Article 50 Notice has been given - what now?

The UK has given notice of its intention to withdraw from the EU, which has started a two year period in which the UK and the EU will negotiate the terms of withdrawal. The UK remains a Member State during this process. Read the letter to President Tusk here.

If no agreement on the arrangements for the UK’s withdrawal is reached, Brexit will occur two years later on 29 March 2019 and Theresa May has said that the default position, in that case, would be to leave on World Trade Organisation terms. The two year period could, however, be extended if negotiations are incomplete, but only with the unanimous consent of the European Council (the Heads of State or Government of all 28 EU Member States). The two year period will include time at the start when the Commission will seek a negotiating mandate from the Council and time at the end when the Council and Parliament consider the terms of the agreement, so the available period for negotiation is less than two years.

What will change when we cease to be an EU member state?

The UK’s membership of the EU is significant because it provides access to the single market of the 28 EU Member States, both to UK businesses and to international businesses that operate in the UK. The single market provides the benefit of the “four freedoms”: the free movement of products, services, people and capital, as well as harmonised regulatory regimes and cross border trade within the world’s largest trading bloc.

EU membership also requires UK businesses or businesses with operations in the UK to comply with EU law whether they operate solely within the UK or across EU borders.

Two main types of EU legislation shape UK law:

  • EU Regulations - these are “directly applicable” in the UK, which means that they do not need to be separately enacted through UK legislation to have effect. These will fall away on exit unless substituted.
  • EU Directives - these have to be implemented into UK legislation. Following an exit by the UK, the national implementing legislation will remain in force in the UK unless repealed by the UK Parliament but there will be no obligation to follow any subsequent amendments to the EU directives. Whilst other (secondary) legislation will only remain in force until the repeal of the European Communities Act 1972 (the ECA), unless expressly retained by the UK Parliament or substituted.

To preserve legal certainty, the UK Government has said that it will propose a Great Repeal Bill in the next parliamentary session and on 30 March 2017 published a White Paper on that bill. This bill will repeal the ECA on the day the UK formally leaves the EU, will simultaneously convert all EU law into domestic legislation, so that the first day following exit does not place the UK in a legal vacuum and will create powers to make secondary legislation to allow corrections to be made to laws, where necessary, to rectify problems which arise as a consequence of leaving the EU. Access the White Paper here.

UK’s future relationship with the EU

Theresa May has made it clear that the UK will not seek membership of the European Economic Area (EEA) or Single Market. Instead, she wants the UK to negotiate a Free Trade Agreement between the UK and the EU.

The letter to President Tusk sets out the UK’s proposed principles for the discussions which are: to engage with one another constructively and respectfully, in a spirit of cooperation; always put citizens first, work towards securing a comprehensive agreement, work together to minimise disruption and give as much certainty as possible, pay attention to the UK’s unique relationship with the Republic of Ireland and the importance of the peace process in Northern Ireland, begin technical talks on detailed policy areas as soon as possible, but prioritise the biggest challenges and continue to work together to advance and protect shared European values.

The letter also states that the UK’s objectives for its future partnership with the EU remain those set out in Theresa May‘s speech of 17 January 2017 and the Government White Paper of 02 February 2017.

Objectives in the White Paper include:

  • ensuring the UK is no longer under the jurisdiction of the Court of Justice of the European Union - so that all domestic legislation, even that which is derived from EU law, will be interpreted by UK courts
  • controlling immigration - the Government plans to restrict the numbers of EU nationals entering the UK
  • ensuring free trade with European markets - the Government wants to form “a new strategic partnership with the EU”, with the freest possible trade. It explicitly notes it will not be seeking membership of the Single Market, but wants an arrangement which allows both the EU and UK system to work together (although it may accept elements of the Single Market arrangements), and
  • seeking a mutually beneficial new customs agreement with the EU (but not remaining a member of the Customs Union).

