The Legal Implications of Brexit

MEDIA ROOM

While on the 25th of this month (March 2017) Europe will celebrate the sixtieth anniversary of the signing of the EU’s founding document – the Treaty of Rome – Britain’s Theresa May has promised that by the end of this same month, Article 50 of the Lisbon Treaty, the equivalent to an exit door out of the European Union, will be triggered. This article has never been activated before since no other Member State has in the past opted out of the European Union. With Brexit, the UK will be the first country of which membership to the EU will be nothing but history after article 50 reaches its full effect.

In-between the activation of such article and the UK actually leaving the EU, there is a period of negotiation. This period, which according to Article 50 is not to exceed 2 years (unless otherwise agreed) will determine the extent of impact clients doing business with or in connection with the UK will be subjected to. An analysis of impact of the various sectors is therefore helpful in order to anticipate any issues which might arise relating to the before and after of Brexit:

Impact on commercial contracts:
The new EU Regulation (GDPR), scheduled to be implemented by May 2018 will be implemented by the UK Government even though UK is leaving the EU. This was announced by the Secretary of State for Culture, Media and Sport Karen Bradley. This means that when it comes to data protection, UK businesses offering goods and services to EU customers will still have to comply with this regulation. One ideal safeguard would be to check for price variation clauses in your clients’ contracts; this will enable one to take advantage of current price volatility in the market. Any territory defined as the ‘EU’ within a licence or contract would need a small variation document extending that kind of territorial jurisdiction. An inadvertent breach of covenants is also best avoided by checking if any facility agreements and security are tied to exchange rate fluctuations or market volatility. If you’re in the middle of a commercial negotiation, termination provisions with specific triggers will help in future-proofing such contracts. When it comes to specialist regulatory compliance then, there will be no change as EU regulation is in most cases already enshrined in UK laws. Once Brexit takes place however, a review of this section would not be harmful.

Impact on employment:
Although intra-group transfers are unlikely to be impacted, there will be significant uncertainty in business immigration. Agency Workers Regulations are also likely to be withdrawn or replaced since they derive from EU law and there will probably be new UK laws further restricting trade union activities. The UK Courts alone will be responsible for the evolution of UK’s own discrimination laws, with the possibility of micro employers being exempted from some of these laws. While EU directive rules used to determine the holiday pay in the UK, UK laws will take over this area and will likely be easier and less costly to employers. A breach of collective redundancy rules will possibly see a reduction in the length of time and penalty. Human rights will no longer be a valid subject of debate within the employment context and the European Works Council will hold no obligations in respect of UK employees. Nonetheless, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) and unfair dismissal will only be subjected to minimal changes, if any.

Immigration:
The British Prime Minister has made it very clear that a control on immigration will be a prioritized topic during negotiations and that ‘’Brexit must mean control of the number of people who come to Britain from Europe’’ . Freedom of movement is considered one of the main pillars which the Union is founded on. For many European leaders, this freedom is a ‘European dream’ which they protect and embrace persistently. This cherished dream will be nothing but a distant memory for the UK once the latter is officially declared to be no longer a member of the EU. Although it is unlikely that EU citizens who are already in the UK will be asked to leave, it will definitely become more difficult for EU citizens to move to the UK and vice-versa. With May herself promoting the abatement of this freedom, millions of citizens from other EU countries may now decide to go back home, leaving behind major skill gaps across the UK.

Impact on IP Rights:
Most UK IP rights are expected to remain unchanged since many of these are territorial. Copyright for example is governed by UK law and international Treaties outside EU. Trade Secrets will also continue to be protected by UK law and the relevant contracts; as will European Patents of which regulation is independent from UK’s membership to the EU. European Union Trade Marks however will need transitional provisions since they only deal with EU member states. Both registered and unregistered community design rights will no longer cover the UK and transitional provisions will consequently be needed. Also, all IP contracts concerning European Union Trademarks and Registered Community Designs should be reviewed as their licence could be removed. Although uncertainty still reigns with regards the Unitary Patent and the Unified Patent Court as Brexit may lead to the proposals being shelved, last November brought with it the announcement that UK will ratify the Unified Patent Court Agreement of which implementation is expected to start in December 2017. This court will be responsible for the settlement of disputes relating to EU patents and EU patents with unitary effect in all the contracting states. This solution however is only a temporary one as UK ratification is needed for the system to launch and is only intended to last until spring 2019.

