Post-Brexit: Withdrawal of the United Kingdom and Rules on Company Law
The United Kingdom (UK) has withdrawn from the EU with effect from 1 January 2021, and as a result of this it no longer belongs to the European Economic Area (EEA). In addition to the much-talked about impact of the withdrawal on trade, customs and border checks, free movement and the fishing industry, the withdrawal will also have implications for the application of EU company law in the UK and, as a consequence, for the recognition of UK incorporated companies and qualification of UK resident board members and managing directors of companies that are registered in Finland and the Finnish branches of UK companies.
In this legal alert we outline some of the most significant implications of the withdrawal of the UK from the EU and suggest certain actions that can be taken to mitigate the effects, for example:
- UK companies will not automatically be recognised under Article 54 of the Treaty. As such, the EU Member States will not be obliged to recognise the legal personality and limited liability of UK companies.
- The branches of UK companies will be branches of third-country companies.
- EU law on disclosure, incorporation, capital maintenance and alteration, and cross-border mergers will no longer apply.
- The UK business register will no longer be connected to the EU-wide business register interconnection system.
- The company form called a European Company (SE) will no longer be available in the UK.
The European Commission issued on 3 July 2020 an updated notice to stakeholders on the withdrawal of the UK from the EU that provided information on how this will affect EU rules on company law. The withdrawal of the UK will, for practical purposes, amount to a hard Brexit in relation to company law (as laid out in our previous legal alert on this topic).
On 31 January 2020, the UK formally left the EU, and was from that date in an 11-month transition period, remaining in the EU’s customs union and single market and continued to obey EU rules under the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community. That transition period ended 31 December 2020 with the UK completing its separation from the EU and withdrawing from following all the rules and institutions of the European Union as from 1 January 2021.
As noted in the stakeholders’ notice, after the end of the transition period the United Kingdom is now a third country as regards the implementation and application of EU law in the EU Member States. The Finnish Trade Register has published a summary of the effects of Brexit on the Finnish trade register.
Qualification of UK resident board members and managing director
As from 1 January 2021, UK residents will no longer fulfil the requirement set out in the Finnish Limited Liability Companies Act under which at least one board member, one deputy board member and the managing director must be a resident of an EEA member state.
As the Finnish trade register notes, the board members and the managing director are responsible for their activities to the company, the shareholders or someone else. To ensure this responsibility, it is required that the enforcement of judgements under Finnish law will apply to at least one of the board members and the managing director.
The Finnish trade register also notes that if no other board members or deputy board members of a Finnish limited liability company are residents of an EEA member state and the Finnish trade register has not granted an exemption to this provision, the board cannot form a quorum and, ultimately, the registration authorities may order the deregistration of the company due to a lack of a competent board of directors.
In practice, the trade register may grant exemptions due to a place of residence to persons living permanently in countries that have acceded to the Lugano Convention.
The UK has not yet acceded to the Lugano Convention and has been bound by it only because of its former EU membership. Now, the consequence of Brexit is that not all the board members of a limited liability company can have their permanent place of residence in the UK.
If the managing director of the company lives permanently in the UK, he or she will be granted an exemption only if at least one of the board members lives permanently within the EEA. In practice, the Finnish trade register has granted exemptions to UK residents if at least one of the board members residing, e.g., in the US has been granted an exemption from the residency requirement.
Branches of UK companies
Starting 1 January 2021, UK companies may no longer rely on the exemption granted to companies that are incorporated in accordance with the regulations of an EEA member state and that have their seat, central administration or main office in an EEA member state. As such, they will require a separate permit to establish and operate a branch in Finland.
The Finnish trade register notes that under the Finnish Act on the Right to Carry on a Trade, the trader must have a representative who is entitled to receive summons and other notifications on behalf of the trader. The representative must be resident in Finland, and the trade register must be notified of the representative.
From now on, the Finnish branches of UK companies may need to replace their current local representative with a representative that is a Finnish resident, and the parent company located in the UK will need to apply for a permit for the branch from the Finnish trade register.
Cross-border mergers and transfer of seats of SE companies
The Commission notes that since 1 January 2021 the Directive (EU) 2017/1132 providing for procedural rules for cross border mergers of limited liability companies no longer apply to the UK. Consequently, if there is a cross border merger involving a company incorporated in the UK pending on 1 January 2021 or later, national rules for mergers with companies established in third countries will be applied to merger as of 1 January 2021.
Under Finnish company law, limited liability companies in the UK and Finland cannot apply the provisions governing cross-border mergers or demergers. Therefore, any cross-border corporate arrangements initiated or completed after 1 January 2021 that involve Finnish and UK companies will create significant legal uncertainty for the legal effects of and regulation governing the cross-border merger.
The European Company (SE) has to have its registered office in the EU, in the same Member State as their head office, as from 1 January 2021. Consequently, as the Commission notes, SEs that have their registered office in the UK no longer enjoy the status of an SE.
As the SEs are no longer available in the UK following a hard Brexit, a Finnish SE is no longer able to transfer its seat to the UK.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this alert. Please feel free to contact Andreas or those with whom you usually work.