The EU Council has published its draft guidelines for the Article 50 negotiations. These guidelines set out the overall positions and principles that the EU will pursue throughout the negotiations. They provide for a ‘phased approach giving priority to an orderly withdrawal’ with discussions on the ‘framework for the future relationship’ being part of the second phase of negotiations and a free trade agreement only being finalised and concluded once the UK is no longer a member state. The guidelines have to be adopted at a meeting of the European Council (EU 27) which is scheduled for 29 April 2017.

What areas of law will be affected?

As it is still not clear what the post-Brexit relationship with the EU will be, it is not possible to specifically state how UK law will be impacted. Set out below are examples of some areas of law that may be affected.

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Banking/financial services
  • Authorisations/passporting: for UK banks and other financial services firms operating internationally, or overseas banks/financial services firms operating through UK subsidiaries, probably the single most important aspect of the UK’s membership of the EU is access to the “single passport”. This enables firms providing financial services in one Member State to operate in other Member States without having to seek authorisation in each and every Member State in which they wish to operate. Many non-EU banks/firms use the UK as their gateway to Europe, thus enabling them to benefit from the four freedoms of movement which membership of the EU confers.

    Following the UK’s exit from the EU, UK firms will cease to benefit from the ability to provide services cross-border or establish branches under relevant passports, subject to the terms of any new treaty. New licenses are likely to be required and networks of branches in the EU are likely to need to be restructured.

    UCITS funds: Unless specifically provided in a new treaty, funds established as UCITS in the UK will no longer fall within the UCITS Directive. To the extent that those funds benefit from the UCITS passport and their managers wish to continue marketing the fund in the EU, then such funds would need to be migrated to an EU Member State. For so long as the fund remains in the UK, it is likely that the Financial Conduct Authority (FCA) would regard the fund for UK regulatory purposes as a type of non-UCITS retail fund, which would be categorised as an Alternative Investment Fund (AIF) under the Alternative Investment Fund Managers Directive (AIFMD). This means that, to the extent that the fund is marketed in the EU, then it would be subject to additional marketing restrictions and largely unavailable to retail investors - it would also need to comply with the different operational, reporting and transparency obligations that AIFMD brings with it.

    UCITS management companies established in the UK wishing to continue acting for non-UK UCITS would need to redomicile into an EU Member State or be replaced by EU entities.

    AIFMs: UK AIFMs will cease to be EU AIFMs. The UK would be able to impose a lighter post-Brexit regulatory regime on its asset managers. However, a UK AIFM wishing to market its funds to investors in the EU would be required to either (a) use local National Private Placement Regimes (NPPRs) where available (or rely on reverse solicitation) or (b) wait for the UK to be assessed and approved by ESMA and for the AIFMD passport to be extended to it (and to the third country in which any relevant non-EU AIF is established).

    Non-EU AIFMs who market AIFs to investors in the EU must still comply with certain transparency and reporting obligations (including "Annex IV" reporting to local regulators). Where access to the marketing passport is allowed and the non-EU AIFM elects to make use of it, however, the full provisions of the AIFMD will apply. As NPPRs may be phased out over time, the option of relying on NPPRs may, consequently, only be temporary.

    A non-EU AIFM making use of the marketing passport will need to select an EU Member State of reference to act, essentially, as its “home regulator” within Europe. A UK AIFM would in time, therefore, find itself subject to the same regime as before the UK’s departure from the EU, but with an EU Member State regulator, in addition to the FCA, to deal with.

    MiFID firms: negotiations around the terms of exit are likely to take until at least 2019 to finalise. In the meantime, MiFID2 and MiFIR will become effective in all EU Member States. Departure from the EU would allow the UK to determine whether it wished to (a) follow the rules which will be implemented across the remaining Member States, (b) create a regime of its own, or (c) do both, by allowing parallel regimes into which firms could opt. No longer being part of the EU will mean that UK firms undertaking MiFID-type business (UK MiFID firms) would no longer be able to make use of the MiFID licensing passport, under which a firm licensed in one Member State is able to provide its services cross-border throughout the EU without further local requirements being imposed. However, on the basis that ESMA may ultimately assess the UK’s regime as being equivalent to that of MiFID2/MiFIR, it would be open for UK MiFID firms, as third country firms, to take advantage of the third country access rules, once those rules are in force.

