As we pass the mid-point of 2021, private equity activity in EMEA continues to fire on all cylinders, and if anything has further picked up as markets look towards a post-pandemic “new normal”. Investor confidence is high and this is feeding through into deal demand and valuations. Legislators and regulators also remain active on all fronts.
Recovery and Transformation - a checklist for business
As we emerge from the pandemic, it is becoming increasingly clear that planning and working for a return to business as usual will not be enough. To survive in the marketplace, careful introspection and planned transformation is needed to mitigate against emerging or enhanced corporate risks.
In essence, the pandemic has put contractual relationships under immense pressure. That pressure may have exposed existing cracks or defects, or may have shown that the structure was not fit for the pandemic landscape. Now is the time to survey what happened to those contracts: have those urgent and pragmatic steps taken quickly - and perhaps case by case - caused lasting damage which may have future consequences? A full review of key contracts in the business is prudent, asking questions such as:
- Where strict legal rights were not enforced, what is the risk they have permanently been waived? Have the parties effectively agreed to a state of affairs which does not reflect the reality? If so, has any estoppel arisen? How will this affect future rights to complain of breaches?
- Have contracts been varied, intentionally or otherwise? If intentionally, was prescribed procedure followed? Are the variations adequate to take parties through the whole Covid period, including erratic tightening and loosening of restrictions, and when normal business resumes?
- Is there scope and need to renegotiate the whole contract? The changed business environment and the exposure of fragile global supply chains has caused some businesses to rethink and refocus relationships where there is leverage to do so.
- Businesses may also need to consider their standard terms across existing and new contracts. As previously unforeseen risks become a part of life, we have seen efforts to re-draft force majeure events, re-frame the nature of material adverse change or breach clauses, and re-allocate risks in liability clauses. As well as mitigating against risk, we are actively advising businesses on how contracting norms may change over time to reflect the challenges of a post-pandemic economy. Shorter terms and flexibility seem top of the agenda.
- Likewise there may be a new appreciation of the power of negotiated alternatives to full-force litigation. Dispute resolution clauses may benefit more than ever from a tiered approach. Where contracts have a European cross-border element, businesses should assess the additional jurisdictional and enforcement risks posed post-Brexit and adjust clauses.
Vulnerability to fraud and dishonest activity has undoubtedly grown during the pandemic. The risks to business are potentially huge. An active assessment of the changing business environment and how that has created additional exposures is imperative.
- Confidentiality and data breaches: working remotely and a wider use of personal devices for work communications have increased the chances of inadvertent or intentional breaches. Do employee policies and targeted training sufficiently and fairly address these additional risks, or are changes to systems required?
- Cyber vulnerability: most cyber-attacks exploit human error. Working remotely increases the incidence of and exacerbates the risk of succumbing to phishing fraud and hacking.
- Less day to day oversight may increase the incidence of internal fraud. The temptation to shortcut systems or share access more widely than usual in order to get business done in difficult circumstances may provide more opportunity. Is this happening in any parts of the business? We are actively working on cases where internal financial fraud has caused significant loss to the business, and where the route to tracing and recovering funds moved globally is problematic, time-consuming and expensive.
- At board level, the pressure of the pandemic may have increased the incidence of wrongful trading by directors, misstatements of financials, and dishonesty. We expect to see a rise in distressed and insolvent acquisitions. Meticulous due diligence of targets by buyers will be crucial. We anticipate a rise in claims in misrepresentation and breach of warranty.
- Businesses suspecting fraud or dishonesty may need to move swiftly to relief to preserve or trace assets. The English courts are adapting to the emerging trends in fraud, and have shown flexibility and a pragmatic approach in the procedures needed to assist with fraud type claims, including during the pandemic. For example, there is increasing willingness to grant injunctions over crypto-assets and against “persons unknown”, and we have experienced more latitude in allowing alternative service –often using novel methods like social media - against uncooperative defendants. Nevertheless, making meaningful recovery after a complex fraud is difficult and time consuming. Emphasis should be on systems and controls to detect vulnerabilities and prevent breaches.
