Commercial Awareness Update - February 2019!

[Bugsy Malone]

Welcome to this week’s commercial news write up (6th February 2019).

Topics discussed this week cover:

1. India’s new e-commerce rules by @Abstruser;
2. Brexit concerns for the UK construction industry by @bugsy malone;
3. US charges against Huawei by @kitk ; and
4. The US government shutdown - including an in depth background to the US budget process, thanks to @Angel .

As always please feel free to ask any questions or add your thoughts

1. India’s new e-commerce rules (Abstruser)

The story:

In December 2018, India introduced its new e-commerce rules, which do not allow e-commerce platforms to “exercise ownership or control over the inventory” of sellers. The regulations are an offshoot of India’s FDI regulations, and therefore only apply to foreign investors. The new rules prevent platforms like Amazon not only from selling their own goods on their marketplaces, but also from selling the goods of companies in which they hold equity stakes.

The rules are a response to complaints from independent online sellers, who have petitioned the government for a level playing field for all sellers, regardless of size or market power. The previous e-commerce rules, an offshoot of India’s FDI regulations, prevented foreign e-commerce platforms from selling their own products on their marketplaces. However, the All India Online Vendors Association accused e-commerce behemoths such as Amazon and Walmart-owned Flipkart of avoiding these rules by creating proxy companies such as Amazon’s Cloudtail Retail and Flipkart’s RetailNet, through which they indirectly sold their own products.

The rules came into force on Friday, despite both Amazon and Flipkart having requested more time to comply with the new regulations.

Impact on businesses and law firms:

As the new regulations took effect on Friday, Amazon and Flipkart began pulling thousands of items from their Indian websites. Amazon and Flipkart collectively account for more than 70% of all online sales in India, and the sudden disappearance of several items have sparked discontent among Indian consumers, who have grown accustomed to cheaply priced online shopping. Some analysts predict that almost a third of Amazon’s Indian sales, currently worth about $6 billion annually, could be temporarily affected by the new rules.

For businesses, India’s new stance on e-commerce signals renewed hostility to foreign investors and companies. Both Amazon and Walmart have invested considerable sums into entering the Indian retail market – Walmart’s $16 billion acquisition of Flipkart was the largest foreign direct investment in Indian history, and Amazon has spent $5 billion on its Indian operations.

For law firms, the new regulations may generate more commercial and corporate work, as companies like Amazon and Flipkart begin to renegotiate and restructure their vendor and supply relationships. In addition, while the new rules were intended to level the competitive playing field between all vendors, some commentators have suggested that the uneven treatment of foreign and local players may raise some competition concerns.

2. Brexit concerns for the UK construction industry (Flora)

The story:

The construction industry provides employment for millions of workers and adds billions in value to the economy every year, making it a key part of the UK economy.

Brexit uncertainty raises three major concerns for businesses in all areas of the construction industry, including infrastructure and real estate. These are investment, movement of goods, and labour.

Impact on businesses and law firms:

(a) Investment:

Construction is a continuous process however the industry fluctuates depending on investment to fund projects. Brexit may lead investors to hold back which would cause problems for financing projects. For example, infrastructure is generally funded by government spending and we are now starting to see delays over HS2 and nuclear projects. As a result, law firms may see a decrease in the firm’s finance practices.

(b) Movement of Goods:

Construction projects work on ‘lead times’, meaning the amount of time that elapses between placing an order for an item and its delivery to site. One of the largest construction materials imported into the UK is timber and 92% is from the EU.

Therefore, changes to EU boarder controls in the UK on the 29th of March could cause disruptions to lead times. If lead times are extended this could cause developers to take longer to plan for their projects, requiring them to take out finance for longer periods of time, as well as construction contracts taking longer. This would add to a projects overall costs and finance lawyers may need to come up with creative loan agreements to ensure projects continue.

(c) Labour/ Workers:

Perhaps the biggest concern is construction labour and access to labour. There are roughly 160,000 EU workers in UK construction, and so changes to EU citizens’ rights to work in the UK could have damning affects. This reliance could delay projects if businesses aren’t able to employ enough staff or if it pushes up prices of new workers brought in.

Employment lawyers will need to assist the construction industry with helping EU employees achieve ‘settled statues’, so that they can continue to work in the UK.

3. US charges against Huawei (Kitk)

The story:

Last week, the US filed 23 criminal charges against the Chinese telecommunications equipment company, Huawei.

These charges include corporate espionage which involve Huawei allegedly attempting to steal trade secrets from T-Mobile, as well as wire fraud related to Huawei’s alleged evasion of US sanctions against Iran.

Huawei has denied the US’s allegations. China has called them a misuse of state power.

Impact on businesses and law firms:

These charges have affected companies in Huawei’s global supply chain. For example, companies which make high volumes of sales to Huawei like Foxconn Industrial Internet and TSMC have seen a fall in their share prices.

They might also affect Huawei's credibility. If countries ban the use of Huawei’s equipment, Goldman Sachs has estimated that 70 suppliers worldwide and Rmb 52.4 billion worth of trade would be adversely affected. However, this could also benefit Huawei’s competitors like Samsung and Nokia.

On a broader level, these charges can make a US-China trade deal less likely. This can affect the levying of US tariffs on some $200bn worth of Chinese goods, which can in turn result in a more negative environment for carrying out international trade.

Law firms which deal with companies in the telecommunications equipment sector should be aware of how the Huawei case can affect the latter’s ability to carry out trade. Given the many charges against Huawei, the development of the Huawei case should also be of interest to practices that handle corporate crime matters.

 

[Bugsy Malone]

4. The US Government Shutdown (Angel)

The Story

The US federal government went into a partial shutdown on the midnight of 22nd December 2018 until January 25 2019, when Congress and Mr Trump could not agree on a budget. Lasting for 35 days in total, it was the longest US government shutdown in history and the second federal government shutdown since Mr Trump became president.

