Brexit... Corporate and commercial

The short answer is, not yet. There are certain sectors where Brexit raises specific concerns e.g. in the context of financial services. For contracts between trading counterparties, however (whether in the context of the provision of goods or services), from a legal perspective relatively little has changed so far.

Clients are aware of broader commercial concerns, such as changed import/export formalities, potential tariffs, and the effect on their supply chains more broadly. It is usually appropriate to assess whether the jurisdiction of the English courts is likely to create any particular issues and, if necessary, consider alternatives to this – non-UK parties are increasingly sensitive to this issue.

Certain drafting considerations also apply – for example, to ensure that references to EU or EU-derived legislation cover the fact that, as matters currently stand, with effect from the end of the transition period (so after 11pm UK time on 31 December 2020), in most cases the legislation will continue to apply in the UK but as a body of retained law on a different statutory footing. We have however seen little appetite for specific “Brexit clauses” entitling a party to renegotiate agreements depending on the political agreement in place at the end of the transition period.

Counterparties from civil law jurisdictions (such as Italy) are not always aware that the English courts will continue to interpret strictly contractual obligations, and that it is strongly inadvisable to assume that the courts will deem Brexit an intervening event which entitles the parties to re-formulate their agreement, or deem the agreement modified because it has now become more onerous for one or both parties to perform.

In a climate of continued uncertainty as to the arrangements which will be in place from 1 January 2021, however (and perhaps with a degree of fatigue at the fact that they seem to have been through a “will it be x/will it be y” process several times already), parties often prefer to agree shorter contractual notice periods to terminate the agreement, and accept that there may be a degree of commercial risk for each party depending on the outcome of the current political negotiations.

Some group restructuring is taking place in anticipation of the end of the transition period, and groups are certainly considering the potential implications for them. The loss of certain financial reporting exemptions (for example, for dormant UK companies with an EU parent) has encouraged parent companies to take action to consolidate their structure and strike off dormant entities.

There has also been a degree of rationalisation in anticipation of the Cross-Border Mergers Regulations ceasing to apply, since this EU-derived legislation facilitated greatly the merging of a UK company with an EU-27 group entity and there is no equivalent mechanism under English law, unlike most civil law jurisdictions (and therefore share or asset sales will remain the only routes available).

Although the UK tax position on outbound dividends should not be affected, there are also concerns in certain jurisdictions about withholding tax on inbound dividends and whether cash-pooling arrangements need to be reviewed in light of this. Finally, assessments of the impact on directors or other key management who are based in the UK (temporarily or permanently) have been undertaken.

As discussed above, Brexit is likely to have certain implications for UK-EU27 group structures and this is a relevant consideration for potential purchasers of UK companies or businesses. In the absence of compelling immediate reasons to proceed, for sectors which seem particularly exposed to risk as a result of Brexit (e.g. where this may result in significant additional tariffs or complexities for products imported into the UK, such as wine) purchasers have sometimes preferred to adopt a “wait and see” approach to the final political agreement, or try to understand better the likely impact on the relevant sector of the UK economy (or the ability of a UK target to trade into the EU), before committing to a transaction.

Alternatively, they have adopted strategies such as deferred consideration or earn out structures so that some impact can be absorbed before the final purchase price is determined. We have also seen concerns about the implications of Brexit for enforcing sale and purchase agreements under English law. That said, the impact of Brexit so far largely pales into significance compared to the impact of Covid-19.