The U.K. voted Thursday to leave the European Union in a stunning referendum result that has huge global implications. The vote wasn’t nearly as close as had been predicted, with the Leave supporters winning 52% to 48%, a margin of more than 1.25 million votes.
The U.K. will not leave the EU for at least two years, but the shocking result has already caused widespread market turmoil.
The value of the U.K.’s currency slumped by over 10 percent to just $1.32—its lowest level in more than 30 years and the largest single-day fall in history. Equities markets across Europe have suffered massive losses, with more than £100 billion wiped off the FTSE100—the share index of the U.K.’s 100-largest listed companies. These are some of Big Law’s most important clients. The banking sector has been particularly hard hit, with shares in Barclays, Lloyds and RBS dropping by at least 30 percent. Rating agency S&P has said that it is likely to downgrade the U.K.’s sovereign credit rating.
British Prime Minister David Cameron, who campaigned for the U.K. to remain within the EU, has announced that he will resign in October.
Law firms are braced for a period of intense activity, with lawyers already receiving floods of inquiries from clients trying to figure out what the result means for their businesses. Most major firms are running 24-hour hotlines to deal with the massive levels of client demand.
The longer-term impact of the unprecedented move is unknown, however.
Even before the vote, the market uncertainty caused by the referendum saw a significant decrease in activity across key law firm practice areas—particularly those with a transactional bent—as deals were postponed and investors withdrew funds. The total value of initial public offerings on European exchanges in the first six months of the year was down by more than half when compared with the same period in 2015, according to financial markets platform Dealogic. M&A activity fell by a similar amount, and private equity work has all but dried up. Bank of England data, meanwhile, revealed that investors removed around 65 billion pounds ($92 billion) from the U.K. between February and April—the greatest exodus of funds since the height of the recession.
Trade, financial services and regulatory lawyers may now see significant increases in workflow. Martin Coleman, global head of the antitrust and competition practice at Norton Rose Fulbright, said Brexit will involve “the biggest program of regulatory and legislative reform ever.” This should go some way toward compensating—in the short term, at least—for what will almost certainly be another steep and prolonged drop in transactional activity. But this work will not substitute for big-ticket deals, which can keep scores of lawyers busy for months.
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U.K. competition lawyers also risk losing their rights to EU professional legal privilege and the right to plead before the European Court of Justice in Luxembourg. Several major law firms, including Allen & Overy, Freshfields Bruckhaus Deringer, Hogan Lovells and Slaughter and May, pre-emptively moved to register scores of lawyers in Ireland in an attempt to protect these rights in the event of a Brexit.
Law firms have been carefully reviewing their currency hedging strategies ahead of the referendum, but the significant devaluation of the pound will still pose a challenge—particularly for firms that have sizable numbers of partners that are paid in foreign currency out of a centralized, sterling-denominated profit pool. It is also likely to have a significant impact on international law firm financials. Baker & McKenzie, for example, last year reported a 4.3 percent drop in gross revenue, to $2.43 billion. Global chair Eduardo Leite blamed the results on the “exceptional appreciation” of the U.S. dollar. The firm collects revenues in more than 35 different currencies and then converts to U.S. dollars for reporting purposes.
On the other hand, a weak pound would be good for U.K. exports and might also help drive M&A activity by presenting foreign buyers with relatively cheap targets. One London-based partner joked that the U.K. may now become a “low-cost jurisdiction.”
But perhaps the most important question for law firms is the degree to which Britain leaving the EU will weaken London’s position as one of the world’s key financial and business centers. The U.K. capital is used by many international organizations—including global law firms—as a gateway to Europe, with the city boasting more European headquarters of non-EU corporations than anywhere else on earth, according to U.K. government data. London is particularly heavily populated by U.S. and international banks, with the EU’s so-called passporting regime allowing them to run the bulk of their European trading operations out of the U.K.
But passporting, which also applies to a range of other businesses, including asset managers and insurance companies, will no longer be possible once Britain leaves the EU. Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley, which collectively employ more than 36,000 people in the U.K., warned before the vote that they would shift their business away from the country in the result of a Brexit. (The four banks each donated more than $100,000 to Britain Stronger in Europe, a pro-EU campaign group.)
Clyde & Co. employment partner Nick Elwell-Sutton said that “large scale redundancies would be highly probable” across the financial services sector unless the passporting rules are resolved in the UK’s favor.
These financial institutions are major drivers of work for international law firms, which have built networks of offices around the world to service client demand. Rob Aird, a financial institutions partner at London-based Ashurst, said that if banks and other important clients started to reallocate resources from London to other European locations—such as Frankfurt and Paris, which are each home to strong financial markets of their own—law firms would have to consider shifting the focus of their own investments. “
Daniel Sutherland, a partnership expert at London’s Fox Williams, said that many U.S. law firms may now have to restructure their European operations anyway, since they were established using an EU directive that has allowed U.S. law firms to open offices in EU jurisdictions that would otherwise not permit them to work freely in partnership with local lawyers. That directive will no longer apply once the U.K. has withdrawn from the EU, and those firms will be at the mercy of local bar rules that may take a protectionist attitude to U.S. law firms.
Despite being only the third national referendum in U.K. history, this is actually the second time the U.K. has voted on whether to leave the EU. In 1975, the country opted overwhelmingly to stay. (The third referendum, a vote on electoral reform in 2011, also resulted in a maintaining of the status quo.) This time, 52 percent of voters chose to leave.
Now that the referendum is over, the next step is for the U.K. government to trigger Article 50 of the Lisbon Treaty, which serves notice of a member state’s intention to leave the EU. The negotiation process is expected to take up to two years, during which time EU laws and treaties will continue to apply to the U.K. What happens after that, nobody knows.
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