It is deemed partial because essential services, such as Medicare, mail delivery, tax collection and military, continued to operate while non-essential departments, such as national park rangers and NASA employees were furloughed (ˈfəːləʊ; a temporary leave of employees due to some special circumstances including current political or economic conditions).

Background:

Understanding how the normal budget process works in the US will help to better understand how the situation got to where it is now. In the briefest form, this process can be simplified into 4 steps.

Step 1: Congress (the US legislative/ lawmakers) appropriates funds by September 30 for the following fiscal year.

• A recap: at the beginning of each year, the US Office of Management and Budget submits the president’s proposed budget, which will be reviewed for authorisation.
• Without the Congress’s approval/ enactments, federal money cannot be spent and agencies cannot function.
• To avoid a halt to the government’s operation:

Step 2: Congress will enact a continuing funding resolution (“CR”)

• A CR is a temporary funding measure that Congress can use to fund the federal government for a limited amount of time
• It is usually used to avoid a government shutdown and to give lawmakers more time to enact the necessary appropriate bills to fund the federal government for the following fiscal year
• Upon expiration of the designated timeframe, a solution will be needed.
• If Congress still cannot agree on this:

Step 3: Government shuts down

• This signals a complete breakdown in the budget process

Step 4: Getting out of the shutdown

• To end the shutdown, an agreement supported by the Democrats and signed by Mr Trump as POTUS is required.

Current situation

• The agreement to end the shutdown was obtained and Mr Trump signs to a three-week CR to renegotiate plans for increased border security
• Republican-controlled Senate submitted a budget that contains wall funding, but Democrats mostly refused to budge.
• Mr Trump hinted on Twitter that he’s willing to negotiate but with an ultimatum for any deal to include full funding for his $5.7 billion project.
• At the time of writing (1st Feb 2019), Mr Trump expressed that he will declare a national emergency if Congress is unable to strike a deal to his liking by the end of three weeks.
• If this happens,

Looking beyond headlines (personal views may be implied):

The shutdown is really just a direct retaliation to Congress for not giving in to Mr Trump’s demands. If you’re wondering why Mr Trump is so insistent on the US-Mexico border, recall that this project is a cornerstone of his election campaign. Even though America is not in turmoil and unemployment is as low as it has ever been, the project is a key piece of Mr Trump’s immigration policy.

On the other side, Democrats fiercely opposed to this as they believe that $5.7bil would be better spent on other border security measures, such as advanced technology instead of a wall. To a large extent, that is correct. It is likely that more people fly into the country legally and overstay their visas. If immigration really is a problem that Mr Trump wants to tackle, it would make more sense to look into those directions. However, $5.7 billion is also nothing compared to the trillions spent in a year.

Thus, perhaps The Economist’s view is correct. The political fight is really just about Mr Trump’s authority. Having picked a fight, he must win it (regardless of what it takes) or risk seeing his powers diminished for the rest of the term.

Impact on businesses and law firms:

The analysis of the effects of the shutdown will be divided into three different sectors. Where current furlough data is not yet available, a comparison will be made to the 2013 shutdown to provide an idea of the likely effects. For an in-depth analysis of the detrimental effects of a government shutdown, see https://www.pgpf.org/analysis/the-cost-of-crisis-driven-fiscal-policy.

a. Commerce:

• Without a clear budget for the year ahead, government agencies cannot plan appropriately to match their resources for their responsibilities. This creates commercial uncertainties in the economy. Careful business actors will need to be armed with contingency plans in case of unexpected changes in the government’s fiscal policies or regulations.
• Business operations are severely affected. Standard and Poor’s analysis reported that the shutdown had reduced economic activity by as much as $6.5 billion per week.
• In the 2013 shutdown: technology exports were delayed.

b. Economy

• Increase in the rate of unemployment
• Lower economic growth
• Higher borrowing costs for business
• The Congressional Budget Office reports that shutdown had cost the economy $11 billion as a whole. Although, understand that the true costs are likely to be higher because the CBO cannot estimate the impact on businesses who cannot get federal permits or loans in time.

c. Government Operation

• Diverted attention increases inefficiency
  • Without a full-year funding’s bill, lawmakers will be dependent on CRs to fund the government on a short-term basis. This takes up time and resources that could have been better spent on other important legislative duties for government agencies to operate more efficiently.
• A comparison to what happened to other departments in the 2013 shutdown:
  • Labor: Hundreds of thousands of government workers have been furloughed without knowing when they will return to work or be paid.
  • Treasury: export certificates for important trade (like alcohol) were not issued, tax refunds were delayed and implementation of financial sanctions against countries like Iran and Syria were hampered
  • Energy: the government agencies’ labs, plants and nuclear clean- up sites lost weeks of productivity
  • Housing and Urban Development: loans to develop or rehabilitate rental units were unprocessed
  • Environment & Healthcare: inspections of hazardous waste and chemical sites, reviews of adverse health effects of industrial chemicals and food safety inspections were delayed or halted

Final thoughts - what can happen from here:

To conclude, government shutdowns are costly and bad for the economy. Ideally, the lawmakers should work together to create a long-term plan to address the growing mismatch between spending and revenue. Should they fail to do so, another CR will be enacted, diverting valuable resources.

Other unfavourable outcomes would be to go through another shutdown, if the lawmakers fail to agree on a complete budget for the rest of the fiscal year 2019 by the time the current CR expires, or have a national emergency declared. In the latter case, Mr Trump will be able to spend money on the wall as ‘military construction’ even as he reopens the government. Constitutional lawyers would be keen to examine the limits and extent of Mr Trump’s presidential authority.

