The United Kingdom is set to leave the EU in March 2019. Although the terms and the consequences of Brexit for companies remain uncertain at this point in time, it is certain many companies will be affected. For transactions which are to be signed between today and March 2019, a number of specific legal points for an M&A practitioner should be considered.
Legal due diligence
When performing a legal due diligence, Brexit means additional issues must be considered in relation to agreements. In general, all contracts that will continue post March 2019 and that have a connection with the United Kingdom will need be assessed because, as a result of Brexit, the balance of responsibilities may alter.
All references in agreements to the EU territory, EU laws, or UK laws based on EU law, may become redundant or inapplicable after Brexit. More in particular, the following contractual clauses will need to be evaluated:
- Territorial scope and definitions: assess the impact on the territorial scope of the agreement, as well as the various definitions used throughout the agreement referring to the EU and/or the EU territory (e.g. non-compete, non-solicitation clauses and territory definitions in licenses and distribution agreements);
- (Amended) regulatory regime: assess which party is responsible for achieving compliance with possible new regulatory requirements, and assess the impact of a new regulatory regime for businesses in, from or involving the United Kingdom (consider also EU passporting);
- (Increased) trade barriers: assess the commercial impact of increased trade barriers between the United Kingdom and the EU (including the business strategy and/or deal rationale);
- Intellectual property: asses the enforceability (in the United Kingdom) of intellectual property rights based on EU law. Further, assess EU trademark or EU design rights and make sure that these rights will be recognized in the United Kingdom post-Brexit. Finally, all license agreements a company holds will need to be reviewed in order to assess their territorial scope and how that may be affected by Brexit;
- Term and termination: assess whether the mere event of Brexit provides for a contractual ground to terminate the agreement. Further, assess whether the (direct or indirect) consequences of Brexit provide for a contractual ground to terminate the agreement (including a hardship clause, material adverse change clause and financial covenants); and
- Applicable law and competent court: assess the impact of contracts which are governed by UK law and/or are subject to UK courts or arbitration.
Within the framework of the drafting and negotiation of the transaction documents, a number of commonly used clauses require careful consideration:
- Non-compete and non-solicitation clauses: non-compete and non-solicitation clauses typically referring to the EU territory will need to be drafted explicitly including the UK territory (assuming this is the intention);
- Material Adverse Change (MAC) clause: parties could consider to make completion of the transaction subject to the outcome of the Brexit negotiations and/or the new applicable legal framework post-Brexit;
- Trade barriers and taxes: any taxes and/or duties that the United Kingdom or EU Member States may introduce after Brexit will need to be taken into account and will need to be allocated to one of the contract parties (consider how any INCO terms should be reinterpreted); and
- Governing law and competent court: where presently UK law and UK courts are seen as a neutral forum for settling disputes, such choice might become inappropriate if the business undertaken is materially based on EU law and/or takes place in EU territory. Also, post-Brexit, the ability to enforce a UK court ruling in the EU and vice-versa, may become problematic, which might suggest a change in the forum is appropriate.
M&A opportunities and corporate restructuring
Finally, from a strategic and/or operational point of view, it could make sense to use M&A as a means of securing an operational presence in the EU to preserve access to European markets and/or secure talent in the future. Inevitably, Brexit will require all international groups of companies dealing with, or doing business in, the United Kingdom to revise the corporate group structure.