Brexit: 7 Key Considerations for Corporate Transactions
The decision taken by the UK electorate to leave the European Union on 23 June 2016 will change the political landscape of the UK forever – companies should not assume that it will be business as usual after the vote. Although the legal and political position following the vote decision is far from certain, we summarise below the key aspects that may be influenced by the vote in relation to ongoing or forthcoming corporate transactions, and – most importantly – what actions can be taken in order to mitigate against any harmful repercussions
1. Finance and funding
The UK’s decision to leave the EU is not expected to have an immediate effect on the availability or drawdown of funds, however this should be confirmed with the banks and other lenders involved in the relevant transaction prior to exchange or completion. From a finance point of view, it is vital that the funds required for completion are available on completion, and that there are no tricky conditions which may allow the bank or other lender to evade providing the required funds.
Interest rate volatility is another factor to consider. Whilst the direct outcome of the vote on interest rates is not yet clear (and it looks as though this uncertainty will remain for the foreseeable future), companies should look at the possible scenarios (a rise or fall in interest rates) and ensure that any financial commitments they enter into with banks or other lenders can still be adhered to in the worst case scenario.
Although present in a variety of property transactions prior to the vote, specific clauses allowing a party to pull out of a deal due to Brexit have been far less common in the corporate sphere. Contracts should be checked, however, to ensure that any termination clauses in existing key contracts are not likely to be triggered by the vote – this is very unlikely if those contracts do not specifically mention Brexit.
Parties should think very carefully about how the vote outcome will impact their current and future contractual relationships and devise a plan of action to ensure any repercussions are minimal. It is important to bear in mind that this impact should be assessed both now (with the outcome of the vote known) and at the point where the government ‘plan of action’ to the result is announced. Of course, the uncertainty makes this task a challenging one; however it is a good idea for parties who are presently debating the terms for new contracts to consider adding flexibility to provide the option of modifying relevant terms of the contract in the future, once the UK formally leaves the EU. Additionally, a ‘Brexit’ termination right may be required if parties are concerned about particular Brexit-related eventualities happening in the future.
3. Due diligence
Due diligence undertaken on any company should be handled in contemplation of the impending removal of the UK from the EU legal landscape. This is particularly relevant to the areas of employment (i.e. more focus will be required on employees from the EU who may need visas once the UK formally exits the EU), data protection, and intellectual property (i.e. is should be ensured that any EU trade marks will adequately be protected in the UK once the UK leaves the EU).
4. Completion accounts
Fluctuations in the currency markets, as witnessed since the vote result was announced, may have an impact on the cash, debt and working capital references in completion accounts mechanisms – this is especially likely if currencies other than sterling are involved in the transaction. Figures should therefore be recalculated, if necessary, prior to completion of the transaction in order to moderate the risk of there being a significant post-completion adjustment. Additionally, earn-out provisions may need to be reviewed in light of the above.
5. Limitation on liability
Thresholds referred to in any limitation on liability clauses – such as de minimis thresholds (which allow a party to escape a potential warranty claim if the value of that claim is below a certain amount) and caps (which allow a party to place a cap on the maximum amount payable for any potential warranty claim) may need to be reconsidered in light of the currency fluctuations.
6. Transaction timing
It is envisaged that UK transactions may be more protracted from start to finish (due to a lengthier due diligence process and possible complications in raising finance), and this should be planned for in the deal process.
With the UK having a corporation tax rate of 17% from 2020, the tax scheme in the UK is very favorable to companies – this makes the UK a competitive jurisdiction to base any newly-incorporated company. In addition, the UK has an extensive double tax treaty system to mitigate the effect of withholding taxes on cross-border outgoings. The potential costs of relocating a UK business out of the UK – which may well involve corporation tax exit fees – should be considered prior to making this decision.