Breaking Down Barriers: Diversity and Inclusion in the C-Suite

THIS ISSUE:

FEATURE Shareholder activism in Asia

SPECIAL REPORT Technology in business: strategy, www.ﬁnancierworldwide.com Issue 188 August 2018 compliance & risk

ROUNDTABLE Risks facing directors & ofﬁcers

Breaking down barriers: diversity and inclusion in the C-suite

Attitudes, cultures and systems need to change for companies to embrace the positives of diversity and inclusion. The best laid plans. They need hatching. Turn your ideas into reality.

ad_check_template.indd 1 10/7/18 15:12:35 CONTENTS August 2018

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FINANCIER WORLDWIDE COVER STORY Editorial & Production Director Breaking down barriers: diversity and inclusion in the C-suite...... 26 Mark Truman

Features Editors Mark Williams FEATURES

Associate Editors Innovation and merger control ...... 14 Fraser Tennant Shareholder activism in Asia ...... 16 Richard Summerﬁeld Integrity in third-party due diligence ...... 19 Designer Karen Watkins Dissolving discord: shareholder dispute resolution in the UK ...... 22

Senior Publisher Ongoing evolution of transfer pricing ...... 24 Peter Livingstone

Specialist Publishing Division

Peter Bailey GLOBAL DEALS AT A GLANCE James Spavin Jul17-Jun18 ...... 04 Paul Davies Stephen Copeland

Content Co-ordinator DEALFRONT Nathan Bagust Mergers & Acquisitions Circulation Manager The ﬁght for Fox continues ...... 06 Ann Wright subscribe@ﬁnancierworldwide.com AT&T closes $85bn Time Warner deal ...... 08

Research Department info@financierworldwide.com Private Equity & Venture Capital Editorial enquiries € editor@financierworldwide.com Platinum Equity to sell WFS for 1.2bn ...... 09 Blackstone exits Intelenet for $1bn ...... 10 Advertising enquiries advertise@financierworldwide.com

Bankruptcy & Corporate Restructuring ISSN: 2515-4885 Poundworld falls into administration...... 11

23rd Floor, Alpha Tower Abraaj ﬁles for bankruptcy ...... 12 Suffolk Street, Queensway Birmingham B1 1TT ROUNDTABLE United Kingdom Risks facing directors & ofﬁcers ...... 31 Telephone: +44 (0)845 345 0456 Fax: +44 (0)121 600 5911

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TwoBirds Ad.indd 1 10/5/18 14:33:53 CONTENTS August 2018

SPECIAL REPORT Technology in business: strategy, compliance & risk ...... 41 Forum: KYC technology for screening, veriﬁcation and monitoring ...... 42 The challenges of the enterprise in the cloud ...... 48 Artiﬁcial intelligence ...... 50 Optimal data commercialisation: transforming raw data into revenue-generating insights ...... 52 Lessons learned – contract renewals and exit management ...... 54 Website consent management solutions under the GDPR ...... 57 Q&A: Global digital transformation ...... 59 Organisation glossary ...... 64

TALKINGPOINT Impact and treatment of IT assets in M&A ...... 70 Creating value in private equity carve-outs ...... 73

PROFESSIONAL INSIGHT Mergers & acquisitions Cross-border M&A driving surge in innovative structures...... 79 Liabilities arising from Canadian immigration in mergers & acquisitions ...... 81 Finance & investment Tax Reform Act provisions impacting the real estate investor ...... 83 National security investment reviews go global: key policy themes and recommendations ...... 85 Banking & ﬁnance

© 2018 FINANCIER WORLDWIDE LTD The disruptive power of FinTech and what it means for boardroom leadership . . . . . 87 No part of this publication may be copied, reproduced, transmitted or held in a The new Mexican FinTech law – balancing innovation, security and stability ...... 89 retrievable system without the written Fraud & corruption permission of the publishers. Whilst every effort is made to ensure the accuracy of all The rise in civil remedies for the growing criminalisation of business practices. . . . . 92 material published in Financier Worldwide, the publishers accept no responsibility for any Employment agreements subject to criminal penalties – DOJ targets no-poach and errors or omissions, nor for any claims made as a result of such errors or omissions. Views wage-fixing deals ...... 94 expressed by contributors are not necessarily those of the publishers. Any statements The political importance of asset recovery...... 97 expressed by professionals in this publication are understood to be general opinions and should not be relied upon as legal or financial advice. Opinions expressed herein do not necessarily represent the views of the author’s firms or clients.

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 3 GLOBAL DEALS AT A GLANCE Jul17-Jun18

GLOBAL M&A ACTIVITY (JUNE 2018)

Region Total Value US $m % Change on % Change on Same Total Volume (No. % Change on % Change on Same Previous Month Month Last Year of Deals) Previous Month Month Last Year

Americas 221,161 +24.5% +72.4% 595 -34.6% -42.1% Europe 57,793 -56.4% -47.7% 739 -19.6% -40.8% Asia Paciﬁc 102,565 +9.1% +56.8% 917 -13.9% -27.2% Middle East & Africa 2,111 -86.0% -24.3% 52 -38.8% -32.5% TOTAL 383,629 -8.6% +25.0% 2,303 -22.7% -36.2%

TOP GLOBAL M&A TRANSACTIONS (JUNE 2018)

Deal Status Acquiror Acquiror Nationality Target Target Nationality Deal Value US $m

Twenty-First Century Pending Comcast Corp United States Fox Inc (Entertainment United States 78,484 business) (Bid No 2)

CK Infrastructure Pending Hong Kong APA Group (Australia) APA Group (Australia) 16,941 Holdings Ltd; et al

Pending Altaba Inc United States Altaba Inc (24.3595%) United States 16,253

GLOBAL BUYOUT ACTIVITY (JUNE 2018)

Region Total Value US $m % Change on % Change on Same Total Volume (No. % Change on % Change on Same Previous Month Month Last Year of Deals) Previous Month Month Last Year

Americas 24,043 -8.4% +6.4% 51 -21.5% -5.6% Europe 8,531 -49.3% -15.5% 52 -11.9% -17.5% Asia Paciﬁc 18,065 +80.5% +317.4% 10 -33.3% -33.3% Middle East & Africa 0 +317.4% -33.3% 0 -100.0% 0 TOTAL 50,640 -5.1% +36.8% 113 -21.0% -14.4%

TOP GLOBAL BUYOUT TRANSACTIONS (JUNE 2018)

Deal Status Acquiror Acquiror Nationality Target Target Nationality Deal Value US $m

