Read on for the key discussions that took place at the IFLR European In-house Counsel Summit:
Debt and equity capital markets
- Underwriters, and both equity and debt issuers are considering their post-Brexit options;
- On the underwriter side, banks are waiting for an equivalence indication, which means they are likely to remain in London in 2017 and possibly 2018. But some are concerned that the transfer to a European Stock Exchange will be difficult;
- In the high yield space, the UK Listing Authority (UKLA) has never been the preferred venue so the tendency has been to list in Luxembourg or Ireland. But MAR now catches both jurisdictions so many are discussing listing in Channel Islands instead;
- Issuers consider their listing venue as an important marketing tool and place importance on how much the venue caters to their investors’ requirements. In a post-Brexit world this will be the same analysis, regardless of its position outside the single market;
- Speakers emphasised the appeal of London as a listing venue post-Brexit due to its deep precedent. Emerging market issuers refer to previous listing venues when considering their options and London’s historic popularity will work in its favour.
Maximising results during M&A transactions
- Trends in M&A structures and techniques were discussed by speakers, who cited an increase in US appetite for UK targets;
- US sellers have less awareness of the locked-box feature than their equivalents in Europe. A UK private equity seller will often insist on a locked box, for instance;
- Warranty & indemnity (W&I) insurance has grown rapidly in Europe and is now both more common and more sophisticated than in its early days;
- W&I brokers and underwriters are much more sophisticated than they used to be. They rarely hold up deals now;
- But W&I is not a replacement for good due diligence, and speakers highlighted that parties are unlikely to secure it without sound diligence. One speaker explained that she has recently had to threaten parties that they may not be granted W&I to focus their minds on diligence;
- Valuation gaps a huge concern and a tool to mitigate them (earnouts) were criticised by speakers. Although earnouts are a tool to bridge the valuation gap, they are easy point to lazily throw out at the early stage of negotiation.
The competition landscape post-Brexit
- The one-stop shop principle of merger control will cease to apply to the UK – it is expected that the Competition Markets Authority will see an increase in its workload as a result because there will need to be parallel filings with both EU and UK authorities;
- It remains to be seen how far the CMA will accept the EU Commission as the leading authority in many cases, argued one panellist. Will the situation require a case-by-case assessment or loose cooperation?
- The Brexit rhetoric has focused partly on ‘taking back control’ but this could be problematic when it comes to the CMA’s workload and costs associated with investigations – the UK may not be prepared for this;
- The strategy for corporates could be to kick off with EU-level clearance, which is a lengthy process, then file with UK authorities thus running a parallel process. According to one speaker, the UK could ‘piggy back off the work done at Commission level’ insofar as the case raises the same issues;
- However, it’s likely that section 60 of the UK Competition Act 1998 – statutory requirement that UK rules are applied consistently with EU law – will no longer be needed although it is expected there will be a grandfathering provision;
- The UK will exit the EU Competition Network (ECN) so an alternative cooperation method is needed. However, what is agreed after Brexit is likely to be less effective than the ECN, said one panellist.
Business ethics: promoting change through corporate criminal responsibility
- The UK Bribery Act introduced a new way of looking at corporate liability (under section 7), an approach which the Serious Fraud Office has continued with the introduction in 2014 of the Deferred Prosecution Agreement (DPA) tool;
- In the UK, a finding of corporate liability is rare unlike in the US – the closest it has come to was in the Libor case although only individuals were prosecuted in that case;
- There’s only been one conviction under section 7 so far, while there have been three DPAs handed out since 2014, the latest one last week involving a £500 million ($627 million) for Rolls-Royce;
- One panellist said that when it comes to private equity deals, an investor may find it easier to control the compliance process as they are in the driving seat. It’s different with special situations or credit investments because investors take a more passive role;
- The UK tends to have much higher standards in terms of compliance than some other jurisdictions so this can cause a culture clash;
- When it comes to tax evasion, a large part of what the UK HMRC does is act as a financial regulator – the Bribery Act has introduced a new criminal tax evasion offence.
Breakout session: Data protection
- The EU’s incoming General Data Protection Regulation (GDPR) is also relevant for firms outside the EU offering products or services or monitoring customer behaviour in the EU, but questions remain as to what that means: does credit monitoring and fraud prevention qualify?
- Companies should already be well into preparation by getting to know the data they hold and prioritising, creating consent forms, planning for additional resources – not just money and external counsel but consider further internal hires;
- After the famous Google case the GDPR also contains a similar provision to the right to be forgotten but it is not an absolute right;
- The previous regime was “more art than science” but that is all about to change;
- The requirement to notify regulators within 72 hours of the breach occurring means companies will know very little when they have to notify – so be prepared with instant response plans.
Breakout session: Whistleblowing
- Develop internal plans for different types of whistleblowers whether they are internal, an ex-employee, a contractor or a third party – if they are internal extra care must be taken;
- If you are the person who takes the call, decide who you are going to involve, to what extent and when. It will usually be HR, compliance, other in-house lawyers, security, PR, senior management and if in the UK, the whistleblowers’ champion;
- Gather evidence before interviewing those involved and conduct interviews either concurrently or one after another so subjects don’t have the chance to discuss;
- Remember as an in-house lawyer you will be wearing many hats, giving both legal and non-legal advice so remember what is privileged and what is not.
Breakout session: Employment law
- In the UK all companies with over 250 employees will have to report their gender pay gap from April 2017 onwards;
- The process is far from simple and involves identifying the average hourly pay rate for both men and women, ranking them and dividing into quartiles;
- The information must be published in an accessible place on the website so cannot be hidden away;
- There is no formal enforcement process but the government has said companies will be named and shamed;
- Contractors in other jurisdictions could also be caught;
- There is an additional obligation on companies to try to reduce the pay gap where possible and identify how it has happened.
How to manage company liabilities
- To assess counterparty risk consider if the entity is strong enough to last the period of the relationship – so that could be five years for a revolving credit facility or 10 for a bond;
- Credit ratings alone can’t be relied upon;
- The LMA’s delayed compensation settlement regime encouraged quicker settlement times and helped to limit counterparty risk;
- The sale of loan books in Europe that weren’t structured to be sold on at a later date complicates the buyer’s economic exposure;
- The use of English schemes of arrangement by foreign companies is unlikely to cease after Brexit as courts in Kuwait and other non-EU jurisdictions have recognised them in the past and chapter 11 remains expensive and lengthy;
- English courts are also increasingly willing to accept jurisdiction over such cases;
- The cost of an increasingly international client base is being subject to a higher number of legal systems;
- While banks have had KYC checks in place for some time now corporates are increasingly needing to do the same assessments.