There has been much discussed on Brexit and the future of the UK, legally, economically and socially. Some are apprehensive the UK’s departure could result in hindering the UK’s economy and international appeal, whereas some imply it will bring a positive impact by releasing some of the EU’s shackles. We speak to Daniel Cheung, the Managing Partner at Maxwell Alves with expert knowledge on Brexit; he discusses the biggest legal impact of Brexit, M&A in the UK, property development, foreign direct investment (FDI) and immigration, post-Brexit.
What recent M&A transactions, including any that your firm has conducted, indicate the UK is remaining quite strong post-Brexit? Do you feel this will continue or hither when article 50 is underway?
In October 2016, we acted for a Hong Kong company that completed their purchase of the Isle of Eriska and its assets for an undisclosed sum. The Isle of Eriska is a 360 acre island on the west coast of Scotland. It has considerable history with the island having a fortified dwelling dating back to the Bronze Age 200 BC and its earliest title deeds was recorded in the 15th century with the church as the legal owners of the island. The island has a 5-star luxury hotel, a Michelin star restaurant and a 9-hole golf course. I consider the Isle of Eriska to be symbolic of the assets and artefacts the UK provides, and together with its strong infrastructure, there is every reason to believe the UK will remain strong post-Brexit.
The general economic consensus is there will be a continuous amount of foreign investors buying into the UK but little UK-to-UK activity. The big deals require the greatest confidence as it involves the highest risk. Brexit does not correlate with a lack confidence but rather a lack of certainty. Lack of certainty does not mean a reduced rate of return as the housing bubble pre-2008 indicated certainty in the property and capital markets, but this was followed by the global financial crisis. Notwithstanding the lack of certainty, a sign the UK remains strong is shown by the agreement in July 2016 by AMC Theatres, the US cinema chain owned by China’s richest man Wang Jianlin, to buy the UK-based Odeon & UCI Cinemas Group in a deal worth £921m. Then in September 2016, Poundland accepted a £610m takeover bid by South African retail group Steinhoff International. These large M&A transactions show the UK remains strong post-Brexit.
Assuming article 50 is triggered in March 2017 as planned, the 2-year transition period will mean the UK should officially leave the EU by April 2019. I do not foresee a major change to M&A activity. For public companies, much of the content in the City Code on Takeovers and Mergers has been the same prior to the EU Takeovers Directive being implemented. Private M&A is likely to remain the same for domestic and cross border transactions because they are not subject to EU law or regulation. Indeed, our Isle of Eriska transaction was a private M&A. Many international M&A transactions are governed by English law and this is unlikely to change upon Article 50 being triggered.
What do you think will have the biggest impact on the legal sector after the UK have left the EU? What risks are you concerned about and what benefits do you see?
Property development may be impacted following Brexit due to some negative macroeconomic factors. What we are seeing is similar to the 2008 global financial crisis where banks were unwilling to lend to each other, causing liquidity to dry up. This was then reflected in 2010 with the Eurozone debt crisis with sovereigns hoarding their cash reserves at their central bank in case of potential runoffs on their bonds and deposits. The principle now is similar with there being a potential liquidity problem for development finance, particularly for the small and medium sized developers. The UK had property funds blocking investors from withdrawing their money following the Brexit vote. The lack of development finance is compounded further with a weaker pound, which increases the costs of construction materials and acts as a disincentive for migrant workers.
However, I consider that this is only a short-term blip when considering other factors in the round. Demand for UK housing exceeds supply, with around 300,000 new homes required each year. As long as there is demand, this will continue to attract foreign investors who wish to invest in UK property. I have just completed a transaction where my China-based client has purchased a Prime Central London property for £12m and the perception from many overseas buyers it that it is now a good time to capitalise on the UK property market. With appropriate mechanisms, foreign investors can fund the development with their deposits and in return, obtain a leasehold title to their property unit, whether that be a residential unit or a commercial unit, such as a hotel. Indeed, tourism has increased with the weaker pound and therefore the occupancy rate of hotels has increased.
I do believe there should be some regulatory body for property developers, particularly when large sums of deposits have been received from overseas investors. Much thought would need to go into how that regulatory body works, such as who can act as the regulator, whether they have insurance and re-insurance, use of hard or soft law, individual accreditations and membership, sanctions, etc. Regulated solicitors acting as the regulator for property developers may be a sound premise because they are in the “field” of daily property transactions, they have updated knowledge and can create mechanisms to govern property developers. Being in the field is important because when property developments are being funded by depositors, corporate finance is involved with the chain leading up to structured finance; having updated knowledge of the financing structure is crucial and will dictate how the regulatory body will govern property developers. This regulatory body can then provide a safer infrastructure for UK property investment which will fuel a higher demand from overseas investors that will provide mutual benefit.