Bonus fun facts: The Wall in Figures

• The US-Mexico border is 2000 miles.
  • A third of this length is already fenced/ walled which reduced immigration by 83,000.
• Building a wall for the rest of the border:
  • would stop 144,000 immigrants
  • raise incomes of low-skilled workers by $0.58 cents a year but cost $15 per American
• The verdict: A Wall is not necessarily good for the overall economy because the ‘pros’ simply do not outweigh the cons.

(source: https://www.thebalance.com/government-shutdown-3305683)

What do you think will happen once the 3 weeks expire? Do you agree that the fight is really just about Mr. Trump’s authority? Thinking in conjunction with the current Brexit situation, will international businesses lose confidence with the stability in Western politics?

 

[Sara Moon]

Hello readers This week's commercial news round up is here. Enjoy reading!

Welcome to this week’s commercial news write up (13th February 2019).

Topics discussed this week cover:

1. EU blocking of Siemens and Alstom merger
2. Disney Fox Merger
3. Wirecard Accounting Scandal
4. NOPEC’ - No Oil Producing and Exporting Cartels Act 2019 Bill
5. Italy’s Recession

As always please feel free to ask any questions or add your thoughts

EU blocking of Siemens and Alstom merger – Shu Qin

The story

Last Wednesday, EU competition authorities blocked the merger of French and German train companies Alstom and Siemens. The deal between the two giants was supposed to create a single “European champion” in the rail industry, to compete with the growing threat of China’s CRRC, the world’s largest train maker. French finance minister Bruno Le Maire expressed deep disappointment with the EU’s decision, stating that it was “an economic mistake” that would “serve the interests of China”. Alstom is now entering merger talks with Canadian train-maker, Bombardier.

Despite several last-minute concessions from both Alstom and Siemens, the EU competition commissioner blocked the merger altogether, as the merger would have led to a near-monopoly of the European rail market. This would have likely hindered fair competition in the industry and carried the risk of higher prices of consumers.

Impact on businesses and law firms

The failed Siemens-Alstom merger illustrates the patchwork insularity of competition regimes worldwide. As competition regimes cover regions such as the EU and the US, decisions made to protect competition in a region may actually be counterproductive to competition on a more international level. In other words, by blocking Siemens and Alstom’s merger, the EU may have made it easier for China’s CRRC to exert market dominance on a more global level.

The decision is likely to prompt fresh efforts from France and Germany for the loosening of EU competition rules, in favour of a broader, more international approach. As business continues to grow across borders, both law firms and businesses alike will continue to keep an eye on whether competition law will begin to converge towards an international standard.

Disney Fox Merger – Flora

The story

Back in December 2017, Disney bid $52.4 billion to acquire 21st Century Fox and its entertainment and sports assets to expand their already asset-rich portfolio.

Disney’s motivations are clearly to reach an enormous size and there is no company capable of rivalling this.

The merger is a consolidation of complementary behemoths for convenience, not two rivals coming together.

Disney’s has had to meet domestic and foreign regulations in order to finalise the acquisition which will have taken around 18 months to complete.

Impact on businesses and law firms

The merger will result in thousands of job losses from positions at Disney and Fox because new synergies will make certain positions redundant.

The merger follows a series of consolidations across the media space. It will reduce the big Hollywood studios from 6 to 5. There is currently an ‘arms race’ for content around film and TV rights. However, this consolidation means there are fewer players competing for rights which means there is less cost inflation overall.

The costs spent on programs each year by these companies is huge. Last year Netflix spent around $13 billion and Disney and Fox combined could be spending over $20 billion. The merger means Disney and Fox will be able to continue to outspend competitors like Netflix and could allow Disney to control as much as 40% of the box office.

The merger is great business for Disney, but may not bode well for other players in the industry.

Wirecard Accounting Scandal – Kit

The story

According to a preliminary report by a law firm in Singapore engaged by the German online payments company Wirecard, there are allegations of potential financial irregularities, money laundering and forgery at the Singapore unit of Wirecard.

The report focused on the alleged involvement of three Wirecard employees in Singapore in the creation of backdated agreements and forged invoices. The report also allegedly indicated accounting irregularities in other countries. An example is the practice of “round-tripping” where money is routed from Wirecard businesses in Hong Kong and Singapore to those it owned in India via external companies, where it would appear as legitimate business revenue.

However, Wirecard said that the report is based on evidence that is either faulty or forged and that in preparing a further report would available in “a matter of weeks”, the law firm had "made no conclusive findings of criminal misconduct on the part of any officer or employee of [Wirecard]". Wirecard has also described the Financial Times (FT) reports on the abovementioned allegations as defamatory and stated that it would sue the FT for these reports.

Impact on businesses and law firms

Following the publication of these FT reports, Wirecard’s stock has lost about €9 billion in value. This led Wirecard to file a criminal complaint, to which German prosecutors have responded by launching a market manipulation probe. The Singapore police have also raided Wirecard’s Singapore offices and Wirecard is cooperating with the former’s investigations.

When dealing with or faced with the possibility of dealing with similar issues to Wirecard, businesses should be aware of the extent to which their operations can be affected by allegations of fraud. This is so even if they only involve a small part of the businesses’ revenues and a minority of the businesses’ international branch offices or subsidiaries. Law firms should be prepared to advise such businesses accordingly.

 

[Sara Moon]

‘NOPEC’ - No Oil Producing and Exporting Cartels Act 2019 Bill - Angel

The Story

Congress further advances the No Oil Producing and Exporting Cartels Act Bill (“NOPEC”) – a Bill that would subject the oil cartel, OPEC, to potential antitrust actions by the Department of Justice. In other words, it would change US antitrust law to revoke OPEC’s protection from their sovereign immunity. This would give the US government jurisdiction to prosecute OPEC member countries on the grounds of collusion for fixing oil prices. The Bill is now on course for a potential vote by the full house.