Brexit and Malta:
Prospects are not so good for Malta and Brexit. While almost all of the 27 Member States have important links to the UK, a study released by KPMG last month on February 17th revealed that Malta is the third most vulnerable country when it comes to trade barriers. Back in June 2016, Standard and Poor’s had already declared Malta to be ‘on the frontline of economies susceptible’ to trade aftershocks from Brexit but now, with KPMG UK’s study we got closer to knowing what the extent of such susceptibility is. With Malta having one of the highest import rates from the UK amongst Member States (27.3% of Malta’s GDP), Maltese consumers will probably suffer higher tariffs resulting from higher import costs. This increase might be toned down in case there is appreciation of the euro against the pound. However even this is a double-edged sword. While an appreciation of the euro will save consumers import charges, a cheaper pound will make Malta’s exports to the UK (about 9% of Malta’s GDP) more expensive.

Hopeful prospects for Malta:
Although post-Brexit Malta may be less sunny, there is the possibility that the clouds covering our shine will turn out to have a silver lining after all. With the UK being out of Europe, financial services companies based in the UK might be tempted to relocate to a European Member State and there are very good chances that the chosen MS  by some of them will actually be Malta. This can be comfortably asserted for various reasons; Malta has both historically and even in present day matters close ties to the UK. Only some days ago, on the 13th of March, Maltese Prime Minister Joseph Muscat flew to Westminster Abbey for a meeting with UK Prime Minister Theresa May during which they focused on the relations between Malta and the UK in the light of Brexit. Maltese Prime Minister Muscat stressed that Malta will do its utmost to maintain the best relation possible with the UK. But our good relations with the UK are not the only thing that may attract British companies seeking to relocate to a EU jurisdiction.

English is an official language here in Malta and its fluent use is very much diffused (At present, 88% of Maltese locals can speak English according to a Eurobarometer poll). This together with Malta’s attractive tax regime, a successful financial services industry, the access to EU passport rights and the EURO currency, Malta is in a very appealing position and will undoubtedly be able to provide a smooth operational transition to companies interested in relocating to Malta. All of this while guaranteeing access to the EU market. Some companies based in the UK have already announced they want to relocate elsewhere – Smiffys, a costume and dress supplier in Lincolnshire announced that after 122 years of trading in the UK, it will be moving to Europe following the Brexit vote. HSBC has also made public its plans to transfer part of its operations to a European jurisdiction. Easy Jet was yet another company to make a similar announcement. Although Malta’s geographical size does not enable it to stretch its carrying capacity as much as it pleases, it would definitely stretch enough to accommodate a company or two.

Conclusion:
With the triggering of Article 50, now only a few days away, the clock will start running and so will negotiations. Since Brexit will not affect the 27 different member states in the same way, there is a 99% chance that each member state will respond to negotiations differently. This is also evident from the fact that although negotiations have not even started yet, there is already a general lack of consensus between member states on what the deal should be. Once all 27 member states reach an agreement, the UK will have to give its approval. Whether this is realistically achievable within the two years stipulated in Article 50 is highly doubtful, after all Article 50 was only introduced in 2009 to improve transparency within the Union, little did the legislator know that it would be resorted to a few years later.

Could the UK change its mind after officially declaring it will be leaving the EU? While this will undoubtedly result in political and legal havoc, the answer will probably turn out to be in the affirmative. It was even implied that an amendment done last Tuesday to the BREXIT White Paper may in fact be used by some opponents of Brexit to try keeping Britain in the EU. This together with the vagueness of Article 50 makes it very hard to predict how things will turn out. The majority of us are hoping that the consequences from Brexit will not be huge. What is certain, although it does sound like a cliché, is that every action has an equal and opposite reaction. Whether a soft or hard Brexit will be administered, having one of the most powerful countries leaving an organization as immense as the EU will undoubtedly lead to serious repercussions. Discussing with our clients and preparing them on how they could be potentially impacted by Brexit is the only way forward.