British Prime Minister Theresa May is determined to begin the process of exiting the EU by March 2017, but a high court ruling may derail her plan. What should companies do while waiting for a clear picture of Brexit to emerge? Vandana Chatlani reports
On 3 November, the London High Court issued a ruling that could foil Prime Minister Theresa May’s plans to trigger article 50 and kick-start the UK’s departure from the EU. The court ruled that a parliamentary nod was needed before the Brexit process could formally begin. The government promptly announced its intention to appeal this decision in the Supreme Court on 5 December.
Commenting on the High Court decision, Alasdair Steele, a partner at Nabarro in London, says: “My view is that the issue which was at stake was nothing to do with the Brexit vote but all about the power of the executive [government] verses the legislative [parliament]. The UK constitutional piece is relatively clear – parliament makes the law and only parliament can change a law which it has made.
“The controversy here is politically driven and stems from the ultimate problem underlying the entire Brexit issue – it was never supposed to happen,” he says. “Article 50 was written on the basis it would never be used [otherwise it would be much more extensive]. Similarly the UK referendum legislation only deals with the question to be asked and the process for holding the referendum itself … [it] says nothing about the result and what it means. The argument that the referendum result is a mandate for government to do that misses the point that the referendum legislation does not give that authority to government.
“As with article 50 itself, the position the government is in is a consequence of what was arguably deficient drafting in the referendum legislation. However, had parliament had to consider the ramifications of a “leave” vote and what government would be authorized to do in the circumstances, there would have been considerably less chance of the referendum bill having been passed in the first place. Arguably, having sacrificed the detailed requirements in drafting the original legislation for political expediency, government is now suffering the constitutional consequences of not having sought the necessary authority at the time.”
In September, former European Council president Herman Van Rompuy told the BBC that negotiations over Britain’s exit from the EU would take a back seat for at least a year until Germany’s new government is formed after elections in September 2017. “You can always start with more technical matters, but the hardcore … difficult topics will be tackled after the constitution of a new German government and that will be October/November [2017],” he said. He referred to Britain’s exit from the EU as a “political amputation of the first degree”, saying that the image of a “strong Europe” had “tarnished a lot after Brexit”.
European powers remain nervous following the UK’s vote to end its membership of the EU in a referendum on 23 June. Many have voiced concerns that the UK’s eventual exit could inspire other EU members to follow. European Council President Donald Tusk urged EU member states to introspect during their meeting in Bratislava without the UK, to discuss the road ahead following Brexit.
“We haven’t come to Bratislava to comfort each other, or even worse, to deny the real challenges we face in this particular moment in the history of our community after the vote in the UK,” said Tusk. “We can’t start our discussion … with this kind of blissful conviction that nothing is wrong … we have to assure … our citizens that we have learned the lesson from Brexit and we are able to bring back stability and a sense of security and effective protection.”
Tusk had previously warned that the UK’s decision to leave the EU should not be viewed in isolation. The concerns expressed in Britain about immigration, security and cultural preservation, he said, were part of “a desperate attempt to answer the questions that millions of Europeans ask themselves daily”. Both European Commission President Jean-Claude Juncker and German Chancellor Angela Merkel have said that the EU is facing an “existential crisis”.
Although May supported the campaign to remain within the EU, she has been firm about respecting the outcome of the referendum, stating “Brexit means Brexit”. Once article 50 is invoked, the UK will have two years to leave the EU.
“No one knows what will happen next, or what the future holds,” says Steele. “Everything is conjecture, which is not helpful to businesses in the UK, Asia or elsewhere.”
Steele also points out that “neither the so-called ‘Brexiteers’, nor other European countries, know what they actually want from a Brexit. Indeed, no two Brexiteers I have heard speak at events have said the same thing about what Brexit means, or should look like.”
Despite the uncertainty, Asian and other foreign companies should have enough time to consider possible outcomes and actions before any Brexit agreements are struck. “It is more likely to be a case of evolution over a number of years rather than a revolution,” says Magnus Rodrigues, a partner at Chadbourne & Parke. “Indeed, from a practical perspective there are major limits as to how much legislation the UK’s houses of parliament – or for that matter any country’s legislative body – can pass in any year.”
In a sense, this means a longer drawn out period of uncertainty, but equally, business as usual. “Given past history, the likelihood is that any deal between the UK and EU will not be done until the very last minute,” says Steele. “And early indications are that non-EU countries do not want to enter into trade negotiations with the UK without knowing first what the UK’s relationship with the EU will be.”
So against this backdrop of uncertainty, what should businesses be doing?
Steele and his team have advised clients to perform an assessment exercise to establish the impact on their business if no deal between the UK and EU is struck at the point of Brexit, and to quantify the costs, impact and potential solutions to those consequences including the time required to implement solutions.
“This will then mean that once the two-year notice period is triggered, businesses will know what they need to decide, and when in order to be ready for Brexit,” says Steele. “For those businesses looking to launch or expand in the UK and Europe, they can also factor these thoughts into their planning. The UK is a full member of the EU until the moment of Brexit, so it is very much business as usual. However, it would be foolish not to be thinking ahead as to possible consequences and solutions.”
Steele says that if May is successful in invoking article 50 in March 2017, investors can expect the end of the two-year period – and likely uncertainty – during the first half of 2019. “The timing is calculated to fall as much as possible between the various elections in Europe, particularly in France and Germany, but before the next European parliamentary elections and selection of the new EU Commission in 2019,” he says. “However, despite the outline timetable having been set, there is still no clarity on what sort of Brexit the UK will be looking for, with different ‘Leave’ campaigners suggesting different Brexit outcomes.”