Indeed, various iterations of the bill had been proposed in the past two decades but failed to be implemented because former presidents like President Bush and President Obama have threated to use their veto power to scupper such legislation. There are better prospects for the Bill to be passed this time because unlike previous the previous Presidents, President Trump is much more vocal about his distaste for the cartel’s practice in holding back oil output to maintain oil prices.

Impact on businesses and law firms

International oil companies and experts warned that passing such a law would risk unknown geopolitical risks and severe unintended consequences. US investors, corporations and the government risk facing retaliation from OPEC members. It would have a negative impact on the US’s presence in the OPEC countries at all levels. Business conditions, profitability and the economies of the countries involved will take the blow.

On the other hand, supporters of the Bill would argue that OPEC member’s manipulation of prices has had a profound effect on US consumers, businesses and military. Republican senator (Chuck Grassley) says that OPEC needs to know that the US is ‘committed to stopping their anti-competitive behaviour’.

While it is true that, theoretically, open competition in an industry as large and globally crucial as the international oil markets is important to ensure its end-users (Americans, in this case) pay fair prices, it must also be noted that US oil companies have benefited from OPEC’s decisions in the past as well. This is why ExxonMobil, BP, The American Petroleum Institute and the US Chamber strongly opposed the proposed law. The risk of retaliatory action from OPEC members against the US government and large oil groups is simply too big. This is especially so when many US oil companies, including both Exxon and BP, have operations in Opec countries like Nigeria and Iraq.

Italy’s Recession - Sara

The story

A recession is when the economy contracts (usually measured by fall in the GDP) for at least two consecutive quarters. Recession manifests itself in the form of a rise in unemployment and a fall in retail sales and incomes. According to the figures published in January, Italy’s economy shrank by 0.2% in the final quarter of 2018, following a 0.1% contraction in the third quarter. This officially marked recession in the EU’s third-largest economy. This is the third time Italy has fallen into recession in a decade.

The Italian’s government and European Union’s executive Commission’s conflict over Italy’s budget plans have largely been blamed for the country’s recession. Italy’s government had been keen to increase the budget deficit so that it can increase spending through greater social security payments and pension reform to stimulate the economy while, at the same time, cutting tax. It wanted to increase the deficit from 1.8% of GDP, the rate a previous government had agreed with the EU, to 2.4% of GDP. The dispute between the Italian government and the commission prolonged for months, hurting business confidence and raising borrowing rates, until a settlement was reached before Christmas, to the deficit of 2.04%.

Although many economists regard the budget deficit dispute as the main reason for Italy’s economic slowdown, the prime minister, Giuseppe Conte, blamed external factors such as the US-China trade war, which undermined Italian export rates, as the cause of the economic slowdown.

Impact on businesses and law firms

The recession has different implications for different practice areas in law firms. Fall in business confidence and higher borrowing cost means that there will be less inclination of companies to expand a business, and thus fewer mergers and acquisitions and private equity projects. This means that many transactional practice areas governing M&A and private equity will suffer from lower client demand. In contrast to this, areas like litigation, restructuring and bankruptcy will see an increase in demand for legal services from firms that are in danger of insolvency. Therefore, law firms with a presence in Italy with strong corporate and private equity practices but weaker bankruptcy and restructuring practices will suffer while those with strength in latter areas will remain strong even during the gloomy period of the economy.

 

[Didi]

Hello readers This week's commercial news round up is here. Enjoy reading!

Welcome to this week’s commercial news write up (13th February 2019).

Topics discussed this week cover:

1. EU blocking of Siemens and Alstom merger
2. Disney Fox Merger
3. Wirecard Accounting Scandal
4. NOPEC’ - No Oil Producing and Exporting Cartels Act 2019 Bill
5. Italy’s Recession

As always please feel free to ask any questions or add your thoughts

EU blocking of Siemens and Alstom merger – Shu Qin

The story

Last Wednesday, EU competition authorities blocked the merger of French and German train companies Alstom and Siemens. The deal between the two giants was supposed to create a single “European champion” in the rail industry, to compete with the growing threat of China’s CRRC, the world’s largest train maker. French finance minister Bruno Le Maire expressed deep disappointment with the EU’s decision, stating that it was “an economic mistake” that would “serve the interests of China”. Alstom is now entering merger talks with Canadian train-maker, Bombardier.

Despite several last-minute concessions from both Alstom and Siemens, the EU competition commissioner blocked the merger altogether, as the merger would have led to a near-monopoly of the European rail market. This would have likely hindered fair competition in the industry and carried the risk of higher prices of consumers.

Impact on businesses and law firms

The failed Siemens-Alstom merger illustrates the patchwork insularity of competition regimes worldwide. As competition regimes cover regions such as the EU and the US, decisions made to protect competition in a region may actually be counterproductive to competition on a more international level. In other words, by blocking Siemens and Alstom’s merger, the EU may have made it easier for China’s CRRC to exert market dominance on a more global level.

The decision is likely to prompt fresh efforts from France and Germany for the loosening of EU competition rules, in favour of a broader, more international approach. As business continues to grow across borders, both law firms and businesses alike will continue to keep an eye on whether competition law will begin to converge towards an international standard.

Disney Fox Merger – Flora

The story

Back in December 2017, Disney bid $52.4 billion to acquire 21st Century Fox and its entertainment and sports assets to expand their already asset-rich portfolio.

Disney’s motivations are clearly to reach an enormous size and there is no company capable of rivalling this.

The merger is a consolidation of complementary behemoths for convenience, not two rivals coming together.

Disney’s has had to meet domestic and foreign regulations in order to finalise the acquisition which will have taken around 18 months to complete.

Impact on businesses and law firms

The merger will result in thousands of job losses from positions at Disney and Fox because new synergies will make certain positions redundant.

The merger follows a series of consolidations across the media space. It will reduce the big Hollywood studios from 6 to 5. There is currently an ‘arms race’ for content around film and TV rights. However, this consolidation means there are fewer players competing for rights which means there is less cost inflation overall.

