Download Business implications for Danish companies operating in the UK

Britain and the EU
Business implications for
Danish companies operating in
the UK
Claus Grube, Danish Ambassador to the UK
John Davies, Freshfields Bruckhaus Deringer
Bart Creve, Kromann Reumert
31 May 2016
What does the timeline look like?
Overview and timings
What’s the current status? (1/2)
EU Internal Market with other Member States
¡ ‘The internal market shall comprise an area without internal frontiers in which the free
movement of goods, persons, services and capital is ensured in accordance with the provisions of
the Treaties’ (Art 26 TFEU)
1. Free movement of goods
¡ Customs Union (Art 30 TFEU)
– No customs duties between EU Member States on imports and exports.
– Common customs tariffs between EU and third countries (high tariffs on cars, chemicals,
clothing, food, beverages, tobacco)
– Reducing non-tariff barriers (product standards, bans, labelling, health and safety etc)
¡ Any (foreign) company manufacturing in UK uses its EU membership as gateway to EU
¡ 45% of UK’s goods and services exports go to EU countries (2014)
2. Free movement of persons, right of establishment
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Right to set up agencies, branches or subsidiaries in other EU countries
Right to stay in a Member State for the purpose of employment
Extends to measures in the field of social security
78% of UK GDP is generated from services (not exports of manufactured goods)
What’s the current status? (2/2)
3. Free movement of services
¡ Freedom to provide services within the Union (Art. 56 TFEU)
¡ Through establishment of a host state branch, or an a cross-border basis – without the
need for a separate host state authorisation
¡ Applies to financial, insurance, professional and any other service
¡ Passport: Member States recognize the authorisation of a regulated business in another
Member State
¡ Particularly important for UK (70% of value added; trade surplus in services)
4. Free movement of capital
¡ Free movement of capital between Member States and between Member States and third
countries (Art. 63 TFEU)
¡ Free payments between Member States and between Member States and third countries
¡ Highly important for financial sector
NOT FORGETTING
¡ 60 Free Trade Agreements which the UK benefits from as an EU Member State
UK / EU Settlement (1/2)
Draft Decision of EU leaders on 2 February 2016
‘A New Settlement for the United Kingdom within the European Union’
Economic governance
¡ Recognition in law – for the first time – that the EU has more than one currency
¡ Confirmation that the UK will not be involved in future Eurozone bailouts and additional
safeguards for non-Eurozone members
¡ Financial supervision and macro-prudential regulation will remain under UK control
¡ Any issues which affect all member states must be discussed by all member states – not
just countries in the Eurozone
Migration and benefits
¡ An emergency brake will limit migrants' access to benefits for four years
¡ In-work benefits graduated from an initial complete exclusion
¡ Migrants may send benefits to children abroad, just in lower amounts
¡ New powers to stop suspected terrorists and criminals coming to the UK
¡ New rules on ‘sham marriages’
UK / EU Settlement (2/2)
Sovereignty
¡ Clarification that ‘ever closer union’ does not amount to political integration
¡ A ‘red card’ system to allow 55% of national parliaments to object to Brussels legislation
(but with a carve-out for rules affecting the Eurozone only)
Competitiveness
¡ Declaration that the EU will work towards greater single market integration
¡ Commitments on better regulation (including burden reduction targets) and subsidiarity
¡ The EU will increase efforts to cut bureaucracy, especially on small and medium
enterprises, which the Government has said damages UK businesses.
ECJ and ECHR
¡ No reforms to ECJ or ECHR, but a reiteration that the EU Charter of Fundamental Rights
is not intended to expand the ECJ’s jurisdiction
Article 50 Treaty on the European Union
Not a very good negotiating position…
¡ 2. A Member State which decides to withdraw shall notify the European Council of its
intention. In the light of the guidelines provided by the European Council, the Union shall
negotiate and conclude an agreement with that State, setting out the arrangements for its
withdrawal, taking account of the framework for its future relationship with the Union.
That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the
Functioning of the European Union. It shall be concluded on behalf of the Union by the
Council, acting by a qualified majority, after obtaining the consent of the European
Parliament.
¡ 3. The Treaties shall cease to apply to the State in question from the date of entry into
force of the withdrawal agreement or, failing that, two years after the notification
referred to in paragraph 2, unless the European Council, in agreement with the Member
State concerned, unanimously decides to extend this period
What do the polls say?
Brexit poll of polls (average of last 6 polls)
¡ % of respondents, includes surveys from ICM, YouGov, Ipsos/Mori, ORB, Survation,
GQRR, BMG, ComRes
Source: ONS, J.P. Morgan
Brexit impact on the UK’s relationship
with the EU and other countries
The macro-economic significance of the UK for the EU
Current macro-economic status
¡ UK is the 3rd largest Member State where 12,5 % of the
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EU population lives.
