© 2016 The Texas Lawbook.
By Andrew Petersen of K&L Gates
(June 24) – We now know what the eye of a storm feels like…
Cameron resigns and will be gone in October; Sterling fell 10 % and is slowly picking itself up off the canvas; UK is still in Europe but may not be in the EU in due course. The UK may in the future no longer be the United Kingdom and there are calls for another Scottish independence referendum and a movement to unite Ireland and Northern Ireland under the Good Friday (how ironic on this Friday of all days) agreement.
What does this all mean? What happens next?
Work will now commence on implementing the will of the UK people and what the extradition process will look like. It will be a long complicated process – at least two years until the UK actually leaves the EU. In all respects it may be longer.
If the UK has its way, an Article 50 notice will not be served before the election of a new Prime Minister in 3 months or so; it may be served later.
This does not suit the EU, as today the group leaders at the European Parliament, as well as its president, have assumed the result, and called for an immediate start of the negotiations and the European Council may consider it has received the official Article 50 notice as early as next week.
If the EU forces the process (although there is no process which the EU can force the UK to serve the notice), the UK leaving could happen more quickly and an over-arching framework may be adopted for the future relationship between UK and the EU, (like the Norwegian model), and the UK and the EU then negotiate an agreement on the framework for their future relationship.
Or there could be a disorderly exit – either the Article 50 negotiation period (with any extension) expires without agreement, or the UK is ejected from the EU.
The official process
Article 50 of the Treaty on European Union sets out a process for a member state to negotiate its exit from the EU:
• the UK notifies the European Council that it has decided to leave the EU;
• the UK and the EU negotiate an agreement on the terms of the UK withdrawal, ‘taking account of the framework for its future relationship with the EU’;
• on the EU side, the negotiations are conducted by the European Commission on the basis of a negotiating mandate given by the Council of the EU; and
• the agreement is concluded on behalf of the EU (excluding the UK) by the Council of the EU, acting by qualified majority, with the consent of the European Parliament.
Article 50 also sets a time limit for the negotiation. If no agreement has been reached within two years following notification of its decision to leave, the UK would then cease to be a member of the EU. That time limit can be extended only with the unanimous agreement of all other member states.
This relates only to the withdrawal agreement, such that a separate agreement would need to be negotiated, in parallel, on the future UK/EU relationship in particular and any agreement on trade and wider co-operation would require the unanimous consent of all member states. The consent of some member states would need ratification by their parliaments.
When the UK leaves the EU it will most likely cease to be party to the EU’s trade agreements with third parties. Assuming the UK wants to replicate, or improve on, those agreements it may need to do so before leaving the EU or risk losing those benefits. It is doubtful whether two years is long enough for all of this.
The UK parliamentary process also has to be factored in as the UK has to prepare the necessary changes to UK legislation in order to deal with its withdrawal from the EU and its future relationship with the EU and third countries – this is a major exercise in itself and may lead to an extension of the leave process.
The process of leaving
The clock starts to run on the two-year period under Article 50 from the time the UK notifies its decision to withdraw. But Article 50 is not specific about precisely when the UK has to give its notification.
Thus there will now be a period of negotiation between the UK and the EU based on gradual divergence as to when it makes sense for the UK to take the political decision to serve this notice – it is unlikely to be done in coming weeks and indeed it may not take place until a replacement for David Cameron is selected in the Autumn although the EU will want it served sooner rather than later.
But the UK will want to improve its negotiating position with the EU before serving the notice. The idea would be to negotiate first and only notify once everything is agreed, avoiding the problems of negotiating under the shadow of the two-year deadline.
But this requires the EU to play ball. If the EU simply refuses to negotiate until the notice is served, no progress will be made and the UK could remain in the EU in the interim. How EU reacts to the vote is very important. Early indication form the EU (now in self-preservation mode) is clear.
Today President Juncker has said: “We now expect the United Kingdom government to give effect to this decision of the British people as soon as possible, however painful that process may be. Any delay would unnecessarily prolong uncertainty. We have rules to deal with this in an orderly way.
“Article 50 of the Treaty on European Union sets out the procedure to be followed if a Member State decides to leave the European Union. We stand ready to launch negotiations swiftly with the United Kingdom regarding the terms and conditions of its withdrawal from the European Union. Until this process of negotiations is over, the United Kingdom remains a member of the European Union, with all the rights and obligations that derive from this. According to the Treaties which the United Kingdom has ratified, EU law continues to apply to the full to and in the United Kingdom until it is no longer a Member.
