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Brexit briefing – three months on what does Brexit mean for companies?
The Brexit transition period ended on 31 December 2020 (Completion Day) and the UK began its new relationship with the European Union (EU) pursuant to the Withdrawal Agreement, the Trade and Cooperation Agreement (TCA) and the various associated agreements and declarations. The repeal of the European Communities Act 1972 (ECA) took effect meaning EU law no longer directly applied to the UK and the UK is now a third country, which from the EU perspective means any country not in the EU (Third Country). The Withdrawal Agreement and lots of Brexit Statutory Instruments (Brexit SIs) were put in place so that directly applicable EU law automatically transferred into UK law and to preserve and clarify existing UK law that refers to EU law.
What has been the impact on company law in the UK? Brexit has had little immediate impact, as 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 generally the same. However, there are some important changes in relation to establishment, filings for the company, mergers and acquisitions, and audits and financial reporting, which companies will need to consider.
EU Directive 2017/1132, sets out the requirements on limited liability companies within member states relating to incorporation, capital maintenance and alterations, and what needs to be on the company registers, no longer applies, however this does not impact UK companies as the requirements are set out within UK company law in any event under the Companies Act 2006 (CA).
Freedom of Establishment
Article 49 of the Treaty on the Functioning of the European Union (TFEU) protects the “freedom of establishment”, which gives individuals, firms and companies the right to carry out economic activities in other EU member states in a stable and continuous way, and Article 54 TFEU prohibits restrictions on that right. However, the TFEU ceased to apply to the UK on the Completion Day and as such, UK companies and individuals can no longer benefit from the right to freedom of establishment, and treatment of UK incorporated companies in an EU member of state depends on the private international law of that individual member state and international treaties.
Consequently, there may be implications for UK incorporated companies with its central administration or principal place of business in an EU member state, depending on which member state it is in. There is a risk UK incorporated companies may not be recognised by an EU member state as a separate legal personality, meaning that the company’s shareholders may be personally liable for the debts of the company. UK incorporated companies should review its status in accordance with the national law of the relevant member state and consider whether it is necessary to set up a local entity.
It is no longer possible to set up Societas Europaea (SEs) in the UK, and UK companies are no longer able to participate in the formation of a SE. Nevertheless, SEs with a registered office in a member state and not in the UK will preserve its legal status even if it was formed by a UK company before the withdrawal date, and SEs registered in the UK were automatically converted into United Kingdom Societies.
In addition, any European Economic Interest Groups (EEIGs) registered in the UK before the transition period ended were converted into a UK Economic Interest Grouping, and European Cooperative Societies (SCEs) set up in the UK were automatically converted to a UK corporate entities.
Filing and Disclosure
Information in the Companies House public register is no longer exchanged on the European Business Registers Interconnection System (BRIS) and E-Justice portal.
UK Companies with a corporate officer and/or branches in an European Economic Area (EEA) member state are now subject to the rules applicable to Third Countries, which will require UK companies to supply extra information and make additional filings, such as in relation to company accounts, if EEA exemptions no longer apply. UK companies must also provide additional information to Companies House about the legal form and governing law of the EEA corporate officer.
EEA registered companies with a registered UK establishment/branch must have provided additional information to Companies House by the end of March 2021, and will no longer benefit from exemptions, such as in relation to the filing of their accounts. These companies will also need to include additional trading disclosures on public facing documents, such as on their websites or letterheads.
Cross border mergers and Acquisitions
The Cross Border Merger Regime Directive 2005/56/EC and the associated implementing UK Regulations, which allowed mergers of EEA companies typically used in corporate group re-organisations, have now been revoked and it is no longer possible for UK companies to take advantage of the process for effecting mergers with European companies. Instead, the individual member states national rules for mergers with third country companies apply instead. Any UK companies who are considering corporate reorganisations of this kind now need to use contractual arrangements to transfer assets and liabilities.
There will also be tax implications for UK companies on transactions in relation to the reorganisation of companies if it involves a company from a EEA member state, as since the UK now has Third Country status, UK companies can no longer take advantage of the Mergers Directive (Council Directive 2009/133/EC), which, broadly, removed the taxation of income, profits and capital gains that would otherwise be triggered by such a transaction.
Audit and Financial Reporting
Generally, the accounting framework remains same however there has been some changes which affect UK companies. For example, UK companies which use EU International Accounting Standards (IAS) now need to use UK adopted IAS. If a UK company has an EEA parent company, it will no longer be exempt from certain reporting obligations, such as filing individual and group accounts and it may need to provide additional information in those accounts. UK companies with an EEA subsidiary, an EEA branch, and/or an EEA listing may also lose accounting exemptions and the companies would need to check the member state equivalency rules.
It is unlikely that the Companies Act will be subject to review anytime soon, although in the longer term, Brexit is likely to lead to less regulation on UK companies.
UK companies should obtain legal advice as to the implications of Brexit following the Completion Day, and businesses may also wish to consider the impact of the new UK/EU trade agreement on their business, as there is different treatment for trade in goods and services and between different industry sectors under the trade agreement, therefore companies will need to consider how the trade agreement alleviates the impact of the loss of EU freedom of movement rights.
Here to help
Our Corporate and Commercial Lawyers are well versed in advising on the implications of Brexit and how it might affect your company. They will be more than happy to guide you through the process, taking into account your business needs and priorities.
Timing, opportunity and commercial acumen are necessary parts of all commercial transactions. You want lawyers who understand your commercial objectives and work hard to achieve them for you.
Lawyers who look after your interests are essential in all transactions. We employ great corporate lawyers with experience and expertise to help you.
We listen and we get to the heart of the matter to achieve the best outcomes for you.
Legal Directory LEGAL 500 (2021 Edition) has this to say about our Corporate and Commercial Team
Practice head Susan Clark and the department regularly handle M&A, reorganisations and private equity buyouts for owner-managed businesses across the IT, manufacturing, agriculture, retail and real estate sectors.