Ant Small & Micro Existing Shareholders; Completed China Financial Services Group China 14,000 et al Co Ltd (9.3333%)

Envision Healthcare Pending KKR & Co LP United States United States 9,569 Corp

CITIC Capital China Biologic Pending China China 3,737 Holdings Ltd Products Holdings Inc

4 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com GLOBAL DEALS AT A GLANCE Jul17-Jun18

KEY COUNTRY M&A ACTIVITY (JUNE 2018)

Country Total Value US $m % Change on % Change on Same Total Volume (No. % Change on % Change on Same Previous Month Month Last Year of Deals) Previous Month Month Last Year

United States 210,018 +33.8% +97.7% 490 -34.1% -37.8% United Kingdom 17,375 -23.2% -37.0% 200 -14.5% -17.0% Germany 1,382 -95.6% -86.5% 71 -26.8% -59.4% France 5,253 +66.0% -62.3% 113 -8.9% -38.3% Japan 5,912 -9.4% +13.3% 199 -13.5% -16.4% Canada 5,997 -58.7% +12.1% 47 -50.5% -67.6% Australia 20,363 +84.3% +288.7% 75 -1.3% -30.6% Italy 1,977 -18.2% -69.5% 36 -41.9% -58.6% Spain 7,372 +232.8% +78.3% 45 +15.4% -26.2% South Korea 4,468 -33.7% -36.2% 32 -62.4% -70.1%

BRIC COUNTRY M&A ACTIVITY (JUNE 2018)

Country Total Value US $m % Change on % Change on Same Total Volume (No. % Change on % Change on Same Previous Month Month Last Year of Deals) Previous Month Month Last Year

Brazil 1,119 +198.4% -74.5% 17 -32.0% -45.2% Russia 304 -95.0% -58.7% 36 -29.4% -60.0% India 3,914 -81.5% +118.1% 81 +17.4% -1.2% China 54,590 +33.4% +36.0% 400 -12.5% -21.1%

12-MONTH M&A ACTIVITY GRAPH

Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18

Americas 116,356 156,955 116,831 107,380 127,579 289,282 220,257 110,311 205,764 231,291 177,710 221,161

Europe 104,122 51,161 69,769 64,274 45,515 87,820 58,521 117,462 181,314 203,733 132,697 57,793 Total Value Asia 98,050 89,283 90,535 66,384 173,798 115,764 75,999 92,588 75,713 87,465 94,025 102,565 Paciﬁc

Middle East & 2,417 5,904 9,045 5,013 3,313 2,296 6,413 4,818 12,130 6,637 15,068 2,111 Africa

Total No. of Deals 3,439 3,318 3,626 3,369 3,086 2,972 3,391 2,813 3,166 2,947 2,979 2,303

in association with

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 5 DEALFRONT Mergers & Acquisitions

MERGERS & ACQUISITIONS

The ﬁght for Fox continues

alt Disney Co. won US regulatory Wapproval to acquire Twenty-First Century Fox Inc’s entertainment assets for $71.3bn in late June, marking the latest twist in the ongoing saga of Fox’s sale. As a result of the approval, Disney’s proposed acquisition of Fox’s assets edged ahead of Comcast Corp’s competing bid of $65bn, at the time of writing. Earlier in June, Fox accepted an improved bid from Disney, which upped its offer following Comcast’s competing bid. Disney’s revised $38-a-share price is around $10 per share higher than the company offered in December and $3 above Comcast’s offer. Disney’s latest offer also includes a mix of through its stock component, certainty of the face of stiff, established competition cash-and-stock, whereas its December offer value through its collar mechanism, the from Netflix and others. was all-stock. Under the terms of the latest opportunity for stockholders to elect cash The Hulu streaming service has also offer, Disney will absorb $13.8bn of Fox’s or stock consideration, as well as certain played an important role in shaping the existing debt, bringing the total value of the enhancements to the existing merger ongoing fight for control of Fox. Fox’s 30 deal to $85.1bn. agreement’s allocation of regulatory risk. percent stake in the Hulu joint venture Fox plans to retain its news and sports “Comcast’s proposed contractual is up for grabs. When Comcast acquired divisions, creating a new company for allocation of regulatory risk, merely NBCUniversal in 2011, the DOJ forced those holdings, which include the flagship matched the regulatory efforts and the company to take a passive role in the Fox News Channel. However, Disney’s reverse termination fee provisions in the management of Hulu for seven years out bid will require the company to divest original combination merger agreement of concern that Comcast might try to steer Fox’s 22 regional sports networks, which and did not offer enhanced protections to Hulu away from competing with its core it reportedly would be willing to do. The address the higher regulatory risk posed cable systems business. Accordingly, any channels are valued at around $19bn, by a transaction with Comcast,” the filing deal that would give Comcast majority according to MoffettNathanson Research. continued. The board also decided that control of Hulu could be a hurdle for The Justice Department believes that a “transaction with Comcast presented antitrust regulators “given that the DOJ without the divestitures, “the proposed unique regulatory uncertainties and placed conditions on Comcast’s ownership acquisition would eliminate the substantial (Comcast’s) proposal did not sufficiently of even a minority position in Hulu, LLC head-to-head competition that currently limit regulatory uncertainty associated in the now-expiring 2011 consent decree”, exists between Disney and Fox and would with a potential strategic transaction with according to the SEC filing. likely result in higher prices for cable sports 21CF”. Comcast had been confident of gaining programming”. The popularity of Netflix and other regulatory approval for its Fox bid. At the According to a Securities and Exchange streaming services has created a rush for time of the company’s offer, the company’s Commission filing, it would appear content in the media sector, and spurred chief executive Brian Roberts said that he that Disney has the right to match any both Disney and Comcast to pursue a was “highly confident” that Comcast would rival offer for Fox: “21CF management deal for Fox. Acquiring Fox would be “obtain all necessary regulatory approvals noted that Disney’s (20 June) proposal, particularly advantageous for Disney which in a timely manner and that our transaction as compared to Comcast’s, provided is set to launch its own streaming service in is as or more likely to receive regulatory for higher nominal value, enhanced 2019. Fox’s well-known media assets would approval than the Disney transaction”. opportunity for value appreciation help kick-start Disney’s streaming service in

