European In-house Summit highlights

Corporate counsel and their advisors shed light on everything from new private equity trends to crisis management and debt financing

The breadth of the modern corporate counsel role was highlighted once again at last month's IFLR European In-house Counsel Summit. With speakers dissecting everything from private equity (PE) trends, to competition fears, crisis management and debt capital markets opportunities, the scope of the job has clearly never been wider. Here are the highlights from the day.

A panel on M&A developments illustrated how the growing volume of unspent funds held by PE firms is driving new trends in deals. Known as dry powder, PE firms are thinking of new ways to invest this money which has already been committed by investors.

"Funds will likely be looking to put this money to use because they make money once they are invested," said Søren Fogh, Copenhagen-based partner at Gorrisen Federspiel, speaking on the panel. "That will likely lead to higher prices as more money chases the same deals."

Matthew Dean, a partner with Wilkie Farr & Gallagher added that there's so much money chasing so few deals that the successful PE funds will have to find new strategies to compete. "The more creative PE funds are now going out and manufacturing deals, finding management teams and matching them together with business opportunities," he said.

While PE funds typically look for cash-generative and asset-light businesses, they are increasingly visible in non-traditional sectors such as shipping. "PE funds have been buying shipping fleets, which are highly cash-intensive and asset-heavy, hoping on fluctuations in the market," said Fogh. "That's one example of where PE funds are changing their business model."

The panel also noted the issues created by the increasing number of sovereign wealth funds entering the market. "There are concerns over the impact these funds will have on prices because of their size," said Fogh. "In total they've got $20,000 billion, which is a lot more than PE funds."

And these funds come into investments with a slightly different perspective. "There are concerns that some of them – because they are state funds – may be buying to hold or buying for strategic purposes," said Fogh.

Dean said that the growing prevalence of these funds means the general denomination 'PE' is going to defy simple stereotypes. And sovereign wealth funds are not the only new entrants. "One of the trends we've seen recently is institutions that would formerly have been limited partners in a traditional buyout context, such as pension funds, are starting to hire teams in-house to do their own investments," said Dean.

Key takeaways: capital markets

Last year saw high levels of equity activity, particularly in the IPO market with volume the highest in 10 years. In 2015 we will see continued growth, and also notable diversity among issuers and their geography. Dual tracks will continue to feature in 2015, with M&A a more realistic exit than recently perceived. Liability management is set to continue too, as companies take advantage of the continuing low interest rates. Accelerated book builds have been a notable feature and will continue. Issuers are seeking to typically raise under 10% to avoid capture of the EU Prospectus Directive. BBVA and Santander both undertook the exercise in 2014. Concerns surround the growing prevalence of pre-marketing or 'early looks'. The practice has gained such momentum in the UK market that investors previously clamouring for pre-marketing are now wary of the exercise.

Representations and warranty (R&W) insurance is also appearing more often. "Traditional reps and warranties, warranty periods and indemnification provisions are a problem for a traditional PE buyer," said Dean. "They want to be sure that two or three years from now they won't be facing a claim where they have to call money back from their limited partners."

Sellers are increasingly obtaining R&W insurance policies in advance of an auction process. "That way, the seller knows they will not have to negotiate price reductions for contingent issues and they won't have to go through extensive negotiations about the warranties and indemnification," said Dean.

And, as the product becomes more prevalent, insurance companies are overcoming their reluctance to cover new areas. "These policies are very popular right now, especially with the insurance companies because no one has made any substantial claims," said Dean. "But it's yet to be seen how well these policies are going to work for actual liabilities."

"I suspect that there will be a testing point in the near future when policies will either become more popular, or less," he added.

The volume of PE firms' dry powder adds a new impetus for in-house counsel to consider how to deal with an approach by a PE fund. The panel discussed the practice known as crossing the line, whereby, at some point during negotiations between bank management teams and the buyer, the management team becomes aware that they're going to be purchased and will be working with new shareholders.

"It's important to make sure that the management is transparently on board because, to some extent, they can shift who actually gets the deal," said Juha Koponen, a partner with Borenius.

"On the bigger buyouts the management teams often have their own financial advisors now," Koponen added. "In-house counsel need to consider how to structure to keep the management out of the deal in the right way."

