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13 June 2016

Brexit – The Legal Dimension

Posted By: AIB Business

Brexit would make legal history. No Member State has ever left the European Union in its 60-year history – territories have left (Algeria, Greenland and Saint Barthélemy) but never a Member State. Moreover, the legal consequences for businesses and citizens are both unknown and unsure, writes  Dr Vincent Power, Partner at A&L Goodbody.

The legal regime for a Member State’s withdrawal from the EU has neither been designed fully nor tested before – a broad roadmap exists in Article 50 of the Treaty on European Union (TEU) but it is sketchy.

If the people of the UK and Gibraltar vote on 23rd June that the UK should leave the EU, it would be as dramatic as New York leaving the USA. It is not that trade or the movement of people between the UK and the smaller EU would stop, but both trade and migration would probably be more difficult in the absence of a satisfactory agreement between the EU and the newly departed UK.

Legally, if the UK wants to leave then it must inform the European Council. Negotiations would then commence after a mandate for negotiation has been agreed by the EU. The negotiation process may take however long is agreed but, by default, it would take two years. A two-year period is optimistic: to unscramble 43 years of membership and thousands of laws in such a short timeframe seems unrealistic. After all, the UK’s application process to join a slimmer European Communities took 12 years and had hiccups.

Post-Brexit Agreements and Law Changes

There would probably be post-Brexit agreements between the UK and the EU such as a “Withdrawal Treaty” and a “Relationship Treaty”. These agreements would legislate for many (but not all) of the issues which would arise. There is no precedent: the much mentioned “Norwegian”, “Canadian”, “Turkish” and “Albanian” models are all for countries which were never EU Member States and one would imagine that the UK would expect more from the “old club” than those who were never members. Conversely, the EU might not want to be generous to a departed member (so as to avoid encouraging others to leave) while some of the third party agreements are designed to encourage non-Member States to join. So, negotiation would be difficult.

There would probably be a “trade agreement” between the UK and the EU. There would also have to be clarity on the trade relationships between the UK and the rest of the world so this would probably mean many more agreements than just the UK-EU one. One should not underestimate the difficulties of reaching agreement on an EU-UK trade agreement: the 1,598 page EU-Canada Comprehensive Economic and Trade Agreement (CETA) is still not in place after a decade of discussions. Even the arrangements in place are complicated (e.g. the EU and Switzerland have over 100 agreements between them).

There would also have to be amendments to UK law to deal with the fact that the UK is no longer an EU Member State. Measures embodied in “Regulations” (e.g. the EU Merger Control Regulation by which businesses benefit from the “one stop shop” of EU merger control regulation) would no longer apply but “Directives” (e.g. on employment and environmental matters), which had been implemented into UK law (i.e. national UK laws that were adopted to give effect to EU directives), might have to be neutralised or reversed (if the UK wishes to do so) by adopting new UK laws. There is no doubt that there would be a period of legal uncertainty while the UK legislative regime is adapted to cope with the new reality.

Brexit would give the UK greater freedom to adopt its own laws. This may put additional pressure on its four parliaments, which may already be burdened by the “Brexit legal process”. Moreover, it is not entirely clear how much freedom really exists in a globalised world to “go it alone”; it may well be that the UK could adopt a different legal standard or approach than the EU (whether that was higher or lower than the EU) but UK businesses that want to sell into the EU are likely to be forced to adopt the EU standard anyway. This means that there would be additional compliance costs for businesses and there could be two “production runs” if dual standards were followed by businesses.

Where would the legal differences be if the UK were to vote for Brexit and were to choose different standards and strategies than the EU? The most commonly cited examples are employment, the environment, product standards and other so-called “red tape” but it is unclear whether the UK electorate would ultimately accept having lower standards (e.g. reduced employment rights). Other examples would include areas such as State aid (e.g. the UK would have greater flexibility to give State aid if it were outside the EU) and taxation (e.g. VAT rates) – an area where the EU has growing significance.

Merger Control and Business Judgment Enforcement

Two areas which have not been mentioned too often in the debate are merger control and the enforcement of business judgments. Currently, if a merger/acquisition or joint venture involves businesses with a large enough combined turnover in the EU (including the UK), the deal can usually benefit from the one-stop shop of the European Commission (rather than having to go to several Member State competition agencies each with different rules) but this option would be reduced for many Irish businesses if the UK were to leave; this is because that “UK” element of their “EU” turnover would disappear and the size of the deal could fall below the EU merger control regulation thresholds. Secondly, court judgments (e.g. over bad debts) are easier to enforce across the EU because of EU legislation, which recognises Member State court judgments, and it is not clear how that would be addressed post-Brexit.

If Scotland or Northern Ireland were to seek EU membership post-Brexit then, according to Article 49 of the TEU, each would have to be  a State in its own right. This would raise further issues, so EU membership for either would not be straightforward.

Impractical for Irish Businesses to “Plan for Brexit”

If there is to be a Brexit then Irish-based businesses should identify and convey to the Irish Government a list of what is required (and not required) to protect Irish businesses in a post-Brexit Withdrawal Treaty / Relationship Treaty.

Both the Withdrawal/Relationship Treaties might well be put to the UK electorate to vote on at some stage in the future (because in 2016 they did not know the terms on which they were leaving) so uncertainty could continue for some time.

It is too easy to advise businesses to “plan for Brexit”. This seems good advice but it is impractical. Businesses should certainly understand (a) what is involved in the Brexit process and (b) what parts of their business would be affected by Brexit, but no one knows what would happen after a vote to leave (other than it would be volatile as the new reality is taking shape). Therefore, it is impossible to plan now for an unknown future. But businesses should at least monitor and understand what can happen between now and polling day as well as anticipate what would happen immediately afterwards.

Written by Dr Vincent J G Power, Partner, A&L Goodbody

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