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AT&T closes $85bn Time Warner deal PREVIOUSLY, THE US DEPARTMENT OF JUSTICE (DOJ) HAD

ollowing months of wrangling and ATTEMPTED TO BLOCK THE AT&T/TIME WARNER DEAL ON Fthe threat of a lawsuit, AT&T Inc. has finally completed its $85bn acquisition of ANTITRUST GROUNDS, STATING THAT IT WOULD DISADVANTAGE Time Warner Inc – a deal which combines CUSTOMERS. global media and entertainment leaders Warner Bros., HBO and Turner with AT&T’s leadership in video, mobile and broadband customer relationships. Under the terms of the deal, Time Warner shareholders received 1.437 shares of AT&T common stock, in addition to more than 170 million D2C relationships Mr Stankey. “So, it is easier and more $53.75 in cash, per share of Time Warner. ‘across its‘ TV, video streaming, mobile and economical to change the’’ name, than invest As a result, AT&T issued 1.185 million broadband services in the US, mobile in in advertising to resolve the confusion.” shares of common stock and paid $42.5bn Mexico, TV in Latin America and D2C The acquisition of Time Warner has also in cash. Including net debt from Time digital properties. Third, high-speed seen the departure of Turner chief executive Warner, AT&T has $180.4bn in net debt. networks: AT&T’s leading wireless and John Martin, with HBO and Warner Bros. AT&T expects the acquisition of Time fibre network, including investments in new chief executives – Richard Plepler and Warner to provide significant financial technology such as 5G, will provide the Kevin Tsujihara respectively – retaining benefits, including increased synergies network bandwidth required as customers their positions. In addition, Jeff Bewkes, to $2.5bn – $1.5bn in annualised cost increase engagement with premium video former chairman and chief executive of synergies by end of year three following and emerging 4K and virtual reality Time Warner, will remain as a senior close and $1bn of annualised revenue content. adviser during a transition period before synergies by end of year three – and a solid AT&T’ s acquisition of Time Warner also retiring. balance sheet and improved credit metrics. sees AT&T executive Jeff Stankey take the Previously, the US Department of “The content and creative talent at reins as chief executive of WarnerMedia Justice (DOJ) had attempted to block the Warner Bros., HBO and Turner are first- – the name of the new entity containing AT&T/Time Warner deal on antitrust rate,” said Randall Stephenson, chairman Time Warner’s operating units. “Why grounds, stating that it would disadvantage and chief executive of AT&T Inc. “Combine WarnerMedia? The short answer is that customers. However, US district court all that with AT&T’s strengths in direct- it tested very well externally as a naming judge Richard Leon rejected this argument to-consumer distribution and we offer convention that holds the valuable HBO, and the acquisition was allowed to proceed. customers a differentiated, high-quality, Turner and Warner Bros. brands,” said mobile-first entertainment experience. Mr Stankey. “In addition, we felt that We are going to bring a fresh approach to maintaining an element of the proud, how the media and entertainment industry established and successful Time Warner is works for consumers, content creators, a testament and sign of respect for both its distributors and advertisers.” history and for you, as architects of that According to Mr Stephenson, the legacy.” future of media entertainment is rapidly Mr Stankey also stated that the decision converging around three elements. First, to choose WarnerMedia was an attempt to premium content: a broadly distributed, clear up the difficulty many people have robust premium content portfolio that distinguishing between Time Warner, the combines leading movies and shows from media company, and Time Warner, the Warner Bros., HBO and Turner, along with former cable company. “Our consumer targeted digital content. Second, direct to research suggests this confusion is consumer distribution (D2C): AT&T has not going away any time soon,” added

8 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com DEALFRONT Private Equity & Venture Capital

PRIVATE EQUITY & VENTURE CAPITAL

Platinum Equity to sell WFS for €1.2bn

ivesting itself of an asset which Dgave it significant momentum in Europe, US private equity firm Platinum Equity has signed a definitive agreement to sell Worldwide Flight Services (WFS) to affiliates of Cerberus Capital Management, L.P. in a transaction valued at approximately €1.2bn. Since Platinum Equity acquired WFS in 2015, the air cargo handler has grown significantly, both organically and through a transformative add-on acquisition, and is now the largest and one of the world’s leading providers of ground handling and technical services. Headquartered in Paris, WSF’s 22,800 employees serve over 300 airlines at 198 major airports in 22 invested in our growth and as a result we “We plan to partner with Craig Smyth, countries on five continents. are well positioned for long-term success.” and WFS’s management team and its “Through a combination of growth and In the view of Brett Ingersoll, head of dedicated and hardworking employees, operational initiatives, WFS has evolved global private equity and senior managing to enhance WFS’s growth and services,” and expanded significantly over the past director of Cerberus, WFS is a market said Craig Brooks, managing director of three years and today enjoys record top-line leader in aviation services and is positioned European Private Equity at Cerberus. “We and earnings performance,” said Louis to benefit from attractive long-term have a longstanding presence in Europe Samson, a partner at Platinum Equity. “The industry growth. “Cerberus has extensive and WFS will be a fantastic addition to our company’s success is a tribute to a strong operational experience and a successful growing portfolio.” partnership with a talented management track record in aviation and we are excited Mr Smyth added: “WFS has transformed team, and the dedication of hardworking to support WFS’s next stage of growth,” he into a leading global aviation handling employees all over the world. We are proud said. player in recent years through growth and of everything we accomplished together.” Founded in 1992, Cerberus is a global operational initiatives. We believe that Furthermore, during Platinum leader in alternative investing with Cerberus is the ideal partner to support our Equity’s ownership, WFS strengthened approximately $34bn in assets across continued transformation.” its leadership team underneath chief complementary credit, private equity and The sale of WSF to Cerberus is expected executive Craig Smyth, installed new real estate strategies. With Cerberus being to close during the fourth quarter of 2018, financial controls and other best practices an experienced and capable new partner, subject to regulatory approval and certain throughout the organisation and expanded Mr Samson believes that WFS is now well closing conditions. the company’s footprint. For example, in positioned to continue its growth trajectory 2016, Mr Smyth oversaw the acquisition of in the years to come. Consolidated Aviation Services (CAS), one Bank of America Merrill Lynch and of the leading cargo handlers in the US. Morgan Stanley served as financial advisers “In recent years, WFS has successfully to Platinum Equity and Baker McKenzie transformed into a leading cargo and was Platinum Equity’s legal adviser. For ground handler with a truly global Cerberus, Citigroup Global Markets presence,” said Mr Smyth. “Platinum Limited served as financial adviser and Equity’s financial and operational support Linklaters LLP was legal adviser. has been instrumental to our success. They

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 9 DEALFRONT Private Equity & Venture Capital

