Commercial Awareness Update April 2020

[Rachel S]

Hi guys and welcome to the first commercial update of April.

So this week's articles:
@Curtley Bale - Trump compels General Motors to manufacture ventilators
@Jiraiya - Coronavirus: How it affects the UK Housing Market
@Alice Manners - IR35 legislation postponed.
@Rachel S - LVMH produces sanitiser

Trump compels General Motors to manufacture ventilators - @Curtley Bale ​

The Story
President Trump has used Cold War-era measures to compel one of America’s largest car companies to ramp up the production of ventilators. The Defense Production Act was first enacted in 1950 and requires the company in question to prioritise its manufacturing for the government. The President has used this measure to force General Motors (GM) to increase ventilator production, with the fight against Coronavirus being ‘too urgent’ to worry about contractual negotiations.

What it means for Businesses and Law Firms
Trump’s measures come at a time when cases in the USA are soaring. At the time of writing, there are more than 160,000 cases with nearly 3,000 deaths. Enacting the Defense Production Act will help to reduce the number of people having to fight the disease without a ventilator. By targeting GM, Trump is asking the company to move away from its traditional manufacturing of cars to use its expertise for the greater good. Through a series of loans and incentives, the US government is ensuring those that can help the cause are in a position to do so.

In terms of business implications, GM will now have to prioritise its work for the government over its normal manufacturing contracts. GM is responsible for famous brands such as Chevrolet and Cadillac and turned over $137.2bn in 2019. It is likely that imminent deliveries of cars will now be delayed as attention is turned to ventilator manufacturing. As a result, there may be contractual debates among those who are expecting GM’s cars. Normally, GM would be breaching contracts by failing to deliver on time. However, it is likely a force majeure clause would be exercised in this unprecedented time.

Whilst share price has fallen due to the government compulsion of the company, it is unlikely to affect their standing in the market. This is because competitors such as Ford and Fiat Chrysler are also heavily involved in the efforts and have temporarily placed car production on the proverbial backburner.

 

[Rachel S]

Coronavirus: How it affects the UK Housing Market - @Jiraiya ​

Story

The UK property market is grinding to a halt after the government announced its stay-at-home measures: no marketing new homes, house viewing or surveying. Banks including Lloyds, Barclays, and RBS have stopped offering new mortgages unless the customer can commit a substantial amount of principal payment. Mortgage lenders also agreed to offer mortgage payment holidays for up to three months for existing mortgage borrowers.

Impacts on businesses and law firms

Mortgage loans have always been seen as a stable and crucial source of revenue for banks. Stable as it seems, it is not immune to the macro-economic downturn caused by the coronavirus. The property market freeze undoubtedly adds further pressure on banks amidst recent stock market turmoil. If the use of payment holidays becomes widespread, cash-strapped lenders will face increasing difficulties in meeting their own payment obligations.

The market sentiment is reflected in the declining price of mortgage-backed securities(“MBS”) as investors expect more mortgages’ default.

Given the unprecedented nature of the property market’s shutdown, law firms specializing in the capital market practice like Freshfields and Clifford Chance are working around the clock with authorities and banks to mitigate the impact of the holiday scheme.

Questions mainly revolve around the documentation of MBS. For instance, whether these payment holidays are deemed “arrears” under the common MBS documentation. It is a common term in the MBS documentation that mortgages in arrears for 90 days or more will be deemed in default. This could mean dire legal consequences like repossession, which the Financial Conduct Authority actively warned against recently under the current economic climate. Lenders may have no options if the property market shutdown remains in place for months. The UK government needs to step up as banks do not survive on social goods and law firms can only do so much within the strict confines of contractual agreements.

IR35 Legislation Postponed - @Alice Manners ​

The Story

Growing business uncertainty surrounding the Covid-19 pandemic has led to a delay in the introduction of new IR35 legislation.

The legislation was going to extend the existing IR35 legislation, which ensures those working “off-payroll” but similarly to employees are properly liable to HMRC, to apply to the private as well as the public sector.

Set to be introduced on the 6 April 2020, the changes will now not be enacted until April 2021.

Impact on Law Firms and Businesses

This would have added an additional burden onto businesses and individuals who are already being significantly impacted by the coronavirus. However, some businesses have already offered permanent positions to workers or stopped using the services of contractors in preparation for the change. Some have predicted that businesses will reverse these changes until nearer the new deadline. If anything, businesses will have more time to prepare and law firms more time to provide advice.

The deferral has led to an increase in IT companies seeking contractors. With many businesses now forced to operate remotely, relying on an increasing amount of digital infrastructure, these companies may take on workers for specific purposes without the added pressure of employee costs. With many businesses freezing recruitment during this uncertain time, other companies may also use the deferral to follow this route.

It is worth considering whether the pandemic could change the way we work. Flexible and freelance working could become more desirable once employers realise how easily it can be facilitated. Will the test under IR35 legislation, looking at whether a person is controlled like an employee, still be fit for purpose next April?

LVMH Produces Sanitiser - @Rachel S ​

The story

In a bid to meet demand for hand sanitisers, businesses are stepping up. Luxury goods company LVMH is using perfumes and cosmetics production lines while L’Oréal is retooling factories to make millions of units of sanitiser for nursing homes and hospitals.

In the UK, independent brewer BrewDog, Psychopomp Microdistillery and 58 Gin are all switching production of alcoholic beverages to sanitiser and are either donating or selling and giving the proceeds to hospital charities. Poland’s biggest oil group Orlen, known for windscreen wiper fluid and industrial oils is planning to sell sanitiser.

Bacardi is adapting production across their global sites and is donating sanitiser to frontline workers as well as selling it to partner companies. Alcohol company Pernod Ricard is not only producing sanitisers but agreeing to provide alcohol to companies who can produce sanitiser alike Diageo who will donate two million litres of alcohol to sanitiser manufacturers.

Impact on Businesses and Law Firms

For businesses, alcohol companies may consider how adaptable their production lines are. Hand sanitiser and medical products are in high demand whereas demand for consumer luxuries like expensive alcohol or cosmetics will decrease as economies worldwide fear a recession. Alternatively, as most companies will donate products, corporate philanthropy can strongly bolster a company’s reputation. This is especially interesting as last year’s Business Roundtable redefined the purpose of a corporation to better serve society and not just aim for profit.

Law firms will advise on regulatory approval and taxation for producing sanitiser. HMRC in the UK has recently changed requirements for distillers in the UK who no longer need to get approval to produce sanitiser while the FDA in the US has stated it will not take action over entities producing sanitiser, that are not usually licensed. Changes to employee job roles and facility can require consultation and consent and employment lawyers may provide guidance to employers on hours and training if production is at full capacity. Businesses collaborating to produce sanitiser may also raise competition issues and lawyers will need to mitigate this risk when structuring arrangements.

 

[Jaysen]

Welcome to the second update of April!

