Commercial Awareness Update - August 2019

[Alice G]

Hi everyone!

Welcome to the first commercial news update for August.

Happy reading!

Commercial News Update: 7th August 2019

Topics covered this week are:

1. The London Stock Exchange Group’s Proposed Acquisition of Refinitiv (@ELA)
2. Enduring Hong Kong Protests Begin to Add to Economic Uncertainty (@LJ)
3. Saudi Arabia’s Sovereign Wealth Fund Investing in Babylon Health (@Sara Moon)
4. Managing Interest Rates in Uncertain Times (@Jaysen)
5. GlaxoSmithKline and Pfizer Consumer Health Merger (@Sairah)
6. The Falling Pound (@Alice G)

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1. The London Stock Exchange Group’s Proposed Acquisition of Refinitiv @ELA

The Story:

The London Stock Exchange Group (LSEG) confirmed it has agreed on terms to acquire Refinitiv in a US$27 billion all-share transaction.

Refinitiv, which is currently owned by Blackstone and Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure.

The deal would make the LSEG – best known for running stock exchanges and clearing derivatives – a leader in market data and analytics, capable of competing with Bloomberg.

Impact on Businesses and Law Firms:

Finance and corporate lawyers would have been involved in structuring the all-share acquisition, which will result in Refinitiv shareholders owning about 37% of the combined group. Voting rights would have also been negotiated – the two current owners of Refinitiv are expected to own around 30% of the total voting right of the LSEG. It remains to be seen whether the proposal is approved by LSEG’s shareholders and competition authorities. Due to the size of the both companies and Refinitiv’s offices in ninety locations around the world, antitrust regulation probes in the EU, UK and US are a strong possibility.

From a strategic perspective, the proposed acquisition exemplifies the way in which financial institutions – like other businesses – seek to adapt to their changing economic landscape. The LSEG has focused on developing the data services branch of its business for several years following the financial crisis: its former executive Mr Rolet spent £4bn on acquiring data and clearing businesses such as Russell Investment in 2014, and last year data services generated 44% of the LSEG’s revenues, while only 22% came from capital markets. The move to acquire Refinitiv can be seen as another manifestation of the LSEG’s efforts to become less dependent on volatile financial markets for its income, relying instead on offering information which market participants (be the index compilers, fund management institution, hedge funds, investment banks, or private investors) will always need.

2. Enduring Hong Kong Protests Begin to Add to Economic Uncertainty @LJ

The Story:

With Hong Kong’s protests now into their third month, the economic implications are becoming increasingly explicit. The demonstrations began in opposition to an extradition bill proposed by Carrie Lam’s government which is thought to put Hong Kong residents under the authority of the mainland Chinese courts, undermining the ‘one country, two systems’ agreement. Excessive force by the Hong Kong police, as well as violence by apparent pro-Beijing men wearing white shirts in Yuen Long, have further provoked demonstrators. There remains “no sign of the movement losing steam”, the FT reports.

Impact on Businesses and Law Firms:

The events in Hong Kong only further add to the more general global economic uncertainty facilitated by the US-China trade war and crisis with Iran. Business activity has reached a decade low in Hong Kong, as professionals in a multitude of sectors began striking this week. This understandably has an impact on potential investment, making transactions and deals less likely. Indeed, many City firms (such as DLA Piper and Clifford Chane) hold invaluable international offices in Hong Kong, with large US firms (such as Mayer Brown and Baker McKenzie) also already noticing potential concerns. Consequently, corporate lawyers will feel this economic impact, with clients less incentivised to hire expensive City law firms, both domestically and internationally.

We should also not forget the severe impact that this can have on China itself. China utilizes Hong Kong through its stock market as an economic gateway to the Western world. While China’s respective economic growth has meant it relies on Hong Kong less, this capacity remains significant, and it will be keen to control this uncertainty from perpetuating further. Many analysts have pointed to China’s legal capability to deploy the PLA, but China will want to avoid this if possible. As Hong Kong’s growth was already under 1% before the protests, the future looks concerning for both its own economy and the many parties connected to it.

