How to restructure your creative business in France | Restructuring & insolvency law firm Crefovi

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Almost any medium-sized and large creative business has overseas operations, in order to maximise distribution opportunities and take advantage of economies of scale. This is especially true for fashion & luxury businesses, which need strategically-located brick & mortar retail outlets to thrive. However, such overseas boutiques may need to be restructured, from time to time, in view of their annual turnover results, compared to their fixed costs. What to do, then, when you want to either reduce, or even close down, your operations set up in France? How to proceed, in the most time and cost efficient manner, to restructure your creative business in France? [hr]

restructure your creative business in FranceOne thing that needs to be clear from the outset is that you must follow French rules, when you proceed onto scaling back or even winding up your operations set up in France.

Indeed, in case you have incorporated a French limited liability company for your business operations in France, which is a wholly-owned subsidiary of  your foreign parent-company, there is a risk that the financial liability of the French subsidiary be passed onto the foreign parent-company. This is because the corporate veil is very thin in France. Unlike in the UK or the US for example, it is very common, for French judges who are assessing each matter on its merits, to decide that a director and/or shareholder of a French limited liability company should become jointly liable for the loss suffered by a third party. The judge only has to declare that all the following conditions are cumulatively met, in order to pierce the corporate veil and hold its directors and/or shareholders liable for the wrongful acts they have committed:

  • the loss has been caused by the wrongful act of a director or a shareholder;
  • the wrongful act is intentional;
  • the wrongful act is gross misconduct and
  • the wrongful act is not intrinsically linked to the performance of the duties of a director or is incompatible with the normal exercise of the prerogatives attached to the status of the shareholder.

The specific action of liability for shortfall of assets is generally the route that is chosen, to pierce the corporate veil and trigger the director and/or shareholder liability of a French limited liability company. However, there is numerous French case law, showing that French courts do not hesitate to hold French and foreign parent companies liable for the debts of French subsidiaries, especially in case of abuse of corporate veil, by way of intermingling of estates, either by intermingling of accounts or abnormal financial relations. This usually leads to the extension of insolvency proceedings, in case of intermingling of estates, but could also trigger the director and/or shareholder liability in tort for gross misconduct.

Indeed, if a shareholder has committed a fault or gross negligence that contributed to the insolvency of, and subsequent redundancies in, the French subsidiary, that shareholder may be liable to the employees directly. Pursuant to recent French case law, the shareholder could be held liable in the event its decisions:

  • hurt the subsidiary;
  • aggravate the already difficult financial situation of the subsidiary;
  • have no usefulness for the subsidiary, or
  • benefit exclusively to the shareholder.

Of course, any French court decisions are relatively easily enforceable in any other European Union (“EU“) member-state, such as the UK, thanks to the EU regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. This regulation allows the enforcement of any court decision published in a EU member-state without any prior exequatur process. Therefore, the foreign parent-company will not be protected by the mere fact that it is located in the UK, for example, as opposed to France: it will be liable anyway, and the French courts’ judgments will be enforceable in the UK against it. Moreover, a new international convention, the Hague convention on the recognition and enforcement of foreign judgments in civil or commercial matters was concluded, on 2 July 2019, which will become a ‘game changer’ once it becomes ratified by many countries around the world, included the EU. It will therefore become even easier to enforce French court decisions in third-party states, even those located outside the EU.

So what is the best route to restructure or wind up the French operations of your creative business, if so much is at stake?

 

1. How to lawfully terminate your French lease

Most French commercial operations are conducted from commercial premises, be it a retail outlet or some offices. Therefore, leases of such commercial spaces were entered into with French landlords, at the inception of the French operations.

How do you lawfully terminate such French leases?

Well, it is not easy, since the practice of “locking commercial tenants in” has become increasingly common in France, through the use of pre-formulated standard lease agreements which impose some onerous obligations on commercial tenants, that were not subject to any negotiation or discussion between the parties.

This evolution is rather surprising since France has a default regime for commercial leases, set out in articles L. 145-1 and seq. of the French commercial code, which is rather protective of commercial tenants (the “Default regime”). It defines the framework, as well as boundaries between, the landlord and its commercial tenant, as well as their contractual relationship.

For example, article L. 145-4 of the French commercial code sets out that, in the Default regime, the term of the lease cannot be lower than nine years. Meanwhile, articles L. 145-8 and seq. of the French commercial code describe with minutia the Default regime to renew the lease after its termination, declaring null and void any clause, set out in the lease agreement, which withdraws the renewal right of the tenant, to the lease agreement.

