Brexit - Mergers & Acquisitions
A very important question is whether foreign investors will still be willing to invest in UK companies and what will be the consequences thereof for the EU market.
On the one hand, due to the current uncertainty about the exact (legal) implications of Brexit, there could be an increase in investments in the remaining 27 EU Member States, since these jurisdictions do not involve any uncertainty and, more importantly, access to the European Single Market is guaranteed (whereas for the UK, this will depend on the outcome of the negotiations).
On the other hand, the higher GBP-EUR currency volatility and weaker share prices due to the devaluation of the GBP could attract potential investors to the UK market.
When envisaging an M&A transaction that involves a UK entity, the due diligence investigation will become increasingly important. Due to the uncertainty of the legal implications of Brexit, more unforeseen issues may arise in deals with a UK dimension, which makes it essential to conduct a detailed investigation of all potential risks, both short-term and long-term (for example regarding data protection, EU funding, (in)direct tax benefits, IP rights, etc.).
Share Purchase Agreements (SPAs) & Asset Purchase Agreements (APAs)
From a purely contractual point of view, whether the parties opt for Belgian law or UK law, the impact of Brexit on M&A transactions is expected to be minimal, and this because SPAs and APAs are in principle governed by national, non-EU-harmonised law.
Nonetheless, fluctuations in exchange rates and share prices could incentivise both sellers and buyers to incorporate certain protection-mechanism clauses in order to accommodate the risks in this respect.
Another aspect to take into account when drafting M&A contracts is the defining of the geographical scope in clauses containing territorial restrictions, e.g. non-compete clauses. Whereas the geographical scope of the EU used to include the UK, in the future this will no longer be the case, so existing contracts that contain such territorial restriction clauses and that are still in force post Brexit should also be checked on whether the definition of “EU” refers to the 28-member EU or the 27-member EU, and they might have to be amended in this respect.
Material Adverse Change (MAC) clauses
Many M&A contracts contain a Material Adverse Change (MAC) clause, which allows a company to renegotiate or walk away from a deal if the company or its subsidiaries announces a significant event that may negatively affect its stock price or operations or anything else that could be considered a substantial change to the circumstances that are relevant to the contract. When dealing with UK parties, the question arises whether Brexit could be considered as such a “material adverse change”. This will of course depend on the exact wording and definitions used in the relevant contract, but in order to prevent any uncertainty, it is advisable to insert clarifying wording with respect to this specific event.
With respect to merger control and competition, all EU Member States apply a harmonised legislation, and all EU transactions are subject to the same thresholds and supervised by one and the same authority. This is the so-called “one stop shop” clearance process, which avoids the need for clearance in multiple EU Member States. However, with the UK leaving the EU, and if no agreement is reached on this matter during the negotiations, it may be possible that M&A transactions involving a UK entity would be subject to parallel investigations and approval by both the European Commission and the UK Competition and Market Authority, bringing additional paperwork, time and costs.
Choice of law and jurisdiction / Dispute resolution
Even though it is possible that the Rome I Regulation on the Law Applicable to Contractual Obligations might no longer apply to the UK, the impact thereof on M&A contracts is expected to be rather low, thanks to the fact that it is standard practice that such contracts contain a clause defining the law applicable to the contract.
Another aspect to take into account is that the mutual enforcement and recognition of judicial decisions between the UK and the EU might come to an end, which could lead to an increased preference for arbitration as a dispute-resolution mechanism.
- Keep a close watch on the negotiation process and future changes that could have an impact on M&A transactions and be prepared to respond swiftly to any developments.
- Take into account the devaluation of the GBP and the consequences thereof for future investments, both for the UK and the EU market.
- Focus on both the short-term and long-term consequences of Brexit when conducting a due diligence investigation on a UK target and consider the impact thereof on the company’s value.
- Bear in mind that there will no longer be a harmonised (EU) law applicable when entering into an EU-UK cross-border deal, which could lead to parallel procedures, costing more time and money.
- Adapt, clarify and amend certain clauses in your contracts (MAC-clauses, non-compete, choice of law and jurisdiction, dispute resolution, etc.).
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