The articles this week:

@Jiraiya - SoftBank abandons WeWork Buyout
@Curtley Bale - Barclays set out climate change goals
@Alice Manners - Retailer’s refusal to pay rent
@Rachel S - COP26 has been postponed
@Sairah - Threat to Pension Funds Market

SoftBank abandons WeWork Buyout – (by @Jiraiya)
​

The Story:

Despite already having invested $10.5 bn in WeWork since its listing fiasco, Softbank, the Japanese tech investment group, announced to back out from a $3bn tender offer for shares of WeWork, the co-working space’s start-up.

In its justification, Softbank quoted unmet contractual conditions of the deal, including the failure to restructure a joint venture in China, and criminal and civil inquiries into WeWork. The suspicion is that the group is no longer interested in a sinking ship.

Impact on Businesses and Law Firms:

This move is no surprise considering Softbank’s financial situation before the announcement. The firm is launching an emergency $41bn asset sale and a $2tn share buyback, prompted by activist shareholders to defend its freefalling share prices. It recently refused to lend to OneWeb, a satellite internet start-up backed by the fund, which was once valued at $3.3.bn and is now under liquidation.

Considering its staggering $2.2bn annual loss, the news is a nightmare to WeWork. Its occupants are demanding rent concessions or cancellations due to worldwide social distancing measures. Investors’ confidence is shattered as Softbank’s insistence to pull out after investing so much speaks volumes about its outlook.

There are increasing signs from the market that the start-up boom of the last decade is coming to an end as funds and corporations are scrambling for cash to stay afloat. In good times, any “techie” idea could be boasted as the next Facebook just like the dot-com era in the 90s. But as history has taught us, floundering businesses will be revealed in bad times, perhaps for a good cause.

As corporate practice is in a downturn, law firms like Hogan Lovells and Latham & Watkins have started retraining some of their lawyers in restructuring and insolvency practices to handle a rush of businesses in financial stress or in bankruptcy. Could WeWork become one of them?

Barclays set out climate change goals (by @Curtley Bale)
​

The Story:

Europe’s largest financier of fossil fuels, Barclays, has declared its ambition to fall in line with the climate change goals established by the Paris Agreement in 2015. Barclays will target net-zero carbon emissions by 2050, planning to account for its own emissions as well as that of its customers. This announcement comes following large shareholder pressure in January to facilitate change.

Impact on Businesses and Law Firms:

As the seventh-largest global financier of fossil fuels, Barclays has faced intense scrutiny for its record. Since 2015, Barclays has lent around £100bn to fossil fuel-using companies. With that in mind, the climate change goals may be a step towards improving its image as a responsible lender whilst also satisfying its shareholders. Green/ethical investments are becoming an increasingly important factor for shareholders, and making commitments to change its environmental stance is likely to lead to the company becoming a more sustainable investment in the future.

Alongside the climate change goals, Barclays has also committed to investing £175bn over the next five years in environmental innovation as well as granting £100bn of green financing by 2030. This may put pressure on fellow UK banks such as HSBC who have lent $86.5bn to the largest carbon emitters since 2015. Whilst Barclays is a long way behind the global leader of financing fossil fuel, JP Morgan Chase ($268.59bn since 2015), its move towards being a more responsible business may help the company sustain its reputation in the market as a leader.

Retailer’s refusal to pay rent – (by @Alice Manners)
​

The Story:

JD Sports has followed in Primark’s footsteps and refused to pay its rent, after being forced to close its UK stores. Burger King and Topshop have also announced similar actions.

Impact on Businesses and Law Firms:

Other high street businesses are likely to follow suit, with H&M asking for waivers on its rent and service charge bill.

Intu Properties have also spoken out after they only received a third of the rent owed to them last week, saying that they had their own staff to consider. They have offered to cut service charge fees, and many commercial landlords are trying to mitigate issues being faced by tenants, knowing reputation is at stake. However, Intu have their own debt and have said they are not able or willing to bankroll well-capitalised brands who did not want to pay their rent.

The government has allowed a three-month mortgage payment holiday, but no rent holiday. However, landlords have been prevented from evicting tenants during this time.

Even if rent is allowed to be put on hold, this highlights again the worrying future of the high street. Stores like Primark rely entirely on in-store sales so it is difficult to see how they will make up for their losses during this time. Businesses will be looking to plan for the future and how they expect to operate in 2021, but we expect to see many businesses suffer. Carluccio’s, for example, has recently announced that they have entered into administration.

Lawyers will be trying to navigate the unprecedented circumstances, advising landlords on whether to bring proceedings and tenants on what their contracts and the circumstances may allow. As the country continues in lockdown, tenants have little chance of being replaced and therefore may feel more confident withholding payments and trying to negotiate agreements.

 

[Jaysen]

COP26 has been postponed (by @Rachel S)​

The Story:

COP26, the United Nation’s annual climate change conference, scheduled to be hosted in Glasgow this November has been postponed until 2021. Environmentalists may be disappointed in the delay, however, with governments struggling to weather the impact of Covid-19, postponement was inevitable.

With global economies in lockdown; data suggests major declines in power consumption and emissions. Further, a delay could present real opportunities to rebuild economies in the most sustainable way. For example, governments could make airline financial support linked to more stringent reductions in aviation emissions. During the pandemic, world leaders across the world have shown how action can be taken to tackle a global problem. It is hoped that this same coordinated effort will be put toward tackling the climate crisis.

Impact on Businesses and Law Firms:

Investing in more sustainable resources and low-carbon technology may not be economically viable as businesses face the sharpest global downturn since the financial crisis. For example, commercial aircrafts generate roughly 2-3% of global emissions however the FT reports that biofuels take up less than 1% penetration of the market as they remain significantly more expensive than conventional fuel. Similarly, shipping currently contributes up to 3% of greenhouse gases yet the University Maritime Advisory Services suggests it would cost over $1tn to $1.4tn to decarbonise the shipping sector.

With talks delayed, law firms will continue to monitor events, for example Norton Rose Fulbright has a ‘Road to Cop26’ blog while Burges Salmon has a ‘Net Zero blog’. Sustainability is also judged by clients, and lawyers are doing their own to support the Paris Accord regardless of COP26. For example, The Chancery Lane Project is an initiative from UK lawyers who have developed The Climate Contract Playbook; “precedent clauses to help businesses fight and prepare for climate change”, and The Green Papers of Model Laws; “new model laws, regulation and policy” to assist companies in meeting their environmental goals.

Threat to Pension Funds Market - (by @Sairah)​

The Story:

Since the coronavirus outbreak, stock markets have been extremely volatile, falling considerably and then jumping back up as central banks around the world push stimulus policies (e.g. buying government and private-sector bonds on secondary markets to cutting interest rates) in a bid to limit the impact on global growth. In turn, this has raised fears that individuals with pension funds could make a panic dash to withdraw their investments. This is because, if someone saves cash into a pension scheme where the provider (typically a bank) invests the money, they will likely see the value of their pension drop when stock markets fall.

