BREXIT - HOW NOT TO NEGOTIATE: THE ART OF THE NO DEAL

Regardless of whether you think Brexit is a good or a bad thing, the view from the United Kingdom is almost unanimous that the handling of the process by Prime Minister Theresa May‘s government has been shambolic – or at least 90% of the public think so at any rate by polls this past week.

By any basic measure in any organization that would be an F grade and would trigger a move to change management, and rather quickly, which is exactly what is being rumored .

At the very least, the spectacle is a good lesson in how not to negotiate a deal, whether it is a disentanglement from 40 years plus of economic legal and regulatory ties with the European Union, or, in more prosaic terms common to the legal community, a management led spin off or buy out (MBO) of a major division (the UK) from a greater whole (the EU) to become a self-standing entity - which is essentially what Brexit is about.

Let’s look at the lessons of this inartful deal and see what they hold for lawyers as deal practitioners, or perhaps more pertinently to historians, legal and otherwise :

The Basics

1. Know what you are selling

When any organization decides to do a spin off (or indeed break a company into constituent parts), the first questions are why and what is to be gained ? Lawyers who are not involved in this process, as many deal lawyers are not, nonetheless should be.

In the case of Brexit, during the referendum campaign of 2016, the then Leave campaigners argued that the deal was a good one because spinning out the UK from the larger EU would be better for the citizens and would reap countless rewards including saving capital, better medical services, the ability to strike independent trade deals and controlling borders and laws, leading to renewed independence and greater prosperity (the argument of any spin off or MBO – nothing new there, let’s admit : basically what investment bankers tell their clients all the time).

This was a classic aspirational goal based on company (read: political class) politics and not hard analysis, which was the first failure of the Leave management (being at the time a coalition of Tory and Labour Leavers) which proposed the referendum in the first place.

As a result management ran the risk that it could achieve a deal but not the one promised to stakeholders (the public and ultimately Parliament), as it did not stop and think what it was really doing and if its goals could be achieved – a conceptual first step and one which lawyers need to assist their clients in doing, to the greatest extent possible , asking the very basic questions : why? and is the plan actually achievable ?

2. Do your internal due diligence

When spinning out a division of your own company, the organizers always need to understand their own existing commitments and accounts before commencing the process of the sell-off, or of any actual third party due diligence on the target business - internal due diligence in effect. In an MBO, the owner and management know the facts or should know them.

In the Brexit deal, however, key issues fell through the cracks.

Aside from not doing its sums on the economic actual as well as social impact of a Brexit (with its immediate hemmorhaging of lost or abandoned investment in the UK), the perhaps fatal flaw of the post-referendum management (Prime Minister May's government) was not to take a good look at the 1998 Good Friday agreement, which created a political settlement in Northern Ireland and also committed the Irish Republic and Northern Ireland through the United Kingdom to an open border with frictionless trade as a way of reducing tensions and creating confidence between the two traditionally warring sides.

May‘s government admitted that this key due diligence was not done, as have many other politicians on both sides in last week’s boisterous and rather shocking debates, where it was conceded that the Good Friday agreement was “not adequately considered“.

And of course it is the Good Friday agreement that has been the biggest fly in the Brexit ointment, proving that you can’t necessarily have complete freedom from the EU common market and also have an open border, absent technological solutions to replace a customs border, which do not exist yet, to control trade.

This is very much akin to failing to discover before a deal that the company will lose half its critical government contracts, concessions or subsidies in the event of a change of control - and then doing absolutely nothing about it.

3. Don’t kick off until you have a plan

While it is true there are many transactions where you need to move quickly, for example when there are competitive bids, spin offs or management buyouts have many complicated factors which are entirely within the control of either the management or the owner and do not usually require urgency unless the economic situation of the asset to be disposed is dire (in which case an MBO or spin off is unlikely to succeed anyway).

This was also the case with the United Kingdom after the results of the 2016 referendum, but the May government charged ahead with the spin off in triggering Article 50, which gave it a two year self- imposed deadline to complete the process based on promises made during the campaign, which it proved entirely unprepared to do. 

