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Directors' Checklist for a "No-Deal" Brexit

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As Brexit negotiations continue, directors need to be mindful of a number of issues potentially facing their companies from a Corporate and Company law perspective. Here is a helpful checklist of issues and Matheson recommendations to guide them in this process.

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Directors' Checklist for a "No-Deal" Brexit

  1. 1. Beyond Brexit
  2. 2. Area Key Issue Matheson Recommendation Corporate Compliance Directors’ Duties Directors of Irish subsidiaries of international companies need to be fully advised of and briefed on all necessary business restructuring steps needed to meet the challenges of a hard Brexit, should it occur. This is particularly the case where any such restructuring will have a regulatory dimension for the company and will necessarily impact on companies operating in certain sectors more than others. From a regulatory perspective, the transfer of personal data to a UK affiliate will be considered to be a third country transfer under GDPR. In terms of specific sectors, in the context of the distribution of pharmaceutical products directors will need to be aware of their obligations, where the Irish company becomes the group’s EU authorised entity for European Medicines Agency purposes. Other issues which may have implications include the ability for employees based in Ireland to travel to the UK post-Brexit, if for example they are not Irish citizens, as well as other operational consequences. As directors of the Irish subsidiary, the duty lies with the board to ensure all necessary preparatory steps are taken to protect the business and assets of the company from the adverse implications of a hard Brexit. To the extent they have not been completed to date, the board of directors of the Irish companies should convene a board meeting and arrange for a full briefing on all legal issues that have been identified as part of the company’s Brexit diligence exercise and discuss and approve the proposed steps to be taken in advance of a hard Brexit to mitigate the potential adverse consequences for the company. The directors will want to demonstrate that they have taken active steps to ensure the Irish subsidiary has taken all steps possible to prepare the company for the challenges that Brexit will bring for the company. The directors should therefore meet to approve and authorise all actions that are needed as the process unfolds and to ensure the company continues to obtain all required professional advice in relation to such actions. M&A Deals Many market commentators and economists have predicted that a hard Brexit could lead to a recession in the UK, which could affect other parts of Europe in a contagion like reduction in growth across the region. Any significant economic slowdown will likely impact investor confidence more widely, which may result in a reduction in corporates undertaking M&A activity. On the other hand, this may give rise to greater opportunities for financial buyers where there is less buy side competition for assets. On transactions where the target has UK operations, buyers should be undertaking thorough due diligence on the target’s Brexit contingency planning and, where appropriate, specific Brexit related warranty cover should be included in the relevant transaction documents. Similarly, where the acquisition is being partly funded by a third party lender, buyers will need to consider the impact a no deal Brexit may have on the availability (and terms) of such finance. Cross-Border Mergers Cross-border mergers will no longer be permitted between Irish registered and UK registered companies under the European Communities (Cross-Border Mergers) Regulations 2008 (the “Regulations”) because under the Regulations at least two of the merging entities must be governed by the laws of different EEA member states. It is also worth noting that in determining whether reconstruction and amalgamation of companies relief under section 80 of the Stamp Duties ConsolidationAct 1999 (the “SDCA”) can be validly claimed, the acquiring company must be a limited liability company incorporated in an EEA member state. Cross border mergers involving a UK company that are currently in progress should be completed before the UK leaves the EEA as, in the absence of transition arrangements, the relevant court will not have jurisdiction to make the necessary orders to give effect to the merger after that date. The requisite legal framework will not exist. From a practical perspective, if an Ireland/UK cross-border merger was to commence before the final outcome of the Brexit negotiations are confirmed, then it would need to be established that both the Irish and the UK High Courts would agree to start the process without certainty as to its outcome. Cross Border Mergers and the Impact of Brexit Section 56 of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019 the (“the Brexit Omnibus Bill”), amends section 80 of the SDCA and extends the relief to apply to UK incorporated companies that acquire Irish incorporated companies pursuant to a scheme of reconstruction or amalgamation. It is hoped that these legislative provisions are retained in the final text of the Brexit Omnibus Bill should a hard Brexit become a reality. Directors’ Checklist for a “No-Deal” Brexit www.matheson.com
  3. 3. Area Key Issue Matheson Recommendation Corporate Compliance Branch of UK Company A UK company that has registered as a branch in Ireland will after the UK leaves the EEA become a branch of a non-EEA company. It should be noted however that a branch of a UK company that has already registered as a branch of an EEA company will not have to re-register as a branch of a non-EEA company. The documentation to be filed in respect of such branch in the Companies Registration Office in Ireland will however change going forward. See Section 1304 of the Companies Act 2014 The directors of an Irish branch of a UK company should familiarise themselves with the filing requirements for a branch of a non-EEA company and ensure that the business systems of the company address this going forward to ensure compliance with the legislation. It is worth noting that the filing requirements for a branch of an EEA company and non-EEA company are broadly similar Establishing a Branch in Ireland - non EEA Incorporated Company EEA Resident Director Section 137 of the Companies Act 2014 requires every Irish registered company (subject to certain exceptions) to have at least one director who is resident in an EEA member state. As the UK will no longer form part of the EEA, an Irish company relying on a UK resident director to satisfy this legal requirement will need to put in place an alternative arrangement. The main exception to this general rule is that it will not apply if the company holds a prescribed form bond to the value of €25,000. Another discretionary exception applies where the Registrar of Companies grants a certificate certifying that the company has a real and continuous link with one or more economic activities that are being carried on in the State. Application for such certificates are not very common and must also be accompanied by a statement from the Revenue Commissioners that the Revenue Commissioners have reasonable grounds to believe that the company has such a link. Clearly this is a time consuming and discretionary process. The most practical measure at this late stage would, where possible, see affected companies appoint an additional EEA resident director to their board. Brexit Implications and practical solutions Guarantee by Holding Company Under section 357 of the Companies Act 2014 a subsidiary company can file consolidated financial statements of its holding company (established under the laws of an EEA member state) rather than file its own accounts. This is permitted if the holding company provides a guarantee of the subsidiary’s commitments and liabilities and certain other conditions are met. As the holding undertaking must be established under the laws of an EEA state, an Irish subsidiary relying on a UK established holding company for such guarantee will need to reconsider such arrangement. It may need to establish a new holding undertaking (perhaps by way of strategic merger, acquisition or simple incorporation) elsewhere in the EEA in order to continue to avail of the guarantee. This might of course bring other factors such as third party consents and contractual implications into play. Filing Exemption Under section 299 of the Companies Act 2014 a holding company that is a subsidiary undertaking of an undertaking registered in the EEA may avail of an exemption from the obligation to file group financial statements where certain other requirements are satisfied. An Irish holding company relying on a UK registered holding undertaking under this provision will need to consider whether to establish a new legal structure elsewhere in the EEA in order to continue to avail of the filing exemption. Our comments above in relation to additional factors to be considered (eg consents and contracts) apply equally here. www.matheson.com 20.03.19 The material is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute, legal or any other advice on any particular matter. The information in this document is provided subject to the Legal Terms and Liability Disclaimer contained on the Matheson website. Copyright © Matheson Directors’ Checklist for a “No-Deal” Brexit