3. Saudi Arabia’s Sovereign Wealth Fund Investing in Babylon Health @Sara Moon

The Story:

Last week, it was announced that Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), is investing $550 million in the health start-up Babylon Health. Babylon Health is a UK based start-up that developed a chatbot that checks the symptoms of patients and provides a remote consultation service with doctors via text and video messaging. Its chatbot is currently being used by the National Health Service. The investment will be used to expand Babylon’s business to the US, Middle East and Asia.

Impact on Businesses and Law Firms:

Saudi Arabia’s investment is part of its ambitious Vision 2030, which is a strategic blueprint that aims to diversify the Saudi’s economy so that it could become less reliant on oil. The Public Investment Fund is the main vehicle through which Vision 2030 is to be realised and Saudi aims to invest a quarter of its assets overseas by next year, and half by 2030. It has been making several tech bets so far, most notably $45bn in SoftBank’s technology fund.

From the British perspective, this investment will help it to create a stronger economic relationship with Saudi Arabia and strengthen the partnership established between the two countries last year. In 2018, the two countries agreed a £65 billion mutual trade and investment deal and promised to share expertise and support in various sectors including education, health care and entertainment. This kind of partnership comes amid Brexit uncertainties, which may force the UK to create new trade relationships with other countries.

Saudi’s Vision 2030 and the UK’s Brexit means that it is highly likely that transactions between the two countries will increase significantly in the coming years. This could come in various forms, including direct investments, partnerships between companies and M&A deals. This means that there will be a flow of deals that law firms could work on, and law firms with a presence in the Middle East or with strong Middle Eastern teams will particularly benefit from this.

 

[Alice G]

4. Managing Interest Rates in Uncertain Times @Jaysen

The Story:

Last week, the Federal Reserve announced it was reducing interest rates by a quarter-percentage point. It’s the first time the US central bank has cut rates since the 2008 financial crash.

Impact on Businesses and Law Firms:

It might seem strange that the Fed is cutting rates even though the US economy is doing well. There are two reasons for the Fed’s pivot.

First, interest rates are being used as an insurance policy, a pre-emptive step to cushion the economy amid growing trade tensions and slowing growth. It was well timed; the next day, Donald Trump extended tariffs to almost all Chinese imports, and this week, branded China a ‘currency manipulator’ after it allowed its currency to fall below 7 yuan to the dollar.

Second, the central bank has been struggling to overcome persistently low inflation. The US fears it will suffer the same disease that has led the European Central Bank and the Bank of Japan to take extraordinary actions. In this case, cutting interest rates aims to bring the rate of inflation closer to the Fed’s 2% target.

Following the latest actions by Trump against China, it is expected that the Federal Reserve will continue to cut rates further. That means reduced borrowing costs for many companies, although any benefits must also be balanced by the costs of the escalating trade war and the risk of a future recession.

Law firms are also impacted by interest rates. They are businesses, which make money by charging clients for the legal services their lawyers provide. Different firms run their businesses differently. For example, the likes of Herbert Smith Freehills and DWF relied on a relatively high amount of debt to fund their costs and expansion plans in 2017/18. Compare that to the magic circle firms, with four out of the five borrowing nothing between 2014 and 2018.

5. GlaxoSmithKline and Pfizer Consumer Health Merger @Sairah

The Story:

Last Thursday, GlaxoSmithKline (GSK) announced the completion of its £10 billion pound transaction with Pfizer to combine their consumer health care businesses into a world-leading over-the-counter (OTC) business. Under the agreement, GSK will have a controlling equity interest of 68% whilst Pfizer holding will have an equity interest of 32%. The venture will combine GSK’s consumer health brands, such as Sensodyne and Panadol, with Pfizer’s Centrum and Advil. The venture is expected to combine sales of £9.8 billion providing annual cost savings of £500 million by 2022, with 25% of this sum intended to be reinvested in the business to support innovation and other growth opportunities.

Impact on Businesses and Law Firms:

Now that the joint venture is underway, GSK has said it intends to separate as an independent company through a demerger (where a business ‘splits off’ its existing business activities into several smaller components, either to operate on their own, to be sold or to be liquated). In this instance, GSK will operate globally as GSK Consumer Health Care, splitting GSK into two distinct businesses, one being consumer focussed and the other on pharmaceuticals and vaccines. It also hopes to list the consumer health business on the London Stock Exchange within the next three years. Interestingly, GSK may also be able to sell all or part of its stake in the joint venture in a contemporaneous IPO. This is because GSK currently has the sole right to decide whether to and when to initiate a separation. If the separation does take place within five years, Pfizer has an option to participate through distribution of its equity interest to its shareholders. Investors from both companies will undoubtedly want to take precautions with the future plans of this complex process, therefore it is important for them to obtain specialised commercial legal advice in various matters such as takeover bids, management buyout, share buybacks and possibly schemes of arrangement.