But what does the Default regime say about the right of a tenant to terminate the lease? Nothing, really, except from articles L. 145-41 and seq. of the French commercial code, which provide that any clause set out in the lease agreement in relation to the termination of the lease will only apply after one month from the date on which a party to the lease agreement informed the other party that the latter had to comply with all its obligations under the lease agreement and, should such request to comply with its contractual obligations be ignored, the former party will exercise its right to terminate the lease agreement within a month. However, in practice, it is very difficult for French commercial tenants to invoke such articles from the French commercial code, and subsequently prove that their landlords have not complied with their contractual obligations under the lease. This is because such French lease agreements often set out clauses that exonerate the landlords from any liability in case the premises are defective, obsolete, suffer from force majeure cases, etc.

To summarise, the Default regime does not provide for any automatic right for a commercial tenant to terminate the lease agreement, for any reason. It is therefore advisable, when you negotiate the clauses set out in such lease agreement, to ensure that your French entity (be it a branch or a French limited liability company) has an easy way out of the 9 years’ lease. However, since the balance of power is heavily skewed in favour of commercial landlords – especially for sought-after retail locations such as Paris, Cannes, Nice, and other touristic destinations – there is a very high probability that the landlord will dismiss any attempts made by the prospective commercial tenant to insert a clause allowing such tenant to terminate the lease on notice, for any reason (i.e. even in instances when the commercial landlord has complied with all its obligations under the lease).

Still included in the Default regime, on the topic of termination of leases, is article L. 145-45 of the French commercial code, which sets out that the institutionalised receivership or liquidation (i.e. “redressement ou liquidation judiciaires”) do not trigger, in their own right, the termination of the lease relating to the buildings/premises affected to the business of the debtor (i.e. the tenant). Any clause, set out in the lease agreement, which is contradictory to this principle, is null and void, under the Default regime. While this article sounds protective for commercial tenants, it also infers that there is no point in placing the tenant’s business in receivership or liquidation, to automatically trigger the termination of the lease. Such a situation of court-led receivership or liquidation of the French entity will not automatically terminate the lease of its premises.

Consequently, the most conservative way out may be to wait the end of the nine years’ term, for a commercial tenant.

In order to have more flexibility, many foreign clients that set up French commercial operations prefer to opt out of the Default regime, which imposes a nine years’ term, and instead enter into a dispensatory lease (“bail dérogatoire”) which is not covered by the Default regime.

Indeed, article L. 145-5 of the French commercial code sets out that “the parties can (…) override” the Default regime, provided that the overall duration of the commercial lease is not longer than three years. Dispensatory leases, which have an overall duration no longer than 3 years, are therefore excluded from, and not governed by, the Default regime set out in articles L. 145-1 and seq. of the French commercial code, and are instead classified in the category of “contrats de louage de droit commun” i.e. civil law ordinary law contracts of lease, which are governed by the provisions set out in the French civil code, relating, in particular, to non-commercial leases (article 1709 and seq. of the French civil code).

Therefore, if a foreign parent negotiates a dispensatory lease for its French operations, it will be in a position to call it a day after three years, instead of nine years. However, it will not be able to benefit from the tenants’ protections set out in the Default regime and will therefore need to negotiate very astutely the terms of the commercial lease with the French landlord. It is therefore essential to seek appropriate legal advice, prior to signing any lease agreement with any French landlord, in order to ensure that such lease agreement offers options, in particular, for the tenant to terminate it, in case of contractual breaches made by the landlord, and, in any case, upon the end of the three years’ term.

The tenant should keep a paper trail and evidence of any contractual breaches made by the landlord during the execution of the lease, as potential “ammunition” in case it decides to later trigger the termination clause under the lease agreement, for unremedied breach of contract.

2. How to lawfully terminate your French staff

Once the termination of the lease agreement is agreed, it is time for the management of the French operations to focus their attention on termination the employment agreements of French staff members (the “Staff“), which can be a lengthy process.

An audit of all the employment agreements in place with the Staff  should be conducted, confidentially, before making a move, in order to assess whether such agreements are “contrats à durée indéterminée”, or “CDI” (i.e. indeterminate duration employment agreements) or “contrats à durée déterminée”, or “CDD” (i.e. fixed term employment agreements).

As part of this audit, the legal and management team should clarify the amount of the sums due to each member of the Staff, relating to:

  • any paid leave period owed to her;
  • in case of CDDs, if no express agreement is signed by the member of Staff and the employer upon termination, all outstanding remunerations due during the minimum duration of the CDD;;
  • in case of CDDs, an end of contract indemnity at a rate of 10% of the total gross remuneration;
  • in case of CDIs, any notice period salary owed to her;
  • in case of CDIs, any severance pay owed to her and
  • any outstanding social contributions on salary.

This audit will therefore enable the French business, and its foreign parent-company, to assess how much this Staff termination process may cost.

In France, you cannot terminate Staff at will: you must have a “lawful” reason to do so.