The British economy is heavily integrated with EU and
amounts to 15 % of the overall GDP of EU.
Approx. 50 % of British exports are to the EU while
approx. 55 % of British imports arrive from within the
EU.
More than 50 % of FDIs into UK are from other EU
Member States.
City of London, the financial centre of London, is a
highly valuable asset to both UK and EU.
The British banks currently administrate 25 % of all
banking activities in EU and have access to all Member
States through branches or associated banks.
UK is the 2nd largest contributor to the economy of EU
(following Germany) and the 6th largest in terms of
GDP contributions per capita.
The current position of other EU countries
Impact of Brexit on relations with other
countries
¡ Other EU countries have to respect the will of the
British people and will take note of the outcome of
the referendum
¡ Article 50 TEU
– “Accession Treaty in reverse”
– Two-year deadline in order to avoid “zombie
Member State”
– But negotiations can take much longer
¡ Who will the EU have to negotiate with in case of
Brexit? Both the UK Government and the UK
Parliament are divided.
¡ Who will the UK have to negotiate with in case of
Brexit? The EU without the UK will not be the same
as the EU with the UK
Brexit might change the EU as we know it
Political impact
¡ Will Brexit lead to a power shift within the EU?
North/South/East.
¡ The Member States that favour free trade and
liberalisation within the EU will lose a long standing
and crucial ally.
– Wide impact on policies in the areas of trade,
agriculture, state aid, defence, economy, taxation,
environment and public benefits and especially
the development of the internal digital market
and liberalisation of services will be difficult!
¡ Member States outside of the Eurozone can risk
further marginalisation in the Council following
Brexit.
The impact of Brexit on the relationship with non-EU
countries
Trade agreements
¡ As long as Britain is a member of the EU, the EU negotiates
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specific trade agreements on behalf of UK. It must be assumed
that it gives greater weight to negotiations, than the UK could
achieve alone.
The UK will have to renegotiate all existing specific EU FTAs plus
all ongoing agreements negotiated by the EU and, not forgetting,
the agreement with the rest of the EU Member States (the
internal market).
This corresponds to 52 existing agreements, 72 agreements under
negotiation and an agreement with the EU, a total of 125
agreements according to think tank Bruegel.
There is uncertainty as to which countries UK will enter into
FTAs with, on which terms and the period of such negotiations
The negotiations of entering into FTAs typically last 5-7 years.
The prolonged uncertainty about the outcome of future trade
agreements will enhance the economic risks to the UK economy.
Likely UK models following Brexit
Existing models for alternative options are unattractive
or unlikely
Norwegian option
Swiss option
¡ EEA + EFTA membership
¡ EFTA only
¡ Outside EU customs union
¡ Outside EU customs union
¡ Tariff-free trade, subject to country of origin conditions
¡ Tariff-free trade, subject to country of origin conditions
¡ Fully part of single market
¡ Not fully part of the single market and must pay for access
¡ Obligation to comply with single market rules
¡ May not be approved by other members
¡ UK out of EU/third country FTAs
¡ UK must pay
¡ ‘Democracy by fax’
¡ EU has criticised model, uncertain if MSs would approve
¡ UK must pay
¡ For UK probably worst of both worlds
South Korea option
Turkish option
(comprehensive free-trade agreement)
¡ Customs union
¡ Outside EU customs union
¡ Tariff-free trade, regardless of country of origin
¡ Tariff-free trade, subject to country of origin conditions
¡ Not part of the single market
¡ Not part of the single market
¡ UK to apply external EU tariff with third countries
¡ UK ceases to have the benefit or burden of free trade
agreements between the EU and third countries
¡ Less attractive from EU’s perspective
¡ Potential scope to provide for access to the whole or parts of the
single market for services,
(cannot negotiate FTAs with third countries)
¡ From UK`s perspective not enough and too asymmetric
¡ Not part of the single market in services
Existing models for alternative options are unattractive
or unlikely – EEA vs WTO
EEA
WTO
No automatic right to join EEA or EFTA
Principle of non-discrimination
Benefit from EU FTAs (e.g. Korea, Norway) and
those in progress (e.g. Japan, US)
UK controls its own trade policy and bilateral
agreements with other countries
UK required to contribute financially to the
operation of the EU through a EEA grant
Access to trade in the EU on terms no less
advantageous than third countries without FTAs
Obliged to uphold the EU’s four fundamental
freedoms (incl. free movement of people)
No influence in the formation of EU product
standards and regulation
Access to the single market for trade in goods but
not full access for financial services
UK Government not automatically entitled to
challenge EU legislation before the CJEU
Not covered: freedom, security and justice
New set of agreed tariffs
Not covered: Common Agricultural and Fisheries
Policies; Customs Union, Common Trade Policy;
or Common Foreign and Security Policy
No provisions to grant subsidies to its exporters to
compensate for additional tariffs on exports /
imports that were previously tariff-free
Loss of all formal voting rights (MEPs, veto, etc.)
