The UK will hold a referendum on its EU membership in 2017. In-house counsel need to plan now for both outcomes as a matter of urgent risk management, argues Lucy Trevelyan.
In the build up to the UK’s vote on its future in Europe in 2017 a great deal of uncertainty has developed. It is hard to plan for an unknown future, and a lack of clear strategy in the event of an exit exacerbates the feeling that the UK leaving the EU would be bad for business.
‘A British exit would be a bad thing for everybody involved,’ declares Stephan Swinkels, Executive Director of L&E Global. ‘There will be a lot of insecurity and the focus from European countries towards Britain will change. There will be unprecedented consequences: every law, treaty, Act must be renegotiated.’
The alternative relationships the UK would need to foster with the EU to continue trading effectively in the region following an exit are far from ideal. ‘Whatever deal found after Brexit would not be as good,’ says Monckton Chambers barrister and former legal adviser to the European Commission, Peter Oliver.
Given the strong economic links between the UK and the rest of Europe, it is self-evident that a UK outside the EU would want robust trading arrangements with EU member states. ‘Whether that involves the European Economic Area (EEA)/European Free Trade Association (EFTA) structures or alternative bilateral arrangements is unclear’, says Hogan Lovells partner, Charles Brasted, ‘and the detail of those arrangements could vary enormously.’
Although it is, of course, possible for the UK have no agreement with the EU at all following an exit, it would be almost imaginable given the inextricable links between the two. Yet most of the alternative options involve the UK being on the outside looking in and still having to abide by a range of obligations that opponents of the EU find so unpalatable.
‘While EEA/EFTA are often cited as obvious models if the UK exits, it is not so obvious that those models would meet the objectives of exit’, says Brasted, ‘as the UK would remain subject to significant parts of EU regulation and be liable to make significant budget contributions to the EU, while forgoing a say in the rules to which it is subject. It is also not clear that other EEA/EFTA members would welcome the UK, given its size and political positioning.’
For Christopher Muttukumaru, a barrister at Monckton Chambers, there are too many disadvantages to EEA membership for it to be an option which protects UK interests. ‘It’s a nightmare because if you want access to the EU internal market you would have to simply apply everything that comes out of Brussels without having had the opportunity to argue against it or to modify it. That is a fundamental flaw.’
‘Freedom of movement of goods, services, capital and establishment are the key selling points of EU membership and it is highly likely that the UK outside the EU would be subject to additional red tape for cross-border trade’
Charles Brasted, Hogan Lovells
The UK would not have to contribute to the EU budget if it cut all ties with the EU, says Ross Denton, partner in Baker & McKenzie’s European Community, Competition & Trade Department, but UK exports to the EU would be subject to EU import tariffs. ‘The World Trade Organisation (WTO) rules would apply to the UK's right to trade with the EU in respect of both goods and services.’
Other options include a free trade agreement between the UK and EU or a customs union, similar to the current arrangement between the EU and Turkey. The latter would remove tariff barriers on goods and certain agricultural products, but would not cover services. ‘The UK could export goods to the EU without having to comply with customs restrictions or tariffs’, says Denton. ‘The UK would not have to contribute to the EU budget but would have to comply with parts of EU trade policy and would not be able to influence EU legislation. It would not be able to provide professional services on equal terms with EU members.’
Alternatively, the UK and EU could adopt a bilateral agreement, similar to the current Swiss/EU bilateral accord. ‘This would involve the negotiation of individual sector-by-sector agreements with the EU and free trade agreements with EFTA countries’, says Denton. ‘Bearing in mind that Switzerland has around 130 separate bilateral agreements with the EU, this would be mammoth task. Under this model, the UK would not be automatically entitled to the fully access the internal market.’
Limited time to negotiate
The time constraints following a vote in favour of leaving the EU would cause major problems. Under Article 50 of the Treaty of the European Union, the UK would have two years from the time it announces its planned EU exit to negotiate agreement with the EU and other member states. This is an incredibly short period of time and although the deadline can be extended, this can only be done with agreement from all the member states and there is no guarantee that this will be forthcoming.
‘They may extend it by a year or two because it is in their interest to do so, but even a four-year period is not going to be enough’, says Oliver. ‘There are so many areas and it’s so technical. The longer the transitional period lasts the greater the uncertainty, which would create problems in itself for business.’
Indeed, says Swinkels, just the prospect of the referendum could already be hurting the British economy. ‘Dutch bank ING has recently published a report and it says there is a negative financial impact for the UK already because if anyone doesn’t like uncertainty it is big international companies.’