Justifying the termination of a CDD ahead of its term may be pretty complex and risky, in France, especially if the relevant members of Staff have behaved in a normal manner during the execution of such CDD, so far. It may therefore be worth for the employer to pay all outstanding remunerations due during the minimum duration of the CDD, in order to avoid any risk of being dragged to any employment tribunal, by such members of Staff.

As far as CDIs are concerned, there are three types of termination of CDIs, as follows:

  • “licenciement pour motif économique” (i.e. layoff for economic reasons);
  • “rupture conventionnelle du CDI” (i.e. mutually agreed termination of the employment agreement);
  • “rupture conventionnelle collective” (i.e. collective mutually agreed termination of the employment agreement).

A “licenciement pour motif économique” must occur due to a real and serious economic cause, such as job cuts, economic difficulties of the employer or the end of the activity of the employer.

This option would therefore be a good fit for any French entity that wants to stop operating in France. It does come with strings attached, though, as follows:

  • the employer must inform and consult the “représentant du personnel”, or the “Comité d’entreprise”;
  • the employer asks the relevant Staff to attend a preliminary meeting and notifies them of the termination of their CDIs as well as the reasons for such termination;
  • the employer sends a termination letter to the relevant Staff, at least 7 business days from the date of the preliminary meeting, or at least 15 business days from the date of the preliminary meeting if such member of Staff is a “cadre” (i.e. executive), which sets out the economic reason which caused the suppression of the job occupied by the employee, the efforts made by the employer to reclassify the employee internally, the option for the employee to benefit from reclassification leave and
  • the employer informs the French administration, i.e. the relevant ‘Direction régionale des entreprises, de la concurrence, de la consommation, du travail et de l’emploi’ (“DIRECCTE“) of the redundancies.

Another route to lawfully terminate the Staff is via a “rupture conventionnelle du CDI”, i.e. mutually agreed termination of the employment agreement. This is only open to French operations where the Staff is ready to cooperate and mutually agree to the termination of its employment agreements. This situation is hard to come by, in reality, to be honest, by why not?

If the French entity manages to pull this off, with its Staff, then the “convention de rupture conventionnelle” must be signed, then homologated by the DIRECCTE, before any employment agreement is officially terminated.

If the DIRECCTE refuses to homologate the convention, the relevant Staff must keep on working under normal conditions, until the employer makes a new request for homologation of the convention and … obtains it!

Finally, in case an “accord collectif”, also called “accord d’entreprise”, was concluded in the French company, then a “rupture conventionnelle collective” can be organised. If so, only the Staff who has agreed in writing to the “accord collectif” can participate to this collective mutually agreed termination of its employment agreements.

It’s worth noting that French employees are rather belligerent and often file claims with employment tribunals, upon termination of their employment agreements. However, the Macron ordinances, which entered into force in September 2017, have set up a scale that limits the maximum allowances which could be potentially be paid to employees with minimal seniority, in such employment court cases. Thus, employees having less than one year’s seniority are allowed to collect a maximum of one month of salary as compensation. Afterwards, this threshold is grossed up by more or less one month per year of seniority up to eight years. However, such scale does not apply to unlawful dismissals (those related to discrimination or harassment) or to dismissals which occurred in violation of fundamental freedoms. While many French lower courts have published judgments rejecting such Macron scale, the “Cour de cassation” (i.e. the French supreme court) validated such Macron scale in July 2019, forcing French employment tribunals to comply with such scale.

While this should come as a relief to foreign parent companies, it is worth noting that the more orderly and negotiated the departure of the Staff, the better. Having to fight employment lawsuits in France is no fun, and can be cost and time intensive. They therefore must be avoided at all cost.

 

3. How to restructure your creative business in France: terminate other contracts with third parties and clean the slate with French authorities

Of course, other contracts with third parties, such as suppliers, local service providers, must be lawfully terminated before the French operations are shut down. The takeaway is that the French entity and its foreign parent company cannot leave a chaotic and unresolved situation behind them, in France.

They must terminate and lawfully sever all their contractual ties with French companies and professionals, before closing shop, in compliance with the terms of any contracts entered into with such French third parties.

Additionally, French companies must pay off any outstanding balances due to French authorities, such as the French social security organisations, the URSSAF, and the French tax administration, before permanently closing down.

 

4. How to restructure your creative business in France: you must properly wind up your business

Once all the ongoing obligations of the French operations are met, by lawfully terminating all existing agreements such as the commercial lease, the employment agreements, the suppliers’ agreements and the service providers’ agreements, as discussed above, it is time to wind up your business in France.

French limited liability companies have two options to terminate their business as an ongoing concern due to economic grounds, i.e. proceed to a “cessation d’activité”.