Instead, while arguably this was necessary since the EU took the official position it could not negotiate any deal prior to the triggering of Article 50, in fact in politics, as in M&A, when there is a strict deal protocol, these processes are made to be circumvented (it happens all the time from the smallest deals to the largest geo-political ones) as political meetings and back channels could have been opened to discern the boundaries of what could be possible and what red lines were likely to form before any Article 50 notification was sent to achieve at least a basic understanding of the key obtainable goals of the proposition and the real obstacles ahead.

Indeed this is what David Cameron, May’s predecessor, did in extracting concessions from the EU before the 2016 referendum, securing pledges which could be put into practice if the referendum had resulted in a Remain win.

This is also what business folks do before they even think of bringing the lawyers and investment bankers in - sitting down and seeing if any deal is to be had at all and what its shape may look like.

The UK in contrast wasn’t even close to a MOU or LOI, even in concept, before plunging ahead, starting the two year clock ticking, turning the Brexit negotiations into a hail Mary auction of sorts - without a buyer lined up.

4. Know the other side

One of the greatest complaints coming out of the events of the last few weeks is that the May government never really understood the EU and its opponents in the negotiations

This comment of despair comes directly from the Conservative representative to the European Union who quit right after the Brexit vote, and his input during the negotiations was ignored or never solicited (as with other Conservatives who were feared to be too ‘pro Brussels’).

Anybody who has worked in Brussels for many years would know and understand that the EU is in fact quite a cohesive block and acts very deliberately with its highest goal to be to preserve the structures and unity of the European Union against internal and external exploitation.

The EU chief negotiator, Michel Barnier, was also known from the beginning as a seasoned negotiator who has been able to defend his clients’ case consistently without being punitive and (too) unreasonable.

The UK negotiating team in the meantime as noted below was unprepared or disinterested in meeting the EU at an early stage other than to repeat its aspirations.

5. Have a competent and committed negotiation team

The best negotiating team in any deal team is usually made up by astute business leaders who understand both the business proposition, as well as the legal financial and economic aspects of the deal, and seasoned lawyers and other advisors who are there to assist or lead as the case may be on technical solutions and compromises as well as the paperwork.

On this aspect the UK Government also missed the basics, appointing hardliners most of the way during the process, who, when they did not succeed, neither had the energy nor skill set apparently to come back and seek compromises but rather resigned like falling dominoes on ideological grounds without offering any solutions to move the process forward to a consensus.

As a result, whereas what had been promised was the fastest deal ever within the two years of the Article 50 notice, the latest UK version of its deal team achieved only a withdrawal agreement plus a vague annex of principles on which a trade agreement would be later negotiated over another two years, something the ultimate management board (the Parliament) has refused to accept going into the last few weeks of a now extended deadline (assuming Parliament technically amends the end date this week from the current March 29 to April 12 as demanded by the EU unless a deal is passed by that time in which case a further extension to late May would be afforded for UK implementing legislation).

6. Have a mandate and workable fall back solutions ready

An astute negotiator goes into a deal knowing its objectives but having clear fallbacks and classic compromises in hand.

The best approach to deal making flows from this - basic fairness to both sides which does not ask for positions that the other side can except only with humiliation, as that does not bode well for future relations, or even for deal completion.

To its credit, May‘s government was able to put together a deal which the EU finally accepted.  

However, the government's fatal flaw here was ‘front running’ the deal without checking with the stakeholders and sounding out negotiation strategy and ultimately securing its 'back' and mandate along the way.

This almost never works because most big deals are subject to board approval, in this case Parliament, including the Conservatives’ intractable ERG faction and the DUP rump faction, with its critical swing votes, and when those specific stakeholders balked, it became clear that the government neither had or nor has (as of this writing) board support or an agreed fallback position at all, other than a suicidal hard Brexit, which is supported by an actual blocking minority only.

Tunnel vision, obstinance and the lack of internal political nous usually do not make for successful negotiations, and that is what we are witnessing as events unfold towards Brexit day (however long postponed).

7.  Negotiate your extension rights in advance

The biggest technical weakness in recent events was demonstrated by the May government having to ask its counterparts for an extension at the last minute where the only playing card was the ‘mutual assured destruction’ of a hard Brexit.

