Third time’s a charm: draft regulations addressing no-deal Brexit company law are back

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draft version of the Companies, Limited Liability Partnerships and Partnerships (Amendment etc.) (EU Exit) Regulations 2019 was published online on 14 January 2019 (the “Regulations”). This bulletin summarises the changes proposed to be made by the Regulations to UK company law. Those changes are designed to correct deficiencies that would otherwise be created by a no-deal Brexit.

The purpose of the Regulations, made clear in the accompanying explanatory memorandum (the “Memorandum”), is to ensure that there is a functioning legislative framework for companies operating in the UK on the day that the UK leaves the European Union.

The BEIS (the UK government department for business) first published the Regulations and the Memorandum on 31 October 2018. Both documents were subsequently withdrawn and republished on 6 November 2018. Third time’s a charm, as they say.

EU law and the Companies Act 2006 prior to exit day

The Companies Act 2006 (the “Act”) provides companies with the legal framework in which they are supposed to operate within the UK.  The Act currently reflects the UK’s integration of certain aspects of EU law (e.g. special treatment of EEA companies and EEA ‘regulated markets’).

Since the UK is set to leave the EU on 29 March 2019 (and that a no-deal scenario remains a possibility,  if not the front runner still), that legal framework will need to work with the UK sitting outside of the single market and the EU’s common company law framework. In a no-deal Brexit scenario, the UK will no longer be able to treat companies incorporated in the EEA more favourably than companies incorporated in any other jurisdiction (or else find itself in breach of the World Trade Organisation’s ‘Most Favoured Nation’ rules).

Amendment of the term ‘regulated market’

The Regulations propose to amend the current definition in the Act of ‘regulated market’ by creating two separate defined terms: ‘UK regulated market’ and ‘EEA regulated market’. This amendment will have two principal consequences:

• EEA companies will no longer be exempt from the ban on subsidiary companies being shareholders in their holding companies.
• An ‘investment company’ is currently defined in section 833 of the Act as (paraphrased) a public limited company trading in shares, land or other assets and which has given notice of that fact to Companies House. Currently, investment companies are able to make distributions from accumulated revenue (i.e. investment) income (section 832 of the Act).  In effect, section 833 provides an exemption from the requirement (under section 830 of the Act) for a public company only to make distributions from accumulated realised profits, etc.  Section 832 comes with a list of conditions, one of which is that the company’s shares must be admitted to trading on a ‘regulated market’.  If the Regulations become law, ‘regulated market’ will change to ‘UK regulated market’; and this change may be of material significance for UK incorporated investment companies that are traded on an EEA regulated market (but which are not also then traded on a UK regulated market).

Transitional provisions will apply (and are included in the Regulations) for those undertakings caught by the above provisions. Investment companies, whose shares are only admitted to trading on an EEA regulated market, will be able to continue making distributions (so long as the other conditions of section 832 are met) for a period of one year after Brexit.

Corporate directors

UK companies that wish to appoint an EEA company as a corporate director or corporate secretary will now be subject to the same filing requirements as a non-EEA company. The additional requirements are a statement as to the legal form of the company and the law by which it is governed.

Those EEA companies that have been appointed as corporate directors or corporate secretaries under the pre-Brexit framework will have to comply with the new requirements and the registers of the applicable UK companies will need to be updated by June 2019.

Proposed ban on corporate directors

Companies incorporated in the UK, however, will no longer be able to appoint corporate directors once the prohibition included in the Small Business, Enterprise and Employment Act 2015 (corporate aspects) comes into force. This prohibition was supposed to come into force in October 2015, but was subsequently pushed back by the Government to October 2016. The effective date of the prohibition has been pushed back again by the Government without a further proposed implementation date. No further announcements have been made so far as regards the prohibition’s implementation.

Cross border regime

If the Regulations come into force, UK companies (and companies incorporated in the EEA countries seeking to merge with UK companies) will no longer be able to access the regime prescribed by the Companies (Cross-Border Mergers) Regulations 2007. That the regime is only applicable to companies incorporated in EEA states and the Companies (Cross-Border Mergers) Regulations 2007 will be revoked on exit day by the UK. The Memorandum states that, on average, around fifty cross-border mergers take place per annum under the Companies (Cross-Border Mergers) Regulations 2007. Once the UK exits the EU, mergers will may still be structured through private contractual arrangements.

Permitted disclosure provisions

The Regulations propose to amend the provisions which allow the UK company Registrar ‘Companies House’ to disclose certain protected information to specific authorities such as UK and EEA data processors or credit reference agencies. Following a no-deal Brexit, the Registrar will only be able to use UK based data processors in order to avoid giving EEA based businesses preferential treatment over non-EEA businesses (again, with a view to avoiding breaching the World Trade Organisation’s ‘Most Favoured Nation’ rules).

Passage into legislation

The Regulations have not yet been officially adopted as UK law and the next step in the legislative procedure is for the House of Commons to debate the content of the Regulations and then vote on their approval as a Bill. If the Bill is approved by the Commons, the Bill will be put before the House of Lords for approval and with such approval and Royal Assent the Regulations would come into force (presumably well before exit day on 29 March 2019).

Whether Brexit is causing you to think about the structure of your business or you simply want to discuss any of the issues raised in this Bulletin further, please do contact us at enquiries@humphreys.law; our team is available to advise.

This Bulletin was researched and prepared by Amir Kursun, with input from Henry Humphreys.

Humphreys Law