“I am extremely pleased to welcome Blackstone.“The continued success of the Blackstone exits Bhupender and the Intelenet group to company is a testament to the exceptional the Teleperformance family,” said Daniel quality of the management team, the Intelenet for $1bn Julien, chairman and chief executive of value delivered to its customers, and Teleperformance. “We share the same the deep engagement with Blackstone. rench outsourcing giant management values, the same passion We are excited with the transfer of FTeleperformance is to acquire Indian- for service, and the same strategic vision. ownership to an industry leading company, based Intelenet Global Services from Intelenet’s strong integrated solutions Teleperformance, because it ensures private equity giant Blackstone in a $1bn and digital optimisation capacities will continuity for Intelenet’s management, deal. The acquisition, which is expected to immediately and significantly enhance employees and customers. In addition, it close by 30 September, pending regulatory Teleperformance’s offering. Intelenet’s provides a platform to further accelerate approval and other closing conditions, will amazing footprint in India is also an growth by combining Intelenet’s intellectual see Blackstone exit a business it acquired in opportunity for Teleperformance to property with Teleperformance’s global 2013 for around $385m. The firm’s return massively strengthen its presence in this key customer base. We offer our full support would be its largest exit in Asia to date. geography going forward. Thanks to the and best wishes for an exciting future.” Teleperformance, founded in 1978, Intelenet acquisition, Teleperformance is “We thank Blackstone for an excellent currently has around 55,000 employees poised to move quickly ahead with its 2018- partnership over the years,” added across its operations in the Americas, the 2022 strategic plan. Moreover, upon closing Bhupender Singh, chief executive of UK, Europe, Middle East, India and the this deal will be immediately accretive for Intelenet. “Going forward, the management Philippines. The company enjoyed a strong Teleperformance shareholders, as it should team is excited to lead Intelenet in its next 2017, reporting consolidated revenue of have a positive impact of around +10 phase of evolution. With the large, global $4.7bn. For the fiscal year ended 31 March percent on the Group’s earnings per share platform of Teleperformance combined 2018, the company posted revenue of in 2018 on a pro forma basis.” with the transformative services capabilities $449m, a 10 percent year-on-year increase, The sale of Intelenet marks the second of Intelenet, we will be able to deliver as well as EBITDA of $83m. For fiscal year time that Blackstone has exited the even greater value to the clients of both 2019, the company forecasts significant company in the last decade. The firm first companies. In addition, the combination additional revenue growth of at least 10 acquired a stake in 2007 before selling to will provide greater growth opportunities percent and increased profitability. The Selco in 2011. In late 2015, it bought the for our employees.” addition of Intelenet to the company will company back for $385m. Rumours that Teleperformance will finance the hopefully boost revenues moving forward. the firm was interested in selling its stake in acquisition through a debt facility provided Teleperformance anticipates the deal Intelenet first began to surface in May, with by BNP Paribas, JP Morgan and Natixis. will have a positive impact of around 10 a strategic buyer rather than another PE The deal is Teleperformance’s second percent on its earnings per share before firm expected to be its new owner. large India-focused deal in four years. amortisation of goodwill in 2018 on a pro- “We have invested in Intelenet twice,” It acquired BPO company Aegis Ltd’s forma basis. Teleperformance has targeted said Amit Dixit, senior managing director operations in the US, the Philippines and revenue of $7bn by 2022. and head of private equity India at Costa Rica from Essar Group for $610m in July 2014.

THE SALE OF INTELENET MARKS THE SECOND TIME THAT BLACKSTONE HAS EXITED THE COMPANY IN THE LAST DECADE.

10‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com ’’ DEALFRONT Bankruptcy & Corporate Restructuring

BANKRUPTCY & CORPORATE RESTRUCTURING

Poundworld falls into administration

he embattled UK high street suffered Tanother blow in June when discount retailer Poundworld collapsed into administration, giving it temporary protection from its creditors. Deloitte was appointed administrator amid efforts to save the firm, however there are doubts over whether ultimately it can be rescued. In April, Poundworld’s private equity group owner TPG Capital said that it was considering launching a company voluntary arrangement (CVA) which would have seen 100 stores close. In May, TPG took the decision to put the retailer up for sale but was unable to attract a buyer. Talks Poundworld has around 350 stores across most challenging years in recent memory. with potential buyer R Capital fell through, the UK and employs over 5000 people. Marks & Spencer, New Look, Carpetright, as did negotiations with Alteri Partners. ‘Closing down’ sales started across the Mothercare, and House of Fraser As a result, the company was forced to company’s network of stores in June and announced store closures in the first half file for administration on 11 June. Though redundancies quickly followed, when of 2018. House of Fraser’s CVA will see 31 Poundworld’s stores remain open in the around 100 head office staff were laid stores close, affecting over 6000 employees. short term, mass store closures seem likely. off. However, the administrator said that Mothercare will close 50 locations. “The retail trading environment in the the move does not mean that stores will Maplins and Toys R Us also collapsed into UK remains extremely challenging and definitely close. Looking longer term, it administration. Poundworld has been seeking to address seems unlikely that a buyer will be found CVAs have been a favoured method of this through a restructure of its business,” for the whole chain, but individual stores restructuring. A number of CVAs have been said Clare Boardman, joint administrator may receive a reprieve. launched this year as retailers struggle to for Poundworld. “Unfortunately, this Poundworld was acquired by TPG in cope with rising costs and business rates, has not been possible. We still believe a 2015 for around £150m, however the as well as increased competition from buyer can be found for the business or at company has struggled over the last two online rivals and a slowdown in consumer least part of it and we are keeping staff years as the cost of importing goods into spending. TPG also launched a CVA for appraised of developments as they happen. the UK has risen since the Brexit vote. its Prezzo chain which will close around We thank all employees for their support at Poundworld’s losses have climbed since 100 restaurants. Carluccio’s and Byron this difficult time.” 2016. It recorded losses of £17.1m for the have also launched CVAs over the last 12 According to Deloitte, a combination of financial year 2016-17, up from £5.4m months. “high product cost inflation, decreasing in 2015-16. A TPG spokesperson said: footfall, weaker consumer confidence and “This was a difficult decision for every an increasingly competitive discount retail party involved. We invested in Poundworld market” were reasons behind the company’s because of our belief in how the company collapse. It will continue to trade while a serves its customers and the strength of its resolution is sought. “The administrators’ employees.” strategy remains the same; to continue to Store closures in the UK retail market trade the business in order to realise the have become commonplace in recent stock whilst seeking to secure a sale of years. Many high street retailers have the business either in whole or part,” said been forced to downsize their operations, Deloitte. however 2018 has proven to be one of the

