BREXIT has happened – what does it mean for company law and M&A transactions?
11 February 2021
Although the UK left the EU on 31 January 2020, under the European Union (Withdrawal Agreement) Act 2020, the UK continued in most respects to be treated as if it were still part of the EU until 31 December 2020. This transition period has now ended and the full effects of the changes in UK law and regulation now apply.
This article sets out the changes to company law that came into effect at the end of the transition period. In practice these changes are intended to preserve the existing company law framework as far as possible and primarily affect companies with a connection to the EEA. In summary, the changes include:
- Amending the Overseas Companies Regulations 2009 so that all overseas companies (whether incorporated in the EEA or not) have the same registration, filing and disclosure requirements.EEA companies that have an establishment registered in the UK must now provide additional information to Companies House and include more information on their customer-facing materials.
- Amending the information required to be filed by UK companies appointing corporate directors and/or secretaries incorporated in the EEA to align it with the information required to be filed in respect of appointing non-EEA incorporated directors and/or secretaries.
- Removing references to the EU from the political donations and expenditure requirements, so that the requirements for shareholder approval for political donations apply only to UK elections and referendums.
- Changes to the regime for European Economic Interest Groupings (EEIGs) and societas europaea (SE).
- Changes to accounting practice and accounting standards.
- Changes that affect M&A transactions by revoking the Companies (Cross-Border Mergers) Regulations 2007 and removing the ‘shared jurisdiction’ provisions of the UK Takeover Code for public M&A transactions.
Previously the registration and filing requirements for companies incorporated outside the UK with a UK registered establishment (branch or place of business) were less onerous for companies incorporated in the EEA. This has changed, and EEA companies are now subject to the same filing requirements as other overseas companies.
An EEA company with an existing registration has three months from 1 January 2021 in which to provide Companies House with the following:
- information on the law under which the company is incorporated;
- the address of its principal place of business or registered office;
- the company’s purpose (or objects);
- the amount of issued share capital; and
- the company’s accounting reference period and period of disclosure.
In addition to the information about the UK establishment, customer-facing materials such as websites, business letterhead and order forms used in carrying on the activities of the UK establishment of an EEA-incorporated company must also contain additional information including:
- the company’s country of incorporation;
- the identity of the registry where the company is registered and any registration number;
- the location of the company’s head office;
- the legal form of the company;
- if applicable, a statement of the company’s limited liability status;
- if applicable, notice that the company is being wound up or subject to insolvency or analogous proceedings; and
- if the company choses to refer to its share capital, it must do so by reference to paid up capital.
An EEA-incorporated company registering a new UK establishment is subject to the same name checks as other overseas companies.
Corporate directors and secretaries
Previously less detailed information was required for the appointment of corporate directors and/or secretaries incorporated in the EEA; such companies are now required to file the same information as other overseas corporate officers. UK incorporated companies with an existing EEA director and/or secretary had three months from 1 January 2021 to provide Companies House with additional information relating to the corporate form of the corporate officer and the law by which it is governed.
Previously the provisions of the Companies Act 2006 relating to political donations referred to the EU. References to the EU have been removed, and the rules relating to shareholder approval for political donations only apply to UK elections and referendums.
EEIGs and SEs
EEIGs were introduced to help businesses in EU member states establish and maintain links with businesses in other EU member states. At the end of the transition period, EEIGs that were registered in the UK were automatically converted into a new corporate form - a UK Economic Interest Grouping (UKEIG); the intention is for the UKEIG to be a temporary stage.
An SE is a European public limited company which can be created and registered in any member state in several different ways. It is not possible to register a new SE in the UK. SEs registered in other member states can continue to trade in the UK, but they must now register UK establishments with Companies House and file accounts. In addition, any UK registered SEs that failed to put alternative arrangements in place have now automatically converted to a public limited company (referred to as a UK Societas); the intention is that a UK Societas is a temporary stage.
