How will Brexit affect your business?
Corporate law specialist Vaughan Jones explores how Brexit will affect UK businesses.
Where are we now?
The terms of the UK’s future relationship with the European Union going forward will not be known for some time: however, whatever form that may ultimately take, there will almost undoubtedly be a lengthy period of uncertainty during which the Brexit model to be adopted by the UK is decided upon, and businesses should assess what they need to do, and plan, to protect themselves in the interim.
No immediate effect
The United Kingdom is still a member of the European Union, and no immediate change in EU or domestic law will result from the leave vote.
So, can you “Brexit-proof” your business? Probably not, but you can review some aspects of its operations, and your contract terms, and be as prepared as possible.
It will be helpful to consider the following:
Do your contracts contain pricing mechanisms which are reliant on free-trade access to the European Union market, and which based on an assumption that there are no tariffs in place?
If any important contracts are likely to be affected by Brexit, think about trying to agree changes which allow for contract termination, or renegotiation, if prices change substantially (whether due to trade barriers or currency fluctuations) or if the contract becomes unprofitable.
Some contracts define an area of operation (sometimes referred to as “Territory”), and if this is the European Union, does it mean the EU as it exists now, or as it exists from time to time? It may be worth considering now whether this might change following Brexit, and whether a change to future or existing contracts should be sought.
As a related point, many IP and software-related contracts and licences are restricted by territory, and may have to be changed.
While it is very unlikely that Brexit would frustrate a contract, so causing it to be set aside (just because an arrangement becomes more difficult or expensive does not mean that it may be walked away from) businesses should check any “force majeure” clauses in their existing contracts, as they may refer to actions of governments or regulators being allowable force majeure events (which would excuse the party from having to perform its obligations under the contract): such circumstances may also, depending on the drafting, allow for termination of a contract. It might also be that contracts contain a “material adverse change” clause, which allow for it to be ended.
In any event, businesses should bear in mind whether to look to add a new provision in their contracts dealing with Brexit – principally, whether a right to terminate the agreement is wanted. This is a similar consideration to the issue (mentioned above) of whether a price rise following Brexit should allow for termination.
Do you have any contracts which contain an obligation to comply with laws? If so, does it specify whether those laws are those which applied at the time the contract was entered into, or to the law as it may be awarded (e.g. following Brexit)?
Choice of Law and Judicial System
It is good practice for agreements to specify which country’s law and courts will apply, and where - for example – the laws of England and Wales have been chosen, it is unlikely that Brexit would have any substantial input. However, where law and jurisdiction are not expressly chosen, EU Treaty obligations apply, and we will have to wait and see what the position will be in the wake of Brexit.
Further, references to English law in an agreement at present will include applicable European Union law and regulation, but in the future there may be questions about what “English law” is and is not, which might produce a rather different situation from that which was envisaged when the contract in question was entered into.
While it is probably unlikely that Brexit will have substantial impact on the terms of corporate acquisitions, the possible effect of Brexit – inspired changes would form part of the due diligence process, in particular with regard to employment (is free movement of labour important to the business being purchased?), competition law, intellectual property, data protection and financial regulation.
The continued application (or not) of the TUPE Regulations will be important in the context of outsourcing contracts (and, of course, of purchases of businesses, although for the present, the Regulations will continue to apply as before).
The Companies Act 2006 is not, in the main, based on European law, and it is not likely that the form of company law will be given any priority by Governments in the foreseeable future although in time Government may look to reduce the regulatory burden on companies which is derived from European Union law. There should, therefore, be no need to undertake any immediate review of company constitutions or shareholders agreements, unless the group contains a corporate entity registered within the EU, in which case, with the passage of time, it will be necessary to consider any relevant changes to English and other applicable laws.
It is clear from the indication that rates of corporation tax will be reduced following Brexit and that the Government will do all that it can to make sure that the economic position of the UK is not made worse by Brexit and whatever deal is ultimately reached by post-Brexit negotiations.
The effect of Brexit is likely to be different across sectors of business, and you should start to consider the potential impact on your business: what that will be will to an extent depend upon what the new trading relationship between the UK and the EU proves to be, but while in many ways it will be “business as usual”, there will be changes, and some of the potential consequences require your attention now.
For further information or guidance, contact Vaughan Jones on 01228 552222 or email firstname.lastname@example.org .
About the author
Vaughan Jones is Partnership Chair and a specialist in Corporate Law.