After Brexit, Chemical Companies Urged to Review Contracts

By Pat Rizzuto

June 24 —Chemical manufacturers located outside the European Economic Area, but exporting to it, should review contractual relationships in their supply chain to determine whether they have any U.K. operations responsible for complying with European Union regulations, a Steptoe & Johnson LLP attorney said June 24.

Chemical and pesticide manufacturers should determine wherever a U.K. entity discharges its EU regulatory obligations, Darren Abrahams, a partner in Steptoe & Johnson’s Brussels’ office, told Bloomberg BNA. He discussed near term actions chemical manufacturers may want to undertake in light of the U.K.’s June 23 vote to leave the European Union.

If the worst case scenario happens and the U.K. not only exits the European Union but also doesn't join the European Economic Area (EEA), which consists of the 28 EU member states along with Iceland, Liechtenstein and Norway, companies with U.K. operations that discharge regulatory obligations for REACH and the Biocidal Products Regulation may have to end contracts, arrange new ones and take other actions, Abrahams said.

No chemical or pesticide can be sold in the European Economic Area unless it complies with the EU's REACH (registration, evaluation, authorization and restriction of chemicals) regulation or its biocides regulation.

Chemical and pesticide manufacturers that are based outside the European Economic Area but export their products to the EEA comply with both chemical laws by designating EEA-based entities, Abrahams said. Those EEA-based companies discharge the regulatory obligations, he said.

Will U.K. Join EEA?

One uncertainty is whether the U.K. will exit the European Union and join the European Economic Area or, as Abrahams said seems likely at present, remain outside both legal structures.

If the U.K. remains outside both legal structures, U.K.-based companies could no longer discharge the regulatory obligations they currently carry out for REACH or the BPR, Abrahams said.

The full impact of the U.K. vote won't be known for two or more years, because it depends on exit negotiations that can't yet begin, Abrahams said.

The U.K.'s vote has no immediate impact, he said.

The negotiating process triggered by Article 50 of the Treaty on European Union, which addresses a member state's decision to withdraw from the union, begins after the state formally notifies the European Council of its intention.

Former Prime Minister Punts on Responsibility

Newly resigned Prime Minister David Cameron has said he will leave it to his successor to issue that notification and formally begin the withdrawal process.

That means, Abrahams said, the formal exiting process may not begin for months.

Once the negotiations begin, it will take the full two years allowed under Article 50—a timeline that can be extended—to complete the enormous amount of work needed to legally separate the U.K.'s and EU's integrated legal and regulatory systems, he said.

That gives businesses time to prepare for divergent possible outcomes, he said.

Capital, Tax Implications

Herb Estreicher, a partner with Keller and Heckman LLP, agreed companies have time to make preparations but said getting ready for possible Brexit scenarios will take time.

U.S. companies that have set up an affiliate in the U.K. that serves as their only representative, meaning it discharges their REACH obligations, may need to soon start looking at options to establish an only representative in the EEA, he told Bloomberg BNA by e-mail.

Companies will have to consider capital requirements as well as income and value added tax implications, he said.

Challenges for U.K. Chemical Manufacturers

Abrahams said U.K. chemical manufacturers face different and trickier challenges.

Under REACH, chemical companies that make more than one metric ton but less than 100 metric tons of a chemical must register that substance by 2018.

Non-European chemical manufacturers can appoint an only representative in the EEA to discharge their regulatory compliance, Abrahams said.

The REACH regulation, however, doesn't allow a company located in the EU—as the U.K. will be until the exit process is complete—to appoint an only representative, he said.

The U.K. exit negotiations are unlikely to be completed by 2018, but U.K. chemical manufacturers may want to consider contingency plans, such as having an arrangement with an EU-based company to take over registration and other compliance obligations, Abrahams said.

Considering this contingency plan should be only a paper exercise, he said.

Transitional Period Said Likely

Most likely the U.K. and EU will negotiate some kind of transitional period, he said.

Estreicher said: “U.K. chemical companies need to continue their registration efforts.

“If worst comes to worst, and the U.K. does not become a member of the European Economic Area, then the U.K. companies will need to appoint EU-based only representatives and transfer the registrations to them.”

Groups of chemical manufacturers that have formed consortia or Substance Information Exchange Forums (SIEFs) and appointed a U.K.-based company to be the lead registrant as they jointly register the same chemical should think about contingency plans, Estreicher said.

Similar to the U.K. chemical manufacturers, these consortia and SIEFs should ensure that an EU-based company is willing to take on the lead registrant role if worst comes to worst, he said.

To contact the reporter on this story: Pat Rizzuto in Washington at prizzuto@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com

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