Brexit forces businesses to make decisions soon – York-Alexander von Massenbach sheds light on risks and legal frameworks
“Identify your risks – and start to manage them.” That’s the message to corporate decision-makers from York-Alexander von Massenbach, a lawyer in Luther’s London office and Chairman of the Regional Committee UK of the British Chamber of Commerce in Germany. Blue chip companies, especially financial institutions, are implementing contingency plans to protect their businesses in Europe. EasyJet is opening a new European division in Austria. Nomura and Sumitomo Mitsui will have new bases in Frankfurt. Lloyd’s, the insurance market, is setting up a new division in Brussels. Brexit planning is relevant to virtually every industry and sometimes even harder for medium-sized companies. Companies worldwide must assess their individual risks and become active.
Assess your risks – key areas are people, goods and data
“Brexit means Brexit” may be a good punchline for politicians, but it’s no help to companies trying to run a business and cope with a rollercoaster environment. Where to start in assessing risks?
“Business leaders need to consider different potential exit models and their implications. They should identify the risks and review the current political perspective. For example, if no agreement is reached, the EU and the UK could end up relying on the WTO rules. That is, the UK leaves the customs union and the single market and is subject to the EU’s common external tariff”, says York von Massenbach: “But so far, the UK has not installed any customs infrastructure and exporting or importing businesses would need to learn the necessary practical processes.” He adds:
“For manufacturing and retail companies, how will custom duties and interest rates affect the supply chain? We are seeing pledges from the Government to impose customs duties on all goods from the European Union if a deal can’t be agreed. Companies will have to make decisions about balancing price increases and paying dividends while remaining competitive.”
Other concerns are the ongoing weakening of sterling and an end to freedom of movement. “Working in the UK is losing its attraction for EU nationals. For instance, if you’re a Polish national, instead of working in the UK it now makes more sense to work in Germany and be paid in euros, especially if you are sending money home,” says Mr. von Massenbach. “ On the other hand, there are tangible immediate effects that have to be considered – a sustained period of low base rates, higher inflation and lower consumer confidence, just to name a few. You might want to take into account where your staff originates from and what drives employees to work for your company.“
Data protection: the UK might be considered as “insecure” as the US
“And then of course there’s data privacy and data protection. UK companies are already looking at implementing the EU’s General Data Protection Regulation, which comes into force next year, regardless of what the Government does. If the UK is outside the EU, it may be considered an insecure third country, similar to the United States. Britain would have to prove that the UK’s standard of data protection is rigorous enough.”
“In short, after Brexit things may not fit together any more, and certainly not in the same way. Relocating your business or setting up subsidiaries will become much harder and more expensive once Brexit has happened. So it’s important not to wait too long to prepare for the future. What are the risks for your operating model? What are your priorities? At the same time, there are businesses to be run. Extra support may be needed to plan for a post-Brexit world, and of course, that is where good advisers come in.”
Look for UK opportunities in distressed and turnaround investments
Mr. von Massenbach cites the British attitude of “Keep calm and carry on” as being good for the economy in the short term, but is concerned about the bigger picture. Falling house prices have brought the annual rate of growth in the market to the lowest level in four years and the average rent in London is dropping by 3%. Investment opportunities in the UK are likely to be found in turnaround and distressed investments, leveraging private equity and other financing solutions. In contrast, the continental market may profit as UK companies strengthen existing European subsidiaries, set up new ones or even relocate – expansion through deal-making is always an option.
No European Court of Justice for the UK – converting EU into UK law and keeping up with developments
The Prime Minister has declared ending the ECJ’s oversight of British legal matters to be a “red line” but if the UK plans to continue trading with EU countries which will be applying EU laws, Mr. von Massenbach says, it’s hard to say that it won’t accept the Court’s jurisdiction. The “Great Repeal Bill” will convert all EU law into UK law, but if new EU law comes into force or new ECJ decisions are handed down, UK law will have to develop in a compatible way. The Institute of Government suggests dropping ECJ jurisdiction as a red line, in the interests of harmonising rules and standards and knocking down regulatory barriers to trade. In its latest paper the Government only alluded to examples of existing deals where the ECJ still has substantial direct or indirect power.
More immediately, Brexit may also see an increasing reluctance to accept contracts under UK law. The UK legal system, its language and history, are well known. But continental countries may see themselves as being in a stronger position to ensure that contracts are governed by their own legal systems, particularly if it becomes unclear as to what is meant when speaking of “English law”.
A word of advice
“Every business is going to be affected in different ways,” says Mr. von Massenbach. “Everyone needs to prepare and now is the time. March 2019 is not that far away.”
York-Alexander von Massenbach
Luther Rechtsanwaltsgesellschaft mbH
7 Pilgrim Street
EC4V 6LB London
Phone +44 207 002 53 48
Fax +44 207 002 53 45