Mayer Brown is helping companies and organizations worldwide understand, and respond to, the emerging legal and business implications of the UK’s decision to leave the EU. The majority vote in the UK referendum on membership of the European Union, announced on 24 June 2016, in favor of departure by the United Kingdom from the European Union, means that businesses operating in the United Kingdom now face a period of uncertainty.
As things stand, following a short extension request, the United Kingdom is set to leave the European Union on 12 April 2019. However, the Prime Minister has requested a further extension until 30 June 2019 in order to develop a cross-party 'compromise' approach to the future trading relationship with the EU. This request will be considered at an emergency Summit of EU leaders on 10 April. If the EU agrees to this request, it is likely to that they will insist on a much longer extension period, which would mean the UK participating in European Parliamentary elections – a move which would be politically problematic for the UK. If the EU does not agree to a further extension in April, then the UK will need to either leave without a deal or unilaterally revoke its decision to leave (see further below).
The formal legal agreement on the terms of withdrawal (Withdrawal Agreement) and the non-binding Political Declaration on the framework for the future relationship were endorsed at an EU summit on 25 November 2018. However, the deal cannot take effect until it is approved by both UK and EU Parliaments (in that order) and by a majority of Member States at an EU Summit. After some delay, a 'meaningful vote' by UK MPs took place on 15 January 2019 and the deal was rejected by an overwhelming majority. A second meaningful vote will be held by 12 March.
MPs have requested that the Prime Minister reopens negotiations with the EU in order to find an alternative solution to the contentious Irish 'backstop' arrangements. The backstop is designed to avoid a hard border between Ireland and Norther Ireland by establishing a temporary UK-EU Customs Territory (with deeper integration for Northern Ireland) in the event that no agreement on the future relationship can be reached by the end of the transition period. The key issue is that the UK would be unable to exit this backstop without the EU's agreement. While it is considered unlikely that the EU will move away from the core principles of the backstop, it is possible that there will be some room for further negotiation in the coming days.
If the deal is rejected by MPs on 12 March, then they will be able to vote on an alternative approach. First, there will be a vote on whether to leave the EU without a deal on 29 March. If this approach is also rejected, then MPs will vote on whether to request a time-limited extension to the timetable for withdrawal. These votes will take place on 13 and 14 March.
The possibility of leaving without a deal remains on the table. Both the UK and EU have significantly stepped up their 'no deal' contingency planning since December, and this is the legal default option if the Prime Minister cannot renegotiate her deal, or if no majority can be found in Parliament for an alternative approach.
If the UK were to request an extension, agreement would require the unanimous approval of the 27 remaining Member States. The EU has indicated it would consider a short extension in order to finalise the Withdrawal Agreement. However, it may only be prepared to grant a longer one (beyond June 2019) if the UK were to decide to call a General Election or hold a Second Referendum. While the Labour Party's preference would be to renegotiate a permanent Customs Union and close alignment with the Single Market, it has now moved towards supporting a Second Referendum.
A 'no deal' scenario could arise if the terms of the Withdrawal Agreement (and Political Declaration) are not approved by the UK Parliament. The EU Withdrawal Act states that if Parliament has rejected the negotiated agreement, then the Prime Minister must make a statement setting out how Government will proceed.
In the event of no deal, there would be no transition period for businesses to adjust to the immediate effects of leaving the EU. This would give rise to a period of unprecedented legal and regulatory uncertainty. Trade between the two economies would be conducted under WTO rules, with tariffs likely on UK exports to the EU (and vice versa). Further, the border between the UK and EU would become a customs border, with significant disruption, including delays and administrative costs for business.
While it may be possible for the EU and UK to agree a 'bare-bones' deal covering key issues of mutual concern such as counter-terrorism cooperation, or put in place a series of unilateral or bilateral (UK-EU27) measures to minimise disruption in certain areas, none of this could be guaranteed.
While neither side wants a no deal outcome, contingency planning is now a central feature of both the UK Government's and the EU 27's Brexit preparations. The UK and EU have both issued a series of technical notices outlining the impact of no deal in a wide range of areas and it is clear that much of the burden of planning for this scenario is falling on businesses themselves.
The prudent course is for businesses to plan for the worst case – an abrupt exit with no new arrangements in place to govern the UK's future trading relationship with the EU.
January 2019 – March 2019: The Withdrawal Agreement and Political Declaration
The formal legal terms of the Withdrawal Agreement relate to separation issues such as citizens' rights, the transition period and the financial settlement, as well as provisions to allow businesses more time to adjust to leaving the EU, e.g. the ongoing recognition of professional qualifications.
If UK Parliament votes to approve the deal, the Bill to put the Withdrawal Agreement onto the UK statute book, the EU (Withdrawal Agreement) Bill, will be introduced. This Bill must be passed before Exit Day in order for the agreement to have domestic legal effect.
The draft Withdrawal Agreement must also be approved by the European Parliament in a plenary vote and then endorsed at an EU Summit by a majority of Member States (representing at least 20 of the other 27 EU countries and 65% of the population). It will have the status of an international treaty.
The accompanying Political Declaration is not legally binding, but will form the basis for the agreement between the EU and UK on their future trading relationship.
29 March 2019: Exit Day