“As agreed, the “New Settlement for the United Kingdom within the European Union”, reached at the European Council on 18-19 February 2016, will now not take effect and ceases to exist. There will be no renegotiation.
“As regards the United Kingdom, we hope to have it as a close partner of the European Union also in the future. We expect the United Kingdom to formulate its proposals in this respect. Any agreement, which will be concluded with the United Kingdom as a third country, will have to reflect the interests of both sides and be balanced in terms of rights and obligations.
The UK reaction to this statement should be closely monitored in coming days.
UK Voters may be impatient with the whole Article 50 process, particularly if this means it could be well into the 2020s before the UK leaves the EU.
Voters may want immediate action to curb immigration, for example, even if this puts the UK in breach of its EU treaty obligations. The consequences of a deliberate and sustained breach of treaty obligations on the UK’s relationship with other member states are difficult to predict.
Legally, a repudiation of treaty obligations could give the other member states, acting unanimously, the ability to force the UK out of the EU. As stated above the EU expects the UK to stand by its obligations under EU law during this period.
A disorderly exit – ie an exit without agreement on the terms of the withdrawal or the future UK/EU relationship – would create serious problems. There would be substantial areas of legal uncertainty regarding the position of UK businesses and individuals located or doing business in the continuing EU.
Given the breakdown of the vote and the price of Scotland leaving the UK along with the land border in Northern Ireland and Ireland a disorderly exit is highly unlikely. A disorderly exit would also require immediate UK legislation to try to provide legal certainty within the UK’s own legal order.
What should clients be doing?
Clients will need to begin planning today and assess the potential impact of the UK leaving the EU. Contracts that contain EU-related provisions will need to be checked to see whether they remain appropriate. Firms that have licenses to operate and that are currently recognized throughout the EU will need to consider whether this will continue.
The potential for a separate agreement on new tariffs and other barriers to trade will be important for many businesses – there could be adverse effects on some businesses but benefits for others. It may be possible to mitigate some of these risks with advance planning.
For example, in some cases it may make sense to consider moving certain business operations into other EU member states. It may be possible to agree amendments to contracts that will no longer be appropriate post-Brexit – so called flexit clauses, which our firm has been negotiating for clients.
Clients should now be communicating with employees, customers and shareholders. Clients will also need to consider whether they have a legal obligation to say anything, for example in their annual reports or because of their obligations as issuers of listed securities.
Clients that do not already have a clear framework for co-ordinating their thinking about Brexit will need to establish one. Those that already have committees or working groups looking at these things will need to consider whether those structures remain appropriate once the UK moves onto a ‘leave’ trajectory.
Clients now need to look for strategic opportunities. The withdrawal process will strengthen some businesses and weaken others. This is what disruption brings – both positive and negative consequences as the competitive landscape changes.
There may be a strategic opportunity to take advantage of the weakness (perhaps temporary) of a competitor. Institutional investors and others confident of their analytical skills may see mismatches between market perceptions of value and their own assessment.
There may be opportunities for acquisitions and disposals.
Clients will need to have their voices heard in the debate about the withdrawal process. The UK will need to adopt some basic policy orientations now if the EU continues to take a hard-line negotiating position.
Those favoring ‘independence max’ may see increased trade barriers (at least in the short term) as a price worth paying. As set out above, there will be a parallel debate in continental Europe and the EU institutions on the EU’s approach to the Brexit negotiation.
This would focus on whether the EU should take a tough negotiating position to discourage others from following the UK out of the EU, or whether it should seek a pragmatic solution that is financially advantageous to the EU. Clients that want to engage with these issues need to consider how best to do so.
Initially, at least, the priority may be to influence policymakers – seeking to persuade people of the benefits of a pragmatic approach focused on obtaining the best result for businesses. Engagement with our firm’s policy team in Brussels which contains former MEPs and EU competition and policy experts is a requirement when clients want to consider how they might seek to persuade EU politicians and policymakers.
Many clients will share a common interest, and there may be some scope for working collaboratively with others where appropriate through sector trade associations such as the Commercial Real Estate Finance Council-Europe, which remains ready to serve its members.
Andrew Peterson is a partner specializing in corporate finance in the global law firm K&L Gates, which has offices in Dallas and Houston.
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