Manoeuvring through uncertainty

Morrison & Foerster prepares its clients for a post-Brexit future

Text by Gavin Blair  /  Photos by Benjamin Parks

The Tokyo offices of Morrison & Foerster (MoFo), one of the world’s leading international law firms, is busy helping Japanese clients prepare for the potential implications of Brexit on their business operations in Europe and the UK, as well as advising SoftBank on its $32 billion acquisition of UK chip-maker ARM Holdings.

With around 130 attorneys, including 40 Japanese bengoshi, Japan’s largest foreign law firm is a fully integrated operation, covering US, British and Japanese law, and offering legal services in fields including M&A, litigation and arbitration, finance and capital markets.

Uncertainty is always an unwelcome state of affairs for both businesses and investors, and in the case of Brexit, much remains unknown. The leave vote result was predicted by few, and the final result of such a momentous shift will be as tricky to forecast.

“We were as surprised as our clients — it was unexpected. It’s too early to make a full assessment,” observes partner James Robinson, who specialises in advising Japanese companies on outbound M&A deals.

“The one immediate impact was volatility on the currency side,” he continues, noting that the subsequent weakening of sterling is at least a short-term silver lining for companies manufacturing in the UK and exporting to Europe and elsewhere.

“For the medium- to long-term, Japanese companies are trying to prepare, and a number of these are establishing project teams to analyse what the potential issues and impacts are for their own businesses. We’ve had a number of clients asking us to help them prepare,” says Robinson.

MoFo has set up a task force, led predominantly by partners from across the firm’s European offices, to help prepare responses to clients, many of whom have similar queries about the impact of Brexit.

The major areas of immediate concern are around data protection, financial services and tax, according to Robinson.

The EU is introducing a significant shift in approach to data protection, with a new set of rules that will come into effect in May 2018. The General Data Protection Regulation (GDPR) is “four to five times the length in written regulation of the current regime,” he adds, and reflects recent changes, such as the rise of big data.

“The fact that the exit from the EU is likely to occur relatively soon after the regulation is introduced means the UK will have to come up with its own set of rules,” explains Robinson.

One of the key issues is transferring personal customer or employee data between countries.

“The basic principle being that if you are in the EU, you can freely transfer data within its borders,” Robinson explains. “But if the UK is outside of the EU, it will be treated like any other country and likely have to apply for its regime to be treated as equivalent.”

From his perspective, if the GDPR is replaced with an equivalent regime in the UK, then that should be acceptable to the EU, though the verification process usually takes a number of years.

“For the Leave Campaign, the whole point of exiting was that you can then set your own rules. But in a number of areas, if the UK asks to get equal access to the European market and the EU says you need to have the same protections and regulations, then they are going to effectively end up applying EU laws, except, going forward, they will have no place at the EU negotiating table to set them in the first place,” notes Robinson.

MoFo has also been getting a lot of enquiries about financial services issues, which Robinson describes as “more pressing” because applying for new regulatory licences is a lengthy process. The key point is that companies can currently “passport” financial products, meaning they can be sold in all 28 member states once they are licensed in one state.

“We expect the government to put that high on the agenda in the negotiations because preserving the City of London as a financial centre should be a priority. But the EU may not be so amenable to allowing the UK to pull out, but let London continue to sell its financial products across Europe unrestricted,” he says.

In terms of tax, the big questions are about tariff levels, how the UK will deal with the VAT harmonisation that is currently an ongoing EU-wide issue, as well as transfer pricing — how much companies charge subsidiaries when they exchange goods internally, but that are cross-border transactions.

“If you manufacture goods in the UK with parts made in France and sell it to a subsidiary in the Netherlands, and they then sell them to customers in Germany, there are strict rules as to where you can book your profit. Within the EU, it’s relatively straightforward; but once the UK is outside, it’s going to become a big issue. The UK will have to negotiate double-tax treaties, and these usually take years to negotiate,” notes Robinson.

And while the uncertainty around the Brexit vote is likely to have contributed to a cooling off in major M&A deals in the UK in the first half of this year, a matter of weeks after the referendum result, SoftBank made headlines with its $32 billion takeover of the UK’s ARM. SoftBank CEO Masayoshi Son made a point of saying that Brexit hadn’t impacted the acquisition.

Elsewhere though, the cheaper pound is a potential driver of deals.

“Yes, there’s uncertainty, but if there’s a target business in the UK that is strategically good and commercially sound, then it’s worth going for,” says Robinson. “Currency-wise, it’s going to be cheaper. Targets that were previously overpriced will now become more affordable.”  •