The first branch of the alternative is to execute a voluntary and early termination of the French business as an ongoing concern. It can be exercised by the French company, its shareholders and its board of directors, when it can still exercise its activity and pay back its debts. If the articles of association of such French company provide for the various cases in which the company may be wound up, such as the end of the term of the French company, or upon the common decision made by its shareholders, then it is possible for the French limited liability company and its directors to execute a voluntary and early termination of the business as an ongoing concern.

The second branch to the alternative, opened to French limited liability companies, occurs when a company cannot pay its debts anymore, and is in a situation of “cessation de paiements” i.e. it cannot pay its debts with its assets, in cessation of payments. In this instance, the French company must file a notification of cessation of payments with the competent commercial courts within 45 days from the date on which it stopped to make payments. Also, within that time frame of 45 days, the board of directors of the French company must open a “procédure de redressement ou de liquidation judiciaire” (i.e. receivership or liquidation institutionalised process, monitored by French courts) with the competent commercial court. This court will decide, further to examining the various documents filed with the “déclaration de cessation des paiements”, which institutionalised process (receivership? liquidation?) is the most appropriate, in view of all the interests that need being taken into account (debts, safeguarding employments, etc.).

If you want to exit the French territory in a graceful manner, you do not want to find yourself in a situation of cessation of payments, and then receivership or liquidation monitored by French courts. Not only this guarantees a protracted and painful judiciary process to terminate your French operations, but this may lead to situations where the money claims made against the French company would be escalated to its shareholders, directors and/or parent company, as explained in our introduction above.

Not only the parent company, and any other shareholder, could be dragged in the mud and found liable, but its directors, and in particular its managing director, too. French commercial courts have no patience for sloppy and irresponsible management, and many managing directors (“associes gerants”) have seen their civil liability triggered because their actions had caused some prejudices to the French company or a third party. Even criminal liability of an “associe gerant” can be triggered, in case the French court discovers fraud. In particular, it is frequent that in collective insolvency proceedings, if the judicial liquidation of a French limited liability company shows an asset shortfall (“insuffisance d’actif”), the courts order its managing director to pay, personally, for the company’s social liability, if she has committed a management error.

 

To conclude, the French company acts as a shield for its managing director, except if such director commits a personal mistake detachable from her mandate, in case the company is still solvent. However, if the company is in receivership, both the shareholders’, and the directors’ liability may be triggered in many ways, by French courts, the French social security contributions entity URSSAF and the French tax administration.

It is therefore essential to leave France with a clean slate, because any unfinished business left to fester may hit your foreign company and the management like a boomerang, by way of enforceable and very onerous French court decisions.

Don’t worry, though, we are here, at Crefovi, to service you to achieve this, and you can tap into our expertise to leave French territories unscathed and victorious.

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Lawfully Creative | Farmers’ by Nancy Durham and Welsh Lavender

Lawfully Creative | Farmers’ by Nancy Durham and Welsh Lavender
‟Lawfully Creative” podcast

 
 
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About the show

Farmers'The podcast ‟Lawfully Creative” is a series of intimate and honest conversations hosted by Annabelle Gauberti, the founding and managing partner of London and Paris-based law firm Crefovi, which focuses on advising the creative industries. Annabelle talks with artists, policy makers and professionals in the creative industries – to hear their stories, what inspires their creations, what decisions changed their careers, and what relationships influenced their work. Produced by Crefovi.

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Catch-up with our original shows on iTunes, Spotify, DeezerStitcherYouTube, Patreon, Google PodcastsSoundcloud, CastboxTuneIn, Breaker, RadioPublic, Anchor, Pocket Casts, PlayerFM, iHeartRadio and Overcast, every month.

Episode n. 9: Farmers’ by Nancy Durham and Welsh Lavender

Farmers'Farmers’ founder, Nancy Durham, gives us the genesis of her fantastic Welsh cosmetics brand, as well as the lowdown on the next steps for her Welsh Lavenders’ business, from her farm in Wales.

26 November 2018 – The first Welsh lavender farm, owned by Nancy Durham and her philosopher husband Bill Newton-Smith, started back in 2003. Nancy explains, in this episode of Lawfully Creative, the reasons underpinning such daring experiment of growing lavender in Wales, and how her Farmers’ brand grew organically, thanks to gifted and visionary allies such as Helen Lowe and Tyler Brulé of Monocle’s fame. Nancy also unveils what lies ahead, for the future success and scaling up of her Farmers’ brand, worldwide. Nancy talks about all these topics with Annabelle Gauberti, at her farm in Powys, in Wales, straight after the Hay-on-Wye winter festival.

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Please do leave a review and rating about the podcast ‟Lawfully Creative”, to encourage others to discover our curated content.

