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How Brexit will affect private M&A

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United Kingdom

Brexit is having immediate implications for many UK businesses, particularly those with an international footprint. Here, we highlight areas that prospective acquirers of UK-headquartered businesses should consider as part of their due diligence.

 

The status of branches and subsidiaries in EU Member States

Before Brexit, a UK-incorporated company was automatically recognised by all EU Member States, irrespective of the location or residence of the company’s management.

Similarly, national rules requiring the appointment of representatives for foreign branches could be complied with by appointing UK residents as managers for European branches.

Since UK companies now receive "third country" treatment in EU Member States, some may no longer recognise, or may call into question, the status of UK companies, especially where these are regarded as being centrally managed from an EU Member State.

This could have potentially grave consequences for the UK company (such as the loss of legal status as a company and the loss of the members’ limited liability under the private international law rules of some EU Member States).

It is therefore important to review the status of the UK target company and any UK-incorporated subsidiaries (especially those with major operations abroad) from this perspective.

Likewise, the status of European branches of UK companies should be reviewed to ensure they comply with applicable local laws following Brexit.
 
Tax treatment of permanent establishments

EU rules against discrimination mean that certain tax benefits and reliefs cannot be denied by a Member State to a permanent establishment of a company incorporated in another Member State, if such benefits and reliefs would be available to a local resident.

Favourable tax treatment that a branch of the UK target may have enjoyed before Brexit may not be guidance for future treatment.

Tax status of any permanent establishments that the UK target may have in the EU will need to be reviewed and analysed as part of due diligence.
 
Trade arrangements

Trading arrangements between the UK target and its counterparts in Europe and the rest of the world will need to be reviewed by specialists to assess the likely impact of post-Brexit trade barriers, such as higher import tariffs, customs declarations and checks and the need to meet different regulatory standards in the UK and the EU.

Import or export of certain goods may now require special licences (e.g. waste, certain hazardous chemicals, GMOs) or additional formalities (e.g. alcohol, tobacco, or fuel).

The buyer should, as part of its due diligence, look at specific rules of origin that will apply to the UK target's goods following Brexit.

More information on how Brexit is likely to affect the import of goods can be found in Fieldfisher's Supply Chains Checklist.

VAT rules and procedures for transactions between the UK and the EU are also changing and should be reviewed by tax specialists.
 
Jurisdiction and governing law clauses in material contracts

Special attention should be paid to jurisdiction and governing law clauses in existing contracts that are material to the UK target's business.

Since the Recast Brussels Regulation ceased to apply in the UK at the end of the Brexit transition period, there has been less certainty around enforceability of judgments in future disputes between UK and EU counterparties.

Key contracts of the UK target should be reviewed to understand who the parties are, where their assets are located and how likely it is that a dispute will arise in the future.

This area of law is developing rapidly (see further information about the impact of Brexit on cross-border litigation).
 
Merger control regime

As the UK is no longer part of the EU "one stop shop" competition regime provided by the EU Merger Regulation, the Competition and Markets Authority (CMA) has the power to review a merger with a Community dimension and its effects within the UK, even where the transaction is also being reviewed by the European Commission.

Although the UK merger control regime is voluntary (and therefore there is no obligation to notify a merger), buyer's are advised to assess whether the proposed transaction is likely to raise competition concerns in the UK and engage in pre-notification discussions with the CMA at an early stage.
 
New FDI regime

In addition to the merger control regime, the new National Security and Investment Bill (NSI Bill) is set to provide the UK government with the power to screen M&A transactions involving companies operating in sensitive sectors of the economy.

The government already has certain powers to intervene in mergers and acquisitions on the grounds of national security, which are set out in the Enterprise Act 2002, but the powers provided by the new FDI regime will be much broader in scope.

Due diligence should establish whether the UK target operates in a sector in which the government considers national security risks are most likely to arise and whether an authorisation or a voluntary notification process needs to be followed.

In addition, UK-based acquirers of companies with subsidiaries in the EU may now be subject to national FDI restrictions, which did not apply before the end of the transition period due to EU law.
 
Data protection

On 31 December 2020, EU data protection law ceased to apply in the UK. The European Union (Withdrawal) Act 2018 converted EU data protection law (as it applied at the end of the transition period) into UK law.

Although the EU and the UK data protection regimes are currently very similar, changes may be coming as these develop.

As the EU GDPR will continue to have extra-territorial scope, a UK target may still be caught by its provisions, for example if it has branches in, or is selling goods or services into, the EU.

As the "one stop shop" regime available under the EU GDPR will no longer apply in the UK, if a UK target is subject to a data breach, it may face action by supervisory authorities in all jurisdictions in which data subjects have been affected.

It is therefore important to establish through due diligence what data protection law applies to the target and its group and whether there have been any breaches.

For more insights on data protection following Brexit, see: EU-UK data flows, adequacy and regulatory changes from 1 January 2021.
 
Intellectual property rights

IP rights most affected by Brexit include EU trade marks (EUTMs), registered Community designs (RCDs) and unregistered Community designs (UCDs).

From 1 January 2021, EUTMs and CDRs stopped applying in the UK. Instead, they were converted to comparable UK rights.

UCDs will be protected as UK continuing unregistered designs. On the same date, the rules for importing IPR-protected goods from the EEA to the UK (the "exhaustion regime") changed.

IP specialists should review the target's IP portfolio, bearing in mind these and other important changes. Fieldfisher guidance on Brexit and intellectual property can be found here: Impact of Brexit on intellectual property.
 
Other important areas for due diligence

Other areas where due diligence may become particularly relevant include passporting, licencing and regulation, immigration status of EU and non-EU workers and application of TUPE provisions.

Apart from due diligence, Brexit will have wider consequences for private M&A affecting most aspects of an M&A transaction, including structuring, timing and drafting.

Choice of law and jurisdiction should be one of the key considerations for buyers and sellers alike following Brexit.

Parties should carefully consider the dispute resolution mechanism that they wish to rely on and any potential issues with enforcement.

As UK law diverges from EU law, it will no doubt create new complexities as well as opportunities for potential investors.   

This article was authored by Natalia Schuster, corporate director at Fieldfisher.

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