At present, countries within Asia-Pacific have been hard hit with this concern. In particular, Australia who has the fourth-largest pension market in the world (more than £1.6 trillion in assets). This comes after its worst quarterly performance since 1987 where its share market has fallen 24% since the start of 2020. As a result, the Australian government has allowed citizens in financial distress to withdraw a maximum of A$20,000 (£9,800) from their superannuation accounts over the next six months.

Impact on Businesses and Law Firms:

Pension funds hold a large importance within the financial sector, and are known to be major investors in listed companies. If pension funds shift their allocation away from these companies because of the volatility of the stock market, these companies could be further impacted.

Investors have been encouraged not to panic about the short-term performance of stock market movements, however the current sharp fall affecting some funds have led to individuals with no choice but to reconsider their retirement strategies. This is due to the fact that majority of pension funds tend to hold 60-70% of their investments in stock markets.

Businesses will therefore need to consider other means to maintain their presence and finances. For example, UK businesses will carefully look at Rishi Sunak’s Budget, where he announced a £30bn package to support businesses throughout the coronavirus crisis.

Law firms with strong expertise in pension law like Clyde & Co and Irwin Mitchell will be needed to offer advice to trustees of pension funds and pension providers. Pension lawyers will likely see themselves advising more on the restructuring of pension funds and negotiating amendments or even possible closures to pension plans with clients. As most pensions are subject to specialist tax regimes, tax lawyers may also be needed to assist clients with possible entitlements (or deductions) to tax relief on contributions and tax-free allowances. This will be considered if amendments are made or the structure has changed to pension funds.

 

[Ayah]

Hi guys,

Please find this weeks commercial update below!

@Rachel S - Cyber Security amidst Covid-19: Disruption and Disinformation
@Curtley Bale - Law firms re-train and re-deploy lawyers to battle COVID-19
@Jiraiya - Zoom’s Security Concerns
@Sairah - FCA’s Fundraising Measures
@Ayah - Basic Income: Will it be Universal?

Cyber Security amidst Covid-19: Disruption and Disinformation - @Rachel S
​

The Story

The U.S. Health and Human Services Department has been hit by two cyber attacks; one designed to slow the department’s systems and the second, a text message-based attack inaccurately spreading information about a nationwide quarantine. The World Health Organisation (‘WHO’) also had their internal email system impersonated by cyber criminals attempting to steal agency staff passwords.

Concern is twofold. Firstly, “Advanced Persistent Threat” groups - state backed hackers of China, Russia and Iran who are presumed to want information about how other countries are handling the pandemic. Second is opportunistic cyber criminals capitalising on the persistent fear and desire for information about Covid-19 within society, disabling files and systems unless a ransom is paid.

Impact on Businesses and Law Firms

Businesses will need robust incident response plans, staff training and risk management plans to avoid high costs and damaging brand reputation associated with a data breach. For example, working from homes means employees are in danger of losing money and sensitive data if they’re tricked into clicking on harmful links in emails. Overstretched organisations like hospitals are particularly vulnerable and researchers at the cyber security company Proofpoint say such attacks have recently focused on the supply chain impact of the virus on sectors such as shipping, transport and retail.


Law firms will advise businesses on cyber resilience and responding to cyber incidents such as legal obligations to notify regulators like the ICO in the UK if data has been leaked. Pre-emptive measures will avoid heavy fines, injunctions, and even criminal liability. Alongside this, DLA Piper was subject to a global cyber attack in 2017 which was heavily publicised, and law firms will constantly look to protect against in-house cyber attacks.

Law firms re-train and re-deploy lawyers to battle COVID-19 - @Curtley Bale
​

The Story

As businesses across the globe continue to battle the impacts of coronavirus, law firms are readying themselves for a deluge. Since the beginning of the outbreak, restructuring and insolvency work has grown four-fold. As such, firms are re-training lawyers from other practice areas to help with this large undertaking, with Latham & Watkins doing so via video conference. Firms such as Hogan Lovells have begun offering six or twelve-month secondments to lawyers who are willing to move departments. Tactics such as this will help a firm balance out the potential lack of activity in areas such as M&A.

Impact on Businesses and Law Firms

The surge in work for restructuring and insolvency has followed a string of high street chains falling into administration. Since the beginning of the outbreak, Debenhams, Carluccio’s and BrightHouse have called in the administrators following cash flow issues. Kirkland & Ellis, Freshfields, Shoosmiths and Ashurst have all been involved with these recent administrations.

By relocating some lawyers, firms will be hoping to take on work in this area whilst the deal-making market slowly picks up pace. The last week of March saw the lowest level of M&A activity since April 2009 with just $12.5bn changing hands. Increasing capabilities in the restructuring practice will therefore help the firm maintain clients by providing them with a range of services.

Increasing lawyers in these areas may also prevent firms from taking drastic measures to preserve cash reserves. Linklaters, Freshfields and Slaughter and May have all taken measures to defer partner pay-outs whilst Norton Rose Fulbright has begun to implement a four-day week.

For law firms, being able to help with administration and give insolvency advice will keep cash flowing into the business. Hopefully, this will minimise the impact coronavirus has on the legal sector and its ability to service its clients.

 

[Ayah]

Zoom’s Security Concerns - @Jiraiya
​

The Story

How are you staying connected in the times of social distancing? Zoom, the video-conferencing application, is probably the answer for most people with a surge in its service globally. Before the pandemic, 10m people were using Zoom; the company now claims 200m daily users.

With this new-found popularity, Zoom’s stock price has skyrocketed by 67% from the beginning of February to the end of March, trading at more than 275 times its expected earnings; a sign of the market’s confidence in the company’s rapid growth.

Impact on Businesses and Law Firms

While governments and businesses are trying to adapt to the new norm, an increasing number of incidents of data leaks and “Zoombombing”, the childish practice of gate-crashing meetings or encryption flaws are reported worldwide. The software is now banned by the US Senate, as well as Taiwanese and German government for official use.

Zoom must step up their game in buttressing privacy and security, as its business ties with China makes it a natural scapegoat in light of the growing concern of China’s influence on foreign countries through its technological dominance. The founder Eric Yuan admitted that “if we mess up again, we are done”. Rivals like Microsoft Teams, Google hangouts, all with fewer security reports, are lurking to take a bigger piece of this $11.56bn market.

This shift will also pose a new challenge to law firms' practice as more countries have now shifted to remote courts to mitigate the impact of the virus on the judicial system. In the words of Richard Susskind, a key advocate of the virtual court’s movement, this is what “tomorrow’s lawyers” should prepare for.

FCA’s Fundraising Measures - @Sairah
​

The Story

Last Wednesday, the Financial Conduct Authority (FCA) set out temporary measures to make it easier for London-listed companies to raise new share capital, while also ensuring investors are protected. This announcement is no surprise as it comes a week after listed companies, investors and intermediaries held discussions to find practical solutions to help businesses raise funds faster since revenues across multiple sectors have collapsed during the coronavirus lockdown.

