March and April’s 2018 Commercial Awareness Update

Welcome to our bi-weekly commercial awareness newsletter. Over the coming months, we will be breaking down a range of case study questions and topical business issues. For more details, please check out our recent forum post.

Today’s post is a little different. One of our members has been posting useful commercial awareness updates in our forums over the last few months. We wanted to share.

If you’ve fallen behind on the news or just want to refresh your memory before an upcoming interview, we have collated the posts below. Note, we’ve broken down the summaries into two newsletters, so this is part 1 of 2.

Big props to Coralin for improving her commercial awareness! You can find the full posts – in date order – for March here and April here.

The General Data Protection Regulation (“GDPR”)

• The story: The GDPR – an EU regulation that’s considered to be ‘the biggest overhaul of the world’s privacy rules‘ – comes into force on the 25th May 2018. It will regulate how companies use the personal data of EU citizens. So, if you’re a company that collects personal data, you’ll need to make sure that you’re compliant, or you could be subject to some very serious enforcement measures. Regulators will have the power to fine companies to the highest of €20m or 4% of a company’s annual turnover – whichever is higher.
• The Federation of Small Businesses reported that fewer than 1 in 10 small businesses in Britain are prepared for the General Data Protection Regulation. The group has called for a safe harbour so businesses can get advice rather than face a penalty if they don’t comply immediately. The GDPR adds stricter rules on processing and personal data storage, and includes new consent requirements. Businesses that have lots of personal data will also need to appoint a data protection officer.
• Impact on law firms and clients: This regulation is going to significantly impact law firms, directly and indirectly. Both companies and law firms will be required to follow stringent rules on how they process and store data, and whether they get customer consent to use the data. The reach is also wide. In addition to companies operating in the EU, the regulation applies to those who employ EU workers or sell to EU customers. Regulatory and data protection lawyers who specialise in this field will be in high demand as companies will need detailed advice to avoid the significant penalties. The problem for many small businesses is that compliance is costly, and many can’t afford to hire lawyers to help. It could impact the ability to do business.

Brexit

Unilever is leaving the UK

• The story: The company behind big brands like Magnum ice cream, Persil, Marmite and Dove has chosen Rotterdam instead of London for its new headquarters. Some, including the shadow business secretary, has used this to suggest businesses ‘are losing confidence in the government’. But both Theresa May and Unilever have said it is not related to Brexit. In fact, Unilever has said it will continue to invest £1bn in the UK. Unilever has been in the UK for 130 years and it’s the third biggest UK company by market value (valued at £105bn!).
• Impact on law firms and clients: Many think the move is because the Netherlands has stricter protectionist rules that can prevent foreign takeovers. We’ve seen a recent example of this – the acquisition of British engineering company GKN by Melrose. And this comes after Kraft Heinz tried to buy Unilever last year. Unilever will require law firms to help with their restructuring and relocation. It remains to be seen whether Slaughters – the company’s longstanding adviser – will be chosen, especially because Linklaters has acted for Unilever recently. Whichever firm is chosen, the company will need the advice of Dutch counsel for the move.

Brexit transition and financial services

• The story: The EU agreed to a 21-month transition period for Brexit after Theresa May agreed to pay an exit bill (£35-39bn!). Many predict that the detailed negotiations won’t begin until next March, and that means an exit won’t take place until the end of 2020. Financial services were also mentioned in the European Council’s draft negotiating guidelines for the first time. Part of this is thanks to Luxembourg, which has a lot of links to London when it comes to financial services. Contrast this to France who has played hardball, refusing to give the UK a special deal for financial services. It’s clear that France’s financial services stand to gain a lot with the UK out the picture.
• Impact on law firms and clients: The wording if the draft negotiating guidelines says that financial services in London will get the same access as any other non-EU country. This suggests banks and companies won’t get the same passporting rights that they had before Brexit – or any special provisions altogether. This will have huge consequences as currently many companies use the UK as a platform to enter into the EU. As it stands, this will limited. Expect law firms to establish Brexit teams and provide resources to help companies with preparations and appropriate contract provisions. Meanwhile, the European Central Bank is still advising EU banks to assume a worst case scenario, suggesting that they undertake contingency planning. Some companies have been preparing for the loss of passporting rights for some time now. Investment banks such as Deutsche Bank and Goldman Sachs have already started moving people out of London. They’ll need law firms to relocate and restructure.