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 11 DEALFRONT Bankruptcy & Corporate Restructuring

Abraaj ﬁles for bankruptcy AH’S SECURED CREDITORS HAVE PROVIDED THEIR FULL

nce a rising star of the Middle East SUPPORT FOR THE JPLS TO WORK ALONGSIDE THE COMPANY Oinvestment world, humbler times now beckon for Dubai-based private equity firm TO FORMULATE AND IMPLEMENT A RESTRUCTURING OF Abraaj Holdings (AH), as it undergoes a COMPANY LIABILITIES WHICH IS IN THE BEST INTEREST OF ALL debt restructuring plan under the auspices of court appointed joint provisional CREDITORS. liquidators (JPLs). The order by the Grand Court of the Cayman Islands to appoint JPLs – Simon Conway of PwC Corporate Finance and Recovery (Cayman) Limited and Michael Jervis and Mohammed Farzadi of PwC ‘‘ ’’ – means that authorisation has been granted for all necessary steps to be taken to develop and propose, in consultation with AH and its advisers, a consensual restructuring of the company’s obligations. These obligations include £300m owed to support for the JPLs to work alongside the “We are pleased with this outcome private-debt specialist Auctus Fund Ltd and company to formulate and implement a and grateful to the court for its careful $100m to Kuwait’s Public Institution for restructuring of company liabilities which is consideration of the issues and positive Social Security, a national pension fund. in the best interest of all creditors. judgment,” said Arif Naqvi, founder of the Furthermore, subject to the final sealed Mr Jervis added: “Given our longstanding Abraaj Group. “This order validates the order of the Cayman Court, the JPL order experience in global restructuring for position consistently maintained by Abraaj ensures that the rights of all stakeholders financial and corporate institutions, that an orderly restructuring, under the can be protected. That said, the court- PwC is extremely well placed to deliver guidance of a highly experienced team of supervised restructuring has resulted in the a satisfactory outcome for the company’s joint provisional liquidators, can ensure resignation of AH chairman Sean Cleary, constituents and is commencing on this the outcomes we seek for the company who left his role in June 2018. process with immediate effect.” and its creditors. We are wholly committed “Our role is to manage the restructuring In parallel proceedings, the court heard to supporting the JPLs through the of AH in an orderly fashion, safeguard an application by Abraaj Investment restructuring process and ensuring stability the assets of the company, and ensure that Management Limited (AIML) – the Abraaj and value maximisation for all parties.” the interests of creditors, employees and Group’s fund management business – to However, in an unfortunate development broader stakeholders are fully served,” said appoint David Soden and Stuart Sybersma for Mr Naqvi, authorities in the United Mr Jervis. “The order by the court enables of Deloitte as JPLs. This application was Arab Emirates (UAE) issued arrest AH to swiftly move into a stable phase of also approved by the court. warrants for both he and another executive, operations whereby restructuring plans and The decisions made by the court enable Muhammad Rafique Lakhani, for issuing asset disposals can be executed upon in a both AH and AIML to independently a cheque for 177.1m dirhams ($48m) protected and controlled environment.” pursue court-supervised restructuring without sufficient funds being available. The court order grants extensive plans in an orderly fashion and for the Both men deny the alleged mismanagement powers to the JPLs for the protection benefit of their respective creditors. The of company funds. and management of AH assets, including court supervised restructuring of AH will maintaining oversight of board and have minimum impact on the day-to-day management activities to maximise the operations of the management of funds and returns to company stakeholders. AH’s their portfolio companies. secured creditors have provided their full

12 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com Embrace change

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ad_check_template.indd 1 17/5/18 16:39:17 FEATURES Mergers & Acquisitions

Innovation and merger control

BY RICHARD SUMMERFIELD

erger control authorities One of the biggest factors inﬂuencing competitive harm caused by the potential appear increasingly willing to merger control reviews is innovation. reduction of innovation as they are with exercise their right to block The European Commission (EC) (which increased prices and reduced output mergers, demonstrating a operates alongside and must co-exist with stemming from a merger. Mstrong appetite for enforcement. With national merger control regimes in most of Companies in the pharmaceutical and more deals facing regulatory scrutiny the European Union’s 28 Member States), agricultural sectors, for example, have been than seemingly ever before, it is vital that the US Department of Justice (DOJ) and consolidating at a rapid pace, to the point merging companies are prepared to have the Federal Trade Commission (FTC) that a handful of companies now dominate their potential deals rigorously assessed. are now equally concerned about the those markets. And with such domination

14 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com FEATURES Mergers & Acquisitions

comes less pressure to pursue innovation, which, in turn, has led to a decline in research and development (R&D) spending, as well as reduced competition. MERGER CONTROL AUTHORITIES APPEAR INCREASINGLY In 2016, the FTC challenged 22 mergers after determining that they would likely WILLING TO EXERCISE THEIR RIGHT TO BLOCK MERGERS, result in competitive harm in the form of higher prices, reduced quality or lower DEMONSTRATING A STRONG APPETITE FOR ENFORCEMENT. rates of innovation. Though the majority of those challenges result in negotiated settlements which were designed to maintain competition in the affected markets while still allowing the merger to proceed, the FTC did block three deals, including Staples’ proposed $6.3bn acquisition of Office Depot. The DOJ too is more actively scrutinising ‘‘ ’’ proposed deals, particularly in the agribusiness space. US Congress has also expressed an interest in agricultural In Europe, the proposed mergers of GE Innovation will continue to be a major deals. In September 2016, the Senate and Alstom, Dow and DuPont, and Bayer consideration for competition authorities Judiciary Committee held a hearing on and Monsanto were examined by the EC around the world. There are, of course, ‘Consolidation and Competition in the US on innovation grounds. The EC’s decision areas of uncertainty, particularly in the Seed and Agrochemical Industry’. to clear the $130bn merger between EU where the bloc’s future relationship For companies operating in the EU, Dow and DuPont was one of the most with the UK remains unclear. At present, the EC’s approach to innovation and important rulings in some time. The EC was if a merger is notifiable at EU level, the dealmaking is nothing new. In a July 2014 concerned that innovation could suffer as UK’s Competition and Markets Authority address to the European Parliament, the combined parties’ incentive to develop (CMA) does not have primary jurisdiction president Jean-Claude Juncker argued that and bring new pesticides to market would to review that merger. However, in the “Jobs, growth and investment will only be reduced. DuPont was ordered to divest aftermath of Brexit, the UK’s merger return to Europe if we create the right its global R&D unit as a way of ensuring control regime will be outside the EU regulatory environment and promote that innovation would not be diminished. and it is possible that both the European a climate of entrepreneurship and job Industry consolidation can have a Commission and the CMA will need to creation. We must not stifle innovation and dramatic impact on product pipelines and review deals, adding a further level of competitiveness.” European Commissioner on companies’ ability to get their products complexity to the process. This could, at for Competition Margrethe Vestager has to market. This is particularly pertinent least in theory, lead to a divergence in the also echoed these sentiments, noting in industries such as the pharmaceutical treatment of innovation during merger that it is her responsibility to ensure that and technology sectors, which dedicate reviews, post-Brexit. companies which dominate the market considerable resources to R&D and so don’t misuse their power to stop others may wish to merge with a firm that could competing” and that “they don’t shut down potentially produce similar products. innovation before new ideas have the Such mergers raise significant questions, chance to show customers what they can however. It is not currently clear how do”. parties can demonstrate that their mergers The Commission’s Horizontal Merger will not harm innovation. Guidelines also dictate that a merger The EC’s decision in the Dow/DuPont between an incumbent and a potential merger could have serious implications. competitor can give rise to anti-competitive Companies must be wary when effects where the “potential competitor pursuing deals which involve markets significantly constrains the behaviour of the where innovation is a key parameter of firms active in the market”. According to competition. Their deal planning should the Guidelines “the effect on innovation” is consider innovation and make allowances a factor which must also be considered in for it early in the process. merger control.