Shareholders of GSK may not want to back out yet because, on Monday, GSK announced it is about to provide its shareholders a dividend payment of £0.19 per share in the next two days. Dividends are an important source of income to many shareholders, but the health of GSK is crucial to maintaining those dividends. Although, GSK’s earning per share are shrinking, this should not be a concern as GlaxoSmithKline’s dividend is covered by both profits and cash flow, showing a sign that the dividend is sustainable. To confirm this, tax lawyers will be needed to assess GSK’s sufficient distributable profits or reserves.

6. The Falling Pound @Alice G

The Story:

Before Boris Johnson’s premiership, there were fluctuations in the value of sterling to the euro dependent upon Brexit developments, but it did hover against the euro at around €1.16. Johnson’s willingness to accept a no-deal Brexit has spurred the further depreciation of the pound which has now lost 4% against the US dollar since the start of July, just €1.09 against the euro at the time of writing.

Impact on Businesses and Law Firms:

Put very simply, the depreciation of the pound will make imports more expensive but will spell reductions in export prices. Major exporting businesses, such as UK manufacturers, might expect to see an increase in sales volume thanks to a weak pound stimulating export activity. However, this might only be the case until October 31st because UK trade relationships still hang in the balance. A weaker pound may also attract foreign investment since UK assets will be cheaper for them to purchase. The UK tourism trade can also expect to flourish since London will be cheaper to visit.

However, in purely economic terms, the lowering of export prices and their attractiveness might not spell prosperity. Much of those exports rely on imported raw materials, IP, services etc. which will all be more expensive. The 2008 financial crash and initial post-referendum slumps did not result in great export economic stimulus for this reason.

Inbound M&A activity due to cheaper UK assets might rise which would see law firms involved in facilitating a deal. The weakened pound may incentivise businesses who import from the UK to look elsewhere due to the increased costs of UK goods which would disrupt supply chains and result in a need for new contracts.

 

[ELA]

Hi everyone!

See below our second Commercial Awareness Update for the month of August.


Commercial News Update: 14th August 2019

Topics covered this week are:

1. Apple Begins Release of its New Apple Card (@LJ)
2. Elizabeth Warren’s “Stop Wall Street Looting Act” (@ELA)
3. Investment Bank Job Cuts (@Alice G)
4. Uber’s Shares Tumble (@Sairah)
5. China's Currency Devaluation (@Moni)

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1. Apple Begins Release of its New Apple Card (@LJ)

The Story

Last week Apple and Goldman Sachs quietly released their new Apple Card to a select few customers who had registered interest in the product previously. Apple Card is a virtual credit card working through Apple Pay, offering up to 3% cash back. While virtual, consumers can request a heavy-weighted titanium physical card. The product is supported by Goldman (and Mastercard, who is in charge of managing transaction data, payment disputes and the general infrastructure).

Impact on Businesses and Law Firms

Apple Card is being seen by many as a way to establish a new profit stream for both Goldman and Apple. In the recent third quarter iPhone sales dropped, now accounting for less than half of Apple’s revenues. The Apple Card was ultimately an expected move from Apple, after releasing Apple Pay and their wallet app. Likewise, Goldman’s securities trading has been slowing, as the firm recently made moves into consumer finance by developing a consumer bank, Marcus, in 2015. It is hoped therefore that the Apple Card can help overcome the slowing of these previous profit engines by providing a new consistent stream of revenue.

Corporate lawyers will be playing an important role in determining how the two titans are going to work together. They are both performing very distinct roles in the delivery of the Apple Card. Indeed, it is far more than a Goldman card with an Apple face. Reportedly, Apple has been working directly with Goldman staff. The structure of this relationship, in the context of such differing corporate cultures, is an interesting element of this story to follow.