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It is about understanding now what your exposure is, says Gavin Williams, a corporate partner and part of the Brexit team at Herbert Smith Freehills. “Companies need to do their homework, conduct detailed due diligence and identify the major risks. They may find that Brexit only affects their businesses in a minor way. For companies that realize it’s a big concern, minimizing the impact depends on devising alternative structures – physical or legal – to minimize the impact of changes, and on making their businesses more resilient and robust.”
Richard Cranfield, a partner at Allen & Overy, says Asian clients who are the most engaged are those with the greatest investment across the EU, and thus potentially the most at risk. “The most active sectors from our perspective are financial services such as banking, investment banking and asset management, insurance and funds, automotive, life sciences, telecom media and technology, and general manufacturing,” he says.
Samantha Mobley, a partner and head of the EU, competition and trade practice group at Baker & McKenzie, says the UK has been an attractive jurisdiction for Asian businesses to establish their operations and venture into the broader EU single market. In addition, many of these businesses chose the UK as a hub to benefit from its favourable tax regime and to rely on EU tax directives that exempt interest, royalties and dividends from withholding tax when paid by companies in one EU country to companies in another.
“The UK has double tax treaties in place with all EU member states under which the rate of withholding tax is reduced, in some instances to zero,” says Mobley. “However, if the UK withdraws from this regime, UK companies receiving interest, royalties or dividends from their group companies in certain EU countries are likely to suffer a withholding tax cost. We have advised our Asia-based clients that this could make the UK a less attractive location for a European holding company.”
The future of business ties between the UK and Asia will depend on the shape of the trade deal the UK is able to negotiate with the EU.
“If the UK exits the EU single market, then depending on what trade agreement is reached between the UK and the EU, this could result in customs duties, tariffs and import requirements for goods and services moving between the UK and EU,” says Mobley. “This could result in higher costs and administrative requirements for Asia corporates using the UK as a gateway to the EU.”
Some Asian companies could be hit by changes to the benefits of EU licensing and authorizations that allowed them to register and obtain licences or authorizations in the UK and then sell goods or provide services throughout the EU. “Going forward, these passporting arrangements may no longer be available and so these Asia-based companies are considering the possibility of needing to register and obtain licences or authorizations in another EU country,” says Mobley, although she adds that most of her Asia-based clients believe it is too early to take specific action now.
While the UK may decide to forge bilateral trade relationships with Asian countries post Brexit, technical and legal barriers stand in the way of formal progress in this direction. For example, in 2013, the EU and China announced the launch of negotiations for a comprehensive EU-China Investment Agreement, which aims to achieve progressive liberalization of investment and eliminate restrictions for investors to each other’s market.
“If such an agreement with the EU is finalized, post Brexit, the UK would no longer be party to it,” says Mobley. “The UK and China may, however, consider negotiating a separate free trade agreement and investment agreement.”
But as Williams points out, while the UK remains a member state of the EU, “the responsibility for negotiating free trade agreements lies not with the British government but with the European Commission. So although preliminary discussions can be had, it’s not currently legal for the UK to negotiate free trade agreements with foreign countries.”
One thing companies can try to do is influence the exit negotiation process, as the UK government tries to ascertain what path will gain the most support. Understandably, it is mainly large Asian companies that are major employers and profit generators in the UK that will be able to wield such influence. “It’s an inherently political situation which means that jobs and taxes and livelihoods play into the debate,” says Williams. “If there are major employers out there who’ve identified really significant risks and they conclude that they may need to relocate operations away from the UK to preserve the best interests of their business, then the government will want to know that. It’s hungry for that information.”
Some companies may have enough clout to go directly to a relevant minister with their concerns, while others may be represented by industry bodies. Williams says law firms like his can help individual companies or those represented by their associations craft arguments “into a form politicians will recognize” and hopefully steer the government towards addressing thorny issues and compromising on others.
Among the thorniest issues, immigration was at the heart of the EU referendum in the UK. For now, Europe is sticking to its guns with a strict view that the UK cannot enjoy free market access in the EU without permitting the free movement of people across its borders.
Mobley says some companies are concerned about the possibility of more stringent immigration requirements which would threaten their operations and their “flexibility in being able to mobilize and utilize their workforces across the UK and EU”.
Asian companies should be prepared for disputes if Brexit results in higher costs, alters regulatory requirements or has other adverse effects on businesses. “There is a possibility that counterparties to contractual arrangements may try to rely on force majeure or material adverse change events to seek to modify or terminate contractual arrangements, leading to the possibility of increased disputes and potential litigation,” says Mobley.
For some companies, particularly those with no exposure in the UK, Brexit may be a blessing. The plummeting pound and lower valuations mean the time is right for bargain hunting. “Many of our Asia-based clients are actively looking at potential UK acquisition targets in light of Brexit,” says Mobley. Steele says his firm is seeing a steady flow of investment – rather than a torrent – into the UK from a range of different geographies. “Japan is tending to the more cautious end, while we are seeing Chinese investors coming back into the UK market, particularly in real estate,” he says.
Companies may be exercising caution, but Williams says he anticipates the announcement of several deals in the coming months. “Due diligence will be very high; acquirers want to understand where every last risk may lie,” he says. “But money is cheap. The flow of work has far from dried up.”
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