Legal briefing | 10 Feb 2021 |

What does the UK-EU Brexit trade deal say about investment and M&A?

The Trade and Cooperation Agreement (TCA) signed by the UK and EU in December 2020 contains few provisions which are directly relevant to M&A – but there are provisions on investment and the end of the Brexit transition period is likely to have a significant impact, both on M&A and the wider investment landscape.

Mergers and acquisitions

There is little of direct relevance to mergers and acquisitions in the TCA and it would be unusual for a trade agreement to contain extensive coverage of this area – although there are some provisions on investment (see below). However, the fact that we now have a Brexit trade deal resolves the immediate uncertainty and should boost deal activity in 2021. There is no doubt that the uncertainty of the past few years (rather than the fact of Brexit itself) has had an impact on deal-flow in the UK and any outcome that provides certainty is welcome news for the M&A market.

WIDER IMPACT OF BREXIT ON M&A

Of course, some transactions will be impacted by added complexities in relation to merger clearances (see this briefing) and due diligence as a result of parallel but diverging regimes. In addition, whilst the TCA provides welcome clarity in certain areas, there remains considerable uncertainty over what the UK Government's longer term post-Brexit strategy is, in particular which areas of UK law it will look to "de-Europeanise" first. For more detailed discussion of the impact of Brexit on M&A, click here.

Investment

The TCA contains provisions on investment similar to those in the EU's trade agreements with Canada and Japan. For example, each party agrees not to impose measures such as limitations on foreign-owned shareholdings or requirements for its own nationals to be represented on boards of directors. The TCA also includes commitments by each party to treat the other party's investors no less favourably than its own investors in like situations (or investors of any third country when it comes to establishment). However, for the most part, these are obligations that the UK and EU already meet and where they do not, the TCA carves out "any existing non-conforming measure" as listed in the Annexes to the agreement. The overall effect is therefore to lock in existing levels of openness to investment from outside the EU or the UK, as the case may be.

Whilst this is helpful, the TCA does not oblige the parties to improve upon existing levels of openness. In particular, the EU is not obliged to give UK investors the exact same rights that they enjoyed before the end of the Brexit transition period, when they would have been treated as EU investors (enabling them, for example, to rely on provisions of the Treaty on the Functioning of the European Union to tackle a wider range of potentially discriminatory measures). That said, this weakening of investor protection is only likely to be material in a minority of cases; as a general proposition, UK businesses will continue to be able to acquire EU businesses (and vice versa) in much the same way as they have done to date (although note the points made below about the impact of Brexit on the wider investment landscape).

THE WIDER INVESTMENT LANDSCAPE

As regards the wider investment landscape beyond the issues addressed by the TCA (which primarily relate to foreign ownership), the end of the Brexit transition period will lead to material changes where the activities have a financial services element, notably in relation to the following areas:

Marketing between UK-EU and access to capital markets – for example, UK issuers will no longer be able to "passport" an investment prospectus into the EU (and vice versa), which will add time and cost to fundraising in Europe and companies which are listed on markets in both the UK and the EEA will now be subject to regulation by two separate regulators (which, again, will have time and cost implications)
Cross-border investment activities between UK-EU – for example, dealing, underwriting, investment advice and investment management which have previously been carried out in reliance on financial services passporting arrangements may no longer be possible (subject to any future decisions on equivalence)
Other specific regulations that impose requirements on certain activities in financial instruments – such as mandatory clearing of certain derivatives, mandatory posting of collateral for uncleared derivatives, trading obligations or reporting obligations

In all these areas, the TCA provides little, if any, assistance and so far, there are no relevant equivalence decisions (and in any event, equivalence is unlikely to be achievable for all pre-Brexit financial services activity). For more discussion of the implications of the TCA for financial services, click here.

For more information on the TCA generally, see our Business-friendly guide to the UK-EU Brexit trade deal.

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