    The new third country regime would allow a UK MiFID firm to be able to register a branch within the EU, either with the EU national competent authority in the relevant Member State or centrally with ESMA (depending on the customer type with which the firm deals). The third country rules are not immediately effective when MiFID2 comes into force and UK MiFID firms would, therefore, risk facing a period of time during which they are neither MiFID firms, nor able to benefit from the third country licensing regime.

    Further, under the existing MiFID regime (and to continue under MiFID2/MiFIR), investment firms from one Member State are permitted access to regulated markets, central counterparties (CCPs) and clearing systems in other Member States. As with AIFMs and UCITS, a consequence of the UK no longer being a Member State is that (subject to the terms of any new treaty), such firms will no longer be able to take advantage of these provisions.

Intellectual property
  • Intellectual property law will be impacted as in the UK it is very largely integrated with EU law and transactions dealing with intellectual property are often affected by EU law, particularly competition law and the Technology Transfer Block Exemption.

    A short term effect of Brexit will be that anyone holding EU-wide rights will need to replace them with national rights. This will probably require the holders of those rights to pay additional fees as the administrative costs are likely to be substantial.

    In the longer term, IP rights-owners will need to deal with the UK (a major market) under a system where IP rights are free- standing and where the local law is likely to diverge over time from the law in the EU, as judgments from the EU courts will no longer bind the UK courts. This will reverse the movement to align IP law in Europe with a single market, in which manufacturers and other rights- holders have to deal with IP issues only once for the whole market.

    Even if the UK remains part of a single market with the EEA, manufacturers will have to accommodate a significant market where courts can decide that what can be sold is not the same as elsewhere in Europe. Of course, this is a problem that has existed in the recent past and will affect only a small number of companies, but it does (re) introduce a complication which manufacturers will need to take into account if their businesses involve selling the same products throughout Europe.

    Companies which manage EU-wide registrations from the UK may have to change their practice, as UK lawyers and patent and trade mark attorneys will no longer have the right to handle applications and other proceedings in the EU Intellectual Property Office. The European Patent Office will be unaffected, as it is not an EU institution.

Data protection
  • Like many areas, the impact on data protection compliance will depend on the nature of the continuing relationship with the EU. Unless alternative arrangements are put in place, the ability to transfer personal data to the UK post-Brexit will be affected, as it will place the UK in the same situation as other countries outside the EEA, such as the US. Given that the UK will undoubtedly keep the Data Protection Act in place, the solution for this is likely to be for the EU Commission to make a “finding of adequacy” in relation to the UK’s data protection regime which would allow the transfer of data from the EU to the UK to continue. However, such a finding is unlikely to be immediate and may not be made at all. Therefore, in the meantime, businesses will have to make transfers of personal data compliant by putting in place EU approved data transfer agreements to cover EU-UK transfers.

    Another area is to what extent the UK will implement the new EU General Data Protection Regulation (GDPR), which is due to be implemented in roughly the same two year period as the exit negotiations will take place. The UK has been one of the dissenting voices in respect of some of the more onerous aspects of the GDPR - in particular, the enhanced protections for individuals and greater compliance burden for companies. It is therefore possible that the UK will choose to remain with the current data protection regime, which would be comparatively more business-friendly when compared with the GDPR.

    The exit of the UK could well change the assessment of where the “main establishment” under the GDPR is for many companies. This concept is important as it is the data protection authority in the country of “main establishment” that will lead on any enforcement of breaches of the GDPR in the EU. There could well be many companies who would otherwise fall under the jurisdiction of the UK Information Commissioner who would instead fall under the jurisdiction of another (likely more strict) data protection authority.

