Insights / 24-06-2016 / Brexit begins What are the implications for your business

On 23 June 2016, the UK electorate voted to leave the European Union by 51.9% to 48.1%. This will start a process with profound political, economic and social consequences for the UK and its neighbouring European countries. 

While some constitutional experts have expressed doubt that a Referendum vote is legally binding on a UK Government, there is no doubt that, politically, the present UK Government has no option but to respect the popular will and start the process for the UK to leave the EU.

The 2016 Conservative Party leadership election occurred as a result of David Cameron's resignation as leader following the European Union Referendum. Theresa May won the contest on 11 July 2016 after the withdrawal of Andrea Leadsom left her as the sole candidate. She thus succeeded Cameron as leader of the Conservative Party and Prime Minister of the United Kingdom and immediately made sweeping changes to the cabinet.  These changes included appointing a Brexit team led by David Davis as a new EU Exit Secretary, with Boris Johnson as Foreign Secretary and Liam Fox as International Trade Secretary.  The high court has been told that Theresa May will not trigger article 50 of the Lisbon Treaty to initiate the UK’s departure from the European Union before the end of 2016. If Article 50 of the Lisbon Treaty is invoked in January 2017, the withdrawal negotiations are unlikely to be completed before January 2019. An extension to the two year period will have to be agreed by the remaining 27 EU Member States (by unanimity) and the UK.

The mechanics of Brexit

The mechanics of “Brexit” are complex and have been little reported. In brief, the process requires a two year period of exit negotiations (which can be extended by agreement) during which the immensely complex process of disentangling 40 years of EU treaties, agreements and laws are unwound in as orderly a fashion as possible.

The process is made particularly complex because two interrelated EU Treaties come into play: the Treaty on European Union (“TEU”); and the Treaty on the Functioning of the European Union (“TFEU”). Article 50 TEU provides that the exiting Member State must give notice of its intention to leave the EU to the European Council (the EU institution where the heads of government of the 28 Member States are represented). There then begin the negotiations for exit which are conducted by the European Commission under a mandate given to it by the Council. The concluded Treaty of Withdrawal is then put to a vote of the remaining Member States acting by a qualified majority (defined by Article 238(3)(b) TFEU as “at least 72% of the members of the Council representing Member States comprising at least 65% of the population of these States”). So two thirds of the EU’s population as represented by their heads of government in the Council must approve the exit deal, which also requires the “consent” of the European Parliament (a majority vote).

If, as many predict, two years prove insufficient to conclude the negotiations, then the parties can agree to an extended period of time provided the UK and the unanimity of the remaining 27 Member States agree to this under Article 50(3) TEU.

What happens to EU rights, agreements and treaties during the 'exit period'?

A very complex situation arises during the exit period.

Political rights

First, the UK cannot vote in the European Council on matters relevant to the negotiations for exit (see Article 50(4) TEU). The Council presidency rotates between the 28 Member States and the holder of the Presidency will have a crucial political role during the exit negotiations. Currently, the Netherlands has the Presidency until 30 June 2016. However, during the two year exit negotiation period, the agreed schedule for Presidency is:

>  Slovakia (1 July to 31 December 2016)

>  Malta (1 January to 30 June 2017)

>  United Kingdom (1 July to 31 December 2017)

>  Estonia (1 January to 30 June 2018)

>  Bulgaria (1 July to 31 December 2018)

As an exiting Member State, it is highly unlikely that the UK could hold the EU Council Presidency and, Estonia as next in the schedule after the UK is likely to take the chair to be followed by Bulgaria (with Austria next) during the remaining part of the two year exit period.

During the exit period, the UK will remain bound by all EU Treaties and agreements, include trade agreements, as part of its obligations under international law.

In terms of international trade, under EU law, the 28 Member States act as bloc, negotiating trade treaties as a group, including within the WTO. Unilateral action (– i.e. the UK entering into or amending individual trade agreements with non-EU states) will not be lawful until the UK ceases to be a Member State of the Union. However, the UK can negotiate such bilateral agreements with their entry into force timed to coincide with its date of exit from the EU.

 

Legal rights derived from EU law

Constitutionally, EU law is transposed into UK domestic law by the European Communities Act 1972 (“ECA”). Thus when the EU Council adopts a Regulation or a Directive, the ECA provides a mechanism for the new EU law to become incorporated into UK domestic law. The ECA will only be repealed as from the date of withdrawal from the EU since, before this date, the UK remains obliged by its treaty obligations to respect its obligations as a Member State which includes incorporation of EU law into its domestic legal system.

During the two year period of exit negotiations, all existing EU rights and obligations will remain in force. This means, for example, that right of UK citizens and companies to exercise their freedom of movement and establishment will remain in full for the period of exit. Again, during the exit period, EU law remains in force and will be applied by British courts whenever appropriate.

At the same time, all companies trading with the UK and the EU will continue to be under the obligation to comply with EU law. For example, any exporter to the EU will be obliged to satisfy EU standards and regulations and commercial agreements will be obliged to comply with EU competition rules. These obligations will continue even after the UK ceases to be a Member State of the EU if a company or person continues to operate within the EU and to trade within its territory. At the same time EU regulators have powers to apply EU competition and other laws on UK companies if their activities produce effects within the EU market.

What happens after the negotiations for exit?

It is unclear what the situation will be when the UK Government has negotiated a Treaty of Withdrawal with its former 27 EU partners. In particular, the terms of exit will include terms and conditions for future access to the EU single market: some commentators believe that the “exit treaty” should not just be put to the vote in the UK Parliament but, if the terms are controversial, should also be put to the UK electorate in a second referendum or a general election.

 

Uncertain future

Whatever the outcome of the UK’s vote to leave the EU, one thing is certain: the UK and its former 27 EU partners are sailing into totally uncharted waters. In the past, only three territories connected to the EU have left the Union: Algeria when it became independent from France, Greenland when it obtained self-rule from Denmark and the Caribbean island of Saint Barthelemy. There has never been an occasion when a major state withdraws from an economic regional association, let alone from the world’s largest economic bloc in terms of GDP.

The negotiations for the terms of exit from the EU are certain to be complex and most likely difficult, and they will affect every part of private, public and commercial life in the UK.

We will provide regular updates on the progress of the negotiations and our EU Brexit team is available for advice and information.