Impact on Businesses and Law Firms

Under the measures, companies with a premium listing will be allowed to seek an exemption from the requirement to hold a shareholder meeting, where equity issuances would normally be approved. Instead, companies will only need written undertakings from shareholders that would approve the proposed transaction if a meeting were to be held.

Corporate lawyers will be needed to advise shareholders (especially those with a majority share) on certain protections to put in place before approving the share issuance. This could include, exercising their pre-emption rights or even re-drafting clauses in the shareholder agreement to avoid liabilities.

The FCA added to avoid shareholder uncertainties, the working capital statement in a prospectus normally used to reassure investors that a company is solvent for the next 12 months will be essential to confirm that the need for new funds is related to the coronavirus pandemic, rather than any financial weaknesses. This is because, the statement provides a forward-looking assessment of whether or not the company has sufficient financial capital to cover the worst-case scenario, for example, insolvency which can be a detrimental consequence for shareholders.

Many companies have already turned to capital markets to raise cash to support their low cash flow, in particular retail companies who have been significantly impacted by this pandemic. For instance, WH Smith has recently asked investors for a cash injection after it closed its travel business (a large contributor to its annual profits) and the majority of its high-street stores around the UK. According to the FT, it has raised £165.9m through a share placing. Similarly, the fashion retailer ASOS has raised over £200m from shareholders after it was announced its sales had fallen below 20-25% in recent weeks. This highlights, shareholders are still willing to cash out, and with FCA’s measures in place, shareholders will be more flexible and confident with the issuance of their shares in the weeks to come.

Basic Income: Will it be Universal? - @Ayah ​

The Story

Last week, Spain announced its intention to roll out a basic income for its worst off citizens. Contrary to initial reports in English speaking media, the Spanish government isn’t quite proposing what is considered a truly “Universal” Basic Income (UBI).

The Spanish coalition government has clarified that the basic income will only be available to those without any source of income. The practice has been implemented in some Spanish regions but the aim is to launch it nationwide, permanently.

Yesterday, the Chancellor of the Exchequer Rishi Sunak shut down the prospect of introducing UBI in the UK, insisting that Universal Credit was sufficient.

Impact on Businesses and Law Firms

Can basic income ever become universal? Should it be universal? Debates surrounding UBI have long existed. Such debates more recently centred around the prediction that increasing automation will inevitably lead to widespread redundancies.

The current Covid-19 pandemic has now brought these questions to the forefront as countries across the world are grappling with the issue of how to tackle widespread unemployment. It is argued that UBI could reduce the current inefficiencies with the welfare system by significantly cutting the time and resources put into calculating each individuals entitlement.

However, the prospect of UBI brings with it many uncertainties. A major concern with rolling out UBI is the negative impact it could have on a nations productivity. Last year, Finland became the first European country to trial out UBI by handing out a monthly wage to 2,000 unemployed people for two years. The results suggested the wage did not encourage the recipients to find jobs.

Despite the results of the Finnish experiment, If the economy continues on its current trajectory, it is unlikely we will see any dwindling down of calls for UBI.

 

[Jaysen]

Thought we'd also share Week 9 of TCLA's Weekly Report for free this week!

 

[Jaysen]

Hi All,

I'm delighted to announce a new member of our commercial writers' team - Lauren Counsell (@Lauren2)!.

Please see below the updates for this week (Wednesday 22 April 2020):

Amazon Delivers Deliveroo Lifeline

By @Curtley Bale

The Story

In a surprising U-turn, the UK’s competition watchdog, the CMA, has provisionally approved Amazon’s $575m investment in Deliveroo. The initial deal has been under review since June 2019. However, since the outbreak of the coronavirus pandemic, Deliveroo has struggled. Without Amazon’s investment, Deliveroo would likely have failed and exited the market. It has been said that such a quantity of money is “only realistically available from Amazon”.

What it Means for Businesses and Law Firms

Despite serving over 500 cities, Deliveroo is suffering due to COVID-19-related restaurant closures. The CMA was keen to avoid narrowing the market, especially when home deliveries are on the rise. If they were to allow Deliveroo to exit the market, it would enable businesses such as Just Eat and Uber Eats to grow their market share. Therefore, the advantage of provisionally allowing Amazon’s investment is that the company can continue to compete in the market, providing variety for UK customers.

The CMA has been criticised for their slow decision-making in this space. Many commentators suggested it would be an embarrassing blow to see a company such as Deliveroo fail due to a delay by the market regulator. The CMA’s response to the coronavirus pandemic suggests they are willing to adapt to the ever-evolving situation and help keep businesses afloat.

Deliveroo’s cash injection will coincide with the CMA lifting restrictions on JustEat-Takeaway.com’s business integration. The competition authority had been holding up this deal too but has decided to allow the integration of its business operations, as it completes its review into the merger. JustEat’s orders have surged 50% since the lockdown period, therefore securing more cash for Deliveroo is vital if it intends to stay in the market. This will lead to fair competition whilst also maintaining quality of service.

ByteDance Waltzes Into International Hiring Spree

By @Ayah

The Story

ByteDance, the parent company of TikTok, has announced plans to hire an additional 10,000 employees internationally. In the current economic climate, such moves are extremely rare, yet this news will not come as a surprise to most, given the surge in popularity of the TikTok app is hard to ignore.

Valued at US$75billion (Bloomberg), ByteDance sits as the world’s largest unlisted technology “unicorn” company. However, TikTok’s breakthrough in the global market is unique. It has gained popularity in a way other Chinese tech firms, including Tencent and Baidu, simply failed to. ByteDance have an international audience of over half a billion users, successfully filling the void of similar app Vine, which failed in 2016.

What it Means for Businesses and Law Firms

ByteDance is likely to experience increased vulnerability on two fronts: security concerns and intellectual property issues.

As discussed in last week’s newsletter, there are numerous security concerns with the various applications that have come to fill the void of lockdown life. TikTok is particularly acute given the fact it is a Chinese-owned company. The US Committee on Foreign Investment has opened a national security investigation into how the app handles US citizens’ data. If TikTok does not prove the separation between their American and Chinese entities is strong enough, it could face the same fate as Huawei – a nationwide ban.

Given the nature of TikTok as a short video platform, many users use copyrighted audio over recordings of themselves. The FT reported that following a year of negotiations, Universal Music Publishing Group, the world’s second largest music publishing company, has threatened to sue TikTok for copyright infringement.

To avoid the takedown of audio, TikTok is seeking to partner with record companies to acquire the appropriate licenses to use their music, removing the threat of litigation. It may be wise for the mass hiring spree to include an army of intellectual property experts to address this growing issue, given over 50% of the music publishing market was unlicensed with TikTok (National Music Publishers Association).

COVID-19 UPDATES:

Not Faring Well: Coronavirus and Maritime Shipping

By @Rachel S

The Story

Responsible for 90% of global trade, maritime shipping has not escaped the destructive path of the coronavirus crisis. With shipping’s prosperity having long been tied to China, manufacturing shutdowns have led to fewer exports and a collapse in demand for containers.