    The departure of the UK from the EU could also, from a practical perspective, alter data processing activities and it may change things like the legal jurisdiction for processing of personal data (processing in the EU could not be based on a UK legal obligation for example). This may well require a reassessment of existing data protection compliance measures probably alongside a GDPR compliance programme.

    Finally, it is worth noting that the GDPR applies to businesses outside of the EU that target the selling of goods and services to individuals within the EU or that monitor individuals in the EU. Therefore, even though the GDPR might not otherwise be effective within UK law, many UK businesses would still be subject to its requirements.

Employment
  • As a result of Brexit, the UK Government may amend or repeal some EU-based employment legislation. However, wholesale repeal of legislation is unlikely, since much of it would be regarded as fair and reasonable by the main political parties and the public at large, and in view of the uncertainty and disruption it would cause.

    The likely contenders for some form of amendment include the Working Time Regulations and TUPE. The Agency Workers Regulations might be repealed. These amendments/repeals would require adjustments to policies and practices of UK companies. Many of the changes would bring a slightly greater degree of flexibility to workforce management, but few would have a significant impact.

    In addition, Theresa May said in her speech of 17 January 2017: “as we translate the body of European law into our domestic regulations, we will ensure that workers’ rights are fully protected and maintained”.

Dispute resolution
  • The UK’s status as an EU Member State means that it is included within a framework for:

    • deciding jurisdiction
    • in disputes, recognising judgments of other Member States (and having the judgments of its own courts recognised and enforced throughout the EU) service of proceedings, and
    • deciding the governing law of contracts and for tortious claims.

    When the UK leaves the EU, although the UK is unlikely to be able to remain part of that framework in its current form, there are a number of alternatives which should mean that UK courts and parties should not become isolated from the mutual recognition and common principles involved in disputes.

Competition
  • The effect of Brexit on UK competition law will depend on the precise nature of the arrangement between the UK and EU in negotiations. Whatever the outcome, additional costs, regulatory burdens and uncertainty are likely to result from the need for companies to comply with both EU competition law and a separate (and in due course, potentially divergent) UK competition law regime. Businesses operating in the UK and the EU will need to be aware of the risk of parallel cartel investigations (and fines), parallel merger control notifications in some circumstances, and the importance of antitrust compliance in general.

Tax
  • The tax impact of Brexit will depend on a number of factors, including the nature of the UK’s future relationship with the EU. In the short term, some EU laws which directly impact taxation in the UK may cease to apply, including, for example, those giving effect to the customs union and provisions of the Capital Duties Directive (albeit that the Prime Minister has indicated that, on exit, a Great Repeal Bill will be enacted to preserve and carry over into UK law the full body of EU law not already implemented in national law). However, in the longer term, the UK will not be bound by EU Directives which have been implemented into domestic law and will, in principle, have greater freedom to legislate in those areas free from the constraints of EU laws.

    In addition, the application of the EU fundamental freedoms and other EU legal principles will, in principle, have less impact on UK tax rules, again providing greater freedom to a future UK government to legislate in those areas.

    However, the impact of Brexit may well be minimised by the economic and political reality of the need to adhere to business friendly EU Directives, to raise revenue through taxes such as VAT and to fill the vacuum in customs duty legislation, for example. Indeed, the UK may choose to remain aligned to certain areas of EU law, particularly where Brexit might negatively impact the business interests. However, there may still be increased administrative costs for UK businesses in complying with different systems of taxation.

    More generally, not being in the EU will remove the UK’s powers to influence EU level tax matters such as its ability to oppose/influence the enhanced co-operation procedure financial transaction tax (FTT) proposal, which could be adverse to UK businesses that could suffer EU FTT.

