COMMERCIAL UPDATE 33 ‘BREXIT – THE HEADLINES ON WHAT HAS CHANGED IN THE UK CORPORATE AND BUSINESS WORLD‘
Now we are finally at the point that the transition period has ended, the full effect of Brexit and the changes in both UK law and regulation will now apply. As we all remember (just in time for Christmas!), on 24 December 2020, the UK and the EU finally agreed a deal – the Trade and Cooperation Agreement (TCA) – to govern significant aspects of the trade relationship between the UK and EU from 1 January 2021 onwards.
The TCA is only one part (albeit a central part) of the overall package of agreements reached including a series of Joint Declarations on a range of important issues where further cooperation is foreseen, including financial services regulatory cooperation, subsidies, road hauliers and the declaration of adequacy decisions. The focus of this article though is to briefly summarise some the headline changes for business, look then at UK and EEA companies in the UK, take a brief look at corporate transactions and the role of those UK companies registered in EEA member states.
Key Business Changes – headlines
A. Customs tariffs and services
As you may be aware, the goal of zero tariff and quota free trade in goods between the EU and the UK has been achieved. However, businesses will need to look carefully at their supply chains, processing/ assembly and distribution to ensure the complex ‘rules of origin’ requirements are met, to benefit from the zero tariff regime. The position however is different for services, where UK service providers (including providers of digital services) will no longer benefit from the country-of-origin principle when accessing the EU market. They will have to comply with the (varying) rules of each EU member state in which they operate, or set up in the EU, if they want to continue operating as previously.
B. Data protection
The headline here is that some personal data can continue to be transferred from the EU to the UK, as if the UK were still a member state, for at least four months from 1 January 2021 and potentially for a further two months, provided neither party objects and the UK does not amend its current data protection regime during that period. The UK has already recognised the EU, EEA and EFTA countries as providing adequate protection to personal data transferred to them from the UK. Please note that UK-based controllers and processors without an EEA presence offering EEA individuals goods or services or monitoring their behaviour may have to appoint a representative in the EEA and conversely, controllers and processors with no UK presence offering goods or services to UK individuals or monitoring their behaviour, may have to appoint a UK representative, even where they already have an EEA presence.
C. Digital content and services
The TCA does not continue the cross-border elements of the eCommerce Directive and UK established services will have to comply with the laws on topics like online information, advertising, shopping and contracting, in each EU country in which their services are received, rather than simply relying on their compliance with UK law to give them ‘passported’ access into the EU. Conversely, the UK has, for now, unilaterally preserved the freedom of EU established services to operate in the UK without needing to comply with additional UK requirements.
For copyright there is a restatement of the international copyright treaties, with a few adjustments for the current state of EU law (which is almost entirely already implemented in the UK).
E. Trademarks and patents
We already knew that Brexit would have a significant impact on EU Trade Marks/Registered and Unregistered Community Design rights and under the provisions of the TCA, these rights
Holders of EU rights that were registered as at the end of the transition period have been granted a ‘comparable’ UK registration automatically. Those with EU applications pending on that date must refile in the UK and if the UK application is filed by 31 September 2021, it can claim the same priority/filing dates as the corresponding EU right. The UK has obtained the ability to set its own permanent regime and the IPO will be consulting in early 2021 on this. The position on the grant of UK European patents has not changed, because the system by which they are granted by the European Patent Office is governed by the European Patent Convention – which is an international treaty, not EU law.
F. Product marks
From 1 January the UK has a separate product conformity assessment and marking system from the EU. However, in the UK, in most cases it will be possible until 1 January 2022 to use the EU CE mark when placing products on the UK market. The new UKCA (UK Conformity Assessed) mark may also be used with approval by a UK-based approved body.
Please note that after 1 January 2022, ‘UKCA’ marking will be required, declaring conformity with the UK requirements. There is also a ‘UKNI’ marking for products placed on the market in Northern Ireland which have undergone mandatory third-party conformity assessment by a body based in the UK, but remember that Northern Ireland will stay aligned with all relevant EU rules relating to the placing on the market of manufactured goods.
