The ‘Midnight Compromise’. Could M&A dealmakers offer a key to end the UK-EU deadlock?

For two years, UK 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 UK 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, KPMG UK Deal Advisory 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 frontier at least as impermeable 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.

This article was first published on the KPMG UK Insights page – more on the sequencing of the ‘Midnight Compromise’ can be found here.



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