Brexit: impact on cross border M&A: it’s not all bad

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Alan Farkas, a partner at international law firm Dorsey & Whitney in its London office, has been advising companies on Brexit, and despite some bleak reports he believes there are some positive developments worth noting.

Whilst Brexit inevitably caused great uncertainty and with it a significant drop off in M&A activity, there is a growing sense amongst both Corporates as well as M&A professionals that the tide may be about to turn. Indeed, much has already been written about the “Boris Bounce.

It remains unlikely that there will be much clarity before the autumn in relation to the specifics around a trade deal with the EU. Between now and the end of the transition period under the Withdrawal Agreement, the UK Government will take action to stimulate the economy and lay out plans to reinforce the message that the UK is “open for business” and is an attractive place to invest.

Whilst a lot has been said about, the threats and risks associated with Brexit, there may be several positives that could potentially make investing in the UK highly attractive to foreign businesses.

Exchange rate – with continued uncertainty over what form a “comprehensive” trade deal between the UK and the EU will take, the “pound” is unlikely to strengthen in the short to medium term. Therefore, the opportunity for foreign buyers to invest in UK assets at an attractive price will remain for some time.

Regulatory alignment – the UK Government continues to insist that it does not wish to have long-term regulatory alignment with the EU and on that basis there would be less “red tape” faced by UK companies making the UK more attractive as a place to invest with increased regulatory flexibility.

Zero Tariffs – whilst there remains a lot of “grand standing” by both sides over the terms of a trade agreement between the UK and the EU, there is a general acceptance (as stated in the political declaration that accompanied the Withdrawal Agreement) that trade between the UK and the EU will be based on “zero tariffs and zero quotas”.  Stephen Barclay, the UK’s Brexit Secretary, stated “it’s in both sides interest to keep the flow of goods going.

Services Sector – Whilst originally there was considerable concern as to the potential impact of Brexit on the UK’s financial services sector – in recent months there has been a growing acceptance that there could be a significant upside for the UK’s financial services sector of not being aligned with the EU in terms of financial services.  After Brexit, the UK could boost financial services by lowering capital requirements, easing taxes and loosening labour laws. UK financial services is not as geographically limited as goods, and can therefore instead focus on building new relations with other financial hubs around the world such as Hong Kong and Singapore.

Whilst the “equivalence regime”, the system by which the EU will allow the City of London to access EU markets on condition that financial regulations mirror EU rules, can be withdrawn on 30 days’ notice, the practical realities are that the City of London dwarfs the financial sectors of Paris, Frankfurt and Amsterdam. The EU would be most unwilling for the UK to leave its regulatory orbit in the short to medium term.

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