G. Travel and immigration
The decision had already been taken by the EU outside the TCA, to allow UK nationals short-term visa-free visits of up to 90 days within any 180-day period from 1 January 2021. This decision is conditional on the UK continuing to provide for equal visa-free travel for short-term visits for EU citizens. On the business travel front, the TCA goes into some detail about what activities individuals can and cannot carry out when travelling between the UK and EU with or without a visa. To summarise, short-term business visitors without a visa will be permitted to undertake normal business activities including attending meetings or conferences, engaging in consultations with business associates and attending a trade fair.
There is little on mutual recognition of professional qualifications and for services, recognition of qualifications is subject to (varying) local EU member state regulation.
As expected, the TCA does not deal with immigration into the UK and those seeking to work or study in the UK will need prior approval to do so. This remains subject to the settled and pre-settled status regime announced previously for people who have established residence in the UK by 31 December 2020.
H. Tax and VAT
As expected, tax is not generally covered other than EU directives which can reduce or eliminate withholding taxes on payments between group companies in different EU member states have ceased to apply to the UK. VAT is not generally covered (save for an agreement to cooperate on VAT compliance and combating VAT fraud) and UK VAT is now largely separate from the EU VAT system, although special rules apply to supplies of goods involving Northern Ireland.
I. Financial services
There is very little on financial services in the TCA but there is a non-binding Joint Declaration on financial services regulatory cooperation. This contains a commitment for the UK and the EU to agree a Memorandum of Understanding by March 2021 that will establish the framework for cooperation.
J. Choice of governing law and courts
We have looked at this in our earlier update, but there is nothing in the TCA on choice of courts or enforcement of judgments for business contracts.. In the absence of that, the current position is that the UK has acceded to The Hague Convention on Choice of Court Agreements 2005 (The Hague Convention), in its own right, from 1 January 2021. As a result, with certain exceptions, courts of EU countries will be required to recognise and enforce exclusive jurisdiction clauses, at least for agreements entered into from 1 January 2021 onwards. Enforcement is also governed (in part) by the Hague Convention in that you can only rely on the Hague Convention if you obtain a judgment from a court in a state designated in an exclusive jurisdiction clause. If the Hague Convention applies, enforcing a judgment in an EU state should be relatively quick and straightforward. In all other circumstances and as referred to below, fresh proceedings applying the local rules on the judgment in the forum of enforcement will likely be needed.
K. Competition law, merger control and level playing field
The TCA recognises the importance of competition law and the EU and the UK commit to address anti-competitive practices and has in it the ‘level playing field’ provisions, and in particular the issue of subsidies with state resources. The UK has committed to create a subsidy regime where many of the principles will be similar to the EU state aid regime.
L. Pharma and medical devices
For the time being these products will be regulated in the UK separately from the EU (with the EU and the UK keeping each other informed of changes to their regimes and using international standards as a starting point for new regulation).
M. Special treatment of Northern Ireland
More generally, the special treatment of Northern Ireland envisaged in the Withdrawal Agreement is retained, with the impact of border arrangements reduced by the zero tariff agreement.
What does the TCA mean for different types of companies?
There have been some EU directives covering issues such as incorporation, but the establishment and regulation of companies in the UK has always been regulated in the most part by our domestic law.
We are aware of a few changes that have been made with a view to:
A. Addressing the position of European Economic Area (EEA) companies with registered establishments in the UK. The pre-Brexit Companies House less onerous registration and filing requirements for companies incorporated outside the UK with a UK registered establishment (branch or place of business) in respect of EEA incorporated companies have been brought into line with non-EEA incorporated companies, so that EEA-incorporated company with an existing registration has three months from 1 January 2021 in which to provide Companies House with the following additional information:
- information on the law under which the company is incorporated;
- the address of its principal place of business or registered office;
- the company’s purpose;
- the amount of share capital issued; and
- the company’s accounting period and period of disclosure
Any websites, order forms and business letterheads, used in the UK establishment of an EEA-incorporated company must now include (in addition to information about the UK establishment):
- the legal form of the company;
- the company’s country of incorporation;
- if applicable, notice that the company is being wound up, or is subject to insolvency or any other analogous proceedings;
- the identity of the registry where the company is registered and its registration number if applicable;
- the location of the company’s head office;
- a statement of its limited liability status, if the liability of its members is limited;
- if the company chooses to refer to its share capital, it must do this by reference to paid up capital.