The UK will be more free to trade with other non-EU countries, but although it can make its own agreements with these countries, it will be extremely difficult to do so in the short time available. The UK will also not have the same clout in negotiating with these countries as the EU has. ‘The civil service simply doesn’t have the staff to negotiate treaties with say 90 countries at the same time’, says Oliver. ‘It would have to be done very quickly and trade with those countries is bound to be affected. There would be total disarray.’
It is likely therefore that the UK would become isolated in the event of exiting the EU. ‘If you’re talking about a new trade agreement, for example, you add up the power of 27 countries on the one hand and the UK on the other, you can see with whom world leaders will be at the table’ says Swinkels. ‘The same applies to big international companies. The UK should not overstate its position. I’m not sure it is strong enough to pull this whole thing together. Also, if the UK pulls out there will be some bad blood among some of the member states. If you feel you can’t trust someone anymore that has implications on a country.’
Swinkels also believes that an UK exit could also trigger a fresh referendum in Scotland. ‘If the UK pulls out it will be a no-brainer to hold another referendum on Scottish independence’, he says. ‘Scotland is much more pro-EU than the rest of the UK. So from an EU point of view, they lose the UK but gain Scotland.’
Free movement of persons is, of course, another controversial aspect of EU membership, which may not actually be averted by an EU exit. For example, the two million UK people living in other member states would have to be accommodated.
Julia Onslow-Cole, Legal Markets Leader and Head Of Global Immigration at PricewaterhouseCoopers Legal and Vice- Chair for Multinationals of the IBA Global Employment Institute says that following a UK exit, British citizens will find it more difficult, and in most cases impossible, to get work in the EU.
‘EU member states will give strict preference to their own citizens and citizens of other member states, as they do now. Even assuming that an EU member state permits a British citizen to take a job, the person concerned will be subject to the expense and effort of obtaining a suitable work visa.’
British companies will also find it much more difficult to recruit employees from EU member states or to send their employees to work in related companies in EU member states. ‘There will be a general expectation that they must make do with whoever they can find in the British workforce’, she says.
This stagnancy in employee movement could have a devastating effect on investment in British business. ‘Investors will be reluctant to invest in British companies with international connections or aspirations’, says Onslow-Cole, ‘because British companies’ activities will be restricted by the limitations on inward and outward migration. Some inward investment that might otherwise have come to the UK will go to EU member states instead, and some existing multinationals will relocate from the UK to Europe.’
Indeed, businesses might have pause for thought before investing or expanding in the UK before the referendum. ‘In-house lawyers have to tell their clients that if this happens there will be a monumental upheaval lasting several years’, says Oliver.
Manage your risk: plan ahead
In-house counsel should be very careful about what their companies are doing now in the UK with regard to corporate governance structure, real estate, headquarters and so on. ‘Some corporate counsel may be asked to conduct due diligence and maybe even set up a task group if the UK is big enough or important enough for their company’, says Swinkels, ‘to see what are the risks, which contracts cannot uphold any more, what benefits will be lost, or tax issues, etc.’
In–house lawyers need to consider what issues might arise following a UK exit, in relation to both transactional and legal arrangements. ‘General counsel will be looking at the legal issues that affect the strategic direction that the company wishes to take and also looking at day-to-day transactional business’, says Muttukumaru. ‘In terms of risk management they’re going to want to plot the two scenarios: "in" or "out", even though only one will come to pass. In-house lawyers need to know what the key issues are both generally and particularly in relation to their own sector. [They] have an opportunity through their organisation both to lobby on the issues which are of specific interest in the referendum and also on the outcomes that might come as a result of the referendum. They need to be quite savvy, lobbying not only in Brussels but also here.’
An example of a general issue that would need to be addressed if the UK leaves the EU is that there will be no more concept of direct applicability of EU regulations may be jettisoned and there may be nothing in UK law which reflects the EU regulations currently in place, leaving a lacuna in the law. ‘The Interpretation Act might help in some cases. But Parliament needs to provide, through the repealing legislation, adequate legal clarity to enable the courts and public and private entities to understand the network of legal obligations that will apply after exit’, says Muttukumaru. ‘If it says nothing, the regulations may no longer apply. This would be a complete legal nightmare.’
In-house lawyers should ensure now that contracts specify exactly which law they are governed by and as of when. They should also spell out provisions in contracts which they might not ordinarily think to include because at present an EU Regulation would automatically apply (for example, in relation to some EU-derived consumer rights): in the event of a UK exit it would not necessarily apply at all.
