Antitrust | Banking | Commercial Real Estate | Corporate | Data protection | Employment law | Environment and Climate Change | Financial regulation | Funds and asset management | Intellectual property | Litigation | Pensions | Tax
Antitrust
Currently EU competition law: (i) prohibits anticompetitive agreements and concerted practices (Article 101 TFEU) and abuse of a dominant position (Article 102 TFEU); (ii) governs mergers in the EU that meet clear thresholds and conditions (through the EU Merger Regulation); (iii) prohibits certain State aid subsidies; and (iv) imposes public procurement obligations on public bodies to carry out fair, transparent and non-discriminatory tenders.
During the transition period, EU competition law continues to apply in the same way as prior to Brexit.
Following the expiry of the transitional period, and in the absence of any agreement between the EU and UK to align their respective competition laws:
- The UK's Competition Act 1998 and Enterprise Act 2002 largely mirror EU legislation so there would not necessarily be an immediate divergence in competition policy. However, UK courts will cease to be bound by judgments of the EU Courts, so divergences in the interpretation of the prohibitions on anticompetitive agreements and abuse of dominance could arise over time.
- The CMA will have to assess mergers and cases involving anticompetitive agreements and abuse of dominance in relation to the UK that are currently dealt with by the European Commission. This will mean an increase in merger and antitrust investigations being carried out by the CMA and the European Commission in parallel.
- There is the possibility that UK enforcement practices in relation to mergers may diverge over time from those of the EU. This could add an extra element of risk to mergers of businesses that operate in the UK and the EU given the requirement for approval in an extra jurisdiction.
- Any activities including mergers with an impact outside the UK will continue to be subject to EU law.
- EU State aid prohibitions will cease to apply. Whether the UK agrees to implement a domestic State aid regime that follows the principles of the EU regime will be a key issue in the upcoming negotiations regarding the future trading UK/EU trading relationship. Before winning the general election, the Conservative Party stated that it would introduce a domestic State aid regime based on the principles of WTO law (in particular the Agreement on Subsidies and Countervailing Measures), not EU law. It is not yet clear what form such a regime would take, if implemented, or whether it would maintain the rights of businesses to challenge subsidies granted to their rivals before the UK courts.
- EU public procurement obligations will also cease to apply. Here, the Conservative Party has stated that it will replace the EU's public procurement regulations with new laws, based on the WTO's Agreement on Government Procurement, which are "(i) simpler and cheaper; and (ii) geared towards supporting local business and promoting British business".
- The UK has in the past been influential in the framing of EU competition policy. For example the 2014 EU Damages Directive introduced minimum standards for antitrust damages claims in the EU, e.g. for disclosure, protection of leniency submissions, limitation periods, which had long been features of damages actions in the UK. The departure of the UK may see the EU become more protectionist, with the risk of a renewed push towards establishing national champions and looser State aid rules.
Banking
As there is still uncertainty as to the terms of the future relationship between the UK and the EU it remains unclear how banking transactions and loan documentation may be affected once the transition period comes to an end on 31 December 2020.
See our briefing Brexit – implications for loan documentation. However, the main points to note are:
- English law remains an appropriate choice of law for loan documentation after the transition period. EU member states will continue to apply Rome I and Rome II Regulations which require the law chosen by the parties to be applied whether or not it is the law of an EU member state. Rome I and Rome II will also continue to apply in the UK in the form of retained EU law. In terms of jurisdiction clauses we think that, on balance, the best way to proceed would be for parties to continue to follow their usual practice (i.e. opt for the non-exclusive or exclusive jurisdiction of the English courts). However, parties may want to consider this in light of the circumstances of their transaction if enforcement of English judgments in EU states is likely to be important, as, following the end of the transition period, the Brussels I Regulation (which ensures recognition of judgments across EU member states) may no longer apply. This means that a judgment of the English courts after the end of the transition period will need to be enforced under the law of each member state applicable to foreign judgments not covered by a treaty (the law currently applicable to New York judgments for example). It is also possible that arrangements for the automatic recognition of judgments may be achieved through the UK becoming party to another convention, such as the Lugano Convention or the Hague Convention, or otherwise agreed. See our briefing Brexit, English law and the English courts: where are we now? for more information.
- References to EU member state or EEA member state in documentation should be checked on a transaction by transaction basis and amended as necessary to "EU member state and the UK" and "EEA member state and the UK" to reflect the fact that the UK is no longer a member state of the EU/EEA.
- References to EU legislation in documentation should be checked on a transaction by transaction basis as should the statutory/legislative interpretation provisions. These are unlikely to need to be changed until the end of the transition period when there is more certainty.
- Article 55 of the Bank Resolution and Recovery Directive may need to be addressed in relevant English law contracts through the inclusion of a bail-in clause. Indeed, it is now common for facility agreements to include an Article 55 bail-in clause. It is not a legal requirement during the transition period to include the clause in relevant contracts however as the UK has now left the EU, its inclusion avoids the need for amendments to documentation after the transition period.
- It is too early to say whether some clauses such as illegality or increased costs may eventually be triggered. However, potential loss of 'passporting' may be an issue for some lenders (which could potentially lead to triggering of illegality provisions). The main issue would be where licences are required for the making of (or maintaining participation in) loans in jurisdictions. For flexibility, and to the extent that they do not already, lenders may want to consider inserting wording into documents which allows them to designate affiliates who meet the relevant regulatory requirements to make loans (without transferring commitment) to preserve a degree of flexibility.
- "Material Adverse Effect" provisions are unlikely to have been triggered by the vote result but it is still not clear what will happen at the end of the transition period. Whether future events will trigger a MAE will depend on the terms of documentation and the circumstances or events concerned and will need to be addressed on a case by case basis. There has been case law (the Grupo Hotelero case of 2013) which suggests that an MAE cannot be called if the situation giving rise to the MAE was already known to the parties when entering into the agreement – it could be argued that the possibility of Brexit has been known for a number of years. However, the counter argument would be that the details of the UK/EU relationship in the post transition period along with its actual effects may not have been foreseeable. When negotiating documents with MAE provisions, close attention should be paid to the MAE wording.