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 15 FEATURES Boardroom Intelligence

Shareholder activism in Asia

BY RICHARD SUMMERFIELD

hareholder activism, both Lazard, with notable activists including according to JP Morgan. And though the disruptive and collaborative, has Elliott Management, Trian Partners and US and Europe were the most targeted, attracted increased attention in ValueAct Capital, among others. large companies elsewhere also attracted recent years. While previously The ﬁrst half of 2018 also saw activist attention. Smost commonly associated with the US, considerable activity. In Q1, $25bn In Asia, the number of companies publicly activism is now gaining traction in other of capital was deployed, a record 73 targeted more than doubled between 2013 jurisdictions. To the end of October 2017, campaigns were launched and 68 board and 2016, according to Activist Insight. activist shareholders launched $45bn seats were won. Europe accounted for Last year, 106 Asia-focused campaigns were in new campaigns globally, according to 23 percent of all campaigns launched,

16 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com FEATURES Boardroom Intelligence

launched, compared to just 10 in 2011, In addition, the saturated landscape in disclosure rules during its purchase of according to JP Morgan. the US is forcing activists to look further shares in Samsung C&T Co in 2015. Campaigns in Asia have been more evenly afield for new targets, and Asia is a fertile Institutional investors, much more so distributed across all sectors than in other and largely-untapped resource. In Japan, than dispersed and diverse individual regions. JPMorgan found that between for example, activists have been drawn to investors, could have a dramatic impact 2011 and 2017, no sector surpassed 11 the large sums of unused capital sitting in on Asian companies. Many of the larger percent of total activity. In Australia, the corporate treasuries. Activists often pursue institutional investors, such as Elliott, have US and Europe, during the same period, share buybacks or dividend increases, or track records of supporting activism in the most targeted sectors represented 40 both, and Japanese companies in 2017 saw other jurisdictions. “Normally, shareholders percent, 19 percent and 15 percent of all the average return on equity (ROE) surpass lack interest in pursuing a cause of action campaigns, respectively. 10 percent for the first time, according to due to the small number of shares that they Nikkei, nearing the 12.8 percent average are holding, but institutional investors are Shifting sands recorded in the US. different,” says Dr William Wong, senior Asia’s style of business has long been counsel at Des Voeux Chambers. “The case considered ill-suited to activism. Public Institutional influx of Elliot v. Bank of East Asia is a typical criticism from disgruntled investors is still The proliferation of global institutional example. Secondly, there is the availability fairly uncommon in the region, as they investors taking stakes in Asian companies of a class action, which gives ammunition prefer to exert influence behind closed is another turning point. Institutional to shareholders to take legal action. Thirdly, doors. A sense of respect also dissuades investors are often keen to support there has been an increase in intervention activists from embarrassing other business activism. For example, Elliott Management by regulators, with the active and positive leaders in public. Given these cultural recently challenged South Korea’s top two role played by the Securities and Futures nuances, what has driven the increased family-run conglomerates: Samsung and Commission in Hong Kong a typical popularity of shareholder activism in a Hyundai. example. market previously unreceptive to it? With regard to Hyundai, where Elliott “There are more institutional investors, at “There has been a significant shift in holds more than $1bn in shares in three of least professionals from the buy side, who attitude toward shareholder activism in its key affiliates, the fund called for “a more are keen to make sure that there is good Asia,” explains Jonathan Wenig, a partner detailed roadmap as to how it will improve corporate governance in the companies at Arnold Bloch Leibler. “Historically, corporate governance, optimise balance in which they invested,” adds Dr Wong. the low rate of shareholder activism in sheets, and enhance capital returns” at “Furthermore, after the Lehman Brothers Asia reflected the perceived challenges of Hyundai Mobis, Hyundai Motor and Kia collapse, regulators are now much more penetrating a market that was characterised Motors. In response, Hyundai announced actively pursuing companies which have by complex ownership structures, family a corporate restructuring scheme which caused prejudice to shareholders.” control and government participation. This will streamline its ownership structure by attitude has shifted as activists increasingly spinning off its domestic module and after- Regulatory reform perceive these factors as representing service parts businesses, merging them with Regulators are also driving change in an opportunity to leverage their own logistics affiliate Hyundai Glovis. the region by enacting reforms geared interests.” Elliott dismissed Hyundai’s proposed toward the adoption of international best Local economic growth and a significant restructuring plan, calling it insufficient. practices in investor engagement and eastward shift in the global economy have It called on Hyundai to adopt a holding corporate governance. In 2017, Hong Kong also played a key role. “Activism follows company strategy and combine Hyundai Exchanges and Clearing finalised new the money,” says Deborah Hayden, regional Mobis with Hyundai Motor, and demanded rules for capital raisings by listed issuers director of the Japan capital markets that Hyundai establish a clear policy aimed at “restricting abusive practices... and M&A practice at Edelman. “As Asia for dividend payouts and appoint more and protecting the interests of minority increasingly becomes the powerhouse of the independent board members. “We believe shareholders”. world economy, more investors are drawn this is truly a unique opportunity to unlock Corporate governance reforms and to take a closer look at potential value- significant value in Hyundai Motor Group stewardship codes introduced across Asia creating opportunities. The Organisation that the founding family and the leadership have strengthened shareholder engagement for Economic Development (OECD) of the Group have built over the decades,” and participation, according to Mr Wenig. predicts that leading Asian economies will Elliott said in its presentation. Singapore accounted for 14 percent of post higher growth rates than the global In 2017, Elliott successfully forced activism in Asia last year, according to JP average of 3.7 percent in 2018. China is Samsung Electronics to increase Morgan, and that could rise in the future expected to post 6.6 percent growth and shareholder returns. However, South thanks to proposed changes to its Code India 7.0 percent.” Korean prosecutors are investigating of Corporate Governance. A consultation whether the US firm may have violated paper released in January suggested that

