What are the Implications of Brexit in Corporate Law?

Overview


Since January 1 of this year, the Brexit is final and, as a result of UK leaving the EU, the binding effect of EU-law no longer applies. But what does this actually mean for corporate law? We briefly summarize the most important changes for companies.1

In Depth


IN GENERAL: WHAT DOES THE EU-UK TRADE AND COOPERATION AGREEMENT (TCA) COVER?

Essentially, the agreement between the European Union (EU) and the United Kingdom (UK) covers three main sections: Free trade between EU and UK, judicial cooperation in criminal matters and arrangements for the prevention and settlement of disputes between the parties to the TCA.

  • The free trade agreement between EU and UK not only regulates trade in goods and services, but also in digital trade, intellectual property, competition, public procurement, energy and the coordination of social security systems.
  • It does not regulate judicial cooperation in civil and commercial matters;
  • British companies no longer have the automatic right to offer services throughout the EU. If they want to continue operating in the EU, they must also be based there.
  • All imports from UK into the EU are subject to customs formalities and must meet EU standards, they are therefore subject to appropriate controls. Special regulations apply to goods transported between Northern Ireland and the EU.

CCORPORATE LAW: WHAT CONTINUES TO APPLY, WHAT NO LONGER APPLIES

All rights and obligations that UK had as an EU member state (and during the transition period) no longer apply to it. Since EU legislation also affects many areas of national law in UK, UK has undertaken a comprehensive incorporation of European legal acts that existed immediately before the end of the transition period into national law (retained EU law) in order to avoid legal uncertainties. However, this does not apply to all EU law. In particular, the following are excluded from such incorporation:

  • European legal forms (SE, SCE, EEIG): It is no longer possible to establish new European companies with their head office or registered office in the UK. Companies existing at the time of the UK exit were automatically transformed with effect from January 1, 2021, preserving their legal identity: SE became the “UK Societas”, EEIV became “UKEIG”. The SCE as a legal form ceased to exist in UK without replacement as there was no need for a transformation (there simply were no SCEs in UK). The previous legal bases (SE Regulation, EEIG Regulation) were incorporated into national law accordingly.
  • Cross-border mergers (Verschmelzungen): The directive-based regulation enabling cross-border mergers was repealed with effect from January 1, 2021, so that a merger of an EU company with a UK company is no longer possible. On the German side, there is a transitional provision in the form of Sec. 122m Transition Act (Umwandlungsgesetz), but in practice this will no longer be feasible in the absence of a corresponding provision from UK.
  • Cross-border change of legal form/ cross-border spin-off (Spaltung): The freedom of establishment pursuant to Artt. 49, 54 TFEU in and for UK companies ceases to apply and thus also a cross-border change of legal form and a cross-border spin-off which was made possible by the ECJ on this basis, ceases to be possible. Even without the implementation of the Directive on Cross-Border Conversion Measures (Directive (EU) 2019/2121), which has been issued in the meantime, the ECJ had enforced the enabling of these corporate law measures for companies within the EU, to the extent that they are also possible for domestic companies (ECJ, judgment of July 12, 2012 – C-378/10 – VALE; ECJ, judgment of October 25, 2017 – C-106/16 – Polbud).
  • Branches: UK is now a “third country”, so branches of EU/EEA companies in UK must meet the special requirements for those from third countries. The same applies to branches of UK companies in an EU/EEA state.
  • Financial reporting: The International Financial Reporting Standards (IFRS) have been incorporated into UK law. However, amendments to the IFRS adopted at EU level no longer apply directly in UK, where only the UK-adopted international accounting standards now in force are applicable and must be taken into account by UK companies in their balance sheet from now on.

CESSATION OF THE FREEDOM OF ESTABLISHMENT – APPLICATION OF THE SEAT THEORY (SITZTHEORIE)

A company incorporated in EU with its administrative headquarter in UK can no longer invoke freedom of establishment, nor can a UK company with its administrative headquarter in the EU. What are the consequences?

  • As a result, the mandatory application of the incorporation theory (Gründungstheorie) throughout the European Union, as pronounced by the ECJ, no longer applies in relation to UK. According to the incorporation theory, the legal provisions applicable to a company are those which apply under the law of the state under which it was incorporated, irrespective of the actual seat of the company’s administration.
  • In German corporate law, as in many other EU countries, the seat theory still prevails for non-EU companies (unless, as with USA, separate agreements apply). According to the seat theory, a company is governed by the legal system in which its administrative headquarter, i.e. the actual seat of management, is located.
  • For UK companies with their administrative headquarter in Germany, German (company) law is now generally applicable. A UK limited company with its administrative headquarter in Germany now runs the risk of no longer being recognized as UK Ltd (or corporation a all) in Germany. The company would have to be assessed according to German corporate law, where it does not meet the incorporation requirements of a German corporation (especially a German limited liability company). Accordingly, it would be regarded in Germany as a partnership (Commercial Partnership (OHG) or a civil law partnership (GbR), depending on whether it operates a commercial trade (Handelsgewerbe). In case such Limited has only one sole shareholder, it would be regarded as a sole businessman (Einzelkaufmann) or co called “small trader” (Kleingewerbetreibender). Anyway, it would lose its limitation of liability in Germany. This is particularly interesting for the Limited (UK) & Co. KG, which was quite popular in practice in the past and which always has its administrative seat in Germany.
  • The legal consequence or rather the continuation of the incorporation theory for UK companies is quite controversial under the TCA. A clarifying regulation would certainly be advisable here, as the result of a strict application of the seat theory appears hardly manageable in practice.
  • For companies seated in UK or in member states of the EU following the incorporation theory, this has no effect, as only the law of the respective state of incorporation continues to apply to the company.

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  Source and further references: https://www.bmjv.de/DE/Themen/FokusThemen/Brexit/Gesellschaftsrecht/Brexit_Gesellschaft_node.htmlhttps://ec.europa.eu/info/relations-united-kingdom/eu-uk-trade-and-cooperation-agreement_en (the entire agreement is also available here) (both last accessed on March 9, 2021); and Schmidt, Brexit: Implikationen des EU-UK TCA im Bereich des Gesellschaftsrechts, GmbHR 2021, 229 et seq.