Commercial Real Estate
- The principles of English real estate law are derived from UK statute and common law, so EU law tends not to shape English real estate rights significantly. Therefore, under the Withdrawal Agreement, English real estate law was not a discussion topic and, moreover, none of the key points of the Government's agenda for the scope of UK negotiations with the EU appear likely to affect English real estate rights directly. Consequently, we would expect English real estate law to be only indirectly affected by Brexit.
- There are some specialist areas within the umbrella of a real estate transaction that derive some of their legislation from EU law, such as environmental law and health and safety law. There are also specialist (typically regulated) sectors with a significant real estate element, such as telecoms and energy distribution, which are also impacted by wider EU regulatory initiatives. Our views are:
- Following Brexit, we expect that such EU legislation which is already implemented in the UK (such as the commitment to carbon reduction) will probably be retained, at least at first, as UK public policy in this regard is unlikely to change significantly in the short term.
- While there may be divergence in the regulatory purposes of the EU and the UK after Brexit, the underlying impact on real estate law is unlikely to change significantly; energy distribution and telecoms operators typically already have considerable rights and powers over private and public property and these are unlikely to be removed (though they may be extended).
- Employment issues can play an important role within property management contracts and construction transactions. Additionally competition laws can sometimes impact on cross-border or particularly high value real estate deals. The effect of Brexit on these particular areas of law over time could be significant, with associated effects on the commercial real estate sphere.
- With the success of the Conservative Party in the UK General Election of December 2019, the possibility has significantly diminished that there will be widespread and major changes to public policy in respect of real estate (in particular, the housing sector). However, the possibility of an increase in powers for local authorities to acquire land unilaterally, known as "compulsory purchase", to enable and encourage housing development should not be completely ruled out. The conditionality around such compulsory purchase may be simplified after Brexit, to the extent that EU restrictions on exercise of state power no longer apply and there is any repeal of the Human Rights Act 1998.
- The choice of offshore structures to hold UK property is an area of possible change, as both UK and global attitudes towards such tax efficient structures evolve.
- We consider that the legal fundamentals of UK asset purchases and sales, UK development projects and share purchase transactions governed by English law are unlikely to be significantly affected by Brexit.
Corporate
The Companies Act 2006 is the core legislation affecting the incorporation and operation of UK companies. Some parts of the Companies Act 2006 derive from EU directives, including some of the provisions relating to takeovers, accounts, statutory audit, dividends, capital maintenance, disclosure of information and various shareholder rights. Such provisions will not fall away at the end of the transition period (because they have already been implemented into domestic legislation) and are not significantly impacted by Brexit - some changes relate to the fact that EEA member states are now third countries and should be treated the same as third countries.
There are some EU-wide corporate law concepts that fell away at the end of the Brexit transition period:
- European public limited companies/Societas Europaea (SEs) and European Economic Interest Groupings (EEIGs) are no longer available for registration in the UK. SEs and EEIGs registered in the UK on 31 December 2020 were automatically converted into new UK corporate structures so they will have a clear legal status i.e. United Kingdom Societas (or UK Societas) and UK economic interest grouping (or UKEIG) respectively. The existing provisions for the conversion of an SE into a public company have been adopted to allow the conversion of a UK Societas into a public company.
- The EU cross-border merger regime that allows mergers between companies in different EU member states will no longer be available in the UK.
The UK equity capital markets are heavily regulated by EU legislation, in particular:
- The market abuse regime is derived from an EU regulation. The European Union (Withdrawal) Act 2018 ensures this regime continues in the UK by "onshoring" EU MAR, although consequential amendments have been made to the "onshored" version by The Market Abuse (Amendment) (EU Exit) Regulations 2019.
- During the Brexit transitional period, the UK remained subject to the single disclosure and transparency regime for companies listed on a regulated market anywhere in the EEA (which term was read as including the UK during the transition period). Prior to the end of the transition period, companies with a dual listing in the UK and in an EEA member state did not have to comply with separate obligations in each state. Following the end of the transition period, companies with a listing in both the UK and an EU member state are subject to two regimes, increasing the regulatory burden.
- In addition, during the Brexit transition period, a prospectus to offer or list shares or bonds which was approved by the FCA in the UK could be used in EEA member states without any further approval and minimal additional administrative requirements. This passporting right ended at the end of the transition period.
- Takeovers in the UK are governed by the Companies Act 2006 (which implemented the Takeovers Directive) and the Takeover Code which are largely unaffected by Brexit save in relation to the shared jurisdiction regime which no longer applies following the end of the Brexit transition period. Brexit related changes have been made to both Part 28 of the Companies Act 2006 and to the Takeover Code.
Brexit insights for multinationals are available in the Clifford Change briefings section of this Topic Guide and on the Clifford Chance Brexit Hub.
Data protection
The UK data protection regime comprises the EU General Data Protection Regulation (GDPR), which took direct effect across the EU on 25 May 2018, and UK regulations implementing an EU Directive on privacy and electronic communications. The European Commission has also proposed to replace the EU ePrivacy Directive with a new (and more onerous) EU ePrivacy Regulation, originally proposed to take effect alongside the GDPR but now unlikely to take effect until after Brexit. The following key points should be considered:
- The GDPR restricts transfers of personal data to countries outside the EEA which have not been determined by the European Commission to ensure an "adequate" level of protection for personal data.
- The GDPR will cease to be effective in the UK on Brexit, but is likely to be replaced by a new UK law having essentially the same effect. The UK will in theory have the freedom to introduce a new, more "light-touch", regime, but in practice is unlikely to do so, at least in the short term. It may also agree not to for a transitional period through a transitional agreement with the EU.
- There is still the risk, however, that the UK will not benefit from an adequacy determination from the Commission, either in the short to medium term (because the Commission has to go through the process of considering the adequacy of the UK regime, and cannot begin that process while the UK is still an EU member state) or in the longer term (because the Commission decides that other aspects of the UK regime – for example in relation to government access to communications data – undermine the adequacy of data protection law). In those circumstances, the UK may similarly not treat the EU regime as adequate.
- Although the GDPR restrictions (and any UK equivalents) will not amount to an absolute prohibition on sharing personal data between the EU and the UK, they will impose very substantial administrative burdens on cross-border businesses. It is therefore important that, if possible, the UK is treated as adequate by the EU (and vice versa). In the short term, this is most likely to be achieved through a transitional agreement between the EU and the UK. This may give sufficient time for adequacy determinations to be reached before the transitional agreement expires.