The Capesize Index, which tracks freight costs for the largest carriers of dry bulk commodities, such as coal and grain, fell into negative territory for the first time in February, indicating that shipping companies are operating at a loss on some routes. Furthermore, the global decline in consumer spending has led to retailers revoking orders, which has also led to an increase in ‘blank sailings’ – scheduled ships being cancelled.

Strict quarantine rules and travel restrictions have also affected seafarers, those employed on ships. The regular changeover of 100,000 seafarers each month has been delayed and many are struggling to return home. The world’s largest container shipping company, Maersk, has prolonged a ban on crew changes of its vessels until May 12th. Both UK and international shipping bodies, including the International Chamber of Shipping, have urged the government to protect the interests of seafarers, principally by facilitating ship crew changes for their safety and wellbeing.

What it Means for Businesses and Law Firms

Amid decreased container demand, managing port restrictions, and employee welfare, 2020 has been a challenging year for the shipping industry. The introduction of a sulphur emissions cap in January has meant an expensive transition from cheaper bunker fuel to more expensive fuel products, alongside the failed implementation of the first phase of a US-China trade agreement. While maintaining profitability will be a focus, in the longer term, shipping companies may invest in movement towards autonomous ships, given human frailty has been exposed by the pandemic.

Head of Shipping at HFW, Paul Dean, has predicted that the COVID-19 crisis will generate an “enormous amount of arbitration and litigation”. Likewise, lawyers may experience an increased workload in reviewing shipping companies’ contractual commitments; for example, reviewing if a delayed vessel is deemed ‘on-hire’ and liable for payment, or whether port restrictions constitute a ‘force majeure’ event, allowing shipping companies to escape liability. If so, insurance companies may find themselves covering any associated losses. Employment lawyers may also find themselves advising on the duty of care owed towards the crew.

In future, lawyers are likely to be instructed to advise on so-called ‘corona clauses’ in future contracts. Such clauses may be to the effect that shipping companies can “deliver X number of goods, so far as the situation does not develop", to guard against the incurrence of liability, if a similar crisis were to emerge.

 

[Jaysen]

Primark Bags Deal to Pay Manufacturers

By @Lauren2

The Story

Fashion retailer, Primark, faced widespread media criticism in recent weeks after refusing to pay suppliers for orders which were in production or transit at the time when the COVID-19 crisis began.

A deal has now been struck to pay £370m to manufacturers, however, new product orders have been cancelled. Primark is reported to have £1.5bn of existing stock left in its closed stores, which they are unable to shift, due to a lack of online presence.

Manufacturers are not the only party the retail chain failed to pay, having withheld rent payments to landlords totalling £33m across its 189 retail stores and seeking their cooperation for the period they are unable to trade. The company has taken these drastic steps to preserve capital reserves, having reported a plunge in sales from £650 million to zero, due to the closure of non-essential stores.

What it Means for Businesses and Law Firms

Disruption of manufacturing operations by a major buyer severely impacts global supply chains, given Primark is supplied by 1,033 factories, spanning 30 countries. Their initial refusal to pay caused a widespread shutdown of factories and the inability pay staff. The severity of this ripple effect will likely result in a restructuring of supply chains and cause many countries to revaluate their heavy reliance on certain trading partners, notably large retailers.

Commercial landlords have likewise suffered the domino effect of the government’s closure of non-essential businesses; it has become increasingly challenging for to extract rent payments from tenants hit hardest by the COVID-19 crisis, notably across the retail and hospitality sectors.

Landlords have responded by threatening legal action for non-payment. Criterion Capital, one of London’s largest property management companies, brought action against several tenants in late March on the basis they were unable to meet their own obligations to lenders. Intu, the shopping centre group, reported that receiving only one third of rents due at the end of March meant they were in breach of their own loan commitments.

Commercial tenants currently remain safe from eviction due to the government’s three month eviction moratorium. However, any inability to meet past and future rent obligations renders their long-term survival uncertain. Many may need to instruct lawyers to help restructure their debt or enter formal insolvency. Lawyers representing clients across the retail sector, amongst others, are likely to find themselves negotiating rent holidays or discounts and encountering increased litigation brought for non-payment of rent and subsequent breach of contract. They may also advise commercial landlords on diversifying their portfolios to mitigate against risk and guard themselves against the continuing decline of the retail sector.

Tracking the Developments of Contact Tracing Apps

By @Alice Manners

The Story

The UK has unveiled plans for an NHS “contact tracing” app. This will utilise smartphones to log the details of each person a user comes into contact with for a significant period of time, and then alert users when a person they have been in close contact with is diagnosed with COVID-19.

Google and Apple are collaborating to launch a system which will allow such apps to track the spread using Bluetooth. This will enable interoperability between Android and iOS devices. Contact tracing could form part of the reopening of society, although concerns have been raised as to its effectiveness, given the current lack of testing.

What it Means for Businesses and Law Firms

COVID-19 tracing apps may soon be rolled out across Europe, as technologists collaborate to develop smartphone software, in the hopes it will form a pan-Europe solution. Germany recently announced the launch of a similar tracing app, which has been delayed due to the rigorous cyber security tests required.

The data collected and stored by the app, despite being anonymised, raises concerns for data protection and privacy lawyers. The app will need to conform to existing regulations and require careful navigation through privacy concerns which will likely arise. The large-scale collection of data is potentially open to abuse and intrusion into citizens lives beyond tracking the spread of coronavirus and is the reason why Apple and Google will not allow the platform to utilise GPS tracking.

This story shows the important role that tech companies, collaboratively, may play in tackling the pandemic. Google and Apple are only developing the platform, on which the app will still need to be developed, so both businesses and law firms will be part of this process.

It is not clear yet exactly how the app would be used to reopen society. Would those who made contact with an infected individual be required to isolate for seven days? What would happen if someone diagnosed with coronavirus continues to make contact with others? Even if only an opt-in app, the legal limitations will need to be carefully considered.

The Oil Crisis Continues: US Oil Prices Plummet, Saudi Arabia Struggles

By Brian Chiu (@Jiraiya)

The Story

For the first time in history, US oil prices have fallen into negative territory, trading as low as US$-40 per barrel on 20th April (The West Texas Intermediate, the benchmark for US crude oil), marking the most severe crisis in history. The effect of a negative oil price is that producers are effectively paying buyers to rid of their existing oil stocks.

Producers find themselves with a chronic oversupply of oil due to decreased global demand, owing to the COVID-19 outbreak disrupting the global supply chains. Commodities provide a stark example of the chaos coronavirus has brought to global markets.

President Trump has offered a financial lifeline to the US oil and gas industry. He cut a deal with the Organisation of Petroleum Exporting Countries (OPEC) and its allies, including Russia and other G20 countries, to slash global oil production by 10%. Yet, despite his efforts, the freefalling oil prices is a huge blow to Trump’s pledge to save jobs in the oil sector.

