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BREXIT: Companies should act now to future-proof contracts

Out-Law Analysis | 04 Apr 2016 | 9:38 am | 2 min. read

FOCUS: UK businesses should ensure that new contracts are future proofed against the UK leaving the EU by giving themselves room for renegotiation in the event of a Brexit.

This is part of Out-Law's series of news and insights from Pinsent Masons lawyers and other experts on the impact of the UK's EU referendum. Sign up to receive our Brexit updates by email. 

Companies should insert a hardship clause allowing parties to renegotiate terms if the agreement becomes unprofitable under the new political situation, and they should consider currency issues in new contracts.

Businesses should also check for potential risk in existing contracts. For example, would the UK leaving the EU constitute a force majeure event, or a material adverse change? Would currency issues affect the contract, or changes to the free movement of goods? Preparation and awareness of any issues will help to avoid problems if the UK votes to leave.

It is worth stressing that the UK is unlikely to become a more deregulated environment post-Brexit. There has been a lot of talk of cutting 'EU red tape', but in reality the UK government has driven much of the regulation that is in place and is unlikely to want to make substantial changes.

The government would not risk, for example, damaging the status of the London Stock Exchange as a major international listing market and trading platform. We can assume, therefore, that the UK will maintain international standards equivalent to existing EU directives.

Much of the UK's company law is derived from EU legislation and the government would have to balance any deregulation against the importance of maintaining confidence in the UK as a country of choice in which to establish and operate companies.

The UK's corporate governance regime was developed within the UK but is certainly influenced by both European and even global initiatives. As with other areas, the opportunity to deregulate would need to be considered against these international influences.

In some areas such as takeovers, the UK has gone beyond EU requirements in its domestic legislation in order to enhance investor confidence. It will not choose to damage confidence by making too many changes to that, and any new UK-specific rules are likely to replicate the existing EU regulation.

Two areas where problems may arise are investment prospectuses and investment funds.

There may be some complexity in prospectuses and announcement requirements if the UK loses the rights of mutual recognition between states. Any UK company or financial institution would now be outside the EU, and it will be up to the Commission to decide whether the UK's law and practice is sufficient to satisfy its equivalence test to approve UK prospectuses.

Previously approved prospectuses could also be affected, depending on the new UK regulations and how the Commission chooses to view these.

For private investment funds such as private equity and infrastructure funds, one of the main impacts of leaving the EU would come as a result of the Alternative Investment Fund Managers Directive. Under this directive non-EU funds and fund managers are treated differently to those in the EU. This would lead to most new funds being established in EU jurisdictions rather than the UK, to make marketing to EU investors more straightforward.

Funds that are already established and no longer being marketed will feel less impact. However, new bilateral agreements between the UK and other member states, particularly in terms of taxation, will mean that existing structures have to be revisited.

Jonathan Beastall is a corporate law expert with Pinsent Masons, the law firm behind Out-Law.com.

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