From employees’ or suppliers’ working conditions, behaviour around furlough, use or misuse of business financial support and more, many corporates found themselves in an uncomfortable spotlight during the pandemic. The ability of the end-consumer and the general public to target perceived unfairness and force change has been magnified. Reputations take time and investment to recover; some may be lost forever.
The direct relationship between reputation and the bottom line has been clearly demonstrated in the pandemic. Some exposed corporates have suffered withdrawal or refusal of investments and an overnight drop in value. Investor-led change seems to have stepped up a gear during the pandemic.
The need for businesses to commit to meaningfully addressing ESG issues has never been stronger. Whilst ESG focus was already growing prior to the pandemic, it has provided a backdrop against which there has clearly been more and deeper questioning of economic and social priorities, and the role business should have in local and global communities. We have started to see stakeholders using the courts, or the threat of court action, to force change upon corporates in terms of environmental targets, board diversity and more. Boards are placing increasing importance on ESG, and enhanced legislative and regulatory requirements will continue to push businesses to address it. However, in order to thrive in the post- pandemic environment businesses need to aim beyond statutory or regulatory requirements and actively engage with stakeholders to effect positive change.
This is an abbreviated summary of an article by our colleagues Graham Shear (London) and Sarah Breckenridge (London). A link to the full article can be found here: https://www.bclplaw.com/en-GB/insights/recovery-and-transformation-a-checklist-for-business.html
Climate-related disclosures for the UK asset management industry
The FCA has published its much-anticipated consultation on climate-related financial disclosures and guidance for UK asset managers, UK life insurers and FCA-regulated pension providers. The proposals represent another step on the road towards mandatory climate-related disclosures and are consistent with, and enshrine, the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
It also relates to UK asset managers doing “portfolio management”, which is given an extended meaning for the purposes of the new rules. It will capture private equity and other private market activities consisting of either advising on investments or managing investments on an ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities.
Consistent with the TCFD recommendations and aligned with the mandatory climate-related financial disclosure requirements for listed issuers and large asset owners (and supportive of the DWP’s draft regulations that apply to in-scope trustees of occupational pension schemes), the proposals follow the pathway set out in HM Treasury’s November 2020 TCFD Interim Report and Roadmap (in line with the expectations in the 2019 Green Finance Strategy).
The FCA’s proposals aim to increase transparency and competition, encourage capital flows towards firms that better manage climate risks and opportunities, and resource allocation towards transitioning the economy to net zero by 2050.
This is an abbreviated summary of an article by our colleagues Matthew Baker (London) and Chris Ormond (London). A link to the full article can be found here: https://www.bclplaw.com/en-GB/insights/climate-related-disclosures-for-the-uk-asset-management-industry-the-fca-consults-on-tcfd-compliant-measures.html
BCLP’s Competition Collective: Antitrust, Foreign Investment and Trade Insights from around the world
BCLP’s global antitrust and competition collective has produced an excellent guide to the trends we saw in 2020 and sets out emerging trends in 2021 across four key areas: Cartels & Investigations, M&A, Litigation and Trade. They also consider the current state of play for the flow of goods, services and capital as governments strengthen their hands in the quest for national resilience.
The digital space remains the central priority of enforcers, with the pharmaceutical sector not far behind. Hurdles for M&A are increasing with new substantive and procedural challenges including novel theories of harm and increased political intervention to take into account on every deal. Meanwhile, the class actions regime in Europe is taking off, and the effects on cross-border trade of the new UK-EU relationship are materialising.
A link to the full guide can be found here: https://www.bclplaw.com/en-GB/insights/bclps-competition-collective-antitrust-foreign-investment-and-trade-insights-from-around-the-world.html
BCLP Global Data Privacy FAQs: What’s the current status of the UK Adequacy Decision?
The European Commission published a draft Adequacy Decision for the UK on 19 February. That document remains in draft, though it is understood to have successfully cleared the last formal approval stage required.
At the time of writing, flows of personal data from the EU to the UK are permitted on the same, seamless basis as pre-Brexit due to a temporary “bridging mechanism”. That arrangement will expire at the end of June 2021 (at the latest) and, unless the European Commission adopts an Adequacy Decision for the UK, such data flows will then become subject to the restrictions imposed by the EU GDPR.
