Brexit: Corporate

Whilst the Companies Act 2006 and the raft of secondary legislation made under it have been heavily influenced by various European Directives (notably the Company Law Directives and Accounting Directives and the Shareholder Rights Directive), Brexit will have little immediate impact on company law. There may be some attempt post-Brexit to remove any unnecessary burdens on business which were previously derived from European Directives. However, given the history of the Companies Acts in the UK, and the extensive consultation process which gave rise to the Companies Act 2006 itself, the key features of company law, including the types of companies which can be incorporated, the role of Companies House as Registrar, directors’ duties and shareholder remedies, and the rules on accounts and audit are expected to remain generally the same.

UK companies with subsidiaries incorporated in the rest of the EU or companies in the EU with subsidiaries in the UK may experience new challenges running their groups cross-border over time, should the EU and UK company law frameworks diverge. Groups may therefore wish to review their current corporate structure and consider the importance of and reliance on companies incorporated in the UK and the rest of the EU and also the use of branches and representative offices.

UK incorporated companies which have their centre of operations in another EU Member State may wish to take legal advice in that Member State as to whether Brexit may impact on which law applies when determining their legal status and the protections that flow from it.

The registration of a UK establishment by European companies should not be affected because the rules relating to UK establishments currently apply equally to companies in and outside the EU. UK companies with subsidiaries, establishments or branches in other EU Member States should also not expect any immediate change in company law terms. The key to the impact of Brexit for both UK companies with establishments in the EU and EU companies with establishments in the UK is not company law but the regulatory and trade framework for the type of business that they conduct ie whether or not the ability of that entity to provide goods or services within the EU or the UK is affected by Brexit (see for example the Financial Services section above).

The methods of re-domiciling from the UK to another EU jurisdiction and vice versa may be more limited following Brexit because, in particular, the EU Cross-Border Merger Regulation only applies to mergers between EU incorporated entities. In addition, it is not clear what the status of a ‘Societas Europaea’ (‘SE’) which has a registered office in the UK will be following Brexit; for example whether there will be a provision to automatically convert those into UK PLCs. Those SEs with registered offices elsewhere in the EU will no longer be able to move their registered office to the UK and those operating partly in the UK may be required to register a branch or establishment in the UK (they are currently exempt from registration).

Companies will need to consider the impact of Brexit (good or bad) on their business, including any specific potential impact on their business model and strategy and also its more general impact via changes in exchange rates and to the economy. For companies that have publicly traded securities, one consideration will be whether that impact creates an inside information announcement obligation. In most cases, Brexit related matters will not be inside information because the information about Brexit itself will be in the public domain. However, particularly as regards a change in financial performance or prospects which is not in line with market expectation, companies will need to assess in the usual way whether they have inside information and their announcement requirements, in consultation with their legal advisers and brokers. In relation to periodic financial reporting, on 12 July 2016 the Financial Reporting Council (‘FRC’) issued guidance on disclosures in the light of the Brexit vote and in December 2016 the FRC confirmed that it will be monitoring Brexit disclosures when it reviews annual reports published in 2017. Brexit risk factors will also need to be included in prospectuses and information memoranda for new issues and for borrowings.

This post comes to us from Herbert Smith Freehills LLP and is based on a Legal Briefing that can be found here.