- The UK will also need to replicate under its own law the adequacy determinations made by the European Commission in respect of other countries, so that transfers of personal data to "adequate" regimes such as Canada, Switzerland and the U.S. "Privacy Shield" arrangement can continue without interruption.
- The UK is also likely to lose the advantage of the "one-stop shop" regulatory concept in the GDPR. Businesses operating cross-border will find themselves regulated by both UK and EU member state regulators where they might previously have been regulated, at least for some purposes, only in a single lead jurisdiction.
- The UK will lose the limited influence that it has over the future development of EU data protection law, which will continue to apply to UK businesses with EU operations. The UK has been an advocate within the EU for a relatively business-friendly data protection regime. It is questionable how influential the UK's advocacy has been, but Brexit may lead to a less business-friendly regime going forward within the EU. The Information Commissioner's office has been very active in the development of pan-European guidance on interpretation of the GDPR and this role is likely to be reduced or eliminated on and from Brexit. The UK Government is keen to retain some influence over EU data-related policy-making as part of the longer-term settlement.
Employment law
A significant portion of UK employment law is derived from EU law including the legislation that governs collective redundancy consultation, paid holiday and the protection of employment upon the transfer of a business. Some of this domestic legislation has however been 'gold plated' beyond the basic requirements of EU law.
EU derived domestic legislation is perceived by some to have led to increased compliance and administrative costs for businesses. By means of the EU (Withdrawal) Act 2018 EU derived employment legislation will be converted into domestic legislation from Brexit, maintaining the protections and standards that benefit workers. In addition existing CJEU judgments will be given effect in our domestic law at the end of the Brexit Transition Period (31 December 2020) (Retained EU Case Law). However, the Supreme Court and Court of Appeal will have the power to depart from such Retained EU Case Law if "it appears right to do so". However after the end of the Transition Period, the UK's domestic courts will not be bound by new CJEU decisions. Accordingly in the event that CJEU judgments develop employment law principles (and potentially expand employment rights) beyond the principles established by the Retained EU Case Law then the English courts will not be bound to follow such decisions when interpreting domestic legislation, but can have regard to them.
The British government has clarified that in the event of a "no-deal" Brexit legislation will be implemented so that no new requests to set up a European Works Council (EWC) procedure can be made but that the provisions relevant to the ongoing operation of existing EWCs will remain in force. The European Commission has confirmed that the EWC Directive will cease to apply to the UK upon Brexit. UK employees may continue to be represented on a EWC if that is provided for in the EWC agreement. If a corporate group's central management or representative agent is in the UK pre Brexit it will be transferred to an EU Member State upon Brexit to the establishment employing the greatest number of employees in a Member State. If English law applied to the EWC agreement with effect from Brexit day the governing law will be that of the Member State where central management moves to.
Practical Implications
- It remains to be seen whether the Supreme Court and Court of Appeal will consider it appropriate to disregard Retained EU Casw Law, particularly in relation to collective redundancy consiultation triggers, working time rights in relation to the calculation of holiday pay and the carry forward of holiday.
- It remains to be seen whether the domestic courts will consider themselves bound by post-Brexit decisions of the CJEU that develop employment law principles beyond the principles established in CJEU case law at the end of the Brexit Transition Period.
- Companies that operate European Works Councils will have to revisit their arrangements whether the Company is UK head quartered or not.
- Companies that transfer workforce data from EU locations to the UK should consider the post Brexit lawful basis for doing so under GDPR (for example a standard contractual clause) and make the appropriate arrangements.
- Companies may wish to audit their current staffing arrangements both within the UK and in EU Member States to assess which EU nationals may potentially be required to apply for a work permit if the current immigration treatment of EU nationals is not maintained. Equally UK nationals working in Member States may have to revisit their immigration status.
- Companies may also wish to provide support to their EU workforce to ensure as far as possible that they are able to continue working in the UK, and are able to clearly demonstrate having the right to work in the UK after 31 December 2020. Doing so will also help to identify any EU workers who may not be able to apply/qualify for the new 'settled status', and therefore may need explore alternative visa options to ensure they can keep working in the UK after 31 December 2020.
- Relocation, redundancies and off-shoring may arise, potentially triggering redundancy, Works Council and TUPE consultation obligations.
Clifford Chance briefing: (September 2019) Brexit Immigration Briefing
Environment and Climate Change
A great deal of current UK environmental and health & safety law derives from EU legislation put in place over several decades. This has been largely onshored as EU retained law as from the end of the Transition Period on 31 December 2020. Under the terms of the Trade and Cooperation Agreement (TCA), the UK retains the right to regulate on environmental and climate change matters. The Government has expressed a general desire for deregulation following Brexit. However, the UK will still have to comply with all rules relating to standards of safety and environmental sustainability of products being put on the EU market, since no 'mutual recognition' mechanism for product standards has been agreed in the TCA.
The UK might be able to relax some laws relating to operational environmental protection controls within UK borders. However, there are a number of reasons why UK may not significantly diverge from the body of EU environmental and climate change law going forward:
- Under the TCA, the UK has agreed that it will not reduce the level of domestic environmental protection or climate protection below levels established as at 31 December 2020 (or enacted before that date but subject to later implementation).
- Also, any significant divergence between the EU and UK in the area of environmental and climate change (among others) is subject to possible rebalancing measures (e.g. tariffs) under the TCA, whether such divergence results from one party reducing or increasing its regulation in a relevant area.
- The UK is bound by a number of international agreements (e.g. the Kyoto protocol on carbon emission reductions, OSPAR Convention on marine pollution, the Bern Convention).
- The UK has been a driver for stronger EU policy in some areas (e.g. integrated permitting, climate change policy and emissions reporting) where the EU has largely adopted UK practices; or the UK has pursued its own environmental framework, e.g. in relation to contaminated land remediation.
- While attempts to roll back environmental protections might find favour with some business sectors, these would be subject to close scrutiny by NGOs and be likely to be resisted by NGOs and the public alike.