A global network

Clients praise Crefovi’s lawyers for their responsiveness & ability to understand the technical, business and legal aspects of each commercial transaction and come back, deal after deal, to be advised by them.

While London and Paris based, we routinely work across borders. The vast majority of our engagements are multi-jurisdictional. We are used to working in multinational teams, and rely on our network of specialist lawyers for support in other jurisdictions.

The team has therefore established an extensive international network of creative industries’ contacts and a close association with other specialist lawyers worldwide. Our history of successes in high profile, politically sensitive matters reflects an ability to act swiftly and with the utmost discretion.

Indeed, Crefovi’s lawyers are very well connected in the world of the creative industries, attending, and participating to discussion panels at, on a regular basis, each session of the professional trade shows such as CESWeb SummitDLD & Slush, Midem, as well as the Cannes film festival and EFM and the Berlinale.


Crefovi regularly updates its social media channels, such as Linkedin, Twitter, Instagram, YouTube and Facebook. Check our latest news there!


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Lawfully Creative | Discovering the charming travelling world of Globe Trotter

Lawfully Creative | Discovering the charming travelling world of Globe Trotter
‟Lawfully Creative” podcast

 
 
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About the show

Globe TrotterThe podcast ‟Lawfully Creative” is a series of intimate and honest conversations hosted by Annabelle Gauberti, the founding and managing partner of London and Paris-based law firm Crefovi, which focuses on advising the creative industries. Annabelle talks with artists, policy makers and professionals in the creative industries – to hear their stories, what inspires their creations, what decisions changed their careers, and what relationships influenced their work. Produced by Crefovi.

Subscribe

Catch-up with our original shows on iTunes, Spotify, DeezerStitcherYouTube, Patreon, Google PodcastsSoundcloud, CastboxTuneIn, Breaker, RadioPublic, Anchor, Pocket Casts, PlayerFM, iHeartRadio and Overcast, every month.

Episode n. 7: Discovering the charming travelling world of Globe Trotter

Globe TrotterGlobe Trotter’s head designer, Charlotte Seddon, and PR manager, Momiji Matsuura, introduce us, at Crefovi, to the traditional yet uber creative travelling world and products created by their iconic luxury brand.

29 May 2018 – Globe Trotter, the luxury travelling brand, has grown from strength to strength in the last 15 years and Charlotte Seddon as well as Momiji Matsuura explain to us, in this episode of Lawfully Creative, the reasons underpinning such stellar success and brand repositioning. What is the distribution strategy of Globe Trotter? How do you become the head designer of one of the most successful travel accessories brands in the world? What are the strategic axes and directions driving Globe Trotter in the future? How does the brand protect itself from counterfeits, especially on internet and through online platforms? The dynamic duo talk about all these topics with Annabelle Gauberti at the Globe Trotter factory in Hoddesdon, a town in the Broxbourne borough of the English county of Hertfordshire.

Rate

Please do leave a review and rating about the podcast ‟Lawfully Creative”, to encourage others to discover our curated content.

A global network

Clients praise Crefovi’s lawyers for their responsiveness & ability to understand the technical, business and legal aspects of each commercial transaction and come back, deal after deal, to be advised by them.

While London and Paris based, we routinely work across borders. The vast majority of our engagements are multi-jurisdictional. We are used to working in multinational teams, and rely on our network of specialist lawyers for support in other jurisdictions.

The team has therefore established an extensive international network of creative industries’ contacts and a close association with other specialist lawyers worldwide. Our history of successes in high profile, politically sensitive matters reflects an ability to act swiftly and with the utmost discretion.

Indeed, Crefovi’s lawyers are very well connected in the world of the creative industries, attending, and participating to discussion panels at, on a regular basis, each session of the professional trade shows such as CESWeb SummitDLD & Slush, Midem, as well as the Cannes film festival and EFM and the Berlinale.


Crefovi regularly updates its social media channels, such as Linkedin, Twitter, Instagram, YouTube and Facebook. Check our latest news there!


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How to make your fashion brand lawfully omnichannel? | Crefovi at Pure fashion trade show

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Crefovi strikes back with presentation on how to make your fashion brand lawfully omnichannel at Pure trade show on 26 July 2016, attended by trade show goers and press.[hr]

 

Annabelle GaubertiHow to make your fashion brand lawfully omnichannel?, founding partner of London fashion law firm Crefovi, presented a talk on the legal stuff to think about, when a fashion business wants to go omnichannel and, in particular, to launch e-commerce functions on its website. This presentation was delivered at Pure, the top bi-annual fashion trade show in London. 

Check out here our slides! 

