Brexit & M&A: impacts for targets with UK activities and for UK buyers

The year in which the COVID-19 pandemic had the entire world in its grip also became the year in which a hard Brexit was prevented at the last minute. With the EU-UK Trade and Cooperation Agreement, the European Union and the United Kingdom wanted to counter further economic shock waves due to the English Alleingang as much as possible. Nevertheless, Brexit has further consequences, also for M&A transactions.

In this article we discuss some of the most salient points of interest for European targets with UK business activities and / or an UK buyer.

Competition law
A first change occurs in the field of competition law. The European Merger Regulation 139/2004 applies to all EU member states. Now that the United Kingdom is no longer an EU member state, the European Commission no longer has exclusive control over mergers involving an UK party. As a result, there is no longer a “one-stop-shop” for all parties involved, but we are back to how it was before the Merger Regulation entered into force. At least two regulators (the UK and a European) will interfere with intended concentrations which involve a UK party. It is not only expected that this requires more time and costs, but this also increases the risk that various regulators will attach additional or - possibly even worse - conflicting conditions to the approval of the concentration. Brexit does not take us forward on this point, but takes us back 17 years in time.

Territory
It is customary to include a non-compete clause for the seller(s) in M&A transaction documentation that has a specific geographic effect. If the United Kingdom is to be included, a reference to the European Union is of course no longer sufficient. This is easy to solve by adding the “United Kingdom”. But what about commercial contracts of the target, with territorial effect within the European Economic Area (“EEA”)? After all, the United Kingdom is no longer covered. In the due diligence process, it has to be carefully investigated whether commercial contracts of the target do, and continue to, operate in the United Kingdom. If this is not the case, ideally this has to be repaired contractually with the relevant counterparties. However, this will not always be feasible. This could then have consequences for the value of those contracts and thus possibly also for the value of - and purchase price for - the target.

Privacy
The United Kingdom intends to implement the European data protection rules (“EU GDPR”) in its own national legislation. As a result, European and UK privacy protection rules will in all probability not differ very much in the short term. In the longer term, however, there is a reasonable chance that these privacy rules will diverge. As a result, an event in the future may cause a data leak in the European Union and not in the United Kingdom, or vice versa. Transfer of privacy-sensitive data between the Netherlands and the United Kingdom can therefore be considered as data transfer to a third country, outside the EEA. This requires additional security measures, such as the usual contractual security provisions and a prior risk analysis.

Furthermore, the UK privacy guard dog ICO (United Kingdom Information Commissioner's Office) is no longer the supervisory authority under the EU GDPR. As a result, companies that currently have the ICO as their supervisory authority and do business in the EEA, are obliged to appoint a new supervisory authority within the EEA, for the purpose of their data transfer. It is likely that the target's internal procedures and rules regarding privacy-sensitive data transfer will require a post-Brexit update. Therefore, this is also a subject that requires further attention during the due diligence investigation.

Intellectual property
The departure of the United Kingdom from Europe has major consequences for the protection of intellectual property, because the uniform European protection via the EU Trade Mark no longer applies in the United Kingdom. For protection in the United Kingdom, an UK trademark right will have to be filed separately. Conversely, an UK company that wishes to enforce its UK trademark right in Europe will still have to register an EU Trade Mark with the European Trademark Office (EUIPO). This problem does not apply to copyrights and patents. Their protection both derives from treaties between countries. Brexit will not affect these types of treaties to which the United Kingdom was a party already.

Annual accounts exemption (403 statement)
If a Dutch target does not want to publish separate annual accounts, but wishes to enjoy extensive publication exemptions by way of consolidation with the figures of the parent company, that parent company must file a so-called 403 statement with the Dutch Chamber of Commerce. By way of such 403 statement, the parent company accepts joint and several liability for (contractual) financial obligations of the target vis-à-vis third parties. As a result of Brexit, the United Kingdom is no longer bound by this European-based regulation. This has consequences if the parent company that issued the 403 statement is English. In that case, the 403 exemption is no longer applicable to the target and the target will have to file its own complete financial reporting every year. If the target fails to do so, this results in an economic offense. Therefore this is (another) point of attention during the due diligence investigation. The target can restore the 403 exemption by having a group company with its registered office in the EEA issue the 403 joint and several liability notice.

Conclusion
Although the consequences of Brexit for M&A transactions appear to be less than expected, there are certainly possible “red flags”. A thorough due diligence investigation on a target with UK business activities should identify these issues. But even if the target group has no UK activities, an UK buyer can trigger issues by itself. M&A with an UK component therefore requires extra vigilance from now on: forewarned is fore armed, as our Western neighbors would say.

The Dutch translation of this publication by Paul Josephus Jitta, Coen van der Mark and Ingrid Cools was also published on the M&A Community website (MenA.nl).