If the UK decides to weaken any particular environmental standards or regulatory frameworks, it seems likely that any change would be done through a process of gradual reform rather than an overnight cull of environmental laws. Irrespective of whether standards would be significantly lowered, it is possible that environmental policy driven purely by domestic politics would be more changeable than the longstanding and gradually evolving policy framework that currently applies across the EU.
The Government has proposed the establishment of an independent statutory environmental body aimed at ensuring that the Government properly enforces environmental law (in light of the removal of the supervisory role performed by the European Commission) through an Environmental Bill, which is currently going through the Parliamentary process.
In relation to climate change action, even if EU legislation and targets for emissions reductions and renewable energy will no longer apply, the UK will still be bound by its own strong domestic climate legislation. The UK Government has reconfirmed and indeed strengthened its climate agenda regularly since the vote.
The UK has enacted a number of standalone regimes into UK law which were previously central EU regimes. These include a UK Emissions Trading Scheme, and a UK version of the REACH chemicals registration etc. regime, and are largely copies of the EU equivalents:
- The UK Emissions Trading Scheme applies across the UK, but excludes activities regulated under the Single Electricity Market in Northern Ireland (which remain covered by the EU Emissions Trading System).
- UK REACH applies only in relation to Great Britain (as Northern Ireland companies are still governed by the EU REACH regulation). Transport of chemicals from Northern Ireland is subject to UK REACH rules although there are some provisions which seek to facilitate compliance. Transport of chemicals from UK to Northern Ireland is subject to compliance with the EU REACH regulation.
Financial regulation
- The end of the Brexit transition period at 11pm (GMT) on 31 December 2020 marks a step change in market access between the UK and EU for financial services, including loss of passporting rights.
- From an EU perspective, the UK will be treated as a "third country", similar to the US or Singapore. While the existing EU financial services regulatory framework includes numerous third-country regimes based on equivalence, none come close to replicating single market membership. UK financial services firms looking to provide services in the EU therefore need to navigate a patchwork of national licensing regimes and face restrictions on cross border business and many other impediments compared with the market access that an EU firm would have.
- As noted above, some areas of EU financial regulation have third country "equivalence" regimes that permit third country firms from jurisdictions with rules "equivalent" to EU rules to operate more freely in the EU. However, these equivalence regimes are far from being a panacea, as they only apply in discrete product and/or service areas, such as recognition of third country CCPs under Article 25 EMIR and a limited EU passport under MiFIR for equivalent third country firms conducting wholesale business in the EU. Also, the European Commission is not generally obliged to make any equivalence determinations and equivalence can be lost if a third country's laws and regulations fail to keep pace with EU regulatory developments.
- The European Commission has adopted a time-limited equivalence decision for UK CCPs, allowing them to be recognised under Article 25 EMIR from the end of the transition period until 30 June 2022. However, equivalence assessments in many other areas are ongoing. In addition, in its communication on readiness at the end of the transition period, the European Commission indicated indicates several areas where it does not intend to make an equivalence determination in the short to medium term, including in relation to cross-border provision of wholesale investment services under Article 47(1) MiFIR.
- The loss of passporting rights also creates uncertainties for the status and continuity of existing cross-border contracts for financial services, particularly those which contemplate the ongoing provision of financial services or carrying on of regulated activities during the life of the contract. Again, there is no harmonised EU-wide solution to this issue and so firms need to navigate a patchwork of different regimes across EU member states.
- In contrast, the UK has introduced temporary permissions and recognition regimes, which allow EU firms and financial market infrastructures that previously provided services in the UK in reliance on passporting rights to continue to provide these services in the UK for a time-limited period (typically up to 3 years) following the end of the transition period.
- Much existing UK financial regulation (statutes, statutory instruments, rules and guidance) implements EU directives and is full of concepts and definitions taken from EU legislation. Also, some important components of UK financial regulation (e.g. the market abuse regime under MAR and rules on derivatives under EMIR) are contained in directly applicable EU regulations. The Withdrawal Act "onshored" this vast body of EU law or EU-related law at the end of the transition period. It provides that existing EU-related domestic law continues to form part of the UK domestic law after the end of the transition period even though the basis for its adoption has ceased to apply. In addition, it provides that directly applicable EU laws automatically becomes part of the UK domestic law at the end of the transition period, as they applied at that point in time.
- However, this on its own would not give the UK a workable body of domestic law as many EU-related provisions would not work effectively when the UK is no longer treated as a Member State. For example, references to EU institutions or processes are no longer appropriate when the UK is no longer treated as a Member State. The Withdrawal Act therefore gave the UK Government powers to make statutory instruments to remedy these and other "deficiencies" to reflect the post-Brexit status of the UK as a third country vis-à-vis the EU. In the area of financial services, HM Treasury and the financial regulators have made dozens of "exit instruments" remedying these deficiencies in the onshored body of financial services legislation and regulatory rules.
- The UK regulators have also been granted temporary transitional powers to smooth the cliff edge impact of the end of the transition period by delaying many of the changes to regulatory rules that would otherwise have applied to firms from that date. In general, these changes are delayed by 15 months to 31 March 2022. HM Treasury has also exercised its powers to make a number of equivalence determinations with respect to the EU ahead of the end of the transition period. Looking ahead, the UK government and regulators are considering what the future UK financial services regulatory framework should look like more broadly, including the respective roles of Parliament, HM Treasury and the regulators in the rulemaking process.
- In financial services the UK's current relationships with many non-EU countries in technical areas are dealt with at an EU level, e.g. recognition of US CCPs under EMIR and EU-US data protection arrangements. Following Brexit, the UK also needs to rebuild these types of relationships bilaterally, e.g. by regulators entering into MoUs and other arrangements for supervisory co-operation. In some cases, non-EU countries have indicated that the status quo will continue at least for a limited period post-Brexit (e.g. the CFTC in relation to EMIR-related no-action relief).
Funds and asset management
The UK funds and asset management industry currently benefits from the ability to passport both certain management and advisory activities and fund marketing activity across the EU. These passporting rights have been used extensively to further the single market and have shaped the way many asset managers conduct their business. There are a number of key areas of potential impact for funds and asset managers:
- Loss of passporting rights – based on current rules, a Brexit would give rise to loss of managing and marketing passporting rights into other EU member states. The potential impact of this on retail fund managers is considerably greater than the impact on private fund managers operating funds marketed to sophisticated and institutional investors only.
