The UK referendum has resulted in much work for pundits, not least because there is little certainty when, if at all, the UK will cease to be an EU Member State and what the legal and political framework of its relationship with the EU will be going forward.
This note looks at the impact of Brexit on M&A, technology and outsourcing in CEE and suggests actions that companies should be taking to mitigate any potential negative effects.
Brexit’s CEE impact
Putting general market confidence and risks of political contagion to one side, we highlight here several legal aspects for companies engaged in M&A, technology and outsourcing in CEE: (1) intellectual property; (2) the validity and enforceability of English law contracts; and (3) financing. Other areas not highlighted in this note include employment and data protection matters.
In March 2016 the UK Ministry of Finance (HM Treasury) published a paper setting out possible EU relationship models for the UK, (“Alternatives to Membership possible models for the United Kingdom outside the European Union”). Of the three models discussed: (i) joining the European Economic Area (EEA), the “Norwegian Model’; (ii) bilateral agreements; or (iii) reliance on the WTO, only the Norwegian Model would essentially retain the status quo in those areas relevant for CEE companies. However, due to the requirement for the UK to agree the four core EU freedoms, including the free movement of people, politically this may be hard to achieve.
Currently European Union Trade Marks and Registered Community Designs are protected throughout the EU by unitary rights. In the event of a UK exit, and unless transition provisions have been negotiated, these rights would no longer apply within the UK. If technology and outsourcing companies in CEE owning intellectual property rely on these rights in the UK, therefore, they will need to apply for a national right. Similarly, if a CEE based rights holder relies on its CEE use of those rights for protection in the UK, it should begin reviewing its current use in the UK.
Regarding copyright in software, there will continue to be differences between how the UK and CEE countries treat copyright, particularly regarding moral rights and enforcement. Once the UK exits the EU it will no longer be required to follow the Software Directive and Database Directive and, over time, it can be expected that copyright treatment will further diverge. CEE based technology and outsourcing companies should therefore begin reviewing service, development and licensing agreements with UK companies or under English law to ensure that rights are clear and protected.
Commercial agreements: contractor and operating agreements
A significant number of commercial agreements used in CEE M&A, technology and outsourcing, may be governed by English law and subject to the jurisdiction either of the English courts or arbitration in London.
A UK exit from the EU should not affect English law as the governing law of agreements. There may, however, be an impact on English courts as having jurisdiction to hear a dispute and an increased burden to enforce judgements of an English court in the EU.
Notwithstanding the form of relationship between the EU and UK after the exit of the UK, English courts would generally accept jurisdiction on the basis of a valid governing law clause in the agreement.
However, if the UK is no longer subject to EC law through membership of the EEA or by bilateral agreement, jurisdiction clauses determining jurisdiction of the English courts may not be accepted by courts in other EU Member States. This is particularly the case where proceedings have already begun elsewhere, or where jurisdiction is not exclusive.
Of equal importance is the likelihood of practical difficulties in service of proceedings and enforcement. If the EC Service Regulation or similar provisions no longer apply, and there is no UK address for service set out in the agreement, it may be difficult even to serve UK proceedings on counterparties located in CEE. Similarly, the procedure for enforcement of English court decisions in CEE will be more onerous and time consuming, with a higher involvement of local law considerations by national courts in deciding whether the standard of proof or substance for enforcement have been met.
What can parties to English law agreements in CEE do? Quite clearly, it is important to review current agreements to ensure that choice of law and jurisdiction terms will be valid and enforceable after a UK exit, or even to change the law of the agreement to the appropriate CEE local law (and amend terms more generally for compliance under that local law). If English law and English court jurisdiction is kept, parties should be required to have a UK address for service of proceedings, and may also agree not to challenge any court decision to facilitate enforcement elsewhere.
By contrast, agreements subject to arbitration in London, and the enforcement of arbitral awards, should not be affected by a UK exit. This is because arbitration is generally governed by national law or international instruments and the cross-border enforcement of arbitral awards is governed by the New York Convention, to which the UK and CEE jurisdictions are signatories.
Financing terms & taxation
As with commercial arrangements, a significant number of financing arrangements currently in place and applying to CEE M&A are either governed by English law and/or involve UK financing institutions.
In general, a UK exit from the EU should not affect English law as the governing law of financing agreements. The EU Rome 1 and Rome 2 Regulations will apply in those CEE countries that are Member States of the EU and the Regulations largely require that the courts in those countries give effect to the parties’ decision to choose English law as the governing law. There may, however, be an impact on English courts as having jurisdiction to hear a dispute and an increased burden to enforce judgements of an English court in the EU.
Other terms contained in financing agreements, and the interpretation of those terms, will be affected. An obvious example is the inclusion of the UK in the use of definitions of “European Union” and “European Economic Area”. Another is the scope of increased costs clauses and the exposure of CEE borrowers to increased costs incurred by UK based lenders as a result of changes to UK legislation following EU exit. More clearly, there is likely to be an impact in relation to the tax treatment of payments to UK institutions or sponsors.
Tax is, in general, a matter for each Member State, although tax policy must be exercised in compliance with EU rules on, for example, non-discrimination and state aid. Future tax effects in relation to UK financing institutions and sponsors will depend on the type of relationship that the UK negotiates. Under the EEA, “Norwegian Model”, tax policy must not be used to discriminate against other members. However, under a bilateral arrangement, or WTO model, discrimination may be permitted. This may result in financial transaction taxes on interest payments from a CEE borrower to a UK lender. Similarly, once the UK leaves the EU it will not be required to follow the Parent-Subsidiary Directive and, thus, distributions from a CEE project to a UK holding company may be subject to double taxation, unless a double taxation agreement is in place. Whilst the UK has a wide network of double taxation agreements with Member States of the EU and those CEE counties outside of the EU, not all provide for a full exemption from withholding tax.
Given the likelihood of an impact on financing terms and the possibility of additional taxes on interest payments or distributions, parties should consider reviewing and discussing amendments in those agreements that will continue past the expected date of a UK exit.
As a first step, it will be prudent for technology and outsourcing companies to review their IP ownership, usage and licensing vis-à-vis the UK Additionally, where companies are parties to English law agreements, a review of choice of law, jurisdiction and enforcement provisions is necessary to ensure that contractual and non-contractual rights are not lost, or unintentionally acquired under local laws in CEE, following Brexit. Agreements may also be converted to local CEE law to ensure enforceability.