The costs spent on programs each year by these companies is huge. Last year Netflix spent around $13 billion and Disney and Fox combined could be spending over $20 billion. The merger means Disney and Fox will be able to continue to outspend competitors like Netflix and could allow Disney to control as much as 40% of the box office.

The merger is great business for Disney, but may not bode well for other players in the industry.

Wirecard Accounting Scandal – Kit

The story

According to a preliminary report by a law firm in Singapore engaged by the German online payments company Wirecard, there are allegations of potential financial irregularities, money laundering and forgery at the Singapore unit of Wirecard.

The report focused on the alleged involvement of three Wirecard employees in Singapore in the creation of backdated agreements and forged invoices. The report also allegedly indicated accounting irregularities in other countries. An example is the practice of “round-tripping” where money is routed from Wirecard businesses in Hong Kong and Singapore to those it owned in India via external companies, where it would appear as legitimate business revenue.

However, Wirecard said that the report is based on evidence that is either faulty or forged and that in preparing a further report would available in “a matter of weeks”, the law firm had "made no conclusive findings of criminal misconduct on the part of any officer or employee of [Wirecard]". Wirecard has also described the Financial Times (FT) reports on the abovementioned allegations as defamatory and stated that it would sue the FT for these reports.

Impact on businesses and law firms

Following the publication of these FT reports, Wirecard’s stock has lost about €9 billion in value. This led Wirecard to file a criminal complaint, to which German prosecutors have responded by launching a market manipulation probe. The Singapore police have also raided Wirecard’s Singapore offices and Wirecard is cooperating with the former’s investigations.

When dealing with or faced with the possibility of dealing with similar issues to Wirecard, businesses should be aware of the extent to which their operations can be affected by allegations of fraud. This is so even if they only involve a small part of the businesses’ revenues and a minority of the businesses’ international branch offices or subsidiaries. Law firms should be prepared to advise such businesses accordingly.

This is regarding the Disney and Fox Merger. I was listening to the Clifford Chance Podcast on trends in Global M&A and they brought up the fact that there is going to be real opportunities in 2019 for law firms to advise frustrated mid-market clients. In trying to compete with corporations that own the giant share of the market like Amazon, Netflix etc. there will be a trend for corporations to form "alliances". Whether it's the sharing of data or pooling of other resources in order to push back and gain more of a footing in comparison.

 

[kitk]

Hello readers

Welcome to this week’s commercial news write up (20th February 2019).

Topics discussed this week cover:

1. Agreement over Draft EU Copyright Directive
2. Biggest bank deal since the financial crisis: the BB&T and SunTrust merger
3. Amazon’s ill-fated NY HQ2
4. UK Economic Slowdown

1. Agreement over Draft EU Copyright Directive (By: Kit)

The story:

Last week, negotiators from the European Parliament, Council of Ministers and European Commission reached an agreement over a final draft of the EU Copyright Directive.

Under this Directive, online platforms like YouTube must negotiate licenses for copyright protected works like songs or video clips before publishing user-uploaded content that incorporates them. Where no licenses are concluded, they are required to make “best efforts” to obtain authorisation to use such content. If platforms are notified of user-uploaded content that infringes copyright, they must act “expeditiously” to remove or block such content.

Also, under this Directive, if platforms do not negotiate licences with publishers and journalists or publishers do not waive their rights, platforms will not be able to reproduce longer fragments of articles under headlines. “Individual words or very short extracts of a press publication” are not covered by this “link tax”. “Private or non-commercial uses of press publications carried out by individual users” are also exempted from this.

This Directive still needs to be formally adopted by the European Parliament and the Council of Ministers, which is likely to occur in March or April.

Impact on businesses and law firms:

This Directive is likely to increase the remuneration available to publishers, broadcasters and artists, as well as their ability to enforce their copyright. However, there is some uncertainty as to the bodies to which this Directive applies. For example, although organisations that have been exempted from the rules under this Directive include non-profit online encyclopaedias and online marketplaces, the term “non-profit” is not defined. Also, concepts such as the extracts that are exempted from this Directive are open to interpretation.

Under this Directive, “new small platforms”, which have been operating for less than three years in the EU, have a turnover of less than €10 million, and fewer than five million monthly users will only have to prove that they have made their “best efforts” to obtain an authorisation and that they have acted expeditiously to remove the copyright-infringing content. However, this Directive has been criticised for effectively imposing an unduly burdensome and expensive obligation on online platforms to install upload filters for a wide range of content. This can, in turn, impede the growth and innovation of start-up online companies.

IP and TMT practices are expected to handle more work in drafting and negotiating the relevant licensing agreements, as well as advising content producers of their rights and content platforms on their policies to ensure compliance with the Directive.

2. Biggest bank deal since the financial crisis: the BB&T and SunTrust merger (By: Angel)

The Story

BB&T and SunTrust are two of the largest lenders in the south-eastern US. Earlier this month, they announced a merger that would create a financial institution valued at USD 66 billion- the largest bank deal since the 2008 financial crisis. The agreement is for BB&T to buy rival SunTrust Banks for $28 billion in an all-stock deal. The bidder’s shareholders will take approximately 57% of the combined company.

By capital, the combined entity would only be behind the six dominant players in the US banking industry (JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley). Internationally, it will have a higher value that UK Barclays and German Deutsche Bank combined.

With regulatory huddles ahead of the deal, the banks plan to complete the deal in the fourth quarter of 2019. US Law firms involved in the deal includes Watchell, Lipton, Rosen & Katz for BB&T and Sullivan & Cromwell for SunTrust.

Impact on businesses and law firms
The initial market reaction to the merger was surprisingly positive. Both banks observed a rise in market shares after the news. If successful, this acquisition would be a turning-point in a hesitant US banking industry that have been passive from mega deal-making since the M&A frenzies during the financial crisis that have led to the fall of mega-players like Bear Stearns.