The US is not the only economy suffering due to the oil crisis. Saudi Arabia slashed its oil selling prices and ramped up production after Russia refused to coordinate to reduce supply to prop up global oil prices. The market suspected that Russia intended to undercut the US, the world’s top oil-producing country, to acquire a larger market share as the cost of production in the US is significantly higher than the two countries.

What it Means for Businesses and Law Firms

US oil producers have been hit hard by the cumulative effects of the COVID-19 pandemic and the price war, with a wave of oil bankruptcies predicted. Nearly 100 producers are predicted to file for Chapter 11 (insolvency) over the next year (Haynes and Boone), at a loss of 240,000 jobs within the industry (Rystad Energy).

Several other oil-producing countries should also brace for prolonged bleeding. The downturn in oil prices has caused Saudi Arabia to urgently diversify and restructure the country’s finances, given oil export accounts for 42% of the country’s GDP. This crisis will likely speed up their existing 2030 program for diversification of their non-oil economy, such as investment into tourism and entertainment. Long-term, SA is likely to seek increased foreign investment to attain this goal.

Contractually, oil is traded using futures contracts, contractual agreements to pay a price now, in anticipation of future delivery. These contracts then expire on a monthly basis. For purchasers, ‘locking in’ this price whilst it is negative, may confer commercial advantages when the price recovers. However, given the surplus, acquiring storage space, which is also sought by the producers, is coming at an increased cost. This increased expense may mean no advantage of betting on the movement of oil prices and purchasing whilst the price is negative.

Deal activity within the oil space is likely to experience a significant downturn. There is currently minimal demand for infrastructure such as oil drillers, marking a potential downturn for projects work. However, US, Singaporean and Chinese oil storage facilities are reportedly near capacity and oil producers have begun chartering “supertankers” to store surplus oil. Acquiring new storage space may be top of their agendas and provide alternative finance work for law firms.

 

[Jaysen]

Law Firms in the COVID-19 crisis

From this week, TCLA is introducing a new feature to the newsletter: an update on the steps being taken each week by City firms during the COVID-19 crisis. We hope to provide updates on how individual law firms are seeking to counter the likely financial impacts to their businesses, as the firms may of you are looking to apply to.

Clifford Chance: the firm has frozen pay for employees, pushed back anticipated bonus packages and postponed partner profit distributions until late 2020 (The Lawyer).

Dentons: the firm’s UK and Middle East arm (which operate under the same UKME LLP) furloughed business support and secretarial staff across their UK offices until 31st May but will top up their salaries to 100%. Other staff have been asked to take 50% of their annual holiday before September. The firm had already deferred partner distributions (Law.com).

Gateley: several trainee solicitors have been furloughed on full pay, or had their qualification date pushed back to December 2020, citing concerns over a lack of NQ roles for those due to qualify in August 2020 (The Lawyer).

Hogan Lovells: the firm has decided to furlough 30 business support employees. Salary reviews and bonus for lawyers have been postponed, alongside the postponement of partner distributions. The firm cancelled its summer vacation scheme for students, opting to make direct training contract offers to some applicants, whilst others were offered an alternative placement on their winter scheme. All other recruitment was ceased in March (The Lawyer).

Reed Smith: the firm announced an unpaid leave programme, which allows voluntary unpaid leave to be taken by staff and reduced partner cash distributions (The Lawyer).

 

[Jaysen]

Hi All,

Please see below the updates for this week (Wednesday 29 April 2020). Thanks again to the team this week for such a smashing job!

Alibaba’s Sky High Investment in Cloud Computing

By @Sairah Saeed

The Story

China’s largest E-commerce company, Alibaba Group, announced an investment of $28.2 billion into its cloud computing division over the next three years. The funding will be used to develop the operating systems, servers and network technologies of Alibaba Cloud, its cloud computing subsidiary. This move has been prompted by increased demand for services including video conferencing and live streaming, as businesses adapt their operations during the COVID-19 pandemic.

Alibaba is also set to focus its attention on building ‘next-generation data centres’ on top of its existing 63 zones, which covers 21 regions, including Australia, Malaysia and Singapore. It hopes this initiative will allow it to grow its market and compete against public cloud titans, such as Amazon Web Services and Microsoft Azure, as companies seek cloud infrastructure providers to support their evolving business operations.

What It Means For Businesses and Law Firms

In this current climate, many companies have started to move a large proportion of their workloads to the cloud. Likewise, consumer shopping habits have also changed during the lockdown, with rapid growth in the online shopping space, which Unilever’s Chief Executive, Alan Jopeis, predicts to be a “lasting change”. Therefore, to ensure survival throughout both these financially trying times and into the future, consumer-oriented businesses will need to develop a digital presence, built on the cloud. Alibaba’s decision to invest such a large amount in cloud services at this point of time is a logical next step for the company given the increased future reliance on cloud storage products.

Cloud storage is likely to attract ever-increased interest from investors. Alibaba Group’s stock may prove particularly attractive; February marked a new milestone for the company, when its cloud business generated $1.53 billion in revenue for the first time. However, it could be difficult for Chinese companies to establish a strong foothold outside of China, given the current privacy concerns surrounding granting Chinese companies’ access to data.

Data centre M&A deals have been in full swing in 2020 and are expected to rise, given COVID-19 appears not to have weakened the cloud services market. The value of data centre M&A deals closing in the first four months of 2020 surpassed the 2019 total (Synergy Research). This included the $8.4 billion (£6.8bn) acquisition of Interxion by Digital Reality, the largest-ever data centre deal, which closed in March.

Pret Fret Over Rescue Loan

By @Rachel S

The Story

The food-to-go chain, Pret A Manger (“Pret”) is in talks with banks, BNP Paribas, HSBC and Santander to raise an urgent €100m ‘rescue’ loan. While Pret has weathered the temporary closure of stores during lockdown and started to re-open ten sites near NHS hospitals, the company’s Chief Executive, Pano Christou, stated funding is needed for a "test and learn stage" involving the development of new systems and products to be introduced into stores, when they can re-open.

To adapt to changing trading conditions, Pret is launching a supermarket range of coffee beans and also hopes to introduce click-and-collect services for customers to consume products at home. Alongside its existing deal with Deliveroo, last week Pret announced new partnerships with takeaway platforms UberEats and Just Eat, to sell sandwiches and boxes of produce.

What It Means For Businesses and Law Firms

With Chiquito and Carluccio’s having entered administration in recent weeks, ensuring flexibility of operating models and securing extra funding is vital for the survival of food chains, such as Pret. Just as many alcohol and clothing companies have been able to switch production lines to meet demands for hand sanitiser and face masks, food chains may follow Pret’s example by building a digital presence, offering new products and arranging deliveries, even as lockdowns ease. For example, Côte Brasserie has sped up plans for a retail range selling chilled versions of dishes for customers to cook at home while Burger King and KFC have reopened for takeaways.