Goldman is also approving ‘subprime’ applicants for Apple Card. After Goldman paid a $5.1 billion settlement in 2016 to the Department of Justice for defrauding investors during the subprime mortgage crisis, there may be calls for more stringent approval procedures here. This is of course another area corporate lawyers will play a pivotal role.

2. Elizabeth Warren’s “Stop Wall Street Looting Act” (@ELA)

The Story

US democrat Elizabeth Warren recently published a piece of draft legislation titled the “Stop Wall Street Looting Act”, which mentions making private equity firms responsible for the debts of the companies they own.

Impact on Businesses and Law Firms

Such a proposal is not within the scope of mainstream Democratic or Republican thought and is unlikely to become law. Nonetheless, it feeds into the debate surrounding the ethics of private equity and questions one of the foundational principles of business-making: limited liability. These topics could be relevant for training contract interviews.

Limited liability means that company directors and shareholders are only liable for the amount they have themselves invested in the company if it fails. Dating back to the early 19th century, limited liability enabled investors to take more risks and spurred capital raising and entrepreneurialism.

Private equity firms typically use a small proportion of their own funds and a large amount of borrowed money to acquire private companies. Thanks to limited liability, they are only liable for the small amount they have invested, and the large debt is pushed down onto the acquired company. Consequently, private equity has been criticised for letting dealmakers prosper while employees risk suffering from measures put in place to service the heavy debts target companies are under following their acquisition. Such measures may include the sale of assets or parts of a company, subsequent redundancies, or reduced investments (see, for instance, the Toys R Us liquidation story).

Warren may think, therefore, that the principle of limited liability is being abused and enables financiers to insulate themselves from the financial risks associated with their decisions. On the other hand, defenders of private equity have argued that abolishing limited liability for private equity firms while leaving it in place or other businesses would simply push investors to acquire companies through different contractual guises. In any case, Warren’s proposal draws attention to the tension between corporate/financial growth and corporate responsibility.

3. Investment Bank Job Cuts (@Alice G)

The Story:

Since the start of April, major investment banks such as HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank have announced job cuts amounting to almost 30,000 in total for the sector, the majority of which have been made within Europe. There are several reasons attributed to the cuts which vary from bank to bank, but the major ones include:

1. The increasing pile of debt paying negative interest rates. This significantly affects the profitability of investment banks and in order to protect profits, they have had to make redundancies.

2. Automation within the industry. Computers, software and algorithms are now able to make investments in the same way human bankers would. With the need to protect profits and cut costs, the automation of the sector is making this even easier.

3. Banks are set to embrace the so-called Basel IV-rules, which will increase the capital requirement of banks (the implementation of these new regulatory rules are to increase stability and confidence in the banking system). But this will make trading less profitable for banks when it comes into force in 2022, and many are therefore making cuts now to mitigate these potential future losses.

4. Brexit and trade war uncertainty are also cited as reasons because these factors have been causing disruption to the sector as well.

Impact on Businesses and Law Firms:

One point to note from this story is the issue of automation. Yuval Noah Harrari has been particularly vocal about how automation, robots and algorithms threaten to make human bankers and lawyers redundant and these reports seem to bolster his pessimistic theory for the future of big business. Despite HSF’s Damien Byrne Hill citing his disbelief that judges can be replaced by robots in the future in a recent article in The Lawyer, these reports do provide us with food for thought as to the future of the City.

 

[ELA]

4. Uber’s Shares Tumble (@Sairah)

The Story:

Last Thursday, Uber’s second-quarter earnings showed a loss of $5.24 billion in the last three months, following its initial public offering in May. Uber’s second-quarter numbers included a $3.9 billion charge of stock-based compensation related to its IPO, an action which has been reported to be the root cause of the latest quarterly loss.

Although Uber’s revenues rose 14% to $3.17 billion in the second quarter, this was still below investors’ expectations of $3.30 billion. Uber lost more money than it generated in sales and continues to lose more, as the company’s share price, which had climbed to 8% on Thursday, fell more than 10% in after-hours trading.

