In November 2017 the European Commission published a notice confirming that after Brexit, EU rules on company law will no longer apply to the UK. What will this mean for UK companies?
It is a timely reminder of some of the company law consequences of Brexit for UK companies. Some examples relating to private limited companies are set out below, together with restructuring opportunities which may be worth considering before Brexit.
Cross-Border Mergers and Restructuring
The EU directive on cross border mergers provides harmonised regulations on mergers between companies incorporated in different Member States. For example, it can enable a company in one Member State to be absorbed into another in a different Member State by way of statutory merger and then automatically dissolved without a liquidation. This may no longer be possible after Brexit, so it is worth considering any proposed restructuring and cross border mergers now.
In 2017 the High Court in England approved a reverse cross-border merger allowing an English company to be absorbed by its Italian subsidiary. This has the potential to play an important role in enabling UK companies to move their headquarters to EU member states or be absorbed by companies in other EU member states before Brexit.
Belgian law provides for the possibility of a cross-border merger with a company in a non-EU country as long as the law of that non-EU country also permits it. However, it remains to be seen whether the UK adopts a new law permitting such mergers after Brexit.
Freedom of Establishment: Applicable Company Law, subsidiaries and branches
In accordance with the principle of Freedom of Establishment within the EU, companies incorporated in Member States have to be dealt with the same way and enjoy the same rights and privileges across Member States, irrespective of the place of their administrative seat. Those companies can also freely establish branches in other Member States of the EU.
After Brexit, if any UK incorporated company has its ‘real seat’ of principal management in another Member State, there is a possibility that the Member State may apply its own company law to the company and choose not to recognise it as an entity because it is not incorporated in the location of its central administration. This could even lead to personal liability of shareholders for the debts of the company, if the company is not recognised. Not all Member States apply this 'real seat' principle, but it is important to take advice on this point.
One option for companies incorporated in the UK with their 'real seat' in another Member State would be to convert into a company form in that Member State. This could be done through a cross-border merger as above.
It is likely that EU subsidiary companies will be regarded as EU nationals, irrespective of the nationality of their parent company, and can continue to benefit from freedom of establishment. Therefore, depending on the outcome of Brexit negotiations, an EU subsidiary may be useful within corporate groups after Brexit.
With regard to branches, UK companies hoping to establish a branch in the EU after Brexit will, in principle, be subject to the more extensive disclosure formalities applicable to branches of non-EU (‘third country’) companies. It might also become more difficult for EU companies to establish a branch in the UK, although the law on UK establishments does not currently distinguish between companies in and outside the EU.
European Corporate Entities
The Societas Europea (SE) is a European public limited company which can be created and registered in any one of the Member States, allowing companies to operate on the basis of a single set of rules. This unlikely to be available in the UK after Brexit.
There are several ways an SE can be created, including converting a public limited company which has had a subsidiary in another Member State for at least two years. The registered office of an SE can also be transferred to another EU Member State. These may be useful mechanisms for some UK companies wishing to relocate to other Member States before Brexit.
- All UK companies with operations in the EU should review their current corporate structure, including companies incorporated in the UK and the rest of the EU, branches and administrative seats, and whether any operations should transfer to or from the UK before Brexit while certain restructuring options are available.