Given the uncertainty surrounding the duration of the UK’s lockdown measures, Pret is likely to be the first of many companies requiring emergency funding to ensure they can weather the current difficult trading conditions. Research has shown that many businesses are struggling to secure government-backed emergency loans under the Coronavirus Business Interruption Loan Scheme (British Chamber of Commerce). It also found that half of the businesses have at most three months cash left and 6% have already run out of cash. Therefore, inability to secure a bailout loan makes survival difficult, particularly for small businesses without significant capital or investors to fall back upon.

No law firm has yet confirmed it has been instructed to assist with Pret’s emergency funding, however, Skadden and Freshfields worked on Pret’s purchase of rival food chain EAT last year and Travers Smith acted for Pret when the chain was acquired by JAB holdings.

Saudi Investment Fund Score Newcastle United

By @Curtley Bale

The Story

Newcastle United FC look set to be acquired by one of the world’s largest sovereign wealth funds - Saudi Arabia’s Public Investment Fund (PIF). The group has had a £300m bid accepted by Mike Ashely, the owner of Newcastle. The PIF is led by Saudi’s Crown Prince and is putting up 80% of the all-cash deal. The remaining investment is coming from British business tycoon, Amanda Staveley, and her private equity fund. The PIF owns over $300bn in assets and is keen to take advantage of the current economic climate by making a variety of long-term investments to diversify their portfolio.

What It Means For Businesses and Law Firms

Mike Ashley, the well-known owner of Sports Direct and House of Fraser, has been looking to sell the football club for many years. Since his initial £134m takeover in 2007, Ashley had to save the club from bankruptcy by paying off over £110m in debts. Since then, the businessman has been reluctant to invest in the playing squad, leading to a large proportion of the fans turning against him. Selling the football club will allow him to focus on his other business ventures which are part of the struggling British high street.

Saudi’s PIF will now have control of a club in one of the world’s most popular leagues. The Premier League is broadcast globally, enabling the fund far greater exposure. Ms. Staveley tried to takeover Newcastle in 2018, but the deal fell through. The businesswoman has a history of securing Middle-Eastern investments for UK clubs after facilitating Abu Dhabi’s Sheik Mansour’s acquisition of Manchester City in 2008.

Lawyers will be involved in helping to structure the deal, which includes a vendor’s agreement from Mike Ashley to Staveley. The multi-jurisdictional element of the deal will see the PIF having to comply with English football’s stringent “directors’ and owners’” test, which requires clubs to meet higher standards than is required under the general law, to protect the reputation and image of the game. Should all go to plan, the deal will see Newcastle become a club with one of the world’s largest spending capabilities.

This may be the first of several acquisitions made by the fund throughout the crisis. PIF recently acquired an 8.2 per cent stake in cruise line operator, Carnival, and PIF are reportedly seeking opportunities. The fund appears unconcerned by the uncertainties surrounding the future of both football and the cruise industry, as they enter into a number of significant deals to diversify their investment portfolio, as part of a wider effort to diversify Saudi Arabia’s economy, reducing its reliance on oil.

 

[Jaysen]

Monzo Interested in US Banking License

By @Ayah

The Story

Monzo has taken a significant step towards its international expansion plans by applying for a US banking license from the Office of the Controller of the Currency (OCC). The London-based FinTech start-up launched in the US in June 2019 under a partnership with Ohio-based Sutton Bank, but currently lacks a banking license, which in turn restricts its product offering.

The move to become a fully licensed bank will open up greater commercial opportunities and allow Monzo to further tap into the US market. Once licensed, Monzo can offer US customers lending products and fully insured deposit accounts. Monzo has reported it already has a waiting list of 20,000 US customers, signalling the significant demand for their services.

The US Federal Deposit Insurance Corp (FDIC) recently began issuing banking licenses again after a plunge in approvals following the 2008 financial crash. Monzo expects its approval to be received within 18 to 24 months, having operated as a UK licensed bank for the past three years.

What It Means For Businesses and Law Firms

Monzo has beaten ‘challenger bank’ rival, Revolut, in applying for a US banking license. Revolut similarly entered the US market in March 2019, likewise in partnership with an existing bank. The two have competed fiercely within the European market and submitting an application may allow Monzo to gain a solid foothold in the US banking market ahead of their main competitor. This is important given the number of new entrants and growth of competition within the online banking space; European competitor, N26 similarly entered the US market in 2018.

Digital banks have experienced some decline in 2020. Monzo, Revolut, Starling and N26 have experienced a decline in growth from 18-36% within their native markets, due to coronavirus (Priori Data). Addressing coronavirus, Monzo is hopeful that “the majority of disruption will have passed by the time Monzo US is ready to launch the bank”. Yet, despite this apparent signal of confidence in the banks international expansion, Monzo has been impacted by the current pandemic. Several hundred staff in the UK were furloughed, and the CEO has announced he will forgo his salary for the next 12 months. Such moves into the US will hopefully allow for the creation of a more resilient business model in future.

Furthermore, there are wider concerns that during tough economic times customers will return to traditional banks, where they feel their money is more secure. Given the recent increase in cybersecurity hacks, challenger banks must work harder to prove their viability if they have any chance of pulling in more income-generating consumers.

Retailers Receive New Rent Protections

By @Alice Manners

The Story

As reported in TCLA’s earlier April updates, the COVID-19 pandemic has caused many high street retailers and restaurants to withhold their rent payments, including Burger King, Boots and Malatan, due to cash flow difficulties.

However, emergency legislation introduced by government, notably section 82 of the Coronavirus Act, implemented at the end of March, has prevented the forfeiture of commercial leases in response to non-payment of rent. This provided protection from eviction until at least the end of June. However, in recent weeks, landlords have trialled other methods of recovering debts owed to them, which has required the government to once again step in.

Commercial rent protections have now been bolstered. New protections announced by the Business Secretary on the 23rd April prevent landlords from taking action using other “aggressive” methods, including the Commercial Rent Arrears Recovery (“CRAR”) process. CRAR involves landlords instructing agents to take control and sell tenants’ assets, to recover rent owed. Commercial landlords identified CRAR as a loophole in the earlier legislation, however it has now been banned until 30th June.

A further protective step taken has been to ban winding up petitions, which allow unpaid creditors (such as landlords to whom rent is owed) to petition the courts to force an insolvent company into compulsory liquidation. Matalan was recently issued with a winding-up petition after failing to pay rent. Additionally, Intu Properties (who, if you remember from the earlier article, had said it neither able, nor willing to bankroll well-capitalised brands who withheld rent payments) threatened several of their tenants with statutory demands.

Although the exact details are not yet known, it is understood that under the forthcoming Corporate Insolvency and Governance Bill, landlords will be temporarily prohibited from using any of the above measures until they are owed 90 days of unpaid rent.

What It Means For Businesses and Law Firms

The new protective measures introduced will impact businesses across a range of sectors. Prior to the ban, gym and health club operators, including Pure Gym and David Lloyd Leisure had received threats of CRAR action from their landlords.

Although retailers are being asked only to “pay what they can,” many high-street businesses will still understandably suffer. Cath Kidston, Warehouse and Oasis are among the latest retailers to fall into administration since the COVID-19 lockdown.

