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The Brexit Column: Is this the solution to Brexit?

Is this the solution to Brexit?

The tools used by M&A dealmakers could offer a key to end the UK-EU deadlock. Mark Essex and Jan Crosby present a new idea, ‘The Midnight Compromise’.

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Mark Essex

Director of Skills

KPMG in the UK

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For two years, our politicians have used the standard political toolkit to find a solution to Brexit. That toolkit – the cajoling, horse-trading, arm-twisting and old fashioned brinkmanship – has so far not delivered. If there’s another track, an alternative model that could be used from outside politics, now is the time to declare it. We think business has one – a device used day in, day out in the deal-making world of mergers and acquisitions (M&A). 

First, we must remind ourselves why we’re deadlocked. The Withdrawal Agreement was rejected by the House of Commons only two weeks ago, but we know that this same House would approve it with changes to the Irish backstop: the clause designed to show no hard border would ever be needed across the island of Ireland.

How does the backstop work? If a trade deal is not signed before the end of transition, the UK enters an indefinite customs union with the EU, rendering border infrastructure unnecessary. The issue for Brexiteers is that membership of a customs union rules out Britain having an independent trade policy. 

The trust gap

The fundamental issue around the backstop is one of trust. That is particularly the case on the British side, where Eurosceptic MPs suspect that the EU would seek to use the Irish backstop to either lock the UK into a customs union permanently – or use that threat for political leverage.

To break the deadlock we need a mechanism for the UK to be able to leave the backstop unilaterally in the future, while making sure the EU were satisfied that its red lines would never be diluted. And this is where I draw inspiration from the world of M&A and a specific legal device known as conditions precedent. 

Jan Crosby, Managing Director in KPMG’s Deal Advisory Practice and a serial deal-doer, explains: “M&A lawyers use conditions precedent to ensure that certain conditions are met before the other side has to fulfil their own duties under a contract. Typically, a bank might lend a firm money to buy another business on condition that this firm meets a number of mutually-agreed conditions first”.

Conditions precedent

In our Brexit case, the EU (i.e. the bank) would commit to dropping its insistence on an open-ended backstop only when the UK (‘the borrower’) had fulfilled certain pre-agreed conditions.  What might these conditions precedent be under which the backstop would no longer be necessary?

1) That the UK creates alternative arrangements for the UK-Irish border including technology or remote processing which create a low-friction frontier at least as impermeable to illicit trade as the EU's frontiers with other third countries. 

2) That reasonable capital and ongoing expenses incurred by the Republic of Ireland and/or EU in implementing and staffing such arrangements would be met by the UK.

3) That UK sanitary and phytosanitary regulations will be aligned with the EU on an ongoing basis in order to facilitate cross-border movements of livestock and animal products.

These three are my opening suggestions and are not intended to be an exhaustive list.  I am sure negotiators on both sides would have plenty more.

The first point regarding the border is the most critical. Asking that the standard be "at least as impermeable as" those the EU already deems acceptable between, say, France and Switzerland or Serbia and Romania should reassure Brexiteers that the EU could not hold the UK/ROI border to an impossible standard while ensuring that imaginative border solutions are sufficient to protect the EU from illicit trade.

And what is the sequencing of this plan? 

The UK and the EU would sign the Withdrawal Agreement, the Political Declaration and this side-deal simultaneously.  But the latter - while a cast iron commitment - would not take effect until after 11.00 pm on 29 March GMT, or 12.00am, Brussels Time – the first possible moment in which the UK can have a international treaty with the EU as a third party. 

This statement (let’s call it the ‘Midnight Compromise’) could be letter or a codicil to the main agreement – that’s for constitutional lawyers to determine.  The two sides would need to agree what body determined if the UK had satisfied the conditions. That could be the World Trade Organisation, an international court, or a bespoke panel, but I would suggest the European Court of Justice is not a route that’s going to work for the British.

The existence of the ‘Midnight Compromise’ would get us over the line and into a transition, six weeks from now. Resolving the Irish border probably means some sort of technological solution. That task remains daunting. However, it now does not rely on being solved in 21 or even 45 months of transition.  Because if it were not solved by the end of transition the UK would move into the backstop.  But entering a backstop in which the UK has the key to the exit door is a much more agreeable prospect than one which requires EU 'permission' to leave.

In deal-making, conditions precedent are used to allow the detailed work needed to arrange financing to take place outside the real-time negotiation of an M&A transaction. Applied to the biggest demerger in the world, it replaces deadlock with progress, uncertainty with clarity and mistrust with confidence: confidence for Eurosceptics that Britain would one day control its international trade relations; for the EU that the integrity of the Customs Union and Single Market were preserved; and for business that No Deal can be avoided.  

 
 
 

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders.
 

 
 

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