The deal also shows a more permissive regulatory environment in the US. In fact, it may even be a direct consequence of Mr Trump’s deregulatory agenda, which included a lowering of US corporate taxes. Analysts opine that this will pressure other regional banks to consider taking on deals of their own. While this has the potential to increase M&A activities in the banking sector, others are concerned over the impact of such a merger on the public.

Upon a successful merger, the banks will be able to pool their resources which, if put to the right use, can improve the services of the combined entity as a whole. The potential and room for innovation would improve the bank’s competitive advantage. The merger will likely lead to a cut-down of unnecessary costs as well. This may include a closure of unneeded branches especially when consumers are increasingly turning to the use of mobile-banking.

Do agree that this deal is a ‘true merger of equals’, as claimed by the banks? What other consequences of the merger can you think of?

 

[kitk]

3. Amazon’s ill-fated NY HQ2 (By: Shu Qin)

The story:

Last year, Amazon launched a highly publicised search across North America for a second headquarters. The new ‘HQ2’, Amazon promised, would bring $5 billion in direct investment, and over 50,000 new jobs to the chosen city. After a long selection process spanning 14 months and hundreds of applications from cities all over the continent, Amazon announced in November last year that it would be opening a split HQ2 in both New York and Virginia. However, barely three months later, Amazon announced on Friday that it would be withdrawing its plans to build HQ2 in New York.
Amazon cited the opposition of local politicians as a key reason for its decision. Amazon’s New York HQ2 plans have faced considerable opposition from Democrat leaders such as Alexandra Ocasio-Cortez. Under the agreement, Amazon would have benefitted from up to $3 billion of government incentives and subsidies in return for creating 25,000 new jobs in New York. This was widely criticised as highly extortionate, especially considering that Amazon is the world’s most valuable company.

Impact on businesses and law firms:

For businesses, Amazon’s decision to pull out of New York illustrates the importance of broader reputation and corporate practices. Congresswoman Ocasio-Cortez celebrated Amazon’s decision to withdraw HQ2 from New York as an example of standing up to ‘corporate greed’ and Amazon’s ‘worker exploitation’. While opposition to HQ2 had stemmed from the extortionate incentives offered by the city of New York, attention also spread to Amazon’s broader corporate practices, such as its resistance to unionised workers, its refusal to provide public benefits for workers, and its links to the US Immigration and Customs Enforcement (ICE).

For law firms, this saga also illustrates the growing role of political activism in the broader regulatory landscape. This will likely encourage greater due diligence for companies and their business activities, to ensure that deals are executed with as little political hindrance as possible.

4. UK Economic Slowdown (By: Sara)

The story

The figure released last Monday (11th Feb) by the Office for National Statistics showed that the British economy grew just 0.2% in the last quarter of 2018. This was slightly lower than many city economists’ estimation of 0.3%. The rate is one-third of the rate of growth in the third quarter, which was 0.6%. Brexit uncertainties played a huge role in the slowdown, but the overall global slowdown was also detrimental. The US-China trade war shook global trade and China’s economic downturn meant fall in demand from one of the world’s biggest consumer group.

However, hopeful news came on the same day that the UK signed a post-Brexit trade deal with Switzerland, a country with which the UK conducts £32 billion worth of trade. With the UK working on singing 40 more free trade deals with other countries by replicating currently existing trade agreements with those countries before March 29th, hopefully, the effects of economic uncertainties get alleviated and give a boost to the economy.

Impact on businesses and law firms

Economic uncertainties shrouding the UK has led to a plunge in sterling, which led to inflation and cut back of consumer spending. This combined with the ramifications of the US-China trade war and China’s economic crisis and hit the British companies hard, leading to the collapse of several big high street brands such as Oddbins and HMV. Activities in the housing market also dropped to the lowest for 20 years and prices dropped by 2.9% in January from December as people became reluctant to spend huge sums of money amid uncertainties. Business investment has been continuously falling since the Brexit vote (businesses had invested $28 billion less since the vote) and it dropped 0.9% in 2018. Recently, Japanese carmaker Nissan Motor Co withdrew from its plan to build a new model in Sunderland and Airbus SE warned that it will pull out UK investments if the no-deal Brexit materialises.

Falling business investments as firms put projects on hold or seek alternative countries for the project means less work for commercial law firms, especially departments like M&A, banking and finance, real estate and tax, which play crucial roles in advising companies on M&A deals, and financing projects in cost-effective ways. In contrast to this, restructuring and insolvency departments have seen an increase in cases as numerous high street firms go into administration.

 

[Abstruser]

Welcome to this week's commercial news update (27th February 2019)!

The topics covered in this week's update are:

1. Updates on US-China trade talks
2. CMA's concerns over the Asda-Sainsbury's deal
3. Kraft Heinz shares plunge
4. ECJ decision on EU diesel emissions
5. Flybmi's insolvency and problems facing airlines

Please feel free to ask any questions, or share your thoughts


1. Updates on US-China Trade Talks (by @kitk)

The story:

Over the last weekend, there has been “substantial progress” made in the US-China trade talks.
US President Donald Trump has said the US would delay an increase in tariffs from 10% to 25% on US$200bn worth of Chinese imports into the US. The deadline for this increase was set as 1 March. Trump also said that, assuming both sides made additional progress, he plans to meet with Chinese President, Xi Jinping, at the former’s Mar-a-Lago resort in Florida to “conclude an agreement”.

China's official news agency Xinhua also reported that "substantial progress" has been made on issues like technology transfer, intellectual property (IP) protection, non-tariff barriers, the services sector, agriculture and exchange rates.

It has been reported that the trade talks included negotiations on changes to China’s treatment of state-owned enterprises, subsidies, forced technology transfers and cyber theft, as well as the mechanism for enforcing any potential US-China trade deal.