- Currently, Brexit will mean that UK firms no longer qualify for a passport under existing EU legislation relevant to fund management and marketing activity (primarily the Markets in Financial Instruments Directives (MiFID), Undertakings for Collective Investment in Transferable Securities Directives (UCITS) and the Alternative Investment Fund Managers' Directive (AIFMD)).
- Managers who do not rely on passporting rights are unlikely to be considerably affected.
- UCITS funds are likely to be more heavily impacted that the private equity fund management industry because:
- UCITS funds must be domiciled in an EU jurisdiction and managed by an EU management company. Post-Brexit, funds established as UCITS in the UK would no longer fall within the scope of the UCITS Directive and will no longer be able to rely on the passporting provisions that allow UCITS established in one member state to be managed and marketed in another.
- The UCITS regime is designed to facilitate marketing of interests in those funds to retail investors. However, UK domiciled UCITS would, post-Brexit, be considered a "non-UCITS retail scheme", which would in turn fall within the definition of "alternative investment fund (AIF)" under AIFMD. As the UCITS marketing passport would no longer be available, a manager wishing to market interests in such a vehicle into other EU member states would need to do so under AIFMD, which requires compliance with individual national private placement regimes (NPPRs). This would likely cause difficulties for existing UCITS funds re-categorised in this way because most NPPRs prevent or heavily restrict marketing to retail investors.
- The impact on private/alternative fund managers managing closed-ended AIFs will be less because there is no requirement that AIFs be domiciled in the EU, other than where an EU AIFM wishes to rely on the AIFMD marketing passport. Post-Brexit, existing EU AIFMs managing UK domiciled AIFs will be able to continue to manage those vehicles and where marketing into other EU member states will need to comply with the NPPRs as is currently the case for managers (EU and non-EU) marketing non-EU AIFs into the EU.
- UK managers of UCITS and AIFs would need to consider whether they become subject to any local licensing requirements as a result of managing and marketing activities if they are doing so in other EU member states.
- Portfolio management and advisory services: many asset managers provide asset management related services under MiFID permissions (e.g. delegation of portfolio management of certain funds or acting as an advisor to a UCITS manager or AIFM, or separate account discretionary or advisory arrangements). Currently, a Brexit would mean loss of the MiFID investment services passport for UK investment firms so they would not be able to provide those services on a cross-border basis, and they would become subject to the national rules/licensing regime relevant in each individual member state in which they want to conduct such services.
- In addition to loss of passporting rights for UK firms, asset managers operating in other EU member states would lose the ability to passport their services and market their funds into the UK. Those firms would need to comply with the current UK Financial Services and Markets Act 2000 regime and related FCA rules.
Intellectual property
Unitary rights
Some categories of intellectual property rights (and rights similar in nature) presently cover the whole EU via a single unitary right. These EU unitary rights will continue to apply in the UK until Implementation Period (IP) Completion Day (the end of the transition period) on 31 December 2020. At that point various Statutory Instruments made under the European Union (Withdrawal) Act 2018 will give rise to comparable rights in the UK. The comparable UK rights which will come into effect in this way are for:
- EU trade marks which are registered on IP Completion Day
- EU registered designs which are registered on IP Completion Day
- EU designations under international trade mark and design registrations which are in force on IP Completion Day
- EU unregistered designs protected on IP Completion Day
- EU Geographical Indications and Protected Designations of Origin (and similar rights) which are registered on IP Completion Day
- EU plant varieties which are granted on IP Completion Day
For registered EU trade marks and designs, where the legal framework is already largely mirrored at national level as a result of harmonisation of EU law, the expectation is that the grant of UK rights to replace the protection under the EU registration will be largely automatic and will only require the owners to take action if requested to do so by the UK IP Office. Holders can pro-actively opt out if they do not wish to have the UK comparable protection.
If an existing EU trade mark or design is the subject of revocation or invalidity proceedings that result in its revocation or invalidity after the IP Completion Day, then the comparable right that derived from that EU trade mark or design will also be revoked or declared invalid. The exception is where the grounds on which the EU trade mark was revoked/declared invalid would not have applied if brought against the comparable mark under the Trade Marks Act 1994 and Registered Designs Act 1949 respectively.
If an application for registration or grant of an EU trade mark or design is only pending before the relevant EU body on IP Completion Day, then the applicant will have to refile in the UK if it wishes to have UK protection, but may claim the filing date/priority/seniority of the EU application, provided that it re-files in the UK within 9 months of IP Completion Day or other applicable specified period.
The applicable Statutory Instruments preserve the rights of licensees under and security interests in EU unitary rights, by applying them to the comparable UK right, but in the case of licences this is subject to contrary agreement, meaning that a review of licences is advisable. Holders of security interests in or licences under the EU rights will also have to proactively re-register their interest to retain the protection of recordal under the comparable UK rights but are given a window of 12 months from IP Completion Day in which to do that.
EU designations under international trade mark and design registrations will have comparable UK rights automatically created at the end of the transition period based on their international rights protected through the Madrid and Hague systems.
For all these unitary registered rights, the Statutory Instruments contain further detailed changes to address the change from an EU-wide right to a UK national right.
Unregistered designs
Unregistered designs are presently protected by an EU unitary system and a UK national system which differ in a number of respects. To ensure continuity of protected design rights, two new UK rights will be created. Existing EU unregistered rights will be mirrored into the UK national system automatically on IP Completion Day and protected as UK continuing unregistered designs. The UK will also create a new unregistered design right called the supplementary unregistered design (SUD). The terms of SUD protection will be similar to that conferred by the EU's unregistered community designs but protection under this will extend only to the UK. The existing UK unregistered design right will also continue to operate as normal alongside these two new rights, however the qualification criteria will be amended to account for the fact the UK is no longer in the EU.
EEA designers disclosing their design in the EEA will cease to enjoy automatic protection under the UK unregistered design right with effect from IP Completion Date. Likewise, designs first disclosed in the UK will no longer be eligible for protection as EU unregistered designs. A business seeking unregistered design protection will therefore have to decide whether they want UK or EU protection. Simultaneous disclosure of the design may be possible but the UKIPO is yet to provide clarity.
