Brexit: impact on corporate law

At 11pm (UK time) on 31 December 2020 (known as "IP completion day), the transition period ended and the UK entered into a new trading relationship with the EU under the EU-UK Trade and Cooperation Agreement ("TCA"). The deal applied provisionally from 1 January 2021, pending approval and ratification in the European Parliament. On 29 April 2021, the EU Council adopted a decision on the conclusion of the TCA, which was the last step for the EU to ratify the agreement. The TCA enters into force on 1 May 2021.

Although the TCA represents a fundamental shift in the EU-UK relationship, it does not deal with corporate law in any significant way. The UK has, therefore, implemented the changes it proposed if there was a no deal exit. The changes took effect from IP completion day.

In most cases, these changes only impact businesses that have a cross-border relationship with the EU through (i) conducting business operations in the EU; (ii) an EU company or individual operating in the UK; or (iii) a UK subsidiary or branch with an EEA parent.

On 8 March 2021, the European Commission published an updated Notice to Stakeholders: Withdrawal of the UK and EU rules on company law. The notice sets out an overview of the effects on company law of the UK's withdrawal from the EU and forms part of a series of Sectoral Guidance Notices, which the Commission is in the process of updating following the end of the transition period.

It confirms that companies incorporated in the UK are third country companies and not covered by Article 54 of the Treaty on the Functioning of the European Union. This means Member States are not obliged to recognise the legal personality (and limited liability) of those companies incorporated in the UK which have their central administration or principle place of business in a Member State. See ‘No freedom of establishment ‘ below.

General company law changes

The changes include:

Additional filing and disclosure changes

UK companies with EEA corporate officers and EEA companies with a registered UK establishment must provide certain additional information to Companies House. EEA companies with a registered UK establishment will also have to publish additional information on public facing materials, such as their website, letterhead and order forms. These companies will have three months from IP Completion Day to provide this additional information to Companies House.

Cross border mergers

The EU cross border mergers regime is no longer available to UK companies. EU member states also no longer have to give effect to cross border mergers that did not complete before IP Completion Day. Where a cross border merger involving a UK company is pending after the end of the transition period, national rules for mergers with third country companies will apply.

No freedom of establishment

UK companies operating in the EU may need to restructure to ensure that they meet legal requirements in the relevant Member States.

From IP Completion Day, UK companies become "third country companies" for EU law purposes. This means that they lose the rights to freedom of establishment throughout the EU and can, therefore, only establish themselves within the relevant national regime of each Member State.

Member States follow two varying approaches to determining a company's domicile:

• the "incorporation regime" (eg in the UK) where companies are regarded as subject to the company law of the jurisdiction in which they were incorporated, irrespective of where the company's business is conducted; and
• the "seat regime" (eg in Austria and Germany) where companies are bound by the legal regime of the jurisdiction from which they are actually directed (their "seat".)

If, after IP Completion Day, a UK company is deemed to have its "real seat" in an EU Member State, that Member State's national law may not recognise the UK company as incorporated, having separate legal personality and limited liability status. This is because national law requirements for incorporation may not have been satisfied. As such, UK companies with their central administration or principal place of business in an EU Member State should take advice in the relevant jurisdiction to ascertain whether they need to take steps to restructure.

Societas Europea (SE)

These entities can no longer be registered in the UK.

Any SEs that did not make alternative arrangements before IP Completion Day will automatically be converted into a new UK corporate structure, a "UK Societas", so that they have clear legal status after transition. This will include maintaining similar employee involvement provisions, but these entities will no longer be able to move their registered office out of the UK. UK Societas will need to ensure that the new corporate identifier is reflected on their websites, stationery and other public facing documents.

SEs registered in the EU with branches or establishments in the UK will have to register these branches or establishment with Companies House under the Overseas Company Regulations.

Companies affected by these changes will have three months from IP Completion Day to make the changes.

European Economic Interest Groupings (EEIGs)

These entities are also no longer able to be registered in the UK and UK members of EEIGs registered in another EU member state cannot participate in that grouping unless the contract under which they are formed allows them to do so.

