Brexit: Important Considerations to Make Before the End of the Year

On the 31st January, the UK finally departed the EU, entering into a transition period set out in the Withdrawal Agreement. This transition period, made between the UK government and the EU Commission in October 2019, unless otherwise agreed by both parties, will end on 31 December 2020.

At this stage, it is yet unclear what agreement the UK government and the EU Commission will reach, if at all. However, in the case of a no-deal Brexit (i.e. transition period ending with no formal trading agreement), a body of EU law currently in force will be implemented into UK law (with amendments) under the European Union (Withdrawal) Act 2018, which will “retain” a considerable amount of current EU law.

From a corporate and company law perspective, nothing has changed and is likely to change until the end of the transition period. This is because The Companies Act 2006, which is the primary source of company law in England and Wales, is unlikely to be amended in any major way.

Directors’ duties, shareholders’ remedies and rules in respect of accounts and audit will also likely not change. However, prior legislation made to amend The Companies Act 2006 raises important considerations that could still significantly affect many companies going forward.

Companies (Cross-Border Mergers) Regulations 2007

Currently, a legal framework allowing cross-border mergers between limited liability companies from the member states of European Economic Area (EEA) exists by way of the European law Directive 2005/56/EC. Part of the procedure prescribed by the directive is set out in the Companies (Cross-Border Mergers) Regulations 2007, which will likely be revoked in the case of a no-deal Brexit. There are several types of cross-border mergers available to companies where the process is largely similar. These are: merger by absorption, merger by absorption of a wholly-owned subsidiary and merger by formation
of a new company.

Currently, companies are required to complete the “pre-merger acts”, which include preparing a merger plan, a directors’ report and an independent expert’s report (not applicable if a merger is by absorption of a wholly owned subsidiary). Companies must then obtain court approval from the country where the merged entity is to be registered and following that, Companies House must receive the merger documentation, which will strike off the relevant company.

In light of this, according to the UK government’s guidance1, cross-border mergers involving UK companies must be completed and registered before 1 January 2021. After this, cross-border mergers that use this regime will not be able to take place. This is likely to increase both the complexity and the time it takes to complete a merger in the future.

Company registration from 1 January 2021

The government states that leaving the EU will not affect how UK companies will be required to report information to Companies House2. There are, however, some changes that need to be taken into consideration if a company is formed under EU law. This includes European public limited liability companies, known “Societas Europaea” (“SE”) or European economic interest groupings (“EEIGs”).

If alternative arrangements are not made before the end of the transition period, these companies will be automatically converted into new UK corporate structures, namely UK Societas and United Kingdom economic interest grouping (“UKEIG”), thereby allowing them to retain a clear legal status. Alternatively, to avoid automatic conversion, SEs can convert to a UK public limited company (PLC) if certain conditions are met and both SEs and EEIGs can also move their seat of registration from the UK to another EU member state.

UK companies with EEA corporate officers

After the end of the transition period, the filing requirements for companies and limited liability partnerships (“LLP”) with EEA corporate officers will also change. The companies, or LLPs, will have to provide the corporate officer’s name, registered or principal office address, legal form, its governing law, and its registration number to the Companies House. Currently, the legal form of the company and the law by which it is governed does not need to be provided if the corporate officer is an EEA company. In practice, this means that some of the Companies House forms will indeed be affected.

UK resident directors in the EU

Companies must also consider whether their subsidiaries based in the EEA will be affected by any local legislation requiring that their directors be EEA residents.
For example, UK-resident directors may be required to meet the requirement of the Irish Companies Act 2014, stating that a company registered in Ireland must have at least one director who is a resident in an EEA state, or meet one of the other options set out in section 137 of the Act. Similar restrictions apply to directors in some other EEA countries including Finland and Norway.

Impact

The UK government has urged all affected companies to take necessary measures to prepare for a no-deal Brexit. In light of the current uncertainty, companies should consider whether their structures will be negatively affected by the changes, and if so, establish a new legal presence for operations in the EU or UK as required.

They also need to ensure that their directors are able to continue carrying out their duties and any cross-border mergers should be completed before the end of the transition period. Above all, companies must continue to monitor developments on the Brexit negotiations closely, to ensure minimum disruption in the event of a no-deal scenario.

Ilja Balkus, Legal Officer, Citco Global Subsidiary Governance Services
Citco GSGS Focus – Summer 2020