UK courts not required to interpret national law
consistently with EU law or EEA rules
UK required to adopt a range of EU legislation
No freedom of movement
Brexit impact on Danish
companies operating in the UK
Strong economic relationship between DK and UK
¡ The UK and Denmark are strongly interlinked in
terms of business and commerce
¡ The UK is the 4th largest overall export market (6.5
% of overall exports in 2015) for Danish companies
following Germany, Sweden and Norway and the 3rd
largest for agriculture products.
¡ Top 10 Danish exporting goods to UK are:
1. Oil
2. Machinery
3. Electronic equipment
4. Pharmaceuticals
5. Plastics
6. Iron or steel products
7. Furniture, lighting, signs
8. Dairy, eggs, honey
9. Meat, seafood preparations
10. Clothing (not knit or crochet)
¡ Danish economy in general is thus heavily exposed
to the financial effects of a Brexit.
¡ There is considerable business and investor
uncertainty as to how a Brexit will impact Danish
companies operating in UK.
Short-term implications of a Brexit
¡ There will be a strong short-term incentive to stabilise
markets as quickly as possible.
¡ Fears, such as those associated with the potential “Grexit”,
will thus not be a risk as we see it, e.g. currency redenomination and re-evaluation, currency and capital control
to prevent flight of funds and bank runs, banking restraints
on payment and cash withdrawals, counterparty defaults, etc.
¡ However, there will be a significant short-term reactions in
the market.
¡ Danske Bank has predicted that a Brexit will lead to a
technical recession in 2016/2017 meaning a drop in GDP in
two consecutive quarters.
¡ This will naturally lead to lowered risk-taking, lowered
investments and lowered consumer and business
demand for Danish goods and services.
¡ There is consensus among financial analytical institutions
that a Brexit will lead to short-term drops in GDP, however
there is uncertainty to the extent of such effects:
Short-term implications
Institution
OECD
PWC/CBI
Citi
Credit Suisse
Deutsche Bank
HSBC
JP Morgan
Morgan Stanley
Nomura
Societe Generale
% effect in UK GDP
Time span
-3.3
5 years
-3.1 to -5.5
5 years
-4.0
3 years
-1.0 to 2.0
1 year
-3.0
1 year
-1.0 to -1.5
2 years
-1.0
1 year
-1.5 to 2.5
2 years
-4.0
1 year
-4.0 to 8.0
5 years
Sources: HM Treasury Analysis, April 2016 and OECD Analysis
General long-term implications
¡ The long-term implications for Danish companies depend a lot on which ‘model’ UK will
enter into with the EU following a Brexit.
Percentage effect of Brexit on UK GDP in 2030
Institution
Open Europe
Static
Dynamic
1.6 to -2.2
Bertelsmann Stiftung
-0.6 to -3.0
-2 to -14
London School of Economics
-1.1 to -3.1
-2.2 to -9.5
HM Treasury
-3.4 to -9.5
OECS
-2.7 to -7.7
Sources: HM Treasury , Open Europe Report, Bertelsmann Stiftung, London School of Economics
¡ Also a Danish drop in GDP of more than 0.5 - 2 % of Danish GDP can be expected in 2030
(source: Tænketanken Europa). In addition, Denmark will have to contribute more (1,7bn
DKK) to the finances of EU as compensation for the loss of the UK’s contribution.
General long-term implications
¡ Danish companies will be exposed to significant uncertainty and potential barriers when
conducting business with UK partners.
¡ In addition, Denmark will lose an important and liberal allied in continued EU
negotiations on the internal market, state aid and anti-protectionism. The potential risks
due to this loss should be considered with regard to other European markets.
¡ Companies should generally assess the implications that a Brexit might inflict on their
specific businesses, especially the risks of tariffs, employment barriers and long-running
contracts.
A ‘LEAVE’ vote
Key issues to consider…
Existing issues for clients
¡ MAC clauses and conditions to drawdown/completion – What is the exposure of
a target/borrower to a collapse in UK asset values, GBP exchange rates and/or disruption
of UK/EU trade?