Impact on Businesses and Law Firms:

The growth of the company has worried investors, as Uber’s revenue has slowed down in each of the past six quarters. Also, it is reported the company’s shares have only closed above their initial public offering price of $45 twice since its share sale, costing early investors around $618 million. Despite this, Uber’s CEO, Dara Khosrowshahi is determined to reassure investors that the company has the determination to ‘grow scale and deliver efficiencies’, while ride-hailing might not be succeeding because of tougher competition. For instance, Japan’s Softbank (a current Uber investor) is currently raising a second Vision Fund and is expected to raise substantial capital that could potentially enter the market to compete against Uber. Another drawback for the hire-vehicle industry is the consideration of even stricter regulations in New York (the US’s largest ride-hailing market), after extending control on new vehicle licenses this month.

However, Uber has the potential to deliver long-term profitability through its other primary business: Uber Eats. Despite competitors such as Just Eat, which announced its mega-merger with Takeaway.com and Deliveroo and recently added Amazon to its investor base, Uber Eats’s revenue expanded 72% from $346 million to $595 million and doubled its customer base, compared to a year ago.

To maximise long-term growth, corporate and finance lawyers will be needed to instruct Uber on its follow-on public financings. Also, if Uber considers re-structuring their company strategy in the future, the existing investor agreement will need to be re-negotiated with the assistance of corporate lawyers to avoid any conflict with investors.


5. China's Currency Devaluation (@Moni)

The Story

China’s economy is currently battling an economic slowdown, political unrest in Hong Kong, and of course the effects of a trade war with the United States. In what many perceive as a response to US tariffs on Chinese goods, the People’s Bank of China allowed the Chinese Yuan to weakened past the critical level of 7 yuan to 1 US Dollar for the first time since the global financial crisis in 2008. Since then the PBOC has kept the Yuan at this weakened level for three consecutive sessions. A weaker Chinese Yuan poses a threat to US exporters as it makes Chinese good relatively cheaper and the Trump administration has consistently accused the Chinese government of manipulating its currency to give the country a trade advantage.

The Chinese government has maintained that the weakening of the Yuan is a response to market dynamics, however the U.S Treasury department designated China as a currency manipulator for then first time since the Clinton administration and said China’s actions were another step in a currency war.

Impact on Businesses and Law Firms

Investors worry that China’s actions may exacerbate the current trade war which is already having significant effects on the global economy and stock markets from the US to Australia saw significant drops following the weakening of the Yuan. There is also some concern that the devaluation of the Yuan could do more harm than good in the Chinese economy, by making it harder for China to import key commodities and triggering as potential debt crisis. This could happen if the weakening of the Yuan makes it more difficult for Chinese companies to pay back debts denominated in foreign companies. Given China’s increasingly important role in the global economy, an economic slowdown, Chinese recession or further escalation of the US-China trade war would have significant ramifications for business globally and could result in less business for law firms.

 

[Jaysen]

Hi everyone!

Welcome to this week's commercial news update. Happy reading!

Commercial News Update: 21 August 2019

The topics covered this week are:

1. Hong Kong Billionaire Li Ka-Shing to Buy Greene King (by @LJ)
2. Competition in the Media Industry (by @Sara Moon)
3. Streaming Battles: Apple TV+’s splurge (by @Alice G)
4. IPOs: The Up-C Structure’s Growing Popularity (by @ELA)

1. Hong Kong Billionaire Li Ka-Shing to Buy Greene King (by @LJ)

The Story

Li Ka-Shing’s property investment firm, CK Asset Holdings Ltd., has agreed to buy the pub operator and brewer Greene King Plc for £4.6 billion. It is paying £2.7 billion for the company, while taking on its £1.9 billion worth of debt. This is following concerning performance over the last year for Greene King, with full-year pre-tax profit down 12.5%. CK’s strategy for Greene King is currently unclear, but they have explicitly stated that they have no intention to cut any of the 38,000 staff.

Impact on Businesses and Law Firms

As news of this transaction was released, the shares of rivals like JD Wetherspoon and Mitchells & Butlers were lifted. This is due to the potential of CK attempting to shut some of its pubs and breweries in an attempt to cut costs, opening up market share to these other competitors.

This deal is in the wider context of foreign buyers purchasing British brewers, with Fuller, Smith & Turner being bought by Asahi and Camden Town Brewery becoming a wholly owned subsidiary of AB InBev (the world’s largest brewer). There seems to be confidence in the long-term prospects of traditional British breweries, as well as a seizing of opportunities given the current low pound.