Any EEIG registered in the UK after IP Completion Day will automatically be converted to a United Kingdom Economic Interest Grouping (UKEIG). UKEIGs will need to ensure that the new corporate identifier is reflected on their websites, stationery and other public facing documents.

Companies affected by these changes will have three months from IP Completion Day to make the changes.

Shareholder approval of political donations

From IP Completion Day, shareholder authorisation for political donations (under the Companies Act 2006) only applies to donations and expenditure relating to UK-based political parties, organisations and candidates for electoral office. Political donations to non-UK parties, organisations and candidates will be covered by the rules in the relevant country.

Accounting and corporate reporting changes

The changes include:

UK incorporated companies and groups

• Preparation of annual accounts using IAS - UK incorporated companies can continue to use EU-adopted IAS for financial years straddling IP Completion Day, but will have to use ‘UK-adopted IAS’ for financial years beginning after that date. In practice these standards are currently the same, but differences may occur later if the UK and the EU take different approaches to future standards or amendments.

• UK company with an EEA listing - will continue to produce accounts in accordance with the UK Companies Act 2006 for domestic filing purposes but will need to check and comply with local regulatory provisions in the jurisdiction where they have a listing. This may include the need to publish accounts using EU-adopted IAS or IAS as issued by the International Accounting Standards Board (IASB).

  On 31 March 2021, ESMA published a Public Statement clarifying how the Transparency Directive (2004/109/EC) (TD) requirements on financial reporting apply to UK issuers with securities admitted to trading on EU regulated markets (now third country issuers) after Brexit. Article 4 of the TD requires issuers with securities admitted to trading on an EU regulated market to publish their annual financial report within four months of the year and also specifies the accounting standards that must be used. Article 23(1) of the TD allows National Competent Authorities (NCAs) to exempt third country issuers from the obligations under Article 4 provided that the third country sets equivalent requirements. The aim of the statement is to ensure a common supervisory approach by all NCAs when exempting UK issuers.

  It highlights that, for a UK issuer to be exempt: (1) If it prepares consolidated accounts, it must use EU IFRS, IFRS issued by the International Accounting Standards Board or other third country accounting standards deemed equivalent to prepare those accounts, and include certain minimum information specified in Article 17 of Commission Directive 2007/14/EC; (2) If it does not prepare consolidate accounts, it must use EU IFRS, IFRS issued by the International Accounting Standards Board or other third country accounting standards deemed equivalent; and (3) in both cases, it must comply with other requirements, such as management reports or statements made by the persons responsible within the issuer, in Articles 13 and 15 of Commission Directive 2007/14/EC.

• UK subsidiaries and LLPs with an EEA-registered parent

  After IP Completion Day, EEA companies with a UK incorporated subsidiary are no longer eligible for certain exemptions from preparing and filing accounts. For example, intermediate UK parent companies with an immediate EEA parent may no longer be exempt from producing group accounts.

  Similarly, UK incorporated dormant companies with EEA parents are no longer exempt from preparing or filing individual accounts.

  UK incorporated companies with an EEA parent have also had certain exemptions removed: the exemptions from producing a non-financial information statement if it is included in the EEA parent’s consolidated annual report; alteration of accounting reference dates; and from statutory audit.

• Operating as a UK company with a cross-border presence in the EEA

  UK companies that have a presence in the EEA, for example a branch, will need to check the local accounting and reporting requirements in each country in which they have a presence as UK reporting requirements (such as UK GAAP) may no longer be considered equivalent to the reporting requirements of those EEA countries after IP Completion Day.

Accounting requirements for EEA companies

• EEA companies with a UK listing – do not need to take any action as they can continue to use accounts prepared using EU-adopted IAS.

• EEA subsidiaries of UK-registered parent companies – will need to check the company reporting requirements that apply to third country companies in the EEA country where they have a presence as certain exemptions that were available prior to IP Completion Day may no longer apply.