– PE bidders for Exact and Precise Mortgages (buy-to-let mortgages) seeking a ‘Brexit
clause’ in £300m deal
– Britons buying holiday homes in the EU are seeking Brexit clauses
– Foreign investors exchanging contracts on a UK property deal with a clause making its
completion conditional on a vote to remain“
¡ Disclosure – How exposed is your business to a collapse in UK asset prices, GBP
exchange rates and/or disruption to UK/EU trade? What disclosure requirements apply to
your accounts, listing requirements, selling documents?
¡ Time for contingency planning - if the UK votes OUT, is 2 years sufficient to adjust
before UK ceases to be a Member State?
¡ ‘Flexit’ clauses – some banks are requiring companies to agree clauses that allow the
banks to flex the rate up if investor demand is weaker than expected, but the “flexit” is on
top of this usual buffer.
Impact of Brexit – key issues (1)
If the UK votes to leave – some specific legal issues
¡ Trade
– Trading venues/CCPs – What exposure do EU businesses have to UK trading
venues/MTFs/CCPs? What contingency plan is needed to move trades to
platforms/CCPs in the EU?
– Imports and exports – How would customs duties or other restrictions on exports to /
from the UK affect you? What would be the added cost of administration and
compliance processes?
¡ Employment – If visas or residence permits became necessary for seconding employees
to or from EU countries, how inconvenient would that be? Is there anything your business
could do to minimise those difficulties?
¡ Contracts – How will contracts be interpreted? Will Brexit trigger a MAC clause? Should
you include Brexit in a MAC for deals this side of the referendum?
¡ Communications – Will you have disclosure requirements? What would Danish
stakeholders need to now and how would you inform them?
Impact of Brexit – key issues (2)
If the UK votes to leave – some specific legal issues
¡ Disputes and enforcement – Consider your jurisdiction clauses. Will English
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judgments be enforceable in Denmark? Will Danish judgments be enforceable in the UK?
Competition compliance – How will EU competition law apply in the UK? Will the UK
still be a popular destination for private actions? What are the practical considerations?
Intellectual property and data – Need for new domestic regime, designation of UK as
‘safe third country’. Do you need to make any changes to your filing and management
strategy to ensure your unitary EU IP rights (including any new unitary patents) would be
protected in both the EU and UK law post-Brexit?
Insolvency and restructuring – Potentially less change for Danish companies as the
EC Regulation on Insolvency Proceedings (EIR) applies to all member states except
Denmark. What rules would govern the UK and Denmark’s relationship here? The UK is
not part of the Nordic Bankruptcy Convention.
Other issues include Tax, Human Rights, Real estate and Environmental
obligation
Impact of Brexit – key issues (3)
Some specific legal issues for the energy sector
¡ Sales and tender processes – UK may lose guaranteed access to the EU’s public
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procurement market without discrimination depending on the model negotiated. Would
the UK energy market be stable enough for long term, large investment?
Accessibility – UK consumers and energy companies might be less likely to import
energy following imposition of tariffs etc.
Ease of trade in derivatives etc. – Energy derivatives, quotas and options might
become more difficult and less prosperous to trade where there is an UK aspect involved
due to specific UK legislation/non-conformity with the internal market.
Demand for renewable energy sources – Legally binding EU targets for carbon
emissions and usage of renewable energy sources will not affect UK following a Brexit.
This might cause a weakening in demand for such energy sources and associated goods
and services.
Weakened FDI – Foreign Direct Investments in the energy infrastructure in UK will be
less attractive due to uncertainty with regard to tariffs and the possibility of supply and
sale of excess energy to/from other Member States.
Impact of Brexit – key issues (4)
Some specific legal issues for financial services
¡ “Passports” – What EU Directive ‘passports’ do you rely on to carry out business in the
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EU? What contingency planning is needed to shift services to an entity incorporated in an
EU member state? Rules on prospectus approval, prospectus content, listing and
continuing obligations are largely EEA-governed. What are the risks , if any, to Danish
capital?
Listing in London – If the FCA is no longer able to authorise Prospectus Directive
compliant prospectuses, usable throughout the EEA, what is the impact on your (or your
clients’) actual/potential investor base? Do you list in the EU? What options are
available?
Misrepresentation for ‘due authorisation’ / Illegality – If financial services firms
are no longer authorised to sell services based on ‘passports’ under the Banking
Consolidation Directive, Solvency II, MiFID, the UCITS Directive or the AIFMD, will there
actually or potentially be a breach of ‘due authorisation’ representations and warranties
and/or an ‘illegality’?
Certain funds – Under acquisition rules, must a ‘certain funds’ guarantee be given by a
bank in an EU member state?
UK markets – Loss of single market rights under CRDIV/MiFID II. Do you stop
accepting deposits / providing services to EU clients/counterparties?
Thank you
LON39921885
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