25 January 2019

With a significant portion of attention focused on the potential problems which UK companies will face in the event of a hard-Brexit, it is important to note that these changes are not just a British problem. In fact, many EU companies could potentially experience a far more significant impact and, as just published, some countries, like Germany, are making their own preparations in an effort to soften the repercussions.

Germany prepares for Brexit

With an estimated 1,300 German subsidiaries in the UK and 25,000 British companies with a branch in Germany with an overall of 2.6 million jobs, Germany is one of the latest EU countries to pass legislation in preparation for the possibility of a no-deal Brexit.

On 14 December 2018, the German Bundesrat passed the Fourth Act to Amend the Transformation Act, which in essence allows UK limited companies to remain and operate in Germany by becoming legal German entities. Without this new piece of legislation, UK companies with administrative headquarters in Germany would lose their freedom of establishment under EU law and more importantly, limited liability companies would be treated as partnerships, with shareholders losing the protection of a limited liability.

The new German law is a reassuring step forward as, although the European Court of Justice ruled last year that a company registered in one EU member state should be permitted to “migrate” to another EU member state, UK law does not have any specific provision to this effect.

Brexit’s impact on other EU countries

Apart from the consequential loss of jobs in the event of UK companies withdrawing their activities from the EU market, there are also other, more nuanced repercussions for the EU and EU companies, especially in the financial sector.

For example, the European Market Infrastructure Regulation (EMIR), which is a body of EU legislation for the regulation of over-the-counter derivatives, currently allows all intragroup transactions of EU companies (or EU companies and a company in a third-country) to rely on intragroup exemption from its stringent clearing obligations. In the event of a hard-Brexit, intragroup trades between an EU company and its UK sister company will no longer benefit from the intragroup exemption. As a result, certain EU companies will be required to clear intragroup trades made with UK companies, which would increase the transaction’s time and cost.

Under UK EMIR, this would not be the position for the UK companies, thanks to a proposed exemption regime which will allow UK companies relying on an intragroup exemption prior to the exit, to continue to rely on this exemption post-Brexit. Consequently, it would appear that at least in that respect, EU firms would face the more direct impact of the changes, over the UK.

What does that mean for your company?

On a very basic level, whether or not your company has subsidiaries or branches in the EU, and whether or not the potential changes described in this article relate to your business, consideration of the change in the market place might still be necessary. For example, those governed by Sections 171 to 177 of the Companies Act 2006, mainly company directors, have well defined duties, including some that are particularly relevant to Brexit contingency planning. Those include:

• Promoting the success of the company (section 172)

Directors should have regard to the likely long term consequences of any decision, the impact on employees and the need to foster business relationships with suppliers, distributors, customers and others; and

• Duty to exercise reasonable care, skill and diligence (section 174)

A Director with particular expertise in overseas markets, trade regulation, or distribution chain management, for example, might be expected to exercise a higher degree of skill and care in Brexit contingency planning.

Therefore, in order to position the company for a successful future in the changed market, current organisations and companies’ structures might need to be carefully examined and potentially reconsidered.

If you would like to further discuss any subject raised in this article, or more specifically the director’s duties or possible re-structures necessary for your company or organisation, please contact Szymon Durlo or Jeremy Glen.

Contacts:

Jeremy Glen, Partner, jsg@bto.co.uk T: 0141 221 8012 

Szymon Durlo, Trainee, szd@bto.co.uk  T: 0141 221 8012