How to make your fashion brand lawfully omnichannel? from Annabelle Gauberti 

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Brexit legal implications: the road less travelled

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On 23 June 2016, during an epic day of flooding in London and South East England, which did not deter a record 72.2 percent of voters to turn out, Little Britain decided to terminate its 43-year membership with the European Union (EU). What are Brexit legal implications that creative industries need to know about?[hr]

Brexit legal implicationsNow, the United Kingdom (UK) – or possibly, only England and Wales if Northern Ireland and Scotland successfully each hold a referendum to stay in the EU in the near future – will join the ranks of the nine other European countries which are not part of the EU, i.e. Norway, Iceland, Liechtenstein, Albania, Switzerland, Turkey, Russia, Macedonia and Montenegro. Of these, two countries, Russia and Turkey, straddle Europe and Asia.

What are the short-term and long-term consequences, from a legal and business standpoint, for the creative industries based in the UK or in commercial relationships with UK creatives?

The two main treaties of the European Union, which are a set of international treaties between the EU member states and which set out the EU’s constitutional basis, are the Treaty on European Union (TEU, signed in Maastricht in 1992) and the Treaty on the Functioning of the European Union (TFEU, signed in Rome in 1958 to establish the European Economic Community).

The TFEU in particular sets out some important policies which guide the EU, such as:

  • Citizenship of the EU;
  • The internal market;
  • Free movement of people, services and capital;
  • Free movement of goods, including the customs union;
  • Competition;
  • Area of freedom, justice and security, including police and justice co-operation;
  • Economic and monetary policy;
  • EU foreign policy, etc.

How is the ending of those policies, in the UK, going to change and affect UK creative professionals and companies, as well as foreign citizens and companies doing business in the UK?

1. Brexit legal implications: removal of EU citizenship for UK citizens and of freedom of movement of people coming in and out of the UK

Citizenship of the EU was introduced by the TEU and has been in force since 1993.

EU citizenship is subsidiary to national citizenship and affords rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or a consulate in the country in which they require protection.

By voting out of the EU, Little Britain has made it difficult for EU citizens to come to the UK, as a visa or work permit may be required in the future, depending on the agreement that the UK will strike with the EU. However, it will also be much more difficult for UK citizens to travel to EU member states, for work, studies or leisure.

Probably, the majority of people in the UK who voted out of the EU do not travel much out of the UK, either for work or leisure, so there was definitely a class battle going on there, during that Brexit referendum, as high flyers and Londoners (who have to be quite wealthy to live in such an expensive city) wanted to remain in the EU, while the working class population and English & Welsh regions were firmly on the Leave side. That’s democracy for you: one individual, one vote and the majority of votes always has the upper hand!

If we look at the example set by some of the other nine European states which are not part of the EU, we see that several options are available. Although Norway, Iceland and Liechtenstein are not members of the EU, they have bilateral agreements with the EU that allow their citizens to live and work in EU-member countries without work permits, and vice versa. Switzerland has a similar bilateral agreement, though its agreement is slightly more limited. At the other end of the spectrum, the decision about whether to permit Turkish citizens to live and work within member countries of the EU is left to the individual member nations, and vice versa.

So what’s it going to be like, for the UK?

Time will tell but as we now know that David Cameron, a relatively “mild” member of the conservative party, will step down as the UK prime minister in October 2016, we are under the impression that his leadership will be replaced with an atypical and highly-strung right-wing and nationalistic team, probably led by hard-core conservatives such as Boris Johnson. Mr Johnson not being renowned for his subtlety and impeccable political flair, we think that negotiations for new bilateral agreements between the UK and EU as well as non-EU countries will be a difficult, protracted and ego-tripped process which may take years to finalise.

The UK will try to reduce immigration from the EU, probably with a points-based system such as the one in place in Australia. It means giving priority to high-skilled workers and blocking entry to low-skilled ones. But first, the UK will have to clarify the status of the nearly 2.2 million EU workers living in the UK. The rules for family reunions may get tougher. Also, 2 million UK nationals also live abroad in EU countries – so any British measures targeting EU workers could trigger retaliation against UK nationals abroad.

This, of course, may have an extremely negative impact on the freedom of movement of people, in and out of the UK, which may have a catastrophic impact on trade, human rights and political relationships with other states, for the UK.

Article 50 of the Lisbon Treaty, another treaty from the set of international treaties between the EU member states and which sets out the EU’s constitutional basis, relates to the rules for exit from the EU and provides that:

1. Any Member State may decide to withdraw from the EU in accordance with its own constitutional requirements.

2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the EU shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the EU. That agreement shall be negotiated in accordance with Article 218(3) of the TFEU. It shall be concluded on behalf of the EU by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it. A qualified majority shall be defined in accordance with Article 238(3)(b) of the TFEU.

5. If a State which has withdrawn from the EU asks to rejoin, its request shall be subject to the procedure referred to in Article 49″.

