Significant Impact post Brexit

Seat v Incorporation – UK companies operating in the EU

The laws of different member states follow two varying approaches to determining a company’s domicile:

• the “incorporation regime”, which applies in the UK, where companies are regarded as subject to the company law of the jurisdiction in which they were incorporated, irrespective of where the company’s business is conducted; and
• the “seat regime”, which applies in states such as Germany and Austria, where companies are bound by the legal regime of the jurisdiction from which they are actually directed (their “seat”).

Currently, freedom of establishment applies to EU companies irrespective of the regime applied in their country of incorporation or the location of their seat.  However, following Brexit, UK companies will become “third country companies” for the purposes of EU law, meaning that they can only establish themselves within the framework of the national regime of each member state. 

Under EU law, third country companies:

• may be subject to access conditions;
• do not enjoy the protections provided by the EU legislation, exposing them to additional obligations and, theoretically at least, discriminatory treatment; and
• may expose their shareholders to unlimited liability where they develop their activities in a “seat” jurisdiction host state and fail to “requalify”. In these circumstances shareholders may become personally liable for all liabilities of the company.

The likelihood of the above measures being applied to UK companies post-Brexit varies between member states. However, the possible repercussions, in particular in cases where limited liability is not recognised, are sufficiently extreme that all UK companies and limited liability partnerships with their central administration or principal place of business in an EU member state should urgently seek advice to whether they need to take steps to restructure prior to Brexit.

Potential Significant Impact post Brexit

Termination, force majeure and frustration

Parties may wish to consider whether to make specific provision for Brexit when drafting corporate transaction documents and commercial agreements. Such provisions may include:

• Termination - If Brexit is likely to significantly impact on a transaction’s subject matter, the parties may consider including express suspension, termination or renegotiation rights in relevant contracts, to be triggered by the anticipated post-Brexit changes.
• Force majeure - The definition of force majeure could also be drafted to encompass certain Brexit-related events relevant to the subject matter of the contract. Alternatively, if a party is looking to ensure that a transaction is not effected by Brexit, and to prevent the other party from seeking to claim Brexit as grounds for any change in position, an express statement could be included to confirm that the force and effect of the contract (or select clauses of the contract) shall not be prejudiced or diminished by the UK leaving the EU.

The recent case of Canary Wharf v European Medicines Agency saw the contention that Brexit had frustrated a high value commercial lease dismissed by the High Court. It seems likely that this case will be followed in the event of any similar claims in the future and demonstrates that the courts continue to set a high bar in relation to the frustration of contracts. 

For further information on the potential impact of Brexit on commercial contracts, please refer to Brexit: Implications for Commercial Contracts.

Jurisdiction and dispute resolution

Brexit could introduce complications to any disputes arising between parties where one remains in the EU and the other does not. Currently, the UK is subject to the Brussels Regime’s rules on determining jurisdiction for disputes which bridge more than one country from the EU Member States and/or the European Free Trade Association states (Iceland, Liechtenstein, Norway and Switzerland), but the Brussels Regime will cease to apply to the UK once it leaves the EU.

The UK’s accession to the Hague Convention on Choice of Court Agreements will come into effect on 1 April 2019 and will give force to exclusive jurisdiction agreements entered into from that date onwards.

For more information on this topic and what steps may be taken in relation to current disputes or upcoming contracts please refer to Brexit: Implications for Commercial Contracts.

Lower Impact post Brexit

Cross-border mergers

From exit day mergers involving UK entities will not benefit from the EU cross-border mergers regime, since this only applies to companies which are governed by the laws of EU member states.

EU companies’ ability to use English schemes of arrangement for re-organisations may also be impacted, although the extent of this impact remains unclear. Certain member states, including the Netherlands, are currently promoting rival procedures in efforts to secure this work.

Seat v Incorporation – EU Companies operating in the UK

No issues should arise post-Brexit for EU companies operating in the UK as a result of their originating in seat jurisdictions. As an incorporation regime jurisdiction, the UK will continue to respect these companies’ adherence to the regimes of their state of incorporation.

Filing requirements

EU Companies with branches in the UK will become subject to the same filing requirements as any other third country’s companies. For example, an EU company, with a UK branch, that is required to prepare, have audited and disclose accounts in its home country will be required post-Brexit to file documentation in the UK which includes its accounts, any annual report and/or auditor’s report.

Certain Companies House forms will also be updated as a result of Brexit. Those currently envisaged as being impacted in this way are the forms IN01, LLIN01, AP02, LLAP02, AP04, CH02, LLCH02 and CH04.

UK owners/managers

UK citizens may face restrictions on their ability to be an owner/senior manager/director of EU Companies. Any restrictions will be member state-specific.

Societas Europaea

Societas Europaea will cease to be a valid form of UK-incorporated entity. Pre-existing Societas Europaea will have the option to convert to a UK public company subject to their having:

• been registered as Societas Europaea for at least 2 years; or
• had two sets of annual accounts approved.