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BREXIT: Triggering of article 50 will lead to board demands on Brexit-proofing, says expert

Out-Law Analysis | 29 Mar 2017 | 1:30 pm | 3 min. read

ANALYSIS: Company directors are likely to demand more concrete Brexit action from executives now that UK prime minister Theresa May has begun the formal process of leaving the EU.

May triggered article 50 of the Treaty on European Union by writing to the European Council today to give formal notice that the UK would leave the EU. That departure must now happen within two years unless all EU countries agree an extension.

That brings Brexit from the theoretical to the concrete, which means that it engages more directly than before directors' duties to act in the best interests of the company. They will now be demanding action to a set timetable.

Everyone knew Brexit would happen and that it was likely to be triggered in March. But the fact that it has now actually happened means that boards will be responsible to shareholders for ensuring that real, detailed plans are in place to prepare companies for the changes ahead.

That will put concrete Brexit planning higher up the agenda of executives, many of whom have not devoted huge resources to making plans because the timing and nature of Brexit have been uncertain.

We have known since January that Theresa May does not plan to prioritise single market access or any existing arrangement, such as membership of the European Economic Area or the European Free Trade Agreement.

Now we know that, barring an extremely unlikely extension, the UK will leave the EU by 29 March 2019. This gives executives more certainty to base plans on, and means that shareholders will demand that boards hold management to account on their planning.

Of course much is still uncertain, including whether or not the UK will manage to negotiate any trade deal at all with the EU.

One place where companies can take immediate and achievable action is in the structure of their commercial deals, arrangements and contracts.

Many companies will already have changed their contracts to reflect this, introducing change of law clauses, termination rights, territorial definitions and currency clauses – these can give give flexibility once the shape of Brexit becomes apparent.

Any companies which have not done this should begin work straight away; with article 50 triggered there is really no reason not to have Brexit-ready agreements for future deals with suppliers, customers and business partners.

Some companies will operate on the basis of short agreements, so the future-proofing of agreements can end there. But companies whose contracts span three, five, seven or more years will now need to start work on amending those to give the necessary flexibility.

Companies have known since the Brexit referendum that this work must be done, but in the political and economic uncertainty of the past months it may not have been a priority, and in many companies those changes have not been made.

Boards will now expect work to be done in earnest, and to fixed timetables, as they will be under pressure to protect shareholders' interests.

The most important part of this process is the analysis phase that will help a company identify where its exposures are and which of those pose the biggest risk or opportunity. Companies should look at where their suppliers and customers are; what the currency and exchange rate implications of that are; what effect tariffs and border controls would have on the movement of components and finished products, and what position their competitors are in.

The results of this analysis, which could take a couple of months, should guide the legal activity of adjusting the risk profile of agreements and negotiating changes with the other party to those contracts.

Some companies in a strong negotiating position might be tempted to insert a termination right into contracts, but since this is likely to be reciprocal it is not suitable for critical suppliers as it also gives them the right to terminate.

Others have tried to insert a clause demanding that the other party absorb all the Brexit-related risk. This is not only likely to be rejected but can sour negotiations over what shape a fairer solution would take.

It would be possible to insert a very, very long clause that detailed what would happen in each one of every possible scenario, but this is unlikely to be workable or commercially desirable.

So companies will have to work out a negotiated solution with each customer, supplier or business partner. This will take time so, again, activity should be prioritised according to the results of the business analysis.

Many companies have held off re-tooling their agreements for Brexit. With the article 50 clock now ticking that is no longer an option.

Clare Francis is a commercial expert at Pinsent Masons, the law firm behind Out-Law.com