would have no bearing on the rights and obligations arising under contracts, but it is incumbent on corporates to undertake this type of analysis, at least in respect of their most material relationships. To the extent possible, clients should consider building in protections in new contracts to be entered into. This is easier said than done, however.
What would a vote to leave the EU mean in practice for corporate lawyers?
GT: It is very difficult indeed to foretell the practical implications of a Brexit for corporate lawyers. Being pessimistic, one can posit that the immediate lead up to a Brexit would result in significantly less M&A activity.
What would a vote to leave the EU mean in practice for corporate clients?
GT: The reflexive response is that this would be negative for them. On the other hand, given the increasingly likely disparity in post-Brexit laws and regulations between the UK and the rest of Europe, significant arbitrage opportunities may well present themselves to clients.
SC: Where companies have groups which have an EU presence, either a head office or subsidiaries, then cross-border issues may become more burdensome over time if there were to be more of a chasm created between European company laws and company law applying in England and Wales and indeed in Scotland. The same is true, of course, in relation to capital markets, financial services regulation and funds. In circumstances where a UK exit meant losing passported regulatory status for certain financial services operations, it is inevitable we would see group restructurings to give UK companies footprints in the EU. This would involve careful planning and costs and the movement of capital away from the UK. Where there are EU or EEA-passported firms operating in the UK then they would have to decide how best to address what would then be a differently regulated market.
Interviewed by Nicola Laver. First published on 22 October 2015 by LexisPSL