Therefore, the UK nows needs to notify its intention to withdraw from the EU to the European Council. We understand that such notification will be handed over by the new prime minister in the UK, therefore after October 2016.

The UK will have, at the latest, a period of two years from such notification date to negotiate and conclude with the EU an agreement setting out the arrangements for its withdrawal, taking out of the framework for its future relationship with the EU. After this period of two years or, if earlier, the date of entry into force of the withdrawal agreement, the EU Treaties will cease to apply to the UK.

Let’s hope that the new UK government will have the ability and gravitas to strike a withdrawal agreement with the EU, in particular in relation to free movement of people coming in and out of the UK, which will be balanced and ensure fluid and constructive relationships with its fellow neighbours and main import partners.

Companies which have – or plan to have – employees in the UK, or which staff often travels to the UK for business reasons, should monitor the negotiation of the bilateral agreements relating to the freedom of movement of people, between the UK and EU member-states, as well as non-EU countries, very closely, as costs, energy and time to secure visas and work permits could become a significant burden to doing business in and with the UK, in the next two years.

2. Brexit legal implications: removal of free movement of goods, services and capital?

The EU’s internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU’s 28 member states.

The internal market is intended to be conducive to increased competition, increased specialisation, larger economies of scale, allowing goods and factors of production to move to the area where they are most valued, thus improving the efficiency of the allocation of resources.

It is also intended to drive economic integration whereby the once separate economies of the member states become integrated within a single EU wide economy. Half of the trade in goods within the EU is covered by legislation harmonised by the EU.

Clearly, the internal market and its wider repercussions have gone totally over the head of Little Britain, who wiped out 43 years of hard-won progress towards economic integration in 12 hours on 23 June 2016! “Put Britain first”, which was what the mentally ill racist and right-wing extremist shouted when he murdered Jo Cox, a Labour politician and campaigner for the rights of refugees, a week and a half ago, summarises what Little Britain had in mind, when they voted out of the EU.

Having said that, it is possible that the internal market remains in place, between the UK and the EU, as such market has been extended to Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA) and to Switzerland through bilateral treaties.

Indeed, the EEA is the area in which the agreement on the EEA provides for the free movement of persons, goods, services and capital within the internal market of the EU. The EEA was established on 1 January 1994 upon entry into force of the EEA Agreement.

The EEA Agreement specifies that membership is open to member states of either the EU or European Free Trade Association (EFTA). EFTA states, i.e. Iceland, Liechtenstein and Norway, which are party to the EEA Agreement participate in the EU’s internal market. One EFTA state, Switzerland, has not joined the EEA, but has a series of bilateral agreements with the EU which allow it to participate in the internal market. The EEA Agreement in respect of these states, and the EU-Swiss treaties have exceptions, notably on agriculture and fisheries.

2.1. Free movement of goods?

Thanks to the internal market, there is a guarantee to free movement of goods.

If the UK decides, during its withdrawal negotiations with the EU, to become a party to the EEA Agreement, then such freedom of movement of goods will be guaranteed.

If the UK decides, during its withdrawal negotiations with the EU, to put in place a series of bilateral agreements with the EU, then such freedom of movement of goods may be guaranteed.

Otherwise, there will be no freedom of movement of goods, between the UK and the EU, and non-EU countries, which would be an extremely perilous commercial situation for the UK. The EU is also a customs union. This means that member-states have removed customs barriers between themselves and introduced a common customs policy towards other countries. The overall purpose of the duties is “to ensure normal conditions of competition and to remove all restrictions of a fiscal nature capable of hindering the free movement of goods within the Common Market“.

Article 30 TFEU prohibits EU member-states from levying any duties on goods crossing a border, both goods produced within the EU and those produced outside. Once a good has been imported into the EU from a third country and the appropriate customs duty paid, Article 29 TFEU dictates that it shall then be considered to be in free circulation between the EU member-states.

Neither the purpose of the charge, nor its name in domestic law, is relevant.

Since the Single European Act, there can be no systematic customs controls at the borders of EU member-states. The emphasis is on post-import audit controls and risk analysis. Physical controls of imports and exports now occur at traders’ premises, rather than at the territorial borders.

Again, if the UK becomes a party to the EEA Agreement, or signs appropriate bilateral agreements with the EU and other countries party to the internal market, customs duties will be prohibited between the UK, the EU, the EEA states and Switzerland. Otherwise, customs duties will be reinstated between the UK and all other European countries, including the EU, which would be again a very disadvantageous situation for UK businesses as the cost of trading goods with foreign countries will substantially increase.

The same goes for taxation of goods and products which will be reinstated if the UK does not manage to become a party to the EEA Agreement or to sign appropriate bilateral agreements with the EU.

