Post-Brexit rules to make M&A and restructuring deals trickier

IFR 2368 - 30 Jan 2021 - 05 Feb 2021
7 min read
Christopher Spink

The UK’s position as the cross-border deal capital of Europe could be dented as advisers grapple with extra procedures surrounding competition clearance and debt restructurings that came in when Brexit took effect at the start of this year.

The UK left the European Union a year ago but remained subject to existing EU rules governing anti-competitive behaviour until the end of the transition period on December 31. Those rules required mergers above a certain size to be cleared by EU authorities.

Now, major transactions involving multinational entities active in the UK must comply with a new UK competition system as well as the existing EU one. And large restructurings done in the UK will need to be recognised in the EU as well before they can go ahead.

“This is the end of the one-stop shop for competition filings,” said Ali Nikpay, head of competition at law firm Gibson Dunn.

Before January, larger deals involving companies with UK turnover went straight to Brussels to be assessed by the European Commission. They will now have to be assessed by the Competition and Markets Authority in London as well. Even relatively small deals, which in the past would have been waved through by the EC, will need to be formally assessed by UK authorities. “The threshold for filing [in the UK] is effectively lower,” said Nikpay.

Security vetting

At the same time, the UK government is in the process of tightening its regime for clearing deals on national security grounds. Lawyers fear this could also require far more deals to be assessed by the Department for Business, Energy and Industrial Strategy than in the past.

Up to now, only one or two deals directly involved in defence and sectors of “public interest” were called in each year for further scrutiny but under the new proposals parties proposing M&A across a much broader range of sectors will now have to notify the BEIS department.

The 17 sectors include energy, transport, technology, communications, data infrastructure and computer hardware, all of which currently see numerous deals each year. If deals are not reported in these areas directors may face criminal charges and the deals could be declared void.

Some competition lawyers have said this could be a seismic shake-up, with up to 2,000 deals a year having to be notified. “This could be a huge change,” said Caroline Hobson, a competition partner at law firm CMS. “It could mean an increased regulatory burden for parties doing M&A.”

Staffing up

The authorities will need to crank up their systems if they are to scrutinise many more transactions, particularly if, as some predict, as many as 70 deals will require further investigation each year. “BEIS may need a team of 100 people if they are going to do this,” said Hobson.

Nikpay agreed. “This will be a significant change in UK merger control. Until recently we had the lightest touch regime but BEIS could be overwhelmed. I expect to see lots of filings as companies will want to be on the safe side,” he said.

BEIS and the CMA declined to comment on specific staffing changes. A new body called the Investment Security Unit is being set up within BEIS to process transactions. And in its latest annual report the CMA said it expected to increase staff resources to accommodate its increased workload.

Bankers are more optimistic that the additional filing will not get in the way of deals too much.

“The UK government is being very sensible about this, asking people to get in touch early. The filing is only seven pages,” said a senior M&A banker. “That said, the proof will be in the pudding. It is added bureaucracy and may affect things, particularly as general merger clearance is now double layered, with filing in the UK and the EU."

A second senior M&A banker added: “This is clearly a developing issue that needs monitoring. Acquirers will need to factor in the view of the government on cross-border deals in certain situations.”

Regarding the new emphasis on national security, the first banker said the UK was only catching up with other jurisdictions, such as the US and France, which have had such measures in place for some time. In January, for example, France blocked an offer for supermarket Carrefour on these grounds.

The UK proposals were published in the National Security and Investment Bill in November. The legislation is expected to be passed in the first half of this year.

Super scheme

Brexit may also affect the smooth running of major debt restructuring deals. Previously, EU regulations effectively allowed court judgements in one jurisdiction of the EU to be recognised throughout the bloc. Now judgements in UK courts will need to be recognised separately by courts in each EU member state individually, adding costs and complexity to the process.

Multinational debtors with predominant EU businesses may prefer to use new UK-style restructuring schemes that have been launched in the Netherlands and Germany.

“The new Dutch and German schemes may impact the appeal of heading to London to restructure a business but it could be quite gradual,” said Matthew Czyzyk, a restructuring partner at law firm Ropes & Gray. “European companies now have the tools within the EU to carry out restructurings.”

The UK has also updated its regime to a “super scheme” that can impose restructuring terms on hold-out creditors. That could maintain London’s edge, said Czyzyk.

“England and Wales has been the go-to jurisdiction for European restructurings for many years. The new restructuring plan or super scheme with its ability to cramdown creditors across classes could be very good for London,” he said.

State aid

Brexit will also complicate how state aid is assessed. Under the free trade treaty agreed with the EU on Christmas Eve, the UK has undertaken to abide by the EU’s state aid guidelines in transactions that involve Northern Ireland.

“The UK is still signed up to EU state aid rules under the Northern Ireland protocol. Any aid granted in the UK that has an impact on the Northern Irish market could be subject to state aid rules. This could potentially be quite broad,” said Hobson.

At the same time, state aid has become less of a concern in the EU, according to Attila Borsos, a Brussels-based partner at Gibson Dunn, since the EU has confirmed state aid does not apply to supranational funds, such as the EU’s €100bn Sure fund.

“The UK could be at a disadvantage as it does not have access to such supranational funds,” he said.