B. Addressing any European public limited-liability company which can be created and registered in any EEA member state and is still registered in the UK. These have been automatically converted to a new UK-only corporate form, known as a ‘UK Societas’. A UK Societas can convert to a UK public limited company or be wound up as the intention is that a UK Societas is a temporary stage for entities rather than a long-term corporate UK choice. Any form of association between companies or other legal bodies, firms or individuals from different EEA member states wanting to operate together across national frontiers registered in the UK has been automatically converted to a new UK corporate form, to be known as a ‘UK Economic Interest Grouping’. The new corporate form preserves the current framework, unchanged as far as possible and appropriate, on a UK-only basis.
C. Ensuring that there is no preferential treatment to EEA companies or EEA states as Companies House previously required less detailed information on the appointment of an EEA-incorporated company as a corporate director or secretary of a UK company. UK companies with an existing EEA-incorporated officer as at 1 January 2021 must, within three months of that date, provide Companies House with additional information relating to the legal form of the corporate officer and the law by which it is governed. This will bring the information filed into line with that filed in respect of non-EEA-incorporated corporate officers. The previous rules regarding getting shareholder authorisation required for a UK-incorporated company’s political donations and expenditure now just apply to UK donations and expenditure.
D. Correcting technical drafting deficiencies.
What about corporate transactions?
The vast majority of corporate sales and purchases, even including those that are cross-border, are governed by private contractual arrangements. That will remain the case. English contract law is often chosen to govern both domestic and cross-border M&A transactions and is largely unaffected by EU regulation. However, parties should obviously ensure that any relevant provisions, as discussed in previous updates, are drafted to reflect the new environment. The Takeovers Directive, which established the legal framework through which public company (or private company shares that had been admitted to trading on a regulated market/facility) takeovers are regulated in the EEA no longer applies in the UK but certain parts of the Directive have been copies over and the Takeover Panel is required to ensure that the Takeover Code gives effect to those provisions.
What about the law for UK companies in other EEA member states now?
The main point to deal with is that just because UK law recognises the limited liability of companies incorporated in other jurisdictions, regardless of whether that jurisdiction is in the EEA or not, this may not be reciprocated under the local law of other EEA member states. Local laws will therefore determine the treatment of UK companies in each EEA member state. This concept (known as the “real seat” principle), has local law potentially providing that a company incorporate in the UK but with its central administration or principal place of business in that country is not locally incorporated. This could mean that the entity gets treated not as a company with separate legal personality but as a partnership, and consequently its shareholders may have personal liability for its debts. Taking this principle any branch of a UK-incorporated company in an EEA member state will become a branch of a non-EEA member state (or ‘third country’) company, meaning that the member state’s domestic company law for third country companies (e.g. on branch registration) may differ from the EU law previously used.
The TCA sets out a basis on which greater mutual co-operation and facilitation of trade in goods and services between the UK and EU can be achieved. This has ended up very much on the ‘hard Brexit’ side of things although tariffs on goods have been avoided. What has not been achieved though is frictionless access to the EEA.
Fundamental things to check should be:
- All businesses should risk audit against the TCA headline changes and make sure they have an overview of where any changes or updates are needed and a plan to action them;
- Companies with a presence in an EEA member state should check the impact of the UK becoming a “third” country for regulatory purposes in that member state and where they are under the real seat principle;
- Any EEA registered or other types of companies will need to make sure they have updated their details as set out above;
- Please refer to our previous guide ‘Update 32 ‘Brexit – CONTRACTS AND PERFORMANCE NOW WE ARE ACTUALLY OUT’ for guidance on contract analysis in terms of provisions to review. We will be publishing an infographic shortly to help with this.
Please drop us an e mail or call if you need any further details or assistance and stay safe and well.