‘The [UK] government needs to sort this out by proposing suitable provisions to repeal the Bill’, says Muttukumaru. ‘ While I don’t think the courts will lightly set aside an agreement entered into by two parties who assume, based on express provisions, that one law applies to it, the parties will have to find a legally sound way to get to that outcome. Without clarity in both the legislation and in contractual drafting, it would be a field day for the lawyers but nobody else.’
‘In terms of risk management [in-house counsel are] going to want to plot the two scenarios, "in" or "out", even though only one will come to pass… [They] have an opportunity… to lobby on the issues which are of specific interest in the referendum and also on the outcomes that might come as a result of the referendum’
Christopher Muttukumaru, Monckton Chambers
The UK government will need to carefully consider to what extent it would wish to diverge from EU regulation. ‘To diverge too much would increase barriers to trade’, says Brasted, ‘which would not be in the best interests of an independent UK. Freedom of movement of goods, services, capital and establishment are the key selling points of EU membership and it is highly likely that the UK outside the EU would be subject to additional red tape for cross-border trade. The UK government's ambition will be to more than match that with reduced domestic regulatory burdens. However, in many areas it is likely that businesses operating across Europe will find themselves subject to UK domestic and EU regulation.’
If UK voters opt to leave the EU, says Oliver, business has to be prepared for a period of massive uncertainty – even before the exit is effected. ‘It’s not clear how EU law would effectively be enforced during that transition period within the UK’, says Oliver. ‘I don’t see how the Commission could bring infringement proceedings if the UK is not observing EU law anymore and it would probably have to close the ones that are already underway.
‘Courts in the UK might also not be too happy to apply EU law across all areas. If the provisions are clear that’s fine, but if there is any kind of doubt the UK courts might decide they don’t want to apply the case law from Europe if it doesn’t suit them.’
Implications for English law
If English law no longer implements EU directives then it will be less harmonised with EU law, which may result in English law becoming a less popular choice for international agreements. ‘English domestic law currently incorporates EU law and provides a predictable and acceptable system for many international businesses’, says Denton. A gradual drift from EU law would mean that the UK would not necessary be a good place from which to serve continental Europe.’
In addition, if the UK were to leave the EU, it would not mean that UK businesses do not have to comply with EU law. ‘The EU competition rules will continue to apply to UK businesses who carry on business in the EU or whose activities have an effect on trade in the EU’, says Denton. ‘A complication is that the European Commission and the UK Competition and Markets Authority could open parallel investigations in respect of the same conduct by a company and both impose penalties in respect of the same cartel.
‘There will also be an impact on merger control’, Denton adds. ‘At present, if a deal is notified to the Commission, it does not need to be separately notified to the national competition authorities of the EU. If the UK leaves the EU, the EU and UK merger control regimes would run in parallel, so that a transaction that meets the EU Merger Regulation notification thresholds may also be notifiable to the UK authority if the relevant UK filing thresholds are met. This would increase the regulatory burden for companies, as well as increasing costs.’
There are, of course, some ways in which the UK could benefit from leaving the EU, including reducing the regulatory burden on businesses in areas such as financial services. ‘For example, the UK would not have to comply with any EU rules on capped bonuses’, says Denton. ‘There would also be freedom to develop the UK's own agricultural and fisheries policy, as the EU common policy would no longer apply. The UK would also not be subject to any EU standards in respect of employment legislation and immigration policy, and so would have greater freedom to develop these.’
The UK would also no longer be subject to the EU State Aid rules, which means its government could provide certain subsidies to UK companies without having to notify the European Commission. ‘However, this change could lead to an increase in the promotion of "national champions" and increased amounts of state resources being used to fund UK companies’, says Denton.
An EU exit by the UK would also be a big loss to the its EU allies. ‘The UK has been a very solid brother in arms’, says Swinkels. ‘When it comes to issues like [avoiding] a negative trade budget or internal trade issues, it’s always the UK, Scandinavia and the Benelux countries which stand close together.’
‘If the UK were to leave, the other member states may say “we want to renegotiate this, that and the other”; that’s one reason why France and Germany don’t want the UK to leave – it would set a precedent. For a small country to leave the EU though would be bizarre and completely crazy.’
Swinkels agrees and stresses that this is not a UK versus the EU issue. ‘This new treaty is not being negotiated between the UK and the EU – every single country has its wish list. Every country will have its demands. No other country wants to pull out of the EU but renegotiating? Absolutely.’