Geographical Indications (GIs)
The UK does not presently have analogous national protection for Geographical Indications or Protected Designations of Origin. The relevant Statutory Instrument will therefore adopt the applicable EU Regulations as national law, subject to amendments to make the new scheme operate as a national scheme rather than an EU-wide one. Geographical Indications and Protected Designations of Origin on the EU register at IP Completion Day will be entered into the UK system.
A new scheme managed by DEFRA will come into effect at the end of the transition period and will be open to producers from the UK and other countries. Established GIs recognised under the EU GI schemes will continue to be protected in the UK.
From 1 January 2021, producers and breeders will need to apply to the relevant UK or EU scheme separately to protect a new GI or plant variety in UK (excluding NI) or Europe respectively. In relation to GIs, GB producers will need to secure protection under the UK scheme before applying to the EU scheme.
Supplementary Protection Certificates (SPCs)
Supplementary Protection Certificates, although currently issued under an EU Regulation, are already granted at a national level by the relevant regulatory authority. From IP Completion Day, the existing EU SPC regulation will form part of UK law pursuant to the Patents (Amendment) (EU Exit) Regulations 2019, however, with certain amendments to create a more standalone system.
SPCs that have already been granted will continue to be valid and no further action will need to be taken by the rightsholder. In addition, SPC applications filed in the UK prior to IP Completion Day that are pending will be unaffected by the change in the regulatory framework and will be examined under the current framework. SPC applications filed in the UK after IP Completion Day will be subject to the new regulatory framework, which requires that the applicant must have a valid patent in the UK and a marketing authorisation which allows the product to be sold on the UK market as at the application filing date. This includes marketing authorisations granted by the MHRA, the UK medicines regulator, and any authorisations granted by the EMA, the European medicines regulator, which have been converted into UK authorisations by the MHRA.
Although the grant of an SPC will be based on the first UK authorisation to place the product on the market as a medicinal product, the period of duration of the SPC will be based on the first authorisation for the product in either the EEA or the UK. However, third parties will be permitted to manufacture SPC protected products in the UK without the rightsholder's consent if such products are for export outside of the UK and EU. Stockpiling will also be permitted during 6 months prior to expiry of the UK SPC if the protected product is for sale in the UK or EU upon the expiry date.
Impact of Brexit on national rights
The existence of certain national rights created under harmonising legislation, such as the sui generis database right, currently requires an EEA nexus. From IP Completion Day, the focus will be on a UK nexus, rather than EEA, but with saving provisions for the database rights of makers from other EEA member states which are already in existence.
UK law relating to copyright and related rights will also be modified in a variety of respects to reflect the future reality of the UK’s separate status. Most UK copyright law is based on harmonising directives, but certain specific measures have latterly been introduced via EU regulations. Some of this will be adopted into UK national law, with appropriate amendments, on IP Completion Day. Regulation (EU) No 2017/1128 on the cross-border portability of online content services in the internal market will cease to apply.
The implementation deadline for Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright and related rights in the Digital Single Market falls after IP Completion Day. The UK Government's present position is that it will not implement that Directive into UK law.
Most of the UK's substantive patent law will be unaffected by Brexit, as it is currently based on the European Patent Convention, which is not an EU instrument. However some changes to compulsory licensing relating to the UK’s separate status will come into effect on IP Completion Day.
Supplementary Protection Certificates, although currently issued under an EU Regulation, are already granted at a national level. The existing EU SPC regulation will from IP Completion Day form part of UK law, but with amendments to create a more standalone system. SPC applications filed in the UK prior to IP Completion Day will be preserved. However, there remains uncertainty around the operation of SPCs, particularly applications which will transition. This is because their existence is subject to the grant of marketing approvals through the medicine regulatory regime, which itself is being separated with centralised European approvals ceasing to have effect in the UK.
EUIPO representation
UK lawyers and attorneys will be unable to represent clients before the EU IP Office from IP Completion Day so clients will need to record an EEA-based representative thereafter. The exception to this is for those existing procedures, such as oppositions (and any related appeals), recordals or objections, which are still ongoing at year end. For those issues, UK lawyers will continue to be recorded as the representative until the matter is resolved.
From the end of the transition period, the recorded address for service of documents in proceedings relating to patents, trade marks, and registered and unregistered designs must be in the UK, Gibraltar or the Channel Islands except in certain specified circumstances.
Open questions and the future
The actions taken to date via the Withdrawal Agreement and the United Kingdom’s implementing legislation aim to ensure that existing rights and law will largely be preserved in the United Kingdom on IP Completion Day, albeit in some cases in a different form or with slightly different rules.
For UK-based right holders, the situation is not necessarily the same in reverse, where protection or its scope currently requires an EEA nexus. This potentially has various impacts, including on UK owners of database rights and design rights in semiconductor topographies, and on UK broadcasters clearing rights for satellite broadcasts into the EEA. The shape of any trade deal will also impact on the future of exhaustion of intellectual property rights as between UK and EEA.
Over time, we may see further divergence, but at least initially UK law will remain largely aligned, but modified to reflect its future separate status.
Litigation
English law: Substantive English law used in transactions will be unaffected by Brexit because it is not, with trivial exceptions, derived from EU law. Regulatory changes arising from Brexit could, however, affect the enforceability of an English law contact after the end of the transition period, ie after 11pm on 31 December 2020 (eg if the loss of a passport or other authorisation in a member state in which an obligation must be performed rendered contractual performance illegal in that member state, it may be that performance would be unenforceable as a matter of English law). This may be affected by the terms of a deal, if any, done by the UK and the EU, as well as the local law in relevant states.
Choice of law: The validity of a choice of English law will be unaffected by Brexit. EU member states will continue to apply the Rome I and Rome II Regulations, which require the law chosen by the parties to be applied whether or not it is the law of an EU member state. Rome I and Rome II will continue to apply, with immaterial changes, in the UK after Brexit in the form of retained EU law under section 3 of the European Union (Withdrawal) Act 2018.
