by Professor Charlotte Villiers, University of Bristol Law School
The Retained EU Law (Revocation and Reform) Bill (“the Bill”) is likely to have the reverse effect to what it aims to achieve: economic growth and business certainty (Explanatory Notes to the Bill) through clarification/simplification of UK law post-Brexit. There is lack of clarity, requiring lawyers and business advisers to search through layers of material to establish which “retained laws” are being targeted, the Retained EU Law Dashboard is not easy to navigate and nor does its list of relevant legislative instruments correspond to other official publications such as that of the House of Commons Library Briefing Paper, Legislating for Brexit: Statutory Instruments Implementing EU Law. Moreover, the sunsetting deadlines for the targeted retained laws are likely to force the relevant departments to experience the dilemma of causing laws to expire without consulting the public fully, applying full Parliamentary scrutiny, or restating retained laws with inadequate resources to make such restatements sufficiently effective (Travers Smith: The Retained EU Law Bill: another Brexit cliff edge looms? October 2022). The resulting uncertainty that businesses will endure from this Bill and the regulatory gaps, at least in the short term, leave one wondering as to the value of the rush to legislate in this way. This blog focuses on the company law impacts as an example of the complexities and problems likely to arise, not just in the company law arena but in other important areas the development of which has been influenced significantly by European legislation, such as environment law.
Modern company law in the UK has been significantly shaped by EU developments since the UK joined the European Economic Community in January 1973. The UK was also influential in the design of many of the harmonization directives and other EU company law and corporate governance related developments.
Beside some of the potential post-Brexit barriers (eg to cross-border mergers) and complications that may arise in cross-border trade activities because UK companies are now viewed as being incorporated in a third country, losing the freedom of establishment and protection from discriminatory treatment by an EU host state (European Company Law Experts: ‘The consequences of Brexit for companies and company law’ (2017)), disentangling our company law from any unwanted “retained” provisions will also likely be a challenge because many of the EU law-related items of secondary legislation have effectively been woven into the application of the primary legislation, the Companies Act 2006. For example, the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, identified in the Retained EU law Dashboard amended Part 15 of the Companies Act 2006 and were, in turn, further amended by the Companies (Miscellaneous Reporting) Regulations 2018. It is difficult to see how the 2008 Regulations could be subjected to a sunset expiry without causing considerable confusion and uncertainty as to the application of the Companies Act that will remain in place. The proposed Bill and Dashboard ought to give greater explanation about how any such secondary legislation is likely be treated. If it is the case that the Regulations will be revoked or fall by way of a sunset expiry, a regulatory gap will arise.
Such gaps will arise at the end of 2023 expiry date unless those laws are, on or before that date, deliberately reinstated to become “assimilated” or replaced with new regulations. The time scale of little more than a year for such replacements presents a considerable challenge across the broad spectrum of laws affected by this Bill. Where such replacements are not possible, keeping the retained laws might be the best solution to facilitate continued transactions between UK-based companies based and the EU-based entities. This approach would ensure a degree of continued harmony between UK law and EU law with comparable legal requirements (European Company Law Experts, 2017, linked above) at least whilst the two different regimes stay relatively aligned and comparable. More closely aligned legal requirements will also allow for consistency of approach for regulatory compliance, which should help to reduce compliance costs for such entities as well, rather than them having to fulfil two different compliance approaches.
In both the EU and the UK, there has been adherence to the International Financial Reporting Standards, and in the immediate post-Brexit period UK companies have thus been able to report according to the UK’s national accounting rules, arguably with little divergence from the requirements found in the relevant EU accounting directive as amended by the Non-Financial Reporting Directive of 2014. However, as the EU institutions make progress with projects such as the Sustainable Finance Initiative and the Sustainable Corporate Governance Initiative the UK will find itself potentially left behind in the updating of the legal requirements with risk of problematic results for continued trade in Europe. The new reporting Directives arising out of these initiatives, such as the proposed Corporate Sustainability Reporting Directive and the proposed Directive on Corporate Sustainability Due Diligence will give rise to significantly broader reporting demands than did the previous Non-Financial Reporting Directive, the scope of which was smaller, covering fewer entities and which gave a fair amount of discretion to Member States and to reporting entities as to what and how they might disclose. Moreover, the Corporate Sustainability Reporting Directive will require third country companies (such as those based in the UK) with substantial activity in the EU market – any with a net turnover of more than €150 million in the EU at consolidated level – and with at least one subsidiary (large or listed) or branch with a net turnover of more than €40 million in the EU, to present, via their EU-based branch or subsidiary company, a sustainability report at the consolidated level in accordance with EU-level sustainability reporting standards or equivalent (Wollmert and Hobbs: ‘How the EU’s new Sustainability Directive is becoming a game changer’ (August 2022)).
Thus, for UK-based companies to be able to comply with these requirements, as well as making sure that they will be able to attract trade and investment going forward, the UK will need to catch up with the EU’s level of reporting standards, perhaps through the provision of equivalent reporting requirements in the UK. Yet, the goal of the Bill seems to be one of deregulation or reducing the so-called burden of the regulatory requirements that have been developed at EU level. This approach misses the point that there is a real and urgent need for some of the regulatory provisions being created at the EU level, not least in the face of challenges such as climate change. The EU’s regulatory efforts seek to tackle those challenges for the benefit, not just of humanity and the planet, but also for business and continued economic activity. The direction being encouraged for the UK with this Retained EU Law Bill indicates a failure to appreciate the value of regulation. It is not always merely an unnecessary cost or burden but an essential support system for successful markets.
Whilst the Companies Act provisions that were originally integrated with EU law will continue to be applicable, Brexit means there is no guarantee that those UK provisions will continue to apply in a way that is consistent with interpretations made within the EU. Moreover, such divergence appears to be encouraged by the Bill with Clause 7 seeking to provide courts in the UK opportunity to depart from retained case law.
In conclusion, this proposed legislation is problematic. The sunset expiry date of end 2023 is far too soon. A longer timescale is required to reduce the risk of damaging regulatory gaps. Careful thought should also be given to ensuring that any revocations or reforms of the retained laws do not weaken the fabric of the UK’s company law system. The Department for Business, Energy and Industrial Strategy will not escape having to develop regulations that keep pace with the progress being made by the EU legislature to ensure that challenges such as climate change will be met just as strongly within the UK. This will be necessary for encouraging and facilitating continued trade and investment in companies based in this country.