Interestingly, Li Ka-Shing recently weighed in, slightly ambiguously, on the Hong Kong protests. It could potentially be claimed that Ka-Shing’s calls to stop violence are economically motivated by the benefits restored peace could bring to his transaction. Likewise, a stop to the unrest will further stabilize his property firm. Indeed, Ka-Shing has suffered paper losses of $3 billion as Hong Kong’s political turbulence undermines the value of his assets.

M&A lawyers will have helped on this transaction, generally helping draw up contracts while pooling support from other departments like tax, real estate and employment. It is likely restructuring lawyers may be needed if CK decides on implementing any significant changes to Greene King.

2. Competition in the Media Industry (by @Sara Moon)

The Story

This Monday (19th Aug), Disney announced that it will begin its streaming television service called “Disney Plus” in November. It is seeking to rely less on cable channels and develop online streaming services which Netflix is currently dominating. As part of this plan, it acquired some of 21st Century Fox assets last March.

AT&T, America’s biggest phone company, also has similar plans. It acquired WarnerMedia last year with an aim to make use of its contents and is planning to launch a new online streaming service called “HBO Max” next year with exclusive shows not available on other platforms. Its premium content is said to amount to 10,000 hours.

Viacom and CBS agreed to merge last Tuesday to compete against streaming services rivals. This deal will combine CBS’s streaming services like CBS All Access and broadcast and news networks with Viacom’s TV networks like Nickelodeon, MTV and Comedy Central.

Impact on Businesses and Law Firms

The Financial Times described the current deals in the media industry as signals of “a second wave of media M&A”. According to Parrot Analytics, Netflix currently accounts for 68% of the demand for online streaming services. Netflix is followed by Amazon Prime Video, which accounts for 10% and Hulu, which accounts for 9%.

With Netflix’s secret to success being its bulk of original shows, other companies in the media industry are looking for M&A deals to quickly maximise the content they provide in order to compete with the media giant. As more people move from TV shows to online streaming services, the number of M&A deals in the media industry is expected to soar. This is good news to many law firms which play central roles in these deals, from negotiating the initial deal to drafting the contracts.

3. Streaming Battles: Apple TV+’s splurge (by @Alice G)

The Story

Apple has reportedly committed $6 billion towards developing original shows and films for its online streaming service, set to launch towards the end of this year. Apple had initially set a budget of $1 billion but it would seem that the growing competition within the streaming sector has led the tech giant to ramp up its efforts. One show in production is set to star A-list celebrities including Steve Carell, Jennifer Aniston and Reese Witherspoon, and is projected to pay such a hefty sum to the actors per episode that it will rival the wage packets of those received by HBO’s Game of Thrones’ stars.

Impact on Businesses and Law Firms

Apple has been struggling of late with the increased tensions between the US and China. The Apple TV+ venture is an interesting development and will shed light on Apple's ability to adapt within a new division. A successful venture would reflect Apple's brand strength and loyal customer base.

People are highly unlikely to hold several different streaming service subscriptions and so we will likely see, over the next two years, the increased attempts of streaming services to ‘win’ the favour of consumers. Apple has vast amounts of cash on its balance sheets to fund the expensive productions costs and Netflix will no doubt be apprehensive of Apple TV’s launch.

Further down the line, as competition becomes increasingly fierce, it is possible that streaming services might enter deals to merge or one might acquire another. M&A lawyers would be involved in this and antitrust lawyers would be called upon to ensure any such deals do not monopolise the market unfairly. Currently, the entertainment sector is one that is growing and as streaming services vie for productions and licensing rights, lawyers will be instrumental in drafting up the necessary documents to facilitate these rights deals.

4. IPOs: The Up-C Structure’s Growing Popularity (by @ELA)

The Story

For its upcoming Initial Public Offering (IPO), WeWork has turned to a corporate structure called an umbrella partnership corporation, commonly referred to as “Up-C”.

This corporate structure was first used by Barnesandnoble.com in 1999 but didn’t used to be particularly popular. However, in The Financial Times, Eric Platt notes that it has been used increasingly in the past decade: 74 Up-Cs having gone public since 2010, including Shake Shack and TradeWeb. Moreover, Platt adds that WeWork’s IPO would be the largest Up-C IPO to date and that given the publicity that surrounds it, it could be followed by more.