PSA to stay after Brexit

• The story: PSA, the parent of car companies like Vauxhall, Peugeot and Citroen, is going to continue to manufacture vehicles until at least 2029. This follows a £9m investment by the UK to guarantee its competitiveness after Brexit.
• Impact on law firms and clients: The UK’s investment gives some certainty to carmakers on what’s going to happen after Brexit. It’s a sign of how interlinked the industry is with the EU as over half of vehicles that are made in the UK are exported to the EU and over half of the manufacturing parts come from the EU. That’s interesting to think about with the threat of a trade war on the horizon – I’ve discussed this in Part 2 of the Commercial Awareness Briefing.
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Tech companies

Digital Tax

• The story: Next week, the European Commission will propose a 3% ‘digital tax’ on many technology giants including Google, Spotify, Facebook and Apple. It’s difficult to say whether it will be implemented because all member states need to agree. For example, Ireland, known for its lax tax regime, opposed the bill, and it has been heavily criticised by the US.
• Impact on law firms and clients: If companies are uncertain about their tax liabilities, they may seek out help from tax lawyers about how to better structure their business. But note, law firms will need to be careful that they are complying with the law and not helping companies to avoid tax(!). Big US tech companies may think about relocating if this is implemented.

Tech stocks back up

• The story: Tech stocks have been falling for a while now, especially since the Facebook scandal. To add to the heat, Trump’s comments on Amazon has also rocked the markets. You may have heard that Trump criticised Amazon for paying minimal taxes. But it gets worse. A report came out suggesting Trump is ‘obsessed’ with sorting out Amazon. This news caused Amazon’s shares to fall up to 4.6%; it’s a clear example of how politics can affect companies. Meanwhile, in China, policies have been approved to encourage big tech companies to list on their stock exchange. A number of companies have already said they are interested in listing in China.
• Impact on law firms and clients: Investors may need to be careful; many people appear to be heavily invested in tech stocks, which leaves them vulnerable to events like this. Before this, technology stocks were rising for a long time, leading to many concerns that they could be in a bubble. Many were also concerned about the high valuations for tech startups – so-called unicorns – that were valued at over $1bn. Investor fears continue over the regulation of tech companies, partly contributing to the S&P 500, featuring some of the biggest US companies, to suffer its first quarterly losses since 2015. In relation to the China story, law firms may consider entering China now if they haven’t already. If they can eventually practice local law, the capital markets will be a very popular practice area.

The Japan Fair Trade Commission has raided Amazon

• The story: Japan’s regulator has raided Amazon’s Tokyo headquarters. The company is being investigated for requiring suppliers to absorb the costs for its discounts. A similar issue happened in 2016 when the Japan’s Fair Trade Commission found Amazon had forced suppliers to sell items at the same or a lower price on the company’s website. Two years ago, Amazon took over its rival company in Japan, making the country Amazon’s third biggest market (interestingly German is second, not the UK).
• Impact on law firms and clients: These practices are against Japan’s antitrust laws, which prevent firms with a better bargaining position taking advantage of its partner. Lawyers will have to review contracts and Amazon may have to change its supplier agreements to ensure the company complies with the law. This story reflects the wider problem of regulators trying to regulate companies that have reached an unprecedented size. Some expect Amazon to become the world’s first trillion dollar company.

Amazon becomes second most valuable company

• The story: Amazon became the most valuable company early this week beating Alphabet, Google’s parent company, who was in second place. Amazon now sits just after Apple. The company has had a good few years, and it’s share price has surged after the acquisition of Whole Foods, Just recently, Amazon overtook Google as the world’s most valuable brand.
• Impact on law firms and clients: Google suffered after the Facebook data scandal because investors were concerned about the risk of new data regulation. This would impact their profits because Google’s advertising model centres around the use of data.