Impact on businesses and law firms:

Due to the large number of goods that are covered by these tariffs, the delay in the increase of the tariffs should be positive news for the many businesses which buying and selling decisions might be affected by it. However, the continuing uncertainty over when this increase would occur and when a trade deal is likely to be reached can have an impact on manufacturing and supply chain decisions. To avoid or minimise the impact of the tariffs and hence the increase in the cost of imports covered by them, businesses might shift their production facilities to outside of China or hold off on purchasing orders.

It would be important for law firms to monitor developments on these talks. The rules that these talks can generate can potentially affect IP law and international trade law.


2. The CMA’s concerns over Asda-Sainsbury Deal (by @Sara Moon)

The story:

Last Wednesday, the Competition and Markets Authority (CMA) provisionally found that the planned £10bn merger between Sainsbury’s and Asda may “result in a substantial lessening of competition in markets in the UK”. It raised concerns that the merger may burden consumers with unfairly high prices and reduce product choices and quality. A full summary of provisional findings can be found here: https://assets.publishing.service.g...7b58d53da/summary_of_provisional_findings.pdf.

This led to a fall in Sainsbury’s shares by 17% on the same day. The merger, if realised, will result in the combined market share of more than 31%, which will overtake the current market leader Tesco’s share of 27.7%. This means that the combined market share of the “Asda-bury’s” and Tesco will be nearly 60% in the UK.

The CMA, however, laid out options two supermarkets may take to address the concerns raised. This includes the companies “to sell off a significant number of stores and other assets…to recreate the competitive rivalry lost through the merger”. The full decision by the CMA will be given in April.

Impact on businesses and law firms:

If the merger does not get approved (which is highly likely), this would mean that Sainsbury's, which had its like-for-like sales fallen by 1.1% in January, losing out to its rivals, has to find alternative ways to survive in the market. For Asda, it would mean that there will be less cash to support its e-commerce business; Asda’s parent company Walmart is heavily investing in e-commerce to better compete with Amazon. Also, it means that it has to find other ways to expand its business to overcome continued market share losses to Tesco, Aldi and Lidl.

After the decision was released, Mike Coupe, the chief executive of Sainsbury’s criticised the CMA for a “fundamentally flawed” analysis and a wrong decision amid uncertainties of Brexit making an investment in the UK unattractive due to unpredictable competition rules. Given his comment, it seems worth to briefly explain what the impact of Brexit on UK competition rules would be in relation to merger control. In the case of the “no-deal” scenario, the CMA will have exclusive jurisdiction over mergers. Also, the so-called ‘one-stop shop’ principle, which allows mergers to be assessed in a single procedure in the European Commission so that they don’t have to go through multiple procedures in individual EU countries, will no longer apply. If a withdrawal agreement is reached, the European Commission will continue to have exclusive jurisdiction over the deals and ‘one-stop shop’ principle will continue to apply. However, this is until the end of the transitional period to 2020. After the transitional period, there are currently no clear arrangements, leaving things in further uncertainty.


3. Kraft Heinz shares plunge (By @Angel)

The story:

It was one of the worst days imaginable for Kraft Heinz when the company announced a:

1. $12 billion loss;
2. Write-down of the company’s value by $15bil
3. 36% cut in dividends; and
4. Probe by the Securities and Exchange Commission into its accounting practices.

The impact of such news on investors was reflected in the company’s shares plunge by as much as 20% in after-hours trading. Kraft Heinz, one of the biggest food companies in the world, is best known for its ketchup, other foods and condiments. The company is the result of a merger controlled by conglomerate Berkshire Hathaway Inc (famously run by Warren Buffett) and private equity firm 3G capital – a firm best known for its cost-cutting approach to businesses.

Impact on businesses and law firms:

This news can be taken as a lesson to learn for the wider industry. The company’s CEO blamed losses on higher operational costs stemming from manufacturing and logistic costs and the lowering of prices to stay competitive in the US market.

First, this shows that the company may have been a little too optimistic when setting its forecasts that did not eventually materialise. Companies need to be careful, as the impact of not meeting such business expectations on investors can be critical.

Second, it shows that there is an increase in competition from cheaper retail brands (such as Walmart) and a change in consumer taste who prefer less or non-processed food. Indeed, Kraft Heinz shares have been faltering in recent years and such challenges are equally faced by rival food makers such as Unilever and Nestle SA. Kraft Heinz now plans to accelerate a deleveraging plan to improve its balance sheet and ‘accommodate additional divestitures’. Indeed, innovation is crucial for the company and the wider industry to catch the trends of changing consumer demands. To improve the situation from now on, it might be suggested that there is no use in solely on cutting costs if they forget the very lifeline of the food industry: to make products that people actually want.

Finally, it is important for companies, with the assistance of their legal advisors, to abide by laws and regulations. The inquiry by the SEC’s procurement division was sparked by the company’s record of a $25mil in extra costs in the fourth quarter. The company’s filing indicated that it received a subpoena in October 2018 ‘associated with an investigation’ into matters including ‘agreements, side agreements, and changes or modifications to its agreements with its vendors.’

 

[Abstruser]

4. ECJ decision on EU diesel emissions (by @Abstruser)

The story:

Last December, the EU General Court reversed a decision of the European Commission which relaxed diesel NOx emission limits by up to 110%. The original emissions limit of 80 mg/km was set by the European Parliament in 2007. However, in 2015, following the 2015 Volkswagen emissions cheating scandal, this was relaxed to 168 mg/km by the Commission. Upon complaints from France, Belgium and Spain that this contributed to “excessively high” pollution levels, the General Court found that the Commission had acted beyond its powers in relaxing these standards. Following this decision, car manufacturers will have one year to ensure their vehicles comply with the original emissions limit.

