Brexit and Its Resulting Uncertainties
The United Kingdom (UK) held a referendum on June 23, 2016, in which a slim majority voted in favor of leaving the European Union (EU) in an action commonly referred to as Brexit. The UK House of Commons passed a bill on February 8, 2017, authorizing the government to proceed with exit talks with the EU. On March 29, 2017, the British government tendered its formal notice to withdraw from the EU pursuant to Article 50 of the Lisbon Treaty. This withdrawal was supposed to take effect on the effective date of the withdrawal agreement, which was initially March 29, 2019, if no agreement had been reached by then. The UK House of Commons rejected the withdrawal agreement on January 15, 2019 (432 to 202 votes), March 12, 2019 (391 to 242 votes), and March 29, 2019 (334 to 286 votes). Since the withdrawal agreement was not approved on March 29, 2019, the Brexit date was set on April 12, 2019 (and later extended to October 31, 2019 and January 31, 2020) pursuant to Article 50 of the Lisbon Treaty. These extensions were the result of a special European Council summit wherein the EU leaders met and agreed to provide the UK such periods with the option to leave the EU earlier if its prime minister can secure the UK House of Commons' support for his Brexit deal. The UK conducted an early general election on December 12, 2019 affording the prime minister's Conservative party a majority of 80 in the UK House of Commons. The UK's EU Withdrawal Bill was enacted into law on January 23, 2020 and the EU parliament approved the Brexit on January 29, 2020. The UK formally left the EU on January 31, 2020. There is an 11-month transition phase (or until Decemer 31, 2020) to sort out the future EU-UK relationship. During this transition phase, the UK will continue to follow all of the EU's rules and its trading relationship will remain the same. Both EU and UK will have to iron out a new trade agreement and decide on various essential arrangements, such as law enforecement, data sharing and security, aviation standards and safety, licencing and regulation of medicines, aviation standards and safety, access to fishing waters and supplies of electricity and gas.
As Brexit's political, legal, regulatory, and economic effects continue to evolve, companies have the duty to ascertain and disclose the effects these may have on their businesses. Right after the Brexit vote in 2016, several companies across various industries had already begun disclosing Brexit-related risks in their filings with the Securities and Exchange Commission (SEC). These disclosures generally were included in the Business, Risk Factors, and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) sections of SEC filings. Most of the initial Brexit disclosures were generic boilerplate provisions or laundry list of riks applicable to almost any company. These disclosures simply included general statements about Brexit and its uncertain effects but did not exactly disclose how Brexit might impact the company, its employees, management, operations, and prospects. This article identifies some Brexit-related disclosures that offer more detailed discussions of effects.
Brexit Disclosures in the Business Section
Item 101(a) (17 C.F.R. § 229.101) of Regulation S-K requires a reporting company to describe the general development of its business, including the material areas specific to it. In their Brexit disclosures in the Business section, companies mentioned that Brexit could materially impact the future regulatory regime that applies to their businesses, products, services, and employees in the UK. Only a few companies specified how, to what degree, and which aspect of their businesses would be affected by Brexit. Here are some examples of Brexit disclosures in the Business section:
- Offering Registration
- "In March 2019, we successfully transferred all current product certificates from BSI-UK to BSINetherlands in anticipation of a no-deal Brexit. Our products currently CE marked and distributed in the EU will be subject to the new EU MDR regulations (replacing the current MDD) starting in May 2020 with a transitional period extending to May 27, 2024 or the length of the currently issued Notified Body certification, whichever comes first." [Avinger, Inc., Form S-1/A filed January 24, 2020 (SIC 3841— Surgical & Medical Instruments & Apparatus)]
- "We are making all reasonable preparations to ensure, in any scenario, that services can continue to be provided in the UK and throughout the EEA, post-Brexit. Accordingly, we have established a legal entity in the Netherlands, Tradeweb EU B.V., and have started to offer services from a new Amsterdam office. We received approval in early 2019 from Dutch regulatory authorities to operate an MTF, an OTF and an APA, essentially replicating our current UK regulatory permissions, including "passports" throughout the EEA. As a result of this approval, we now operate two MTFs, two OTFs and two APAs in Europe, increasing the complexity of the business." [Tradeweb Markets Inc., Form S-1 filed October 15, 2019 (SIC 6200—Security & Commodity Brokers, Dealers, Exchanges & Services)]
- Periodic Reports
- "In Europe, uncertainty around Brexit saw customers less confident in economic growth. This was reflected in the purchases and business investment of many of our EEC end users. This in turn limited growth opportunities in these markets while leading to more aggressive pricing from our competitors, which we were forced to meet, resulting in downward pressure on gross margins." [Lakeland Industries, Inc., Form 10-K filed April 15, 2020 (SIC 3842—Orthopedic, Prosthetic & Surgical Appliances & Supplies)]
- "Pursuant to the formal withdrawal arrangements agreed between the U.K. and the EU, the U.K. will be subject to a transition period until December 31, 2020. During this time, we must register and fulfill new regulatory requirements for continued sales of products in the U.K. beginning on January 1, 2021. If our efforts to obtain new regulatory approval in the U.K. is materially delayed or denied, we may be required to incur additional expenses in order to develop, manufacture and commercialize our product candidates in the EU and our future sales may be impacted. We opened our Hereford, England office in 2019 largely in response to Brexit." [Lemaitre Vascular, Inc., Form 10-K filed March 12, 2020 (SIC 3841—Surgical & Medical Instruments & Apparatus)]
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Originally published by Lexis Practice Advisor on 29 May, 2020
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