On 29 March 2017, the UK submitted a notification of its intention to withdraw from the European Union pursuant to Article 50 of the Treaty on European Union. In the absence of a ratified withdrawal agreement, EU law will cease to apply to the UK from 30 March 2019 onwards without a transition period (a hard Brexit).
On 15 January 2019, the UK parliament voted down the draft withdrawal agreement negotiated with the EU over UK’s departure from the Union. Since that date, the UK has sought revisions to the withdrawal terms and a compromise that would avoid a hard Brexit, but what was widely considered unimaginable – a hard Brexit – now looks like a decisively possible outcome.
While the withdrawal date might be postponed, there are no guarantees that the withdrawal agreement will be revised or that separate assurances or legal guarantees can be agreed upon in time for the transitional arrangements to be ratified and take effect before a later withdrawal date. This means that a hard Brexit may still follow even if the 30 March 2019 deadline is postponed.
The consequences of a hard Brexit on trade in goods and services and on the free movement of people and capital as well as its wider implications on the UK and EU economies have been widely debated. In this legal alert, we will explore some direct consequences a hard Brexit may have in respect of EU and Finnish company law.
Withdrawal of the UK and EU rules on company law
While EU Member States, including Finland, have begun to introduce regulation intended to mitigate the impact of a hard Brexit in some areas (see e.g. our previous legal alert on the topic), there are no concrete measures in place to introduce transitional rules in respect of EU or Finnish company law in the event of a no-deal Brexit.
The Commission published a notice to stakeholders on 19 January 2018 concerning the consequences of a hard Brexit for EU company law. As noted in the notice, in the absence of transitional arrangements, the EU rule will no longer apply to the UK in the field of company law as of the withdrawal date. This will have the following consequences in particular:
- UK companies will not automatically be recognised under Article 54 of the Treaty. As such, 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 European Company (SE) will no longer be available in the UK.
Consequences of a hard Brexit on Finnish company law
Recognition of UK incorporated companies
As noted in the Commission’s notice, UK incorporated companies may be recognised in accordance with each Member State’s national law, even though Article 54 of the Treaty and the automatic recognition it affords would no longer apply in a no-deal Brexit.
State treaties have historically included provisions on recognising the legal personality of companies in the treaty countries. Such provisions exist in treaties concluded between Finland and the US, Japan, Switzerland and Turkey, but no similar bilateral treaty- based recognition exists between Finland and the UK.
However, as a rule, Finnish international private law recognises all foreign legal entities. As such, the legal personality of a UK incorporated and registered company will be recognised under Finnish law in the event of a hard Brexit based on national rules.
Qualification of UK resident board members and managing director
If the UK withdraws from the EU without any transitional arrangement in place, the UK will cease to be a member of the European Economic Area (EEA).
Consequently, UK residents will no longer fulfil the requirement under the Finnish Limited Liability Companies Act that at least one board member, one deputy board member and the managing director must be the resident of an EEA member state.
If no other board members or deputy board members of a Finnish limited liability company are the residents of an EEA member state and the Finnish Trade Register has not granted an exemption, 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.
The company may take certain measures to avoid the risk of deregistration. A straightforward solution would be to replace the UK resident director with a director that is the resident of an EEA member state or to add a director that is the resident of an EEA member state to the board. A UK resident managing director would have to be replaced by a managing director that is the resident of an EEA member state.
Alternatively, the company may file an application for an exemption from the requirement with the Finnish Trade Register. The Finnish Trade Register issued an announcement on 8 February 2019 where it noted that exemptions are, in practice, granted to persons who permanently reside in countries that have acceded the Lugano convention (which the UK has not). Furthermore, the Finnish Trade Register notes that a managing director who permanently resides in the UK will be granted an exemption only if at least one board member the resident of an EEA member state.
It is likely that the processing of exemptions at the Finnish Trade Register will take time, and there are legal uncertainties concerning the competence of the board and its members in the interim period. Therefore, companies are advised to ensure that the boards of any Finnish limited liability companies can continue to form a quorum also in the event of a hard Brexit.
Finnish branches of UK companies
In the event of a hard Brexit, 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 which 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.
In practice, the Finnish Trade Register will usually grant a permit to the branch of a foreign trader if the parent body is duly registered in its home country.
The branch of a foreign trader must have a local representative as referred to in Section 6(3) of the Finnish Act on the Right to Carry on a Trade. The representative is a person entitled to receive summons and other notifications on behalf of the company.
If the company is founded under the legislation of an EEA member state and has its registered office, central administration or head office in an EEA member state, the representative must be a resident of an EEA member state. In other cases, the representative must have a place of residence in Finland.
Hence, in the event of a hard Brexit, 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 from the Finnish Trade Register for the branch.
Cross-border corporate arrangements
The provisions set out in the Finnish Limited Liability Companies’ Act for cross-border mergers and demergers (splits) apply directly only to corporations that are incorporated in accordance with the regulations of an EEA member state and which have their seat, central administration or main office in an EEA member state.
Following a hard Brexit, limited liability companies in the UK and Finland cannot apply the provisions governing cross-border mergers or demergers set out in Finnish company law. As the UK would be considered a third country under EU company law, without the support of express regulation, any cross-border corporate arrangements involving Finnish and UK companies would involve significant legal uncertainty.
As the European Company form (SE) will no longer be available in the UK following a hard Brexit, a Finnish SE would no longer be able to transfer its seat to the UK in that scenario.
We are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact Andreas or those with whom you usually work.