There remains little indication of how to prevent abuse of these concessions, commercial landlords will be working to cooperate with retailers, ensuring those that can pay rent are doing so. Law firms will be playing a continuing role in helping retailers and commercial lawyers navigate this time, with further difficulties likely arising after June when the current provisions are due to end.

Law Firms in the COVID-19 crisis

Shearman & Sterling are offering a voluntary leave programme – the option of sabbaticals for global staff and fee-earners, at 30% pay. The sabbaticals may last between three to six months. Participants’ salaries will be topped up to 40% if they engage in pro bono work during their leave (Law.com).

Reed Smith deferred equity partner bonus payments. Equity partners will receive half of their bonus amount on the scheduled payment date, with the other half deferred until three months later. RS have already reduced partner distributions and deferred bonuses for other staff (Law.com).

Travers Smith reduced monthly drawings for partners with immediate effect. Partner profit distributions have also been deferred. The firm has furloughed a “small number” of front of house, post room and hospitality roles, but not fee-earners (The Law Society Gazette).

Mishcon de Reya announced that if market conditions worsen, staff will be asked to sign up to a reduced 3.5 day working week (Law.com).

Pinsent Masons confirmed they are in discussions to implement a reduced working week, with a pro rata reduction in staff pay during this period (Law.com).

Clyde & Co furloughed some business support staff, postponed salary reviews and promotions, alongside pausing certain recruitment processes. Partner profit distributions have also been placed on hold (The Lawyer, The Law Gazette).

CMS announced the deferral of partner distributions from July until later 2020 (Law.com), however the firm has made hires elsewhere, hiring a new Head of Capital Markets (The Lawyer).

‘Business as usual’ – the deals which went ahead as usual this week:

• The management buyout of financially distressed retailer, Cath Kidston. Shoosmiths’ restructuring team is representing the current PE owners of the retailer (Baring Private Equity Asia), whilst Mayer Brown are advising on the pre-pack administration deal.
• The acquisition of TI Media by media company, Future, was closed last week. The acquisition was made from PE firm, Epiris. Simmons & Simmons acted for the buyer and Macfarlanes PE, competition and M&A teams acted for the seller.
• Several City firms have been instructed on the acquisition of another financially distressed retailer, Laura Ashley. DLA Piper is handling the restructuring, employment and pensions aspects of the transaction and Travers Smith is representing the administrators, PwC.

 

[Jaysen]

No Suitor for Moss Bros?

By @Lauren2

The Story

Crew Clothing has sought to back out of its £22.6m acquisition of tailor and formalwear hirer, Moss Bros. The US company agreed to buy the company the day after the coronavirus was declared a pandemic, using a bid vehicle, Brigadier Acquisition Company.

However, last Wednesday, Brigadier applied to the City Takeover Panel, an independent body which regulates takeovers and mergers, for permission to scrap the deal. It remains to be seen whether it will be permitted. Moss Bros argue the bid vehicle seeks the grounds to revoke and has stated it will “take all necessary action to make its case” to prevent permission being granted.

What It Means For Businesses and Law Firms

Brigadier is believed to be seeking to rely upon a "material adverse change clause" to back out of the deal. In the context of an M&A deal, such clauses give the buyer the right to walk away from the acquisition before its closing, if events occur which are detrimental to the target. Brigadier must prove that the COVID-19 crisis has been of “material significance…in the context of the offer” for it to successfully be retracted. Lawyers commonly include such clauses in private acquisitions to mitigate the risks to the purchaser where an unforeseeable event occurs, rendering the target less attractive and worth less than the proposed acquisition bid.

Moss Bros finds themselves in a financially poorer state due to the closure of all of its UK stores. The company is no longer worth the price agreed of 22p per share bid by Crew Clothing, and further plummeted since news of Brigadier attempted withdrawal hit the press. One of the five largest shareholders expressed the view it would be “disgraceful” if coronavirus was used as an excuse to back out of the deal and causing long-term damage to the company’s share price.

The effects of the COVID-19 crisis on M&A activity have been mixed. Certain deals, including the proposed Moss Bros acquisition have been cancelled, or delayed. Increased risk to buyers and sellers has led to an overall decline in global deal activity. In early April, Xeroz walked away from a $35 billion acquisition of rival printing company, HP, citing the need to focus on its own business needs during the pandemic, rather than growth. Last week, no merger or acquisition worth more than $1bn was announced anywhere in the world for the first time since 2004 (The Financial Times).

Meanwhile, the crisis presents opportunities for those seeking to investing in distressed targets, utilising their current low value to make strategic acquisition which may prove lucrative when times improve. Boohoo has been reported as a potentially buyer for financially distressed retailers, Oasis and Warehouse, allowing the company to further expand its footprint in the women’s fashion sector.

Virgin Atlantic’s Bailout Plea

By @Jiraiya

The Story

To bail out or not bail out? That is the question. British airline, Virgin Atlantic, last week sought a £500m commercial loan from the UK government after its sister company Virgin Australia entered into administration, having failed to secure a bailout deal from the Australian government.

Richard Branson has provided $250m liquidity to the Virgin Group, which owns a 51% stake in the British airline, with the US carrier Delta Airline holding the remaining 49%. $100m of his personal wealth has been earmarked for the airline, however this cash injection is insufficient to make up for the loss of revenue experienced due to strict travel restrictions and lockdown measures.

The UK Chancellor, Rishi Sunak, stated that the government will consider airline bailouts but will only step in as a last resort. HM Treasury were “unimpressed” when Virgin sought a bailout bid, subsequently rejecting it, despite Rolls-Royce, Airbus, Heathrow Airport and Manchester Airport Group sending letters to government highlighting Virgin Atlantic’s vital role in manufacturing supply chains. The government instead urged airlines to consider the Bank of England’s Covid Corporate Finance Facility Scheme to manage their debts.

What It Means For Businesses and Law Firms

Since our last coverage on the aviation sector, airlines worldwide have been scrambling to secure state aid and other emergency funding sources. With the possibility of UK public funding for Virgin Atlantic proving increasingly unlikely, the airline urgently require private investment, having reportedly contacted more than 100 potential investors. Acquiring stakes in reputable airlines at an undervalued is highly attractive to distressed investors; Deloitte, administrators of Virgin Australia, reported a surge of enquiries into the debt restructuring.

Securing commercial loans or a sale of the business are potential options. Several potential buyers for Virgin Atlantic have been identified and a ‘rescue package’ could take several forms. An injection of debt would require repayment by the company at a later date. Equity investment is a further possibility, however Virgin Group (headed up by Branson) would lose its majority shareholding, if new investors entered the business.

Likewise, convertible loans are a further fundraising option; investors provide funding at a set interest rate, requiring regular repayments like an ordinary loan. However, once the loan matures, investors can choose to convert the loan into shares or equity, depending upon their assessment of the airline later down the line. Failure to secure further financing will likely result in the UK-based airline experiencing the same fate as its Australian counterpart – entry into administration.