June 28, 2016
This is an update to our client alert published on June 21, 2016 in which we addressed the possible legal consequences of a vote to leave the European Union in the Referendum held in the United Kingdom on June 23, 2016.
Now that the outcome of the Referendum is known, we consider in this client alert some of the likely immediate consequences of that vote and its impact on anyone doing business in the UK.
What happened on June 23?
In a result announced in the early hours of June 24, the UK electorate voted, by a majority of 51.9% to 48.1%, to leave the European Union. Later in the morning of June 24, the British Prime Minister, David Cameron, announced that he would step down as leader of the Conservative Party (and, therefore, Prime Minister) once a new leader of the Conservative Party had been elected, which he expected would happen before the Conservative Party conference which is scheduled to start on October 2, 2016. He also indicated that he did not feel that he was the right person to steer the UK through its exit negotiations with the EU and that, therefore, such negotiations should be handled by his successor – see further below.
Has anything immediate changed following the outcome of the Referendum?
Whilst the outcome of the Referendum was unexpected and is seen as the first explicit rejection by an EU member state of ever-greater union within Europe, as mentioned further below and in our June 21 client alert, the Referendum vote has no legally binding effect on the UK government. Until such time as the UK leaves the EU, it will remain an EU member and all EU law will remain in force in the UK. There has been, and no doubt will continue to be, considerable market volatility and political uncertainty, but, for now at least, it is very much a case of "business as usual" when it comes to doing business with and in the UK and the EU.
That does not mean that care should not be exercised when entering into any transaction or arrangement with a UK or EU entity and/or which is governed by UK law and/or in monitoring existing transactions and arrangements with UK and EU entities. The following issues are amongst those that should be considered now:
What happens next?
Most commentators have taken Mr. Cameron’s June 24 announcement to mean that a UK government will not invoke the exit mechanisms under Article 50 of the Lisbon Treaty, or otherwise seek to initiate a formal process for the UK’s exit from the EU, until a new Prime Minister has been installed and that Prime Minister has appointed his or her cabinet.
The election for a new Conservative Party leader will be managed by the 1922 Committee, a committee of "back bench" (i.e. non-office holding) Conservative Members of Parliament (MPs). Any Conservative MP can put himself or herself forward for election. Under the 1922 Committee rules, all Conservative MPs will vote on a roster of potential new leaders on a "first-past-the-post" system until the list of candidates is reduced to two, at which point the national party membership (currently reckoned to stand at about 160,000 members) will elect a new leader in a straight run-off between the two remaining candidates. On June 27, the chairman of the 1922 Committee announced that the Conservative party leadership election would be completed (and, therefore, a new Prime Minster appointed) by no later than September 2, 2016 – i.e. about a month earlier than David Cameron anticipated.
As we pointed out in our June 21 client alert, the legislation enabling the Referendum does not impose an obligation on the UK government to legislate one way or another following the outcome of the vote. Whilst a vote to leave could be regarded as providing a like-minded government with a political mandate, it does not tie the UK government to any particular course of action – it has no binding legal effect and, as a strict legal matter, its outcome is merely advisory. It is, therefore, a political judgement for the government of the day as to whether it acts upon or ignores the outcome of the Referendum.
We consider it extremely unlikely that whatever government is in power after the Referendum will ignore its outcome, and our working assumption is that the government will in due course seek to give it binding legal effect. In terms of practical steps, it is possible that the incumbent government will take the view that it requires some form of parliamentary approval (over and beyond the Referendum vote itself) to take legally binding steps to give effect to the Referendum vote (whether that be through service of a notice pursuant to Article 50 of the Treaty of Lisbon or some other formal step). The position, however, is not clear, and the UK government has so far not been specific about it.
Whilst it is highly unlikely that any government would have sought to trigger the Article 50 (or any other exit) procedure immediately following the outcome of the Referendum, the delay to September/October 2016 implicit in David Cameron’s June 24 announcement has met with disappointment and protest from a variety of quarters. The EU (in the form of the presidents of its constituent institutions) has suggested (emphatically) that exit negotiations should start as soon as possible, as have many of those who supported the campaign to remain in the EU. Whilst the motives for such protest are mixed, there is a strong view that continuing uncertainty is inherently destabilizing and bad for financial markets and investor confidence and, therefore, undesirable.
There has been a softening of tone from the EU over the weekend, with the French and German governments recognizing that (1) it is for the exiting member state (i.e. the UK) to initiate the exit procedures and (2) in the circumstances precipitated by David Cameron’s decision to resign, the UK’s exit negotiations cannot begin until a new government has been installed.