Choice of court: The English courts will continue to uphold the parties' choice of the English courts after after the end of the transition period. The English courts will also be able to grant anti-suit injunctions to restrain proceedings in EU member states brought in breach of a jurisdiction clause.
There may be a question as to whether courts in EU member states will uphold a jurisdiction clause in favour of the English courts in circumstances where the EU court has jurisdiction under the Brussels I Regulation (at least, unless the provisions of article 33 of the Brussels I Regulation apply, which require the English court to be first seised).
The UK has acceded in its own right to the Hague Convention on choice of court agreements, which will come into force for the UK on 1 January 2021. For contracts containing exclusive jurisdiction clauses (which do not include asymmetric clauses) in favour of the English courts entered into after the Convention comes into force in the UK, courts in EU member states will be obliged to defer to the parties' choice of the English courts. (The UK argues that the Convention has been in force for the UK from 1 October 2015; the European Commission does not agree.)
Other jurisdictional rules: After the end of the transition period, the Brussels I Regulation will cease to determine the jurisdiction of the English courts over parties domiciled in the EU and in certain other circumstances. The jurisdiction of the English courts will, in the main, revert to the rules applicable to parties not domiciled in the EU (which depend upon the ability to serve a defendant with legal process within the jurisdiction or, with the permission of the court, outside the jurisdiction).
The jurisdiction of courts in EU member states over parties domiciled in the UK will be determined by the national law of each member state, with the limited exceptions where the Brussels I Regulation applies regardless of domicile (eg proceedings relating to real property in a member state or where there is a jurisdiction clause in favour of the courts of that state).
Enforcement of judgments: Under article 67 of the Withdrawal Agreement, an English judgment given in proceedings "instituted" before the end of the transition period will be enforceable in EU member states in accordance with the Brussels I Regulation whether the judgment was given before or after the end of the transition period. Otherwise, a judgment of the English courts will cease to be enforceable in EU member states under the Brussels I Regulation but it is likely to be enforceable under the law of each member state applicable to foreign judgments not covered by a treaty (the law currently applicable to, for example, New York judgments).
A judgment given by a court in an EU member state after Brexit will be enforceable in England by common law means (or, possibly, in the case of six EU member states, under treaties between the UK and those states entered into before the UK joined the EU in 1973).
An English judgment given in proceedings to which the Hague Convention applies will be enforceable throughout the EU in accordance with the Convention. Likewise a judgment to which the Hague Convention applies given by a court in an EU member state will be enforceable in England.
Arbitration: Arbitration is unaffected by Brexit. The UK and all EU member states are parties to the New York Convention, which provides for the recognition of arbitration agreements and the enforcement of awards.
Pensions
Much of current UK pensions legislation is domestic in origination and so will be unaffected by Brexit. However, some of it does have EU-roots. For example, parts of the Pensions Act 2004 relating to scheme funding originally derived from Europe. In addition, some of the UK's pensions practices derive from European case law.
There will not be any immediate changes following the end of the transition period which runs to 31 December 2020 albeit there is scope for divergence if the UK does not in the future follow EU pensions initiatives. As things currently stand, UK courts will not be bound by decisions of the ECJ made after expiry of the transition period, but "may have regard" to those decisions "so far as relevant to any matter before the court" and the power to depart from retained EU case law will extend beyond the UK Supreme Court to the Court of Appeal (and equivalent courts across the UK). It remains to be seen in practice to what extent the English courts will follow/apply post-Brexit decisions of the ECJ that develop new pensions law principles post-Brexit.
The Occupational and Personal Pension Schemes (Amendment etc) (EU Exit) Regulations 2019 (the Pension Brexit Regulations) will come into force on the expiry of the transition period (i.e. 31 December 2020) and make minor and technical changes to UK primary and secondary pensions legislation, broadly to ensure retained EU law continues to operate effectively and to address other deficiencies arising in UK pension legislation as a result of Brexit.
Key things to be thinking about from a pensions perspective:
- Employer covenant – a key issue for defined benefit (DB) schemes is the effect (if any) that Brexit may have on the sponsoring employer's business as this may have a direct impact on the employer covenant (the legal obligation, ability and willingness of an employer to fund its pension scheme). Covenant is not something which will be new to DB scheme trustees (or employer(s)), but it will be important to understand how the employer's business (e.g. its reliance on imports or exports, plans for investment etc.) has been affected by Brexit and any further potential implications after the expiry of the transition period which will largely depend on the terms of any deal reached between the UK and EU as applicable on the expiry of the transition period.
- Funding – the longer-term impact on the funding position of DB schemes remains to be seen. The Pensions Regulator has said that trustees should not be too focussed on short-term market movements caused by Brexit and recent legislative developments (in particular the Pension Schemes Bill) also encourage trustees to focus on the longer-term funding strategy for their schemes.
- Investment issues – the impact on financial markets may also be cause for DB scheme trustees to keep their investment strategies under review even beyond the end of the transition period, whilst defined contribution (DC) schemes and providers may consider whether the investment options made available to members remain appropriate.
- Trustees and employers may need to address the terms of any funding/support packages in place, to check whether any legal or investment triggers occur on the expiry of the transition period that may cause automatic consequences in respect of such arrangements (e.g. the downgrading in a company's credit rating may trigger the termination of a guarantee or increased funding payable to a DB scheme).
- Data protection – changes to the regime for data protection came into effect in all Member States, including the UK on 25 May 2018 under the EU General Data Protection Regulation (GDPR). The GDPR introduced new concepts and some enhancements to the protections for individuals which would have required most pension scheme trustees to alter their existing processes. Please see our Brexit update on data protection for further details.
- Impact on financial services regulation – a key issue is the impact on financial services regulation and arrangements for cross-border access and passporting rights. For example, in a pensions context, there are concerns around how insurers and other personal pension providers who currently rely on passporting rights will be permitted to continue to pay benefits to pensioners and other pension scheme beneficiaries living outside of the UK in the EU after the expiry of the transition period. Please see our Brexit update on financial regulation for further details.
