The legal impact of Brexit on corporate transactions is likely to be less acute than in some other areas. Nevertheless, we do anticipate the following areas being affected:
General M&A activity is highly sensitive to business uncertainty. That said, since the Brexit vote, market activity has been extremely resilient, both in respect of domestic transactions and cross-border activity, where sterling depreciation has meant that UK targets have become increasingly attractive. Whilst some of the continued activity is due to strong fundamentals and generally positive economic indicators, it is likely that it is also due in part to the comparatively long timescales over which Brexit is being played out.
With Brexit itself occurring no earlier than March 2019, businesses remain active against a (for now) static legal backdrop, but as the date for departure approaches (and the shape of the UK’s post-Brexit relationship with the EU becomes clearer) there is likely to be a degree to which businesses will choose to sit on their hands until Brexit has occurred and the choppy waters surrounding the event itself have calmed. As we approach Brexit, from a deal execution perspective (and especially for targets with pan-European operations), increased emphasis will be placed on the risk allocation between vendors and sellers whilst the terms of the UK’s secession are negotiated and implemented.
Following Brexit, business (as opposed to share) sales might be simplified from a scaling back of EU regulation in relation to employee protection on business transfers, although the wholesale repeal of the laws providing for employee protection on those transactions is unlikely.
For transactions which have already completed, it is unlikely that the terms of existing SPAs (now in warranty or earn-out/deferred consideration periods) will need to be substantially revisited, although technical amendments (such as definitions of relevant territories) may be required.
The regulation of public M&A transactions is expected to remain largely unchanged following Brexit, and material changes to the Takeover Code are not anticipated.
Equity capital markets
While this area derives much of its regulatory framework from EU legislation, in order to safeguard investor confidence and the City’s reputation, any scaling back of capital markets regulation is likely to be conservative. Equally, whilst the explicit or implicit threat of deregulation to preserve London’s position as Europe’s pre-eminent capital markets hub may be a political lever deployed in Brexit negotiations, harmonisation with existing (and even future) EU regulation (for example, under the forthcoming Prospectus Regulation) will likely be desirable to some degree in order to reduce regulatory friction for businesses looking to access European investor bases.
Whilst most corporate transactions (and related contractual relationships under SPAs and similar agreements) have a finite lifetime, joint ventures often have indefinite lifespans and so current arrangements will need to be reviewed to ensure that Brexit will not have unintended consequences (such as triggering “force majeure” or equivalent termination provisions).
Commercial terms in joint venture agreements may need to be revisited depending on the ultimate form of Brexit and its general economic impact.
We are starting to see businesses establishing European subsidiaries as contingency planning to secure potential access to the single market post-Brexit, in particular amongst US groups that currently often have a UK company as a channel for their wider European operations. We expect this trend to accelerate as we approach Brexit.
The European cross-border merger regime which, until now, has been somewhat at the periphery of UK corporate activity and principally used to consolidate and rationalise pan-European group structures, is unlikely to survive (at least in its current form) post-Brexit. The regime has a number of attractive features not otherwise available under UK law (including the automatic assumption of the assets and liabilities of the transferor entity as part of the merger), and so businesses may look to push through a pre-Brexit cross border merger in appropriate cases. In a potential sign of things to come, the High Court recently sanctioned the merger of a UK parent company into its Italian subsidiary, the first time a “reverse” cross border merger involving a English company (where a subsidiary, rather than a parent, was the surviving entity) was sanctioned. Businesses currently domiciled in the UK but looking to migrate their headquarters to align with their European businesses in anticipation of Brexit may therefore look closely at this route.
What can businesses do now?
Businesses will need to start planning now to ensure they understand what Brexit could mean for them. To do so, the sorts of questions that you should be asking yourself include the following:
- Will your joint ventures or other long-term collaborative business structures make sense in a post-Brexit environment? Do their terms need amending?
- Do you need to set up subsidiaries in Europe to act as a bridgehead post-Brexit, or think about a wider migration of operations?
- Have you considered the impact of Brexit on M&A and PE/VC deal terms for transactions currently in contemplation?