Focus on Article 50

In this note we focus on Article 50, the mechanism outlining the process through which the United Kingdom (UK) is likely to withdraw from the European Union (EU).

What is Article 50?

Article 50 of the Treaty on European Union sets out the mechanism by which a member state may leave the EU. Prior to its introduction by the Treaty of Lisbon in 2009, no provision existed under the EU treaties for one of its member states to withdraw from the union.

Only two territories have previously left the EU – Algeria, upon independence from France in 1962, and Greenland (part of the Danish Realm) through a vote to leave the EU’s predecessor, the EEC, in 1985. The eyes of the world will now be on the UK, following the historic referendum vote on 23 June, as it enters the uncharted waters of negotiating an exit from the EU.

Once Article 50 has been invoked by the UK (by way of formal notification to the European Council in accordance with its own constitutional requirements), the EU must negotiate an exit agreement with the UK, taking account of the framework for its future relationship with the EU. Triggering Article 50 will start a two year clock ticking, following which the EU treaties would cease to apply to the UK. It is possible for this two year period to end sooner if an agreement is concluded, or for it to be extended by unanimous agreement between the UK and the remaining 27 member states (R27).

The EU’s mandate for the negotiations and its choice of negotiator must be approved by the European Council who would, acting by a qualified majority, conclude any exit agreement with the UK after obtaining the consent of the European Parliament. Such an exit agreement, together with the UK’s repeal of the European Communities Act 1972, would formally end the UK’s membership of the EU.

Not quite as easy as it sounds

The EU, at its founding heart, had set out to create an “ever closer union among the peoples of Europe”, and the process of one of the member states leaving such a union is one that has never been put to the test. It is also a process that will likely take some years to fully implement.

If the final exit agreement cuts across certain policy areas within the remit of individual member states (such as elements of services, transport and investment protection) then it would require additional ratification as a “mixed agreement” by each of the R27 national parliaments. It is also likely that any such exit agreement will not be definitive: the UK will in parallel be required to negotiate bilateral trade deals with its non-EU international partners, as well as to revise its own governance as EU laws recede.

In keeping with the uncertainty of a post-referendum EU, it is not clear to what extent any negotiated exit agreement will deal with the detailed aspects of the UK’s future relationship with the EU and the R27. How will the myriad EU legislation with direct effect in the UK be ‘grandfathered’ or formally introduced into national law (and, indeed, which EU rules and regulations may fall by the wayside in the process)? What agreement will be reached on the status of R27 nationals living and working in the UK (and UK nationals abroad)? Will it be possible to reach a satisfactory result, for all concerned, on the future of the UK-EU trading relationship within two years?

What next?

What can we make of the recent pronouncements of Theresa May, who will succeed David Cameron as leader of the Conservative Party (and accordingly as Prime Minister)? Mrs May, was again quoted as saying that “Brexit means Brexit” and that there would be “no attempts” to remain inside the EU or to “rejoin by the back door”. In contrast with these apparently unequivocal statements, she is also on record as stating that any agreement that is reached with the R27 should be one that is “about controlling free movement [of people]” and that ensures the UK obtains the “best deal possible in trade, in goods and services”. Can that be interpreted, as it has by some, as signalling a potential compromise with the EU and an acceptance on the part of the UK that for it to continue to benefit fully from access to the single market it may need to accept free movement of labour?

The incoming Prime Minister is keen on holding informal discussions prior to triggering Article 50 (having previously ruled out definitive action until 2017), to be contrasted with the position of Jean-Claude Juncker, President of the Commission, who has expressly forbidden EU officials from holding such pre-Article 50 discussions with their UK counterparts. Delaying a formal Article 50 declaration until 2017 could well result in the process being commenced at a time when France and Germany are in the throes of their own presidential, legislative and parliamentary elections during which UK-EU negotiations could take on even greater political significance.

The current position of the Conservative leadership is that triggering Article 50 is the prerogative of government, while others maintain that further parliamentary approval would be required before taking such a step. There has also been much made in recent days of the fact that the 23 June referendum was merely “advisory” and could effectively be side-stepped or ignored. The arguments on both sides of the discussion are beyond the remit of this note, although Theresa May has sought to clarify matters and it now appears likely that “Brexit means Brexit”. It is unfortunate that in many respects we cannot, with any degree of certainty, currently say what else Brexit might mean.

Stimulus announcements by the Bank of England helped calm markets to some extent last week. Today’s news that a new Prime Minister will be in position within days has seen sterling start to edge back, up one cent against the dollar in early trading (although many predict it will remain depressed for some time). We look forward to more certainty over the coming weeks and months once the direction of Article 50 discussions become clearer. In the meantime we are on hand to provide advice as to how the UK’s withdrawal from the EU may impact you and your business.

Max Beazley

Max’s primary practice focus is on cross-border M&A and equity capital markets. Max has extensive experience with UK domestic and cross-border private and public acquisitions and divestitures. Max also advises banks and issuers on IPOs and secondary issues, both on AIM and the Main Market of the London Stock Exchange. Max advises on private equity, venture capital and angel investments, as well as on banking and finance transactions. In addition, EU and US companies look to Max for advice on the UK and EU securities law elements of cross-border fundraising transactions and on UK corporate governance and compliance matters.

Luk Trewhela

Trainee Solicitor at Dorsey & Whitney LLP, London, United Kingdom.

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