What could Brexit mean for M&A?
November 2016 | SPOTLIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Prior to the EU referendum vote on 23 June, the UK M&A market was an uncertain place. Now, new data from the Office for National Statistics (ONS) released in September shows the real extent the market was impacted. In the quarter leading up to the vote, 87 deals were conducted, worth a total of £14bn – making it the quietest quarter since ONS records began in 1990. By comparison, the ONS data also shows that the first quarter of 2016 saw 190 deals involving UK companies, worth £69bn.
Since the vote, though, activity value started to recover steadily. Thomson Reuters data showed that in the month following 23 June, almost 60 transactions totalling $34.5bn were struck by foreign companies for British firms, compared with 79 deals amounting to $4.3bn in the month leading up to the vote.
Foreign companies have been using falling share prices, a devalued pound and cheap equity markets to their advantage and the high profile sales of ODEON and UCI Cinemas Group and Poundland to foreign businesses also offered encouragement to embattled dealmakers. More recently, Softbank’s £24bn takeover of ARM provided a welcome vote of confidence.
As we continue to closely monitor the short term impact of the referendum vote, one of the interesting questions will be how Britain’s yet-to-be-decided post-Brexit relationship will impact M&A activity in the long-term.
From a legal perspective, nothing has yet changed. The UK remains a full member of the EU with continued access to the single market – meaning that, for the moment, the legal status quo continues. While we wait to hear the result of negotiations as to the post-Brexit landscape, it should be noted that each of the commonly discussed models will have their own particular impact on UK M&A.
Firstly, the ‘Norwegian model’ would see the UK leave the EU and join the European Economic Area (EEA) and European Free Trade Association (EFTA), accepting the principles of free movement of goods, services, capital and people in exchange for access to the single market.
In terms of change, this is possibly the lightest touch, meaning a minimal impact. For example, the EU Takeover Directive and the EU Merger Regulations, which provide a single competition clearance process across the EU, will both continue to apply.
Secondly, the ‘Swiss model’ would see the UK leave the EU and join EFTA, but not the EEA. As a result, the UK government would need to negotiate a series of bilateral agreements with the EU to secure access to the single market.
This model presents greater uncertainty, given that the UK would have the flexibility to change its laws and move away from EU regulations. In this scenario, companies contemplating or engaged in M&A activity will need to be nimble enough to react to the changing regulatory framework around M&A and also those areas of law that impact on the running of UK businesses, such as tax, employment, intellectual property and data protection.
Thirdly, total exit from the EU and the single market would mean either relying on the rules of the World Trade Organisation to continue trading with the EU, or seeking to negotiate a new free trade agreement.
In a total exit scenario, the issues facing the UK M&A market would be very similar to those under the Swiss model. Acquisitive companies would therefore need to position themselves to react to the changes that would follow.
When determining the way forward, the government will, of course, consider the likely effect of each model on the UK economy. So if the UK does leave the EU, but does not join the EEA, the temptation to cut red tape must be weighed against the potential impact on UK businesses trading or operating in the EU.
Until a decision is made about the UK’s post-Brexit relationship, we will not know the full extent to which existing laws can and will be amended or repealed. In the meantime, those undertaking M&A activity should also bear the following additional points in mind.
First, the structure and execution of UK private M&A transactions should not be materially impacted as EU-derived legislation plays little part in the laws governing such transactions.
Second, for public company acquisitions there are unlikely to be substantial changes to the UK Takeover Code. The Code is a universally accepted and respected regime which pre-dates the EU Takeover Directive and influenced the approach taken in the Directive.
Third, the nature of intellectual property rights will be affected along with the ability to enforce them. National rights will remain unaffected, but Community Trade Marks and Community Design Rights may cease to apply to the UK.
Fourth, the UK data protection laws are derived from the EU regime. If the UK government elects to stay out of the EEA it has the option to amend the current legislation. However, the UK will want to ensure that it has a regime that is regarded as ‘acceptable’ by the remaining EU countries.
Finally, the impact of certain EU-derived employment regulations on labour relations, for example the Working Time Regulations, may be affected over time if the UK adopts a more laissez faire approach to the employment relationship.
For the UK’s dealmakers, the lasting impact of the referendum vote on the M&A market is not yet clear. The bottom line, though, is that Britain’s attractiveness as a place for investment and for businesses to operate in is very much out of the hands of those at the coalface of M&A. It is therefore vital that the government and the specialist Brexit team do their utmost to ensure that the UK remains open for business.
Sam Pearse is a partner at Pillsbury Winthrop Shaw Pittman LLP. He can be contacted on +44 (0)20 7847 9597 or by email: firstname.lastname@example.org.
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Pillsbury Winthrop Shaw Pittman LLP