Impact on Businesses and Law Firms

If Up-Cs are likely to become more widespread, corporate lawyers need to be aware of their structure, mechanics and implications, in order to be able to assess their suitability for clients. Here is a brief introduction:

Up-Cs have a two-tiered structure. First, there is the pre-IPO company, which holds all the assets and operations of the business. It may be organised in any legal form that is taxable as a partnership (often a limited partnership or a limited liability company). Second, there is another entity, organised to be taxable as a corporation.

The owners of the pre-IPO companies are the only ones who continue to directly hold stakes in it. Public investors do not directly by stock in the pre-IPO company; instead, they have a chance to buy shares in the second entity – a holding company – which in turns owns stakes in the underlying partnership.

For pre-IPO owners, the Up-C structure has tax benefits. Indeed, because the entity they own is a ‘partnership’, it is not subject to corporation tax. Pre-IPO owners thus pay taxes on their share of any profits at individual income tax rates. IPO investors’ profits, on the other hand, are taxed on two levels: 1) the holding company pays corporation tax, and 2) shareholders pay taxes on dividends. In some cases, parties enter a tax receivable agreement, which establishes a percentage of the tax benefits to be shared with investors. This would be a crucial point of negotiation for lawyers.

There is a lot more to be said about the implications of Up-Cs. If you’re interested, you can find out more in this helpful document: https://www.stblaw.com/docs/default...lic-offering-structures-overview.pdf?sfvrsn=4

 

[Jaysen]

Hi everyone,

Welcome to the next commercial news update.

Happy reading!

Commercial News Update – Wednesday, 28 August 2019

Topics covered this week:

1. Record Foreign Investment in British Tech Start-Ups (by @ELA)
2. Denmark’s Jyske Bank Announces Negative Interest Rates (by @Sairah)
3. US Toy Company Hasbro buys Entertainment One (by @LJ)
4. What’s going on with the US-China trade war? (by @Jaysen)

1. Record Foreign Investment in British Tech Start-Ups (by @ELA)

The Story

Recent research from the government’s Digital Economy Council indicates that UK tech companies have secured a record £5.5bn in foreign investment in the first seven months of this year, with US and Asian firms having invested the most. This is 50% more than in the same period last year.

The figure comes while overall foreign investment in the UK has fallen since the Brexit referendum and hit a six-year low last June, according to the Department for International Trade.

Impact on Businesses and Law Firms

The weaker pound has likely contributed to this figure, as it makes UK companies more affordable for overseas investors whose buying power is boosted by their stronger currencies. Moreover, the UK has a long-standing reputation for innovation, and an investment in UK tech firms arguably enables Asian investors to hedge against the trade war with the US.

Overall, this should mean increased activity for law firms’ corporate departments and, since US and Asian investors have together invested £3.02bn of the total £5.5bn, global law firms with an established relationship with US and Asian clients should be ideally positioned. However, lawyers must watch the UK’s plan, first proposed in October 2017, to expand its foreign investment screening regime and give the government more scope for intervention in transactions. More interventionist merger control policies would increase execution risks and make transactions involving foreign investment more costly for clients.

Finally, concerns remain about the impact Brexit will have on the UK high-tech industry, not least because one in five tech workers in London is from the EU. Lawyers currently drafting contracts for foreign investors and UK companies must therefore consider the extent to which any proposed target companies are exposed to political and economic upheavals, and draft clauses to mitigate risks for both parties.

2. Denmark’s Jyske Bank Announces Negative Interest Rates (@Sairah)

The Story

Last Tuesday, Jyske Bank, Denmark’s third-largest lender announced that it will start charging affluent customers for deposits instead of paying interest. This comes less than two weeks after launching the world’s first negative interest-rate mortgage, with the rate of 0.5%. According to the Financial Times, customers with deposits of more than 7.5 million Danish krone (£900,000) will receive a negative interest rate of 0.6% a year to store their money, equating to a loss of £5,350.

This unconventional decision taken by Jyske Bank is the latest in a series of moves undertaken from Denmark’s central banks to revive demand and boost consumption. Currently, the bank is facing an increase in deposit surplus from personal clients, resulting in large expenses. It’s also worth noting that Denmark’s central bank has set negative interest rates since 2012, which is in fact longer than any other country.