    Of course, following Brexit, the UK will no longer be a Member State for the purposes of a number of tax-related EU Directives, such as the Parent and Subsidiary and the Interest and Royalties Directives. This may result in the imposition of withholding taxes on payments between EU group members and UK group members.

    Nevertheless, Brexit will have no impact on the UK’s extensive double tax treaty network, which is not based on EU membership. The UK will, therefore, still benefit from and be bound by the double tax treaties already in force.

Contractual wording
  • Contracts will need to be reviewed for issues such as:

    Interpretation: references in contracts to the EU and EU legislation may cease to work as intended. However, given there is now a transitional period until Brexit becomes effective, contracts entered into in this period should be capable of being drafted so as to ensure this will not be an issue in practice. Older contracts can be reviewed and, if necessary, amended.

    Termination: parties may use Brexit as a reason to try and terminate an existing contract. The right to terminate will be dictated by the actual terms of the contract but the parties may try to use clauses, such as force majeure or material adverse change, which might not otherwise have been available.

    Jurisdiction: the UK is currently a signatory to an EU Regulation which provides a means of determining which courts of the EU Member States will have jurisdiction over a claim. Member States’ courts must apply those rules, rather than exercise any general discretion as to whether they have jurisdiction. This provides certainty as to where proceedings will be heard and ensures that agreements as to jurisdiction generally have primacy over all other considerations. Unless some form of parallel arrangement remains post-Brexit, the risk of jurisdiction clauses in favour of the UK’s courts being undermined by proceedings commenced in other EU Member States will be greatly increased.

    Governing law: Brexit may mean little change in respect of laws governing commercial contracts, as most contain express governing law clauses which override other considerations.

M&A
  • Brexit is unlikely to have a major impact on share sale transactions unless they are affected by competition regulation, as they are typically not subject to much EU law or regulation. Asset and business sales including employees are likely to be affected if the regulations which protect the rights of employees on a business transfer are affected.

    Sale and purchase agreements will, however, have to be reviewed to ensure any references to the EU and EU legislation still work and that clauses such as termination, governing law and jurisdiction are not affected, as described above.

    Any proposed acquisition of a UK public company is governed by the rules of the UK Takeover Code. Although this Code implemented the EU Takeovers Directive, the Code contains a large number of UK-specific rules and we therefore expect them to continue substantially in the same format, but with some amendments to reflect the UK’s exit from the EU.

Capital markets
  • Brexit’s impact on offers of equity and debt securities by both UK and non-UK issuers in the UK, and by UK issuers to European investors, will largely depend on the terms of the exit - in particular the extent to which the UK retains the current listing and prospectus regimes and they remain consistent with EU regulation, whether regulators continue to allow mutual recognition of EU and UK prospectuses, and if not, whether the third country equivalence provisions will allow a UK-approved prospectus to be used to offer securities in the EU.

    We think it is likely that the UK Government and the UK regulator (the Financial Conduct Authority) will, at least initially, decide to retain the current regimes so that they continue to be harmonised with those in the EU. If the UK retains the current regimes, it may not be required to follow future EU amendments, with the result that the rules could diverge at a future date.

Environment
  • The EU is the driver for much of the UK’s environmental policy. The consequences of Brexit depend on how the UK defines its relationship with the EU after its departure. Rather than sweeping changes to all environmental EU-derived legislation, it is more likely that the scope of changes will be relatively limited in order that European markets for regulated products and services remain open. However there is stronger potential for divergence in areas where the UK has previously opposed stricter European controls, such as renewable energy, or where it has fallen behind EU targets, such as air pollution, or where it currently acts under a European umbrella, such as emissions reductions.

More information

You can find more information on these and other issues on our Brexit microsite here.

We will issue regular updates as more information becomes available and you can sign up to receive those updates by registering on elexica.com here.

We have also created a series of guides which provide a summary of the key issues and procedures involved in setting up in other key EU jurisdictions: Germany, Ireland, Italy, Luxembourg and the Netherlands which are available here.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.