- Corporate transactions – if the long-term impact of Brexit is to increase the magnitude of DB scheme deficits whilst simultaneously weakening the strength of sponsoring employers, it is possible this could make pension schemes more of a stumbling block to corporate transactions and restructurings where a UK DB scheme is involved. The government has also introduced the Pension Schemes Bill which covers a wide range of changes designed to create a "stronger" Pensions Regulator; some of which could have a significant impact on business activity (for example corporate, finance and restructuring transactions) where DB schemes are involved including new, very broadly drawn criminal offences. Please see our previous client briefings on this topic for further information.
- Cross-border pension schemes – broadly, cross-border pension schemes are subject to certain additional regulatory requirements, including that they must apply for authorisation and approval from the Pensions Regulator. The cross-border regime will cease to apply to the UK on 31 December 2020. As such, the Pension Brexit Regulations revoke the UK's cross-border regulations and also remove the requirement for UK occupational pension schemes to obtain authorisation from the Pension Regulator for cross-border activities with effect from the end of the transition period. The Commission has confirmed that UK cross-border schemes will be treated as "third-country" undertakings post-Brexit, broadly meaning that they will only be able to operate in an EU Member State if permitted to do so by, and subject to, the national law of the applicable Member State.
Tax
After Brexit, the legal position as regards UK tax law will depend on the terms of the alternative settlement to full EU membership which is agreed by the UK. The key implications from a tax perspective are set out in our briefing: The tax impact of Brexit: what steps should UK and EU businesses take now?
If there is a comprehensive transitional period then most tax changes will be deferred until transition ends. However, after that time, unless there is a very expansive FTA between the UK and EU, the UK Government would be free to implement tax legislation which would not currently be compatible with EU law.
In the event, tax measures which are contrary to the free movement of goods, establishment and/or capital could be implemented, including taxes on the raising of capital or cross-border flows. Furthermore, any area of UK tax law which is currently incompatible with EU law may become valid. For example:
- Controlled foreign company legislation could be extended to its intended original scope, with CFC charges imposed on UK companies calculated by reference to the profits of subsidiaries based in EU jurisdictions with low effective rates of tax (although there is at present no indication the Government will do that)
- The 1.5% tax charge on the issue of shares and securities to clearance services or depositories, which was found to breach the EU Capital Duties Directive, could be enforced (although the Government has announced that it does not intend to do so after Brexit).
An FTA agreed between the UK and EU would likely include rules similar to the prohibition on "State aid" in Art 107 TFEU. However, if it did not then the UK would be free to enact legislation and make arrangements which would currently constitute unlawful State aid, subject only to WTO rules. For example, the Government could incentivise companies to relocate to the UK by offering tax "favours", or advance tax rulings, which provide a selective advantage to those companies over others.
We could even see regions, cities and councils compete to provide business with tax incentives (as they do in the US). Whether this is a good idea from a policy perspective is very arguable – but there could be significant political pressure on Government, at all levels, to provide State aid if able to do so.
The more immediate issue will be establishing how the detail of UK tax law is impacted by Brexit. While the European Union (Withdrawal) Act 2018 addresses some of the difficulties it will not be clear for some time how these will be resolved in practice by the courts. For example:
- The extent to which CJEU case law and EU jurisprudence will continue to influence the decisions of UK courts after Brexit and the interpretation of UK tax law (especially in relation to VAT) remains uncertain;
- It is unclear how pending (or potential) cases brought against the UK Government on the basis of UK tax law being incompatible with EU law will be resolved, particularly where the matter in question has not been referred to the CJEU before exit day; and
- The UK Supreme Court will no longer be bound to follow the principles of interpretation established by the CJEU, so the overarching cornerstones of VAT law (such as the principles of legal certainty, fiscal neutrality, equivalence and non-discrimination) could fall away, which would have a profound impact on the way in which VAT law is interpreted.
Moreover, following a legislative amendment approved by Parliament in January 2019 (the "cooper amendment"), the event of a "no deal" Brexit the UK Government may be restricted in its ability to update relevant UK tax lesgilation to deal with withdrawal from the EU without obtaining Parliamentary approval for those changes. It is not yet possible to predict the full impact of this, but this does result in further uncertainty for taxpayers.
If these uncertainties in relation to taxation are not adequately resolved in the post-Brexit alternative settlement, this is likely to result in potentially unwelcome uncertainty for UK companies. For example:
- Some UK companies may have taken comfort from the limits placed on the UK Government's taxing powers by EU law. Indeed, these limits may have been fundamental to those companies' decisions to base themselves in the UK;
- Preferential EU rules applicable to cross-border transactions may no longer apply. For example, dividends and interest paid by certain EU subsidiaries to UK parents may become subject to withholding tax as a result of the Parent-Subsidiary Directive and Interest and Royalties Directive no longer applying. Moreover, VAT may need to be charged on transactions where it is currently not charged and UK businesses may need to register for VAT in EU countries where they are currently not required to do so;
- The remaining EU Member States would equally be free to exercise their taxing powers in a manner which, by accident or design, discriminates between local entities and UK entities (or local branches of UK entities);
- The UK would lose its influence over tax-related developments within the EU. This could be significant in relation to the proposed EU Financial Transaction Tax, which the UK has so far lobbied against effectively;
- VAT provisions in commercial contracts may need to be amended in light of a full Brexit (e.g. where VAT is defined by reference to EU VAT legislation only, in which case the contractual provisions may no longer apply in relation to UK VAT); and
- In the absence of an alternative free trade agreement, the EU would impose the Common Customs Tariff on imports from the UK, and the UK would likely impose tariffs (limited by its WTO obligations) on imports from the EU.
At a wider international level, Brexit is unlikely to have such a significant impact:
- The UK would continue to benefit from and remain subject to its extensive network of double tax treaties, including (where relevant) their non-discrimination provisions;
- The UK would also continue to have influence in international efforts to drive tax policy, including the ongoing OECD BEPS project; and
- Depending on the alternative settlement reached, the UK may be free to negotiate its own free trade agreements with other jurisdictions, which could result in fewer tariffs and duties on exports and imports between the UK and those other jurisdictions.
There is one important exception for some companies in the EU receiving income from the US on which they claim relief under double tax treaties with the US. US tax treaties limit treaty benefits to certain classes of person, and in many cases one important class is private companies with EU shareholders. Any EU company in this position which has significant UK shareholders will need to consider if Brexit has the indirect effect of causing it to lose its eligibility under the relevant US treaty.