Although the single market has been important for the UK, I consider the alternative had UK voted to remain in the EU. With the European Banking Union (EBU) being implemented to stem the Eurozone debt crisis, UK would have had further difficult decisions to make as to whether to opt-in or opt-out of the EBU, with both options having its own issues, such as: whether opting-in would result in the UK becoming less attractive to other global financial centres; or by opting-out, whether they would have a say in EU banking policies where Eurozone members automatically have the voting rights. EU’s lack of a political and fiscal union would have been issues at the forefront of UK’s involvement but with Brexit, one view is the benefit to the UK is they are now negotiating business deals for themselves rather than having to consider the impact to the other EU 27 countries.
As most people are aware of the disadvantages, do you see tighter immigration regulations and, if decided, a restriction on free movement, benefiting the UK in regards to their economic developments? What immigration regulation changes do you think corporate businesses should be aware of?
Just as I have explored the legal and economic factors for M&As and the property market, I think it is important to look at this too when discussing immigration. In terms of foreign students, research from PwC in 2015 showed foreign students brought in a net benefit of £2.3 billion to the UK economy. The universities in the UK are world-class and there is mutual benefit with the students gaining their degree, the universities profiting from their course fees and the UK benefiting from the students’ expenditure whilst in the UK. To restrict foreign students entering the UK may be a detriment to the universities as well as the UK economy.
Over the past 5 years or so, immigration law has undergone fundamental changes which mainly stems from “Immigration Rules” being upgraded to “hard law” status where its rules are fully enforceable by the Home Office. To make the rules clear and transparent, most appeal rights have now been extinguished and instead, the Immigration Rules dictate whether or not one is to be granted their visa, as decided by the Home Office (or immigration officer). With its hard law status, little discretion is afforded to the applicants and indeed, there is no “near-miss” principle – you either comply with the rule or you don’t. The immigration regulations are already quite tight and it is hard to see scope for tightening it further, other than how EU migrants and students are to be treated following Brexit. For corporate businesses, there is a strict Sponsor Licence regime which is essentially a licence for an employer to recruit a limited number of foreign workers. To get a Sponsor Licence now requires a business plan explaining why potential foreign migrants may be recruited. Only skilled workers can be recruited, measured against level 6 of the National Vocational Qualifications and there is a minimum salary payable, depending on the job category. Before foreign workers are recruited, employers need to conduct a “Resident Labour Market Test” showing there are no suitable domestic workers able to fulfil that job role.
The Home Office have been strict in applying the Resident Labour Market Test. On the one hand, rules need strict enforcement so that it is clear and transparent. On the other hand, perhaps a ‘free market’ approach is more suitable where the employer has greater flexibility in recruiting workers it considers appropriate to their business. Ultimately, there may be negative externalities with strict rules and enforcement being made to reduce net migration, with a risk the UK becomes less attractive for foreign students or foreign employers. What I consider crucial in all this is the principle of fairness and democratic accountability without straining public resources, particularly when appeal rights have been extinguished. We have the Migration Advisory Committee who advises the Home Office of migration issues and much of the information relates to the UK economy. Perhaps a further institution can be established to review and advise the Home Office of their method of rule application and enforcement with its principles of fairness and democratic accountability being mandated. This can then promote transparency in the Home Office’s workings. In light of my answers given above, in relation to M&As and Property purchases, this transparency will hopefully promote foreign direct investment into the UK.
In terms of this FDI, such as investment from China, do you foresee any limitations?
If I use the analogy of the oil and gas industry where the two main players are the Host Government (HG) and the International Oil Companies (IOC): HG requires the capital and technology of IOCs in order to explore, develop and produce oil, and upon the oil being sold, both countries’ economy benefits. What governs their actions is their negotiated contract, which is influenced by the HG’s law as derived from their political preferences or local content. Here, the UK is the HG and seeks an investor in China, who is the IOC. This is exemplified by projects such as Heathrow’s third runway expansion where China Investment Corporation own 10% of Heathrow Holdings. The issue for the UK is how much FDI they are willing to accept because political and local content issues arise, such as housing prices and immigration issues involving the use of foreign workers. If the UK suddenly changes its law, this creates a paradox to the very thing that attracted foreign investors in the first instance - the UK having a stable regulatory and legal system. The oil and gas industry can have a stabilisation mechanism so that the IOC (investor) does not become worse off than when they first contracted with the HG. We saw increased stamp duty rates for second home owners in April 2016 that followed consultation from December 2015. Akin to changing the monetary policy, the UK has the power to further tighten property purchases such as increasing income tax for buy-to-lets. Ultimately, and as touched upon above under the immigration section, what is important is the principle of fairness and democratic accountability so that the UK’s stable legal system is maintained for the benefit of both the UK public and overseas investors.
How do you measure your success?
Law firms have billing targets as companies have sales targets. However, I do not consider this as the measure of one’s success as the legal profession involves a lot of valuable non-chargeable work, particularly in my role as the firm’s Managing Partner. I consider my success should be measured against each client’s individual case adopting a qualitative approach with the ultimate question being: has the job been done? If it has, both parties have benefited and we both move on to the next project. If the job has not yet been done, I need to ask myself whether things can be done to make it complete, or as complete as it can be pursuant to the client care letter. My success is invariably dependent on the percentage of successful cases that we, as a firm, can complete.