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 17 FEATURES Boardroom Intelligence

more should be done to encourage board “The findings of the Royal Commission renewal, strengthen director independence, into Misconduct in the Banking, enhance board diversity, and disclose the Superannuation and Financial Services relationship between remuneration and Industry in Australia are expected later MOMENTUM HAS BEEN value creation. in 2018 and, given the recent revelations In Korea, shadow voting was abolished from the hearings regarding unethical GATHERING AT A STEADY in December 2017 and mobile voting practices, will likely result in a greater was introduced which will make it focus placed on banks and super funds. PACE, AS CHANGES ARE easier for shareholders to gain access to On environmental and social issues, the WOVEN INTO THE FABRIC OF general meetings. The Financial Services resources and primary industries sectors are Commission (FSC) announced in February also becoming increasingly susceptible to ASIAN CAPITAL MARKETS. 2018 a plan to encourage minority shareholder activists and are expected to be shareholder participation at meetings for targeted in future,” says Ms Hayden. listed companies. In Japan, the Corporate Governance China has also seen a rise in activism, Code and the Stewardship Code are aimed so much so that the China Securities at forcing investors to actively engage succession are becoming less popular and Regulatory Commission (CSRC) is more with companies in order to carry out their activists‘‘ are emboldened,’’ demanding that actively policing unlawful practices at fiduciary duties. Japanese companies are managerial transitions be made based on listed companies. Class action lawsuits now faced with clear targets of higher merit, not nepotism. are appearing more frequently. A pilot return on equity, higher capital efficiency These changes have not occurred programme has been launched which and much greater levels of transparency overnight, however. Momentum has been will allow disgruntled investors to come for shareholders. In 2017, 28 Japanese gathering at a steady pace, as changes together and litigate collectively. companies found themselves subject to the are woven into the fabric of Asian capital On the fringes of Asia, Australia has also demands of activist investors. markets. seen a rise in activism. The Australian “Activist investors are targeting Though it can be disruptive and market is characterised by the widely companies with discrepancies between damaging, shareholder activism is here to distributed ownership of public companies the market value and the actual corporate stay, in Asia and beyond. While companies as well as the role of superannuation value, allowing them to profit by can develop strategies to counter activists, funds, which have the voting power to aggressively addressing these discrepancies, it would be prudent for them to better exert influence on board decisions and and in recent cases, winning,” says Ms understand their investors’ concerns and tend to have something of a longer-term Hayden. “This is slowly forcing Japanese motivations. Forewarned is forearmed. bias. “These superannuation funds have companies to focus on shareholder value, a vested interest in the long-term success achieving a fair valuation from the market, of companies and are increasingly willing and ensuring corporate governance is to flex their muscle over important acceptable from the perspective of general decisions,” explains Mr Wenig. “Still, major shareholders. This will involve a degree of shareholders in Australian companies hold investor communication that will render the significantly less stock in public companies traditional practice of recycling earnings than, for example, major shareholders reports with updated numbers obsolete. in US companies. In Australia the 10 Until Japanese companies can move from largest institutional shareholders would, a finance-driven number check to telling on aggregate and on average, hold about a growth story supported by the numbers, 15 percent, meaning their ability to exert expect to see more activism in Japan. The influence is diminished as compared to difference driven by the governance and their US counterparts.” stewardship codes means Japan’s sleepy In Australia, while resolutions put institutional investors are beginning to take forward by shareholder activists rarely notice.” attract support from the wider shareholder base, companies are aware these resolutions Looking ahead could gain support in the future. That is Asian companies have also become more why they are more likely to engage with receptive to direct and open engagement their institutional investors and build their with their investors over the past few investor relations function with a greater years. Corporate culture has slowly begun focus on transparency and trust. to change. Practices such as generational

18 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com FEATURES Risk Management

Integrity in third-party due diligence

BY RICHARD SUMMERFIELD

nderstanding exactly who Foreign Corrupt Practices Act (FCPA), the of regulatory activity, particularly in the you are doing business with UK Bribery Act, the Dodd-Frank Act and financial services sector, which has begun is not only good business others, as well as the role of the Office of to hold organisations responsible for the practice, increasingly it is a the Comptroller of the Currency (OCC) in actions of their vendors and suppliers. Ulegal necessity. Enforcement standards are the US, have increased the focus on third- With the US Department of Justice changing and companies are being held party governance, pressuring companies (DOJ) and the Securities and Exchange responsible for the actions of their business to more effectively manage their third- Commission (SEC), as well the Serious partners and vendors more so today than party relationships. In the wake of the Fraud Office (SFO) in the UK, all paying ever before. Legislation such as the US financial crisis, there has been a rising tide close attention, it is vital that companies

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 19 FEATURES Risk Management