Accounts and accounting standards
The UK Government published Accounting for UK companies in December 2020, setting out the changes to the corporate reporting regime from 2021; the paper observes that the changes will only affect a small number of companies.
Several changes have been made to the Companies Act 2006 (and relevant secondary legislation) relating to the preparation and filing of accounts and limiting the scope of some exemptions.Changes have also been made to the legislation that effectively mirrors these provisions for limited liability partnerships. The changes apply for financial years beginning on or after 1 January 2021 and include:
- Removing the reduced requirements for EEA companies (as compared with other overseas companies) as to the production, audit of filing of their accounts.
- Reduced scope of the exemptions from producing accounts which include:
- removing the exemption from producing accounts that previously applied to dormant UK subsidiaries of certain EEA parent undertakings; these companies are now required to prepare and file accounts annually with Companies House.
- removing the exemption from the requirement to produce group accounts that previously applied in certain circumstance to UK parent companies with an immediate EEA parent company.
These exemptions now available only to UK subsidiaries of certain UK parents.
- Removing the exemption for UK companies from producing a non-financial information statement that was previously available if the UK company was included in the consolidated annual report of an EEA parent company.
- Reduced scope of the subsidiaries audit exemption; it is no longer available to a UK subsidiary of an EEA parent.It is only available to a UK subsidiary of a UK parent.
- Requiring UK companies to use UK adopted international accounting standards (UK IAS) instead of EU adopted international accounting standards (EU IAS).Previously UK companies could choose whether to produce accounts using UK Generally Accepted Accounting Practices (UK GAAP) or International Financial Reporting Standards (IFRS) as endorsed and adopted by the EU (EU IFRS). UK companies that were admitted to trading on an EEA regulated market and produced consolidated accounts had to produce those consolidated accounts using EU IFRS.For accounting periods commencing on or after 1 January 2021 UK companies are generally able to choose between UK GAAP and IFRS as endorsed and adopted by the UK (UK IFRS).Existing EU IFRS was brought into UK law from 1 January 2021, but any adoptions, interpretations and amendments after that date will not automatically apply in the UK.The UK has its own framework for adopting new or amended IFRS which is overseen by the newly formed UK IFRS Endorsement Board.
Corporate M&A transactions (whether domestic or cross-border) are largely governed by private contractual arrangements; this remains the case. However, there are two EU directives that affect M&A transactions, and which have ceased to apply in the UK; the Cross-Borders Merger Directive and the Takeovers Directive.
The EU cross-border merger regime provides a regime for mergers between limited liability companies established in different EU member states. The UK no longer has access to this regime, and the Companies (Cross Border Mergers) Regulations 2007 have been revoked.
The Takeovers Directive established the legal framework through which company takeovers are regulated no longer applies in the UK, although the Companies Act 2006 replicates certain parts of it. The Takeovers (Amendment) (EU Exit) Regulations 2019 removed the requirement for the UK Takeover Panel to implement the ‘shared jurisdiction’ regime under the Takeovers Directive. Shared jurisdiction applied where the target company has its registered office in one EEA member state and its shares admitted to trading on a regulated market in another EEA member state. The practical effect of this is that UK Takeover Panel now has sole jurisdiction over offers for companies that have their registered office in the UK and that satisfy the “residency test” contained in the UK Takeover Code. Offers for companies that have their registered office in an EEA member state and their securities admitted to trading only on a regulated market in the UK are no longer regulated by the UK Takeover Panel.
Broadly, companies had three months from 1 January 2021 to address the changes outlined above; if they have not already taken appropriate action, they should do so now.
Similarly, UK Companies with establishments in any of the remaining EU Member States (EU-27) should seek local legal advice as to the effect of any continuing arrangements in the EU-27.
The UK left the EU at 11pm (UK time) on 31 January 2020, and the transition period came to an end on 31 December 2020. The Trade and Cooperation Agreement reached on Christmas Eve 2020 sets out the shape of the ongoing future relationship between the UK and the EU and provides some degree of certainty for UK businesses.