Adequacy Decisions may be made by the European Commission under Article 45 of the GDPR. For the UK, it will mean adding the UK to the “White List” of countries recognised as ensuring an adequate level of protection for personal data, including Canada, New Zealand and Japan. Without it, EU data exporters sending data to the UK would have to use one of the transfer mechanisms prescribed in the EU GDPR, such as entering into standard contractual clauses (SCCs) with the UK entity importing the data.
This is an abbreviated summary of an article by our colleagues Kate Brimsted (London) and Geraldine Scali (London). A link to the full article can be found here: https://www.bclplaw.com/en-GB/insights/bclp-global-data-privacy-faqs-whats-the-current-status-of-the-uk-adequacy-decision.html
UK National Security and Investment Act 2021
The UK’s long-awaited National Security and Investment Act recently passed into law. Secondary legislation will follow and the regime is expected to be fully in force towards the end of the year. Although the Act is not live yet, investors should already be considering its possible impacts on deals because of the retrospective effect of the legislation, the Secretary of State’s broad powers under it to “call-in” non-notified transactions for review, and the sanctions for non-compliance.
Dealmakers should also remember that the regime does not only govern foreign investment, since the Act applies to both UK and non-UK investors, and that the definitions of the sensitive Key Sectors (which dictate the scope of the mandatory notification regime) are very broad in places and so may capture some unexpected transactions.
There are not many differences between the Bill as introduced to parliament and the Act as it stands. However, a significant change is that the threshold for notification of deals in the 17 Key Sectors has been adapted slightly – under the Act, acquisitions of shares/voting rights of over 25% can trigger the notification requirement. The minimum threshold under the Bill was originally 15%. However, acquisitions of stakes lower than 25% which enable the person to secure or prevent the passage of any class of resolution governing the affairs of an entity can still be caught by the mandatory regime. Transactions which enable a person to “materially to influence” the policy of an entity can also be “called-in” for review where the deal raises national security concerns.
The proposed definitions of the Key Sectors were also refined following a public consultation. Although the headline sectors have not changed, a number of the definitions have been adapted with the aim of providing further clarity to investors.
Secondary legislation and further guidance on the Act is expected to be published later this year. Notably, the Government’s draft Statement of Policy Intent needs to be finalised, as do the definitions of the Key Sectors and the forms that will be used to notify deals.
The Government has indicated it will be working “hand in glove” with investors and businesses to help them understand the Government’s new powers. Special attention will be focussed on those active in the 17 Key Sectors. A new Investment Council will also be created which will act as an advisory body to the Government with the aim of improving and enhancing the environment for foreign investors.
This is an abbreviated summary of an article by our colleagues Andrew Hockley (London) Doran Boyle (London) and Sandy Aziz (London). A link to the full article can be found here: https://www.bclplaw.com/en-GB/insights/act-on-it-the-national-security-and-investment-act-2021.html
FCA consults on a new category of UK authorised open-ended fund to invest in illiquid assets: the Long Term Asset Fund
The FCA has launched its consultation on a new category of authorised fund vehicle designed to accommodate investment in illiquid assets, the Long Term Asset Fund (LTAF). The LTAF rules embed longer redemption periods, greater disclosure requirements, specific liquidity management and governance features that would differentiate the LTAF from other open-ended authorised funds and provide investors with the necessary confidence to invest in less liquid and potentially higher risk assets. This could be an exciting alternative to the Non-UCITS Retail Scheme (NURS) or Qualified Investor Scheme (QIS) for authorised fund vehicles such as PAIFs, CoACS and AUTs investing in real estate, infrastructure, private equity or private debt and that are targeting professional, sophisticated retail and DC pension scheme investors.
Originally proposed by the Investment Association in its June 2019 Final report to HM Treasury Asset Management Taskforce, the LTAF has been championed by the Chancellor of the Exchequer in November 2020 when he announced the first launch would be available this year.
In a briefing by our colleagues Kate Binedell (London), Matthew Baker (London) and Chris Ormond (London) they set out some overview comments along with key proposals of interest in the Consultation. The full article can be found here: https://www.bclplaw.com/en-GB/insights/fca-consults-on-a-new-category-of-uk-authorised-open-ended-fund-to-invest-in-illiquid-assets-the-long-term-asset-fund-ltaf.html