Impact on businesses and law firms:

The decision represents a victory for environmental campaigners across the bloc, many of which have viewed the Commission’s decision as an example of excessive corporate power, and a ‘betrayal’ of the best interests of the European people. Cleaner forms of transportation, such as electric vehicles, are likely to benefit from this decision. However, diesel engine manufacturers will face significant difficulties in ensuring that all their new vehicles will be compliant with the revised limit of 80mg. The EU Industry Commissioner has admitted that the production of millions of cars could potentially be affected by the decision.

On the legal end, the General Court’s decision is still subject to appeal to the European Court of Justice. However, if the decision is not appealed, non-compliance with the emissions standards could result in fines for manufacturers. As such, The European Automobile Manufacturers Association has stated that the General Court’s judgement could “create legal uncertainty for the entire industry”. It could also affect sales, particularly if non-compliant vehicles were not permitted to be sold.


5. Flybmi’s Insolvency and problems facing airlines (by @bugsy malone)

The story:

The airline Flybmi went into administration on the 18th of February. It cancelled all flights over the weekend leaving passengers stranded. It operated 17 aircrafts flying to European cities.

This is part of a wider trend, with a lot of regional/ smaller European airlines coming into problems. For example, Monarch airlines last year and other smaller European airlines. It appears that Flybmi has faced the same issues. There are a number of different factors which make running an airline and actually generating a profit on routes particularly difficult. For example, they face a number of high fixed costs as well as the recent depreciation of the pound in dollars.

Flybmi also blamed Brexit as one of the contributing factors. Although the uncertainty is clearly unhelpful, the aviation sector was given assurances quite soon after the vote to leave. The concern was that aviation sits outside of WTO framework, so there was concern that there was no backstop essentially for aviation. However, the UK and the EU gave assurances that flights would continue post Brexit even in the event of a no deal. Airlines are having to work to make sure that the various contingencies are in place around any regulatory changes. However, Flybmi’s problems are clearly part of broader factors.

Impact on businesses and law firms:

Flybmi’s insolvency could have a huge impact on businesses accessibility to customers. For example, businesses who relied on Flybmi flights from regional airports to meet with customers in other European countries. This could affect businesses attractiveness to customers compared to competitors based in the same country or London which have the transport links to meet more easily.

Easyjet and Ryanair seem to have shaken up the air travel industry similarly to Aldi and Lidl with the supermarket industry. They have provided cheap travel to a lot of people. This could be a sign that the business model is under increased competitive pressures and it is not working as well as it used to. However, government predictions show an expected increase in demand for air travel, with more and more people still looking to fly. There have also been reports from airports which have shown record numbers of passengers traveling through them. This covers up some of the pressures facing airlines directly. There are a number of factors which are somewhat out of airlines control. For example, the weather in particular summers can affect how they perform.

However, there are things within the purview of the UK government. For example, the UK has the highest tax on aviation in the world in passenger duty (£13 on any departing ticket from a UK airport and £26 if you are flying domestically). This really eats into an airlines ability within the UK to make a profit. The financial problems of airlines should act as a wake-up call to government to do something about the factors we can control to try to prevent more airlines under this kind of pressure. The trend with other countries, such as Ireland and the Netherlands, has been to reduce or abolishing these taxes completely. This places UK carriers particularly at a competitive disadvantage compared to non-UK carriers. A study last year also found this tax is preventing UK airlines from making new connections with other domestic airports as well as allowing established ones from being sustainable. Short-haul flights are particularly affected by this ‘double taxation anomaly’ as domestic flights in the UK have to pay this tax twice, when they take off and when they land.

 

[Jaysen]

1. Agreement over Draft EU Copyright Directive (By: Kit)

The story:

Last week, negotiators from the European Parliament, Council of Ministers and European Commission reached an agreement over a final draft of the EU Copyright Directive.

Under this Directive, online platforms like YouTube must negotiate licenses for copyright protected works like songs or video clips before publishing user-uploaded content that incorporates them. Where no licenses are concluded, they are required to make “best efforts” to obtain authorisation to use such content. If platforms are notified of user-uploaded content that infringes copyright, they must act “expeditiously” to remove or block such content.

Also, under this Directive, if platforms do not negotiate licences with publishers and journalists or publishers do not waive their rights, platforms will not be able to reproduce longer fragments of articles under headlines. “Individual words or very short extracts of a press publication” are not covered by this “link tax”. “Private or non-commercial uses of press publications carried out by individual users” are also exempted from this.

This Directive still needs to be formally adopted by the European Parliament and the Council of Ministers, which is likely to occur in March or April.

Impact on businesses and law firms:

This Directive is likely to increase the remuneration available to publishers, broadcasters and artists, as well as their ability to enforce their copyright. However, there is some uncertainty as to the bodies to which this Directive applies. For example, although organisations that have been exempted from the rules under this Directive include non-profit online encyclopaedias and online marketplaces, the term “non-profit” is not defined. Also, concepts such as the extracts that are exempted from this Directive are open to interpretation.

Under this Directive, “new small platforms”, which have been operating for less than three years in the EU, have a turnover of less than €10 million, and fewer than five million monthly users will only have to prove that they have made their “best efforts” to obtain an authorisation and that they have acted expeditiously to remove the copyright-infringing content. However, this Directive has been criticised for effectively imposing an unduly burdensome and expensive obligation on online platforms to install upload filters for a wide range of content. This can, in turn, impede the growth and innovation of start-up online companies.

IP and TMT practices are expected to handle more work in drafting and negotiating the relevant licensing agreements, as well as advising content producers of their rights and content platforms on their policies to ensure compliance with the Directive.

Update to @kitk's story: https://www.nytimes.com/2019/03/26/business/europe-copyright-internet.html and https://edition.cnn.com/2019/03/26/tech/eu-copyright-article-13/index.html

The EU has now passed this controversial copyright bill.