A basic tool at the beginning of any deal is to negotiate exclusivity and also the right or option to extend negotiations unilaterally up front – or if not possible in this case (as some may argue since an extension required the consent of the EU) then at least one seeks and gets a consensus months in advance when a deal runs into headwinds on options to further extend and the conditions, which is what exactly the EU has now done in setting conditions – but unfortunately for the UK at the last minute for May’s government to meet if it wishes further extensions.

This of course has shifted the balance of power and tactical advantage entirely to the EU, other than the hard Brexit route, which May keeps in her card deck, as if veering suddenly off the road into an economic and regulatory ditch is a real ‘leveraging’ solution, which of course is no leverage at all (or least a palatable one), while the clock runs down.

8. Know when to walk away and what options are left 

If your negotiating fallbacks do not work, know what you will do with your assets - and have your Plan Bs and Cs ready on the shelf, ready to go.

Since negotiations don’t always work out as planned for your clients, even with your most reasonable compromises, one should always prepare exit options which in this context involve how to maximize the value of the business to stakeholders, either by finding another solution to the impasse (even when your fallbacks are exhausted) or ditching the deal, and keeping the business as is and improving it.

The clear walk-away choice for the May government was therefore not to walk calmly into the valley of the (hard Brexit) death, but to cancel Article 50, which it has the unilateral right to do without asking the EU (as confirmed by a ECJ court decision), not as a cancellation of the concept of Brexit but as a means for a national pause and reconsideration.

But there has been no consideration of this ‘breathing space’ option (as Article 50 could always be refiled) on the patently obtuse and false proposition (reiterated by May in Parliament today and by many ERGists and for some reason the press) that cancelling Article 50 means abandoning the Brexit project, which it does not. It just means suspending the deal, or putting it on the shelf, which many rational companies would do in this situation. The only current option presented by the government is akin to turning out the lights on the enterprise and firing all the workers, as if this accomplishes anything.

At best, we now have as process to test a number of hypothetical ‘outs’, with the board (Parliament) having voted the right on Monday to put forward a series of votes to be held this week on ‘alternatives’, ranging from a third vote on May’s deal, to a Norway plus style arrangement, some form of customs Union, or a new referendum or a combination of the above, which would be in deal terms be stakeholder generated and not management generated, indicating a basic breakdown of trust between the governing board and the management team and also an absence of consensus on what to do about it three days from the initial deadline and 14 days from the new EU imposed one.

As of this writing, the May government has, however, refused to confirm that it would abide by the will of its own Parliament, even if the majority supported a new path (including as one option cancelling Article 50 altogether).

Which leads to the final point.

9. All change – management goes if nothing else

Ultimately the old mantra holds true in these situations : management is responsible to its stakeholders and has a fiduciary duty to the company. Failure on major projects exposing fundamental flaws in the essential thinking and direction of the enterprise must lead inevitably to change, by resignation, firing or a clean sweep of the entire team.

This is where politics and business diverge, however subtly, because there are no clear mechanisms other than public and peer pressure and having a clear succession plan than can actually force a change in Conservative leadership, with May having won her party's vote of confidence just months ago, with the biggest gap being is the lack of a new alternative CEO with sufficient political clout and cross-party support to pause, move forward and avoid a hard Brexit, or call for more radical alternatives such as cancelling Article 50 or even a new referendum.

Where this leave us

While the corporate world has its own enormous inefficiencies, in basic deal terms, transaction norms do cut across both corporate and governmental transactions, as the rules are ultimately based on pretty universal experience of human interaction and above all common sense.

The May government would have done well to take adequate time to prepare, in a rather conventional but important way, to enter into the biggest deal since the UK entered the Common Market over 40 years ago and to take note of the basic rules of deal making.

Since it did not, it looks like Brexit will end up, instead of a success, as a case study in a law and business tomes on how not to succeed in the art of the deal, to borrow a Trumpian phrase, even if trying.

Unfortunately the exercise and its results, such as they are not so far, aren't just hypothetical but deeply and negatively impact the entire country, the European region, and their economies and the world's as well, and, as a result the lives of millions in a country whose future Brexit was purported to enhance.

Erik D. Lazar 

Mr. Lazar, a London-based international lawyer, is Director and Founder of Transatlantic Law International, a global business law firm, with affiliated firms in over 95 countries.