Facebook’s political scandal

• The story: Facebook is under fire after it was leaked that Cambridge Analytics, a company which claims to ‘change audience behaviours’, used data obtained from Facebook users without their consent. This was under the guise of a personality test, using an app called “This is your Digital Life”, which was downloaded by hundreds of thousands of people. The harvested data was then used for political targeting in the Trump election campaign. It was an employee at Cambridge Analytics, Christopher Wylie, who released the information. He was a former law student(!) and coder.
• Impact on law firms and clients: Data protection is increasingly on the agenda and the question for Facebook is – how far should companies go to protect sensitive data? Interestingly, what Facebook did wouldn’t be illegal in the US – companies can share third-party information. So the issue is that it is illegal under EU data protection law, which shows the differences between the stricter regulation in the EU and the lax position in the US. It also comes as companies like Facebook will have to prepare for the General Data Protection Regulation, which comes into force in May. Regulators can enforce big penalties for failing to report breaches (which is what FB seems to have done), so if there are more reveals, Facebook could become under fire. This story also follows news that Facebook allegedly failed to prevent Russian operatives from creating fake accounts and influencing the US elections. In the UK, the data watchdog is looking into it and contacting other analytics companies to see how data is being used.

The economic damage of scandals

• The story: $60bn was wiped off Facebook’s market value last week, a huge amount of wealth for Mark Zuckerberg, in a sign of how damaging the Cambridge Analytics scandal has been. Investors have been worried about fines and the loss of users, which show privacy fears are costing Facebook. Sonos pulled advertising from Facebook, Instagram, Google and Twitter for a week. Mozilla and Commerzbank also put advertising on hold. Investors have also withdrawn from tech stocks amid a big sell-off. Facebook’s control of personal data is now in the public eye and many have called for tougher regulation – a move that is likely to affect many business models.
• Impact on law firms and clients: This was an interesting story from a commercial awareness perspective. Many regulators in the EU and US are looking at how to regulate data companies. And this isn’t the first time. In 2014, the EU fined Facebook for providing misleading information about the ability to merge information between Facebook and WhatsApp. Last month, the EU also ordered Facebook to stop tracking people who aren’t using Facebook as they browse the web(!).In addition to the GDPR in May, the EU is discussing an e-privacy directive which, if passed, would significantly restrict the tracking of users’ behaviour online. Some investors fear that companies with similar data on users could face more regulation. Indeed, Google and Facebook’s value is largely based on the use of huge amounts of personal data. If this follows to other data companies, law firms may decide to invest in data protection teams. These lawyers can help advise these companies to comply with the regulation and mitigate against the risk of strict enforcement measures.Interestingly, some practices in the US are illegal in the EU, which shows the divergence in policy between the two. For example, Facebook’s Messenger for Kids would not be allowed in the EU due to age restrictions.

Background to the Cambridge Analytica scandal

• The story: We now have more information about the Cambridge Analytica scandal. Aleksandr Kogan, the Cambridge Analytica contractor at the heart of the Facebook scandal, was an employee of the Cambridge Psychometrics Centre. It was there that his team discovered they could use social media to determine people’s psychological profiles. Kogan then created an app called “This is your Digital Life”, a personality quiz for Facebook users. It was a success – 270,000 users signed up, but that wasn’t the whole story. Facebook’s privacy settings allowed Kogan to access the data from each user’s Facebook friends. This meant he could harvest a lot of data: some estimates suggest that he was able to build profiles of 50 million people. Kogan then gave this data to Cambridge Analytica. Meanwhile, an undercover investigation by Channel 4 into Cambridge Analytica was very revealing. The CEO was recorded discussing the company’s history of bribing politicians and spreading ‘fake news’.
• Impact on law firms and clients: There are increasing concerns about how personal data is being used to influence behaviours. This could lead to more regulation for companies that use data to market their products and perhaps this could go so far to target supermarkets that store shopping data using discount cards. At this point, companies will be checking that they are compliant and may need the help of law firms to ensure they have clear policies.

Facebook in trouble

• The story: The EU justice commission will be speaking with Facebook’s COO, Sheryl Sandberg after finding that Facebook’s written response “fell short” of their expectations.
• Impact on law firms and clients: Whilst this is a small story, there are some broader commercial awareness points we can draw from this. Europe’s data protection laws are some world’s toughest and very different to the US. Whilst the public outcry against Facebook is universal, there are concerns that the EU will pressurise US companies to improve privacy standards. So law firms need to be on guard – this is a very hot topic at the moment.

You can find Part 2 of the commercial awareness briefing here.