Douglas Adams, the late British author, wrote that “Don’t Panic” was printed in large, friendly letters on the cover of The Hitchhiker’s Guide to the Galaxy for two reasons: (i) the Guide looked insanely complicated to operate; and (ii) to keep travelers from panicking. U.S. businesses might do well to remember that phrase when analyzing the potential impact of Brexit, the United Kingdom’s (UK) decision to leave the European Union (EU). The UK government served notice on March 29, 2017, under Article 50 of the Treaty on European Union, starting the up-to-two-year period of negotiations over the UK’s exit from the EU. The actual mechanics of Brexit look insanely complicated to operate, and, well, U.S. businesses shouldn’t panic. Taking the role of Ford Prefect, I’ll discuss something other than the Ultimate Question of Life, the Universe, and Everything. (The answer to that question, by the way, is 42.)
The most important current Brexit fact is that we don’t know what it will look like at the end of the process. There is no ‘guide’ to managing the departure since no EU member has ever left the pact. The EU and UK have up to two (2) years to negotiate the terms of the UK’s departure but certain EU members, including Germany, are pressing for the process to be completed faster.
One possible result of this process is that the UK and EU could be in a relationship that preserves the free movement of goods (duty-free) between them (similar to the relationship involving the EU and states in the European Economic Area (“EEA”)), but allows the UK to restrict the movement of non-UK persons. Another result is that if the UK and EU are unable to reach any agreement within the relevant two (2) year period, goods could be subject to tariffs, and the movement of persons restricted. And, of course, there are a wide range of possibilities between those alternatives.
As of right now, it appears that the result of Brexit may be a ‘hard’ exit that leaves the UK outside of both the EU and the EEA, whose products and services would not benefit from EEA-like treatment. An EU official recently stated that the pact was founded on the three principles of free movement of goods, free movement of investment, and free movement of people—and that unless the UK agreed to all three concepts as part of a post-Brexit relationship between the UK and EU, then Brexit would be a ‘hard’ exit with hard economic borders between the UK and EU member states. The UK has significant concerns with the free movement of people; indeed, that was a core reason behind the pro-Brexit vote in last summer’s referendum.
Instead of panicking, U.S. businesses should plan ahead, and focus on some opportunities:
- Currency fluctuations caused by Brexit can make pound-denominated assets (including real estate) relatively less expensive for purchasers using dollars, and will make UK-origin products less expensive on the U.S. market. It may be a good time for U.S. companies to buy. Conversely, U.S. origin products are now relatively more expensive for the UK purchaser, putting revenue pressure on U.S. companies dependent on the UK market. U.S. companies may consider foreign exchange/currency derivatives to minimize the impact of such instability.
- Many U.S. companies have their EU headquarters in the UK. Post-Brexit, U.S. companies should remain in the UK—it is, after all, the fifth largest economy in the world. But, if there is a hard economic border between the UK and EU (as seems likely), U.S. companies may need to shift their EU headquarters to another EU jurisdiction.
- After Brexit, Ireland will be the only English-speaking nation in the EU and in the Eurozone. These facts augment Ireland’s well-educated, talented, and relatively young workforce, as well as its favorable tax regime. U.S. businesses should consider Ireland as a headquarters for pan-EU business operations, either in the first instance or in relocation from the UK.
- One option for U.S. companies may be to have EU headquarters in Ireland, maintain a UK office, but place that UK office (for tax and other reasons) under the Irish office, or have an Irish holding company hold both the UK and Ireland/EU offices.
- Competition/antitrust law will become more complicated. Businesses operating across the UK and EU may be subject to parallel—but not matching– competition/antitrust regimes. In addition, businesses may have to submit to merger review in both the UK and the EU, as opposed to the current single point of notification.
- Once Brexit is complete, the UK will not be a party to the trade agreements between the EU and other nations, and the UK will have to strike new trade agreements with such nations. That could make the movement of goods between the UK and such other nation more expensive—at least during those negotiations. U.S. businesses with supply chains or distribution networks that go through the UK should be aware of the potential for increased cost.
- Citizens of EU members might, and probably will, lose the automatic right to travel to and work in the UK and to have their home-country credentials recognized in the UK. Similarly, UK citizens could lose these rights in EU member states. For a U.S. multinational operating in the EU and UK, the loss of free movement of persons in/out of the UK may complicate staffing decisions, impact certain commercial contracts, and increase immigration compliance costs. Note, however, that notwithstanding Brexit, the Common Travel Area between the UK and Ireland will remain, meaning that people can move freely between those jurisdictions (but that benefit does not extend to non-Irish citizens or residents)
- After Brexit, the Recast Brussels Regulation that governs jurisdiction and the mutual recognition and enforcement of EU member state judgments may have no effect in the UK, and vice versa. Given this uncertainty, U.S. businesses should consider arbitration or other forms of alternative dispute resolution for contract disputes involving the UK and EU, and should write that choice in to their agreements. U.S. businesses should also pay extra attention to the choice of law used in their cross-border contracts, as well as the forum selection clause if arbitration is not the selected method of dispute resolution.
As noted above, much of Brexit’s impact is unknown. We have highlighted a few issues for current consideration by—not to panic—U.S. businesses. We will provide additional client updates going forward.