The Impact of Brexit on Corporate Activity in Ireland
Brexit comes on the back of a slowdown in UK led M&A activity in the first half of 2016. This was due in part to market uncertainty and volatility around Brexit. Now that Brexit has come to pass, market uncertainty and volatility is set to continue, at least in the short to medium term. Volatility presents a number of practical challenges for companies such as agreeing deal valuations, more cautious lending and potentially an increase in shareholder activism.
However volatility arising from Brexit also creates market opportunities for well-capitalised corporates and private equity as companies come under cost pressure to consolidate or restructure their portfolio through the disposal of non-core assets.
In the medium to longer term, as certainty increases around what form the UK's exit will take, we expect deal flow to rise, in particular as corporates and private equity companies identify and take advantage of market opportunities.
Transactional costs may increase for some deals as a result of Brexit. For example, deals involving companies with UK trade will no longer be able to take advantage of the EU’s one-stop-shop when it comes to merger control approval and may have to get separate approval from the relevant UK authorities.
There are 3 areas where the legal effect of Brexit on M&A and corporate finance will be noticeable:
- Existing deals
- Structuring of future deals
- EU-related company law
Where an existing deal is awaiting a condition to fall in – e.g. a regulatory or third party consent – it is not unusual for there to be a material adverse change condition. In private deals it is possible in particular circumstances that the market turmoil caused by Brexit would entitle a party to invoke such a condition with a view to abandoning the deal. In the case of any quoted company takeovers, there is a very high bar to get over in order to satisfy the Irish Takeover Panel so that an offeror would be entitled to walk away from a takeover bid; Brexit would not succeed so as to satisfy such a condition.
In future deals we anticipate careful drafting of such conditions related to the nature of the UK’s ultimate departure from the EU – will it be EEA, Canadian, Turkish or WTO? It will be easier to express the conditions by reference to these tangible possible outcomes rather than by relying on a general material adverse change condition.
If the UK leaves the EU without remaining in the EEA, cross-border mergers using the EU law will be impossible. Any Societas Europeas (SEs) with their seat in the UK could lose their legal basis and could also be required to transform into a UK entity or migrate to an EU Member State.
Similarly, if the UK exits the EEA altogether, then UK companies raising money on the markets will require the approval of the prospectus by an EEA Member State regulator. It would be in the same position as, for example, US companies, which must choose an EU “home Member State” for regulatory purposes. This will increase costs for UK companies as they would have to satisfy two regulators – the FCA and an EU home Member State regulator – rather than just one at present.
In addition, insolvency practitioners may no longer be able to rely on the EC Regulation on Insolvency Proceedings for automatic recognition of EU proceedings in the UK and vice-versa.
If you have any questions on the impact of Brexit on M&A, please contact one of our team below, or our Managing Partner, Declan Black