This is going to become a major headache for the UK’s new leadership: goods exports of the EU, not including the UK, to the rest of the world, including the UK, are about 1,800bn euros; to the UK, about 295bn euros, or a little under 16 percent. So, in 2015, the UK accounted for 16 percent of the EU’s exports, while the US and China accounted for 15 percent and 8 percent respectively.

The UK would, indeed, become the EU’s single largest trading partner for trade in goods. However, this would probably not be the case for trade overall. Including services would probably reduce the UK’s share somewhat (the EU ex UK exports over 600bn euros in services, while the UK imports only about 40-45bn euros in services from the rest of the EU). Moreover, the US will very probably overtake the UK as the EU ex UK’s largest single export market.

What does this tell us about the UK’s bargaining power with the EU after a Brexit?

It certainly confirms that the UK would become one of the EU’s largest export markets, even if not necessarily the largest. But the UK would still be far less important to the EU than they are to the UK – the EU still takes about 45 percent of UK’s exports, down from 55 percent at the turn of the century. And, if you treat the EU as one country, as this analysis does, “exports” become considerably less important overall (intra-EU trade is far more important to almost all EU countries). Indeed, as this Eurostat table shows, only for Ireland and Cyprus does the UK represent more than 10 percent of total (including intra-EU) exports. Brexit legal implications

So how important will exporting to the UK be to the EU economy after Brexit? EU exports to the UK would represent about 3 percent of EU GDP; not negligible by any means, but equally perhaps not as dramatic as one might think. The EU, and even more so the UK, would certainly have a strong incentive to negotiate a sensible trading arrangement post-Brexit. But no-one should imagine the UK holds all the cards here.

Bearing in mind that the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers), we strongly doubt that currently feisty UK and its dubious future leadership (wasn’t Boris Johnson lambasted for being a womanising buffoon by both the press and members of the public until recently?) are cut from the right cloth to pull off a constructive, seamless and peaceful exit from the EU.

Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should monitor the UK negotiations of the withdrawal agreement with the EU extremely closely and, if need be, relocate their operations to the EU within the next 2 years, should new customs duties and taxation of goods and products become inevitable, due to a lack of successful negotiations with the EU.

The alternative would be to face high prices both inside the UK (as UK retailers and end-consumers will have to pay customs duties and taxes on all imported products) and while exporting from the UK (as buyers of UK manufacturers’ goods will have to pay customs duties and taxes on all exported products). Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. UK services – accounting for eighty percent of the UK economy – would lose their preferential access to the EU single market.

While an inevitably weaker pound sterling may set off some of the financial burden represented by these customs duties and taxes, it may still very much be necessary to relocate operations to another country member of the EU or EEA, to balance out the effect of the Brexit, and its aftermath, for creative businesses which produce goods and products and export the vast majority of their productions.

Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas. Analysts think that the most important consequence of Brexit is “a dent to global GDP prospects and damage to confidence. This is likely to develop on the back of downward asset markets adjustments. Hence, more than ever, the fashion industry will have to work on moderating costs and capital expenditures“.

2.2. Free movement of services and capital?

The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, legislation in the area is not as developed as in other areas.

There are no customs duties and taxation on services therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the potentially disastrous effects of unsuccessful negotiations between the EU and the UK, during the withdrawal period.

Free movement of capital is intended to permit movement of investments such as property purchases and buying of shares between countries. Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This includes all member-states of the EU, even those outside the eurozone, provided the transactions are carried out in euro. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.

Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.

Should the withdrawal negotiations between the EU and the UK not be successful, in the next two years, it is possible that such transfer costs, as well as some new controls on capital movements, be put in place when creative businesses and professionals want to transfer money across European territories.

It is advisable for creative companies to open business bank accounts, in euros, in strategic EU countries for them, in order to avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU.

To conclude, we think that it is going to be difficult for creative businesses to do fruitful and high growth business in the UK and from the UK for at least the next two years, as UK politicians and bureaucrats now have to not only negotiate their way out of the EU through a withdrawal agreement, but also to negotiate bilateral free trade deals that the EU negotiated on behalf of its 28 member-states with 53 countries, including Canada, Singapore, South Korea. Moreover, it would require highly-skilled, seasoned, non-emotional and consensual UK leadership to pull off successful trade negotiations with the EU and, in view of the populist campaign lead by a now victorious significant majority of conservative politicians in the UK up to Brexit, we think that such exceptional and innovative UK leaders are either not yet identified or not in existence, at this point in time. The pains and travails of the UK economy may last far longer than just two years and, for now, there is no foreseeable light at the end of the tunnel that all this fuss will be worth it, from a business and trade standpoint. Did Little Britain think about all that, when it went out to vote on 23 June 2016? We certainly do not think so.

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