Impact on Businesses and Law Firms:

Despite the recent move from Jyske Bank, other lenders have been wary of imposing negative rates on other retail customers because it could lead to cash hoarding. Having said that, Jyske Bank’s purpose for both lending, as well as deposits, is to directly encourage consumers to spend rather than save.

However, Jyske’s decision has led to some disbelief on the part of consumers. This has led to the Danish Financial Supervisory Authority to move in and monitor whether banks are providing ‘bad’ advice by pushing its customers into investment products with excessive fees in an attempt to avoid negative rates.

Corporate lawyers specialising in global investment funds may be needed to advise Jyske’s customers on a range of investment funds associated with receiving capital from Jyske Bank, such as from private equity funds, strategy funds, hedge funds and fund structured products. Clients may also receive advice on fund structuring and investment reviews.

3. US Toy Company Hasbro buys Entertainment One (by @LJ)

The Story

Entertainment One is the latest UK-listed firm (although based in Canada) to be bought by a foreign investor. The US toy giant Hasbro purchased Entertainment One in a £3.3bn deal. Entertainment One owns some of the most popular children’s brands such as Peppa Pig and PJ Masks.

Hasbro is hoping to use this acquisition to diversify to more entertainment and pre-school offerings, compared to current profit drivers like Monopoly and Nerf guns. It’s a move reflecting the current trends of children’s entertainment becoming increasingly technology based.

Impact on Businesses and Law Firms

This transaction is another example of foreign investors jumping on the current low pound due to Brexit uncertainties. Indeed, the Guardian claimed that this deal was at a real “bargain price”. Only recently we saw Greene King, Cobham and Just Eat be acquired by international buyers.

While these transactions are of course founded on the political uncertainty that Britain is facing, it is interesting to note that it further underlines the long-term optimism that these investors have in the prospects of British companies.

This acquisition is also particularly interesting in the context of the increasingly tense streaming war between Netflix, Amazon, Apple and Disney. These four are constantly trying to establish their own exclusive content to differentiate themselves between each other. Therefore, Hasbro can be confident that there may be a future buyer for its new IP, as perhaps Apple or Amazon tries to catch-up with the original content that Netflix and Disney are currently boasting.

IP lawyers will have been on hand to establish the value of this property and the limitations of its use. Likewise, M&A lawyers will be being used centrally, while deploying the more specific expertise from departments like employment, real estate and tax.

4. What’s going on with the US-China trade war? (by @Jaysen)

The Story

The long weekend was full of twists and turns.

On Friday, China announced retaliatory tariffs on $75bn worth of US goods. Donald Trump fired back, raising tariffs on existing and planned Chinese imports. He also tweeted that he was ordering US companies to ‘immediately start looking for an alternative to China’. Stocks plummeted.

However, by Monday, talks were back on track with Donald Trump predicting an upcoming trade deal. Global stocks climbed back up.

Impact on Businesses and Law Firms

US businesses that manufacture within China need to make a decision. Stay in China and face tariffs when importing Chinese goods back home, as well as the cost of retaliatory tariffs if they export goods to China. Plus, face the increasing risk of both states using non-tariff measures. Should tensions escalate, the Chinese government could hurt US businesses operating in the country through customs delays or increasing regulations. Trump’s tweet suggests he might also seek a way to direct US companies to leave China under the guise of national security.

So, why not leave China? Well, many companies are exploring destinations such as Vietnam, Indonesia and Malaysia. Earlier this year, a Baker McKenzie poll found that 82% of the 600 global companies surveyed were considering supply chain changes in response to the trade war. However, shifting production facilities is very expensive and means losing access to China’s well-developed network of supply chains. Moving might lead to slower, costlier and less efficient production.

Testing and certifying suppliers, closing and opening production facilities, evaluating the impact of tariffs on a business – that all means demand for trade, regulatory and restructuring lawyers. Law firms may expand their capability through promotions and lateral hires to make the most of this opportunity (as Reed Smith did recently with the hire of Dora Wang). If companies are looking to evaluate suppliers in multiple jurisdictions, it’s the global law firms that stand to benefit, especially those with a strong presence in Southeast Asia.