The advent of Brexit has sparked a fierce debate over the implications for the rights of EU citizens living in the UK and UK citizens living in the rest of the EU. So far, however, there has been relatively little discussion of the implications of Brexit for legal persons—that is, corporate citizens of the EU, which may also be profoundly affected by consequent changes. The ECJ’s 1999 decision in Centros made clear that the treaty freedom of establishment protects the entitlement of corporate persons formed in one Member State to carry on their business in another Member State. Since then, many entrepreneurs in continental European countries chose to form companies in the UK, carrying on their business wholly or entirely in the jurisdiction of the founder. In addition, companies established in one Member State have been able to move to another Member State through a cross-border merger or by forming a European public company. In a recent article, co-authored with Holger Fleischer, Vanessa Knapp and Martin Winner (and forthcoming in European Business Organizations Law Review), I consider the likely consequences of Brexit for such corporate citizens.
We estimate that there are possibly as many as 330,000 UK companies established and operated by entrepreneurs based in other Member States. After Theresa May’s speech last week, it seems clear that the possibility of a ‘soft’ Brexit—in which the UK would remain part of the single market via the EEA—is off the table. This is a pity from the perspective of these corporate citizens, because most of EU company law—and crucially, the ability for companies to rely on the freedom of establishment—are also applicable to the EEA.
Under a ‘hard’ Brexit, to which we now seem headed, the UK will no longer be a participant in the single market, and the acquis of EU company law will no longer apply as such to the UK. While the UK could replicate the effects of EU law within its territory through domestic enactments, UK companies would no longer be able to avail themselves of the freedom of establishment in EU/EEA Member States. Absent changes in the application of choice of law rules by other Member States, this will result in denial of limited liability for owners of UK companies operated in ‘real seat’ countries. Such treatment will apply at the very least to companies founded after Brexit, and—unless something is done to mitigate the rigour of the rule’s application—would also extend to companies already in existence. Hard Brexit could also trigger catastrophic consequences for partly-completed cross-border mergers or transitions to European public companies.
There are clear implications for those managing potentially affected companies. The extent of the potential costs mean that without a clear indication that worst-case outcomes will be avoided, prudent risk management will dictate taking considerable evasive action. For UK companies operated primarily in real seat jurisdictions, this would likely mean changing form to a domestic entity or possibly using a cross-border merger to move to another Member State that will still benefit from the freedom of establishment. And for parties considering a cross-border merger or SE conversion, it implies avoiding any such transaction with a UK company where there is any possibility the transaction will not be concluded prior to the UK’s departure from the EU.
The costs of such evasive actions, and of worst-case outcomes for companies and their founders who fail to take such actions, are likely to be significant. For UK companies operating in real seat jurisdictions, the costs will fall disproportionately on younger and smaller companies. Given that small businesses are commonly thought by policymakers to be a crucial mechanism for economic growth, this seems clearly undesirable as a matter of economic policy for such countries. At the same time, the UK will lose both the modest stream of professional services revenue associated with advice in relation to such companies, as well as the prospect of wider influence on the development of European company law through the widespread adoption of its corporate forms. While the UK will probably be the principal loser from uncertainty surrounding the completion of cross-border corporate transitions, which may well simply proceed without its firms, this will also have adverse consequences for EU27 Member States whose companies would have benefited from such transactions.
Both the UK and EU27 jurisdictions thus have much to gain from taking steps to avoid worst-case outcomes. Such steps could consist of unilateral actions and/or bilateral measures agreed as part of the UK’s ‘exit agreement’. Unilateral action by real seat jurisdictions could be the simplest way to avoid the disastrous consequence of denial of limited liability for owners of pre-Brexit companies. The sooner this can be clarified by legislation, the less will be the avoidance costs that need be incurred by such countries’ entrepreneurs. At the same time, unilateral action by the UK to enact into domestic law the EU law frameworks for cross-border mergers and SEs will ensure the continued viability of UK SEs and the successful UK execution of partially-completed cross-border corporate transitions where a UK entity is the desired outcome.
John Armour is Hogan Lovells Professor of Law and Finance at Oxford University and a Fellow of the European Corporate Governance Institute.