Speakers also debated crisis management, with a consensus emerging that running mock scenarios is key to developing an effective strategy within an organisation. But they agreed that the digital age makes a focus on communications key.

Crisis management involves identifying threats to a business and its stakeholders, and the methods the business uses to deal with these threats. It often requires decisions to be made quickly and after an event has already taken place.

According to Claire Chapman, general counsel and company secretary of DMGT, testing crisis management plans is a crucial, and very simple process. "We've seen a genuine benefit in testing the crisis management plan where we've had incidents before and after testing concerning the ability of the people on the crisis management team to respond," she said.

Mock scenarios

DMGT prepare a scenario and test with the response team. Sometimes employees don't necessarily know it is coming, then invoke it on a test basis. "External providers mock up the scenario as if it were unfolding hour by hour on a condensed timeline," said Chapman. "As we sit in the room talking about the various incidents, the phone might ring or we might get a mock email or communication, adding to or changing a fact pattern."

One question to emerge from this exercise is who needs to be involved from the internal crisis management team.

"Through testing we realised that it's important to very quickly establish the core team for the incident at hand which can include standing people down so that you have the core people focussing on the right issues," said Chapman.

Putting the right message out on social media is also key. "If you're not putting messages out then your own employees and other people will be filling that gap for you," said Chapman. "You need to consider what your response to this will be, and who's leading this response."

"If the CEO or the CFO is leading this, companies also need to consider who's talking to the regulators, and whether that is someone different. People can't be in all places at once," she added.

"Funds will likely be looking to put this money to use. They make money once they are invested" Søren Fogh, Gorrisen Federspiel

However, too much public disclosure at the start of a crisis can lead to problems, particularly if later proven wrong.

Cyber security is a key example. "If there's a cyber-attack it's difficult to get a sense early on of the extent of the breach," said Jonathan Kolodner, a partner from Cleary Gottlieb Steen & Hamilton's New York office.

"It may seem as if it's very small and managers may be tempted early on in the process to come out and say they've got this under control, when in fact there may be much more to it than they initially thought."

This is particularly relevant in the US, where statements, if made publically and from a sufficiently senior level, can be held against the company during civil litigation.

"There could be a basis for a securities fraud litigation and a class action law suit if those statements propped up the stock price then when the true extent of the breach was disclosed, caused the stock price to drop which caused losses to investors," said Kolodner. "How a cyber-attack is prepared for and handled could also be the basis for a derivatives suit against the board by shareholders."

It is also important to ensure that communications are protected by privilege so that they are not easily discoverable in civil litigation. But national regimes differ and large regulatory investigations open up the possibility of arbitrage between different countries' regulators.

"It gets complicated because privilege is different in different jurisdictions," said Kolodner. "In the US there are fairly broad privilege protections, which aren't quite as broad in the UK. Documents you might consider to be privileged in the US may not be privileged in the UK."

He continued: "It may be that once documents are produced in one jurisdiction the company waives the privilege in other jurisdictions."

In September, the Financial Reporting Council (FRC) issued an updated version of the UK Corporate Governance Code. In this, the FRC confirmed proposals for boards to include a so-called viability statement in the strategic report to investors, in addition to the going concern statement.

Key takeaways: competition

It's never been tougher to stay the right side of the line regarding competition law. And the sanctions have never been bigger. There are now 128 competition regimes globally. They want to be thought leaders and, ironically, they are in competition with each other. There is also protectionism at stake. For example, companies can't sign off the rest of their global deal without Mofcom approval in China, even if they carve China out. Is the cartel regime enough of a deterrent in Europe? Prison sentences occur in the US, but higher fines are more likely in Europe.

The viability statement requires directors to confirm three things: that they take a robust assessment of their principal risks; that they monitor risk management and internal control systems on a continuing basis; and to include a longer-term viability statement in the annual report.

"This is something that I suspect is going to assume increasing prominence and that we should all be aware of," said Jonathan Kelly, a partner with Cleary Gottlieb Steen & Hamilton in London.

There are specific questions around how companies will satisfy the requirements as the period that the viability statement needs to cover is not defined, but will be for companies to determine, based on their own circumstances.

"The guidance simply says it has to be significantly longer than the 12 months which applies to the going concern statement. But it is an area for the audit or risk committee to consider and factor into its risk management and reporting approach," said Chapman.