Brexit: Can we predict what's next for your company?
What will Brexit mean for businesses established in the UK and operating in the EU? We consider what the consequences might be in the scenarios of a ‘soft’ and ‘hard’ Brexit.
As we now all know, the British Government triggered Article 50 on 29 March 2017 which trigged the process for the UK to leave the European Union. Here at Gerrish Legal, we are a truly European firm with UK roots and so we are just as curious as many as of our clients as to the outcome of Brexit.
The European Union (Withdrawl) Act 2018 states that on the day of leaving, the European Communities Act 1972 will cease to apply, and provisions in it that the UK follows will be transposed to UK law.
The deadline for an agreement is 29 March 2019, but with only a couple of weeks to go, still no agreement has been reached. It is possible for the negotiation period to be extended, and although the government line is that it opposes this, three cabinet ministers have recently publicly called for the Prime Minister to do so.
What will Brexit mean for businesses established in the UK and operating in the EU? We consider what the consequences might be in the scenarios of a ‘soft’ and ‘hard’ Brexit.
Current Membership
The UK’s current membership to the EU means that companies can enjoy the freedom of establishment anywhere in the EU. The European Courts have been liberal in their interpretations of this and it has led to a high level of corporate mobility within the EU. Just now, any business which has been validly set up in the UK can establish subsidiaries and operate anywhere else in the EU without restrictions.
The UK recognises a company’s nationality and applicable law as being of the place in which it was incorporated. This means that if a company sets up in England and then establishes itself in Germany and conducts most of its business there, it will still be considered an English company. Denmark, Finland, Ireland, the Netherlands, Norway and Sweden also follow this process.
In continental states like France and Germany, the nationality of a company is determined by where its principal place of business is. This means that if a company sets up in England but mainly operates in Germany, it would be considered German, not English.
So that companies can’t be unfairly disadvantaged and so they can be sure what their applicable law will be, the European Courts have set out that the first place that a company incorporates its self will be the place that decides its nationality, and Member States cannot discriminate against them.
Soft Brexit
In the event of a soft Brexit, the UK would continue to be a member of the European Economic Area (EEA) - single market. It is questionable, though, if this is actually possible. The UK is a member of the EEA through its EU membership status, and so it is possible that this membership would need to be renegotiated.
If renegotiation is possible and the UK remains a member, the EEA requires parties to implement the body of law created by the EU. This would mean that freedom of establishment could continue to apply, and companies could continue to be treated as natural persons without restrictions. It doesn’t, however, relieve us of all uncertainties…
Practical Example: Company Insolvency
The European Insolvency Regulation, for example, is not included in the EEA agreement and so would not apply even if the UK remained in the single market. This Regulation came into force shortly after the European Courts made corporate mobility so easy, so Member States have limited experience with the application of national insolvency laws. While there is a UN International Trade Model Cross-Border Insolvency Law it has been adopted in very few EU member states, probably due to the Regulation being applicable. The European Courts have also decided that that insolvency measures are not restrictions on the freedom of establishment, so states would be free to apply their own laws when it comes to insolvency. This means that even in the context of a soft Brexit, UK companies face considerable uncertainty.
Hard Brexit
In the event of a hard Brexit, all that will remain applicable between the UK and the EU is the WTO framework, which doesn’t include any freedom of establishment.
The British government might intend to negotiate a bilateral trade agreement like other WTO members have, however since these don’t provide any freedom of establishment it is likely the same would apply for the UK. A hard Brexit also makes a hard border likely between Northern Ireland and Ireland, one of the biggest sticking points during debates.
For EU companies registered in the UK, recognition will depend on how the countries in which they operate in determine their nationality. For countries looking at the place of incorporation, this will still be English law. However if the English company is only formally foreign, meaning it mainly conducts business in another Member State, it is likely that stronger regulations will apply. The current Dutch rules for example, apply extra regulations more similar to those applied to Dutch companies.
The situation is more complicated for countries which look at where the company operates. When Germany was asked to extend the recognition of EU companies as the place of incorporation to companies outside the EEA (where the UK will find its self after a hard Brexit), the Federal Court refused and applied its own process to look for the place of operation, not incorporation. For formally foreign companies in continental states, it might not be English law but the national law of where they operate that will be their applicable law.
This could make things difficult. Under German law, companies must be registered locally to obtain legal personality, so these foreign companies may be considered not a company any more but a type of partnership. Members could be held personally liable for any debts, and it may be impossible for creditors to recover debts since the company will not have legal personality and cannot be party to any legal proceedings.
So, what next?
“Friendly treatment”?
Brexit has been out of companies’ control so Member States may be sympathetic to pre-Brexit firms. For example, Germany has proposed protection to effectively continue to recognise such companies as UK companies. Perhaps if liability is extended, it will only apply to new debts post-Brexit.
Contracts
It might be useful for companies to insert a ‘Brexit clause’ into your agreements. For example, under UK law, the doctrine of frustration will come into play if an obligation can just no longer be performed due to radically different circumstances (i.e., the difficulties that are encountered in the event of a hard Brexit), but if agreements contain “business continues” clauses, this risk of your existing contracts being “frustrated” can be reduced.
If you conduct all of your activities in a Member State
If a company operates wholly in a continental state, it would be advisable to change form to a domestic entity, or use a cross border merger. The Regulation on cross-border mergers has been transcribed into the UK Companies (Cross-Border Mergers) Regulations 2007, so might be a more certain process for conversion to an EU company. However while Member States’ provisions do allow UK companies to have limited liability, this is on the basis that they are incorporated according to the law of another EU/EEA Member State. We must wait to see if Member States will agree that where companies have followed correct procedures, applications will be accepted on the basis that they have been formed under English law.
Currently we are in a waiting game - firstly to see how the British Government will vote on the current deal, and secondly, in the event of a hard-Brexit, to see how individual Member States will deal with UK companies. Impossible to fully predict the future therefore, but there are things that can be done to smooth the process.
In the meantime, if you have any queries about how Brexit applies to your business, then please get in touch for your free 30 minute consultation.
Article by Lily Morrison @ Gerrish Legal, March 2019