Following David Cameron’s announcement that the referendum on the UK’s membership of the EU will take place in June 2016, lenders should start to consider the potential impact a Brexit may have on loan facilities and security documentation, together with the instantaneous effect it may have on negotiating new finance documentation.
With over 40 years of European Union membership, EU laws and regulations are an integral part of the UK. What adaptions and measures would be put in place is purely speculative at the moment but a Brexit would, no doubt, precipitate immediate (albeit perhaps temporary) overarching UK legislation to solve the inevitable legal uncertainties arising.
Essentially, any amendments to finance documents and contracts generally as a result of a Brexit could potentially be relatively “light”. That being said, commercial standard practice would come under some scrutiny which may lead to a change in current practice. Aside from the obvious need to remove and/or replace redundant references to EU Regulations and EU Directives, we consider the following areas within facility documentation which will or may need to be considered:
- Tax implications being withholding tax (although the UK’s existing network of double tax treaties should avoid any material adverse changes) and arguably VAT provisions (although EU VAT Directives have been implemented in domestic legislation and therefore any change would be minimal)
- Governing law and jurisdictions clauses and issues concerning the enforcement of judgements
- Interest rate setting mechanisms and related definitions (LIBOR or EURIBOR)
- Payment mechanics – payment services are subject to EU law but it would be difficult to see how any issues with interbank markets could not be dealt with
- Illegality clauses – the loss of the “single passport” means lenders would potentially lose the authorisation to perform their obligations under facility documentation. Losing these passporting rights will introduce difficulties for non-European financial institutions to operate in the UK and the regulatory and structural framework would need reform
- Representations would require review for applicability. There would also be a knock-on effect on undertakings to conform with laws (all, of course, dependant on the latest UK legislation post Brexit)
- Increased costs clauses – usually attributable to lenders having funded advances due to a change in law or regulation
- Material adverse change clauses – would a Brexit be interpreted as invoking a material adverse change?
- It is important for lenders to think about strategies in “events of default”. In terms of utilisation, apart from facility agreements being frustrated, a Brexit would only affect the ability to draw or roll over advances if it prompted “an event of default”
- Although already common practice, it may become more vital to insist borrowers and security providers use process servers in England.
Time will soon tell what the real implications could be, but where change could be on the horizon, it affords parties the opportunity of reviewing and reflecting on present practice. A Brexit would certainly precipitate a lengthy serious debate about long established market practice.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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