02 April 2020 - Article
On 25 November 2018, both the draft Withdrawal Agreement and the non-binding Political Declaration on future EU-UK relations were endorsed by EU27 leaders at an EU summit in Brussels.
What does this mean for Italian and other EU27-based businesses, looking in at a process that may affect significantly their trading relationship with clients or customers in the UK, or their subsidiaries or other business interests operating within the UK?
In terms of removing the continued uncertainty for businesses, the EU endorsement was a necessary step but far from a sufficient one. Approval by the UK remains a vastly uncertain and highly politicised process.
If businesses can (somehow) set aside the political uncertainty, a reading of the draft Withdrawal Agreement and Political Declaration would be a relatively reassuring exercise. The draft Withdrawal Agreement postpones the vast majority of practical changes until the end of the proposed transition period (31 December 2020, with the possibility of further extension). The Political Declaration states that the UK and European Union wish to “develop an ambitious, wide-ranging and balanced economic partnership… encompassing a free trade area [which, amongst other things, will combine “deep regulatory and customs cooperation”] as well as wider sectoral cooperation”, with a “level playing field for open and fair competition”. There would be “ambitious customs arrangements”, plus “ambitious [again!], comprehensive and balanced arrangements on trade in services and investment in services and non-services sectors”, and non-discrimination for “services providers and investors”. The parties aim for the “temporary entry and stay of natural persons for business purposes” between the UK and EU27, the preservation of “financial stability, market integrity, investor and consumer protection and fair competition”, the facilitation of electronic commerce and the recognition and maintenance of intellectual property rights, as well as ongoing cooperation on these.
The Political Declaration is a statement of intent only and detailed negotiations for the post-transition period relationship cannot begin till after March 2019. Whether or not the Withdrawal Agreement will be approved – at least allowing businesses a formal transition period to align to (potentially) different trading conditions from 29 March 2019 – remains unclear. Contingency planning remains largely a “best guess” scenario and a question of balancing the costs of taking steps, that may or may not prove necessary or appropriate, against potential risks.
This has been recognised by the English courts in cases involving sectors where the need to take action has been more pressing: in particular, financial services and insurance businesses relying on passporting rights. In a recent approval of an insurance transfer scheme involving a cross-border merger between an English and Luxembourg company (a legal process introduced in England by EU law, with no parallel mechanism existing between English domestic companies, and which may cease to be available to mergers involving UK companies after 29 March 2019), the English court acknowledged that the applicant considered itself compelled to take pre-emptive action. It noted that given the “uncertainty over the Brexit negotiations”, there was “no perfect solution” for policyholders potentially affected by the insurer’s proposals. Whether or not the insurer’s actions were strictly required would only be demonstrated at a later date, but it was unlikely to be prudent for the insurer to wait till the picture was clearer.
In many other sectors, though, where business continuity is less directly affected (in that it may be possible to carry on doing business, even in the event of a “no-deal” Brexit – just more difficult), the justification for complex restructurings or other action has (to date) often seemed less clear. For businesses in these sectors, the evolution of the political situation in the UK over the next month or so is going to be closely watched.