That does not mean that nothing will happen for the next three or four months – the UK government has announced the formation of a Cabinet team mandated to begin addressing exit issues and preparing for an exit negotiation, and there will be continuing formal and informal contact between the UK government and the institutions of the EU in preparation for a formal exit negotiation starting sometime in the autumn of 2016.
In terms of timing for exit, it is our view that the UK will not leave the EU before late 2018 or, more likely, early 2019.
Can the Referendum result be reversed, ignored or blocked?
There has been much comment and speculation over the last 48 hours as to whether the UK government must give effect to the outcome of the Referendum and/or as to whether a second Referendum could be held on the same issue.
There is no constitutional basis on which a second referendum on the same question could be held, and, for the time being at least, no political will to do so. There does, however, seem to be a prevailing view that any UK government wishing to give binding legal effect to the Referendum vote would wish to secure a parliamentary majority on a resolution to do so. It is supposed that a majority of MPs (around three quarters of them) are in favour of remaining in the EU, and so a government seeking a parliamentary mandate for exit could struggle to achieve the (simple) majority required.
An alternative would be for the incoming government to call a general election in the hope of securing an electoral mandate for exit. Under the UK’s fixed term Parliament rules, the UK Parliament can only be dissolved ahead of its five year fixed term (which, in the case of the present Parliament, would expire in 2020) if the government loses a "no confidence" vote, or a two-thirds majority of the House of Commons votes in favour of a dissolution. It is conceivable that the incumbent government could make a vote on a resolution mandating the commencement of exit negotiations (i.e. a resolution giving binding political effect to the Referendum vote) a "confidence" vote such that its loss would trigger a dissolution of Parliament and a general election.
There are, therefore, some complex political calculations to be weighed, and some practical hurdles to be overcome, before formal exit negotiations are commenced, all of which add to the view that such negotiations may not be formally initiated before the end of 2016.
A third possible outcome would be for a second referendum to be held at or close to the end of the exit negotiations in which the UK government would put to the UK electorate the question whether the country should rejoin the EU on whatever revised terms had emerged from the exit negotiations. Whether events will in fact play out this way is impossible to predict at this stage, but it is being suggested that this is a plausible scenario in two or three years’ time. In the meantime, the Referendum result is neither going to be ignored nor reversed, so the UK will continue on a path towards an eventual exit from the EU.
Longer term legal consequences
As discussed in our June 21 client alert, that trajectory towards BREXIT gives rise to potential legal issues in many areas – including competition law, merger control, state aid, financial services passporting (and hence, investment funds formation and management), finance and derivatives, contracting generally, dispute resolution and enforcement, public procurement, employment and tax. At this stage, however, there is so much uncertainty around what a post-BREXIT world will look like in terms of the UK’s relationship with the EU that it is difficult to be specific about mitigating steps that can be taken pending a clearer picture emerging or to make recommendations beyond the practical steps outlined above.
 A member state wishing to leave the EU must serve a notice on the European Council of its intention to leave pursuant to Article 50 of the Treaty of Lisbon. That notice starts a process which, unless extended by unanimous agreement of all 27 remaining member states, results in the exiting member state leaving the Union at the end of the period falling two years after service of the notice.
 A petition calling for a second referendum has received over 3,000,000 signatures and under UK law must now be "considered" by the UK Parliament, although there is no constitutional requirement that any such petition be acted upon.
 This is because Article 50 of the Lisbon Treaty is premised on the supposition that an exiting member state’s "own constitutional requirements" have led to its decision to leave the Union. The June 23 Referendum has no constitutional status in UK law, and a cautious government may take the view that it requires something beyond the advisory Referendum vote to mandate formal steps towards BREXIT. Moreover, service of a notice under Article 50 would inexorably lead to a UK exit from the EU and, therefore, the repeal of the European Communities Act 1972 which is the Act of Parliament enabling the UK’s original accession to the then European Economic Community. The 1972 Act could not be repealed other than by Act of Parliament. It is not inconceivable that any executive action to trigger the Article 50 process might face opposition in Parliament or even challenge in the administrative courts, although the prospects of success of any such challenge would seem to be limited.
This client alert was prepared by London partner Stephen Gillespie with assistance from Head of UK Transactional Practice Development Selina Sagayam, Of Counsel Anne MacPherson and Senior Associate Amy Kennedy. We have a working group in London (led by Stephen Gillespie, Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) that has been considering these issues for many months. Please feel free to contact any member of the working group or any of the other London lawyers mentioned below.
© 2016 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.