are aware of the actions and motivations human rights violations can all jeopardise a As corporate criminal liability can be of third parties and are able to hold company’s reputation and profitability. triggered when a bribe, for example, is them accountable. Companies must be In light of these hazards, companies paid by or through a third party, companies clear about partners with which they must put measures in place to protect are also looking into the details of have working relationships. They must themselves. By understanding the methods transactions and their related third parties. understand their third parties’ reputations, and ethics of their third parties, companies Agents, consultants and distributors are both locally and globally. To achieve this, may avoid potential regulatory enforcement frequently used to conceal the payment of more companies are auditing their third and reduce reputational risk. bribes to foreign officials in international parties, providing regular training sessions Building a third-party due diligence business transactions, according to the and setting forth the standards they will be programme is key. Honesty and integrity are DOJ and SEC. In excess of 90 percent of required to maintain. needed to identify and mitigate corruption reported FCPA cases involve third-party Third parties are a key component of risks. Due diligence should clarify the intermediaries. Holding third and fourth many companies’ operations. They perform identity of the company, its business parties to higher standards is a major countless functions, from providing background and activities, its ownership purpose of due diligence. cloud data storage to sub-contracting structure, its existing relationships with Banks and other financial institutions construction projects. They can help other organisations and individuals and (FIs) tend to have a much higher exposure to mitigate risks, drive down costs and the integrity of its owners and senior to third parties than other sectors and, provide gateways into new markets. management, among other considerations. as a result, are leading the way in third- Companies can be freed to refocus labour However, many organisations are leaving party regulation and monitoring. However, and resources on their core operations. themselves exposed to risk, including managing the process is still a challenge. As a result, third parties have become bribery, corruption and modern day slavery, Accounting for how third parties use and critical to many organisations’ success. by failing to conduct due diligence on protect their data and manage sustainable However, employing any third party creates their third parties. According to Thomson operations, especially for critical services, operational risks for an organisation, Reuters’ 2016 Global Third Party Risk can pose many problems. As a result, senior particularly in emerging and frontier Survey, just 62 percent of suppliers, managers in the financial services industry markets where there is an increased distributors and third parties are being are seeking the best strategies, procedures likelihood that companies could encounter subjected to due diligence, and only 36 and policies to mitigate risks posed by third legal, ethical and reputational challenges percent of companies are fully monitoring parties. According to Deloitte, in 2017, 94 stemming from their use of third parties. ongoing risks. Sixty-one percent of percent of executives who responded to Issues including business integrity, product companies do not know the extent to which the firm’s third-party governance and risk safety, intellectual property licensing and third parties are outsourcing their work. management survey were not confident in the tools and processes at their disposal to manage third-party risk. One of the best methods is to perform integrity due diligence on a third party’s compliance programme. The extent of research conducted into a particular firm should be commensurate to the level of risk a potential partnership may represent, be it low, medium or high risk. Integrity due diligence includes identifying critical ‘red flags’ attached to an individual or a company in relation to money laundering, fraud or corruption. Organisations are only BANKS AND FINANCIAL INSTITUTIONS (FIS) TEND TO HAVE now starting to take a holistic and proactive approach to risk, covering all categories of A MUCH HIGHER EXPOSURE TO THIRD PARTIES THAN OTHER third parties and all areas of risk, including operational, reputational, financial, legal SECTORS AND, AS A RESULT, ARE LEADING THE WAY IN THIRD- and regulatory. Previously, approaches PARTY REGULATION AND MONITORING. HOWEVER, MANAGING to third-party risk have been reactive, decentralised and inadequate. THE PROCESS IS STILL A CHALLENGE. Public record research is an integral part of integrity due diligence. This enables companies to examine a third party and its 20‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.financierworldwide.com ’’ FEATURES Risk Management

associates using a wide range of secondary party malfeasance to identify ‘red flags’. considered, including local communities, sources, including corporate registries, However, this is often a difficult task. As indigenous people, consumers and others. regulatory filings and media sources, such, companies must make every effort to Until now, not enough has been done to among others. From such data, as well improve their due diligence. According to evaluate these groups. Human resources as the third party’s public reputation and MetricStream’s ‘5 Best Practices to Enhance and corporate social responsibility teams, commercial interests, companies should be Third-party Due Diligence’ report, one of as well as compliance and legal, need to able to establish a risk profile which will the most important steps a company can liaise with third parties and ensure that inform the decision to enter into a business take is to assimilate and centralise third- human rights due diligence is adequately relationship. party data. “Information including business performed. Once a decision has been reached and a details, financial status, certifications, Assessing the trustworthiness and relationship established, the ‘onboarding’ contracts, location, associated business reliability of a third party allows companies process should form a part of a third-party units, roles and responsibilities will help to fulfil compliance obligations, as well risk management strategy. This is important with searching third-party agreements, as satisfy internal risk management as managing third-party risk does not assessment results, background checks requirements. It also helps them mitigate stop once the due diligence has ended. and other details. Centralised third-party reputational damage. Given the increased Companies must remain engaged and information improves the accessibility regulatory burden on companies today, the continue to monitor third-party activities. of information globally, as well as details financial and reputational cost of being While initial due diligence may expose about negotiations and risk mitigation associated with a third party that breaches flaws or troublesome practices present at activities,” said the report. trade sanctions, commits corruption, takes the time, it cannot guard against or identify Assimilating data must be conducted part in human trafficking, launders money any future behaviour. As such, compliance within the framework of a third-party or violates other laws internationally, can with regulations and legislation must management process, however. Having a be enormous. be frequently monitored. Financial and clear and well-defined process of screening Addressing such risks can be complex, compliance audits are essential. When a and assessing potential third parties is vital. but conducting third-party integrity due third party’s contract approaches renewal, One of the most important and evolving diligence can make a difference. It can the relationship should be reviewed with areas of third-party risk, particularly in be critical to ensuring the success of a fresh due diligence. emerging markets, relates to human rights business venture. An integrated approach It is imperative, however, that companies issues. Human rights due diligence is an to integrity due diligence can reveal risks conduct due diligence in a coordinated entirely different proposition from ‘know which might otherwise go undetected. manner. Too often, third-party due your client’ due diligence or business Each company is different and will have diligence is done in an ad hoc, piecemeal partner screening; however, it should not be different risk profiles and appetites. As fashion. Companies may focus too intently overlooked. such, there is no blueprint for handling on performance management and less on The UN Guiding Principles on third-party risks. Enforcement action risk management and compliance; as a Business and Human Rights set out the and sentencing guidelines surrounding result, they may fail to identify potential components of human rights due diligence the FCPA, however, make it clear that ethical problems, security breaches, for companies. It is imperative that companies must know who their third bribery, money laundering and regulatory organisations understand these principles, parties are and who they do business with. violations, for example. are able to recognise the importance of Equally, in an age where customers expect Technology has a key role to play. It can human rights due diligence and are able companies to be transparent and compliant, automate and standardise due diligence, to identify and manage any potential it is no longer possible for organisations and many tools have been developed to human rights violations which may be to turn a blind eye to the actions of their address this demand. Data aggregators, associated with a business’ operations, business partners. Furthermore, third- data analytics and process workflow supply chain or value chain. This helps party due diligence cannot be a box-ticking management can relieve some of the businesses become aware of any actual or exercise. Companies must take a holistic administrative burden felt by organisations potential human rights impacts on people view if they are to truly understand the that have to manage compliance and third- associated with their business, and to take spectrum of risks their third parties party management on a global scale. But appropriate action to prevent and address present. technology is not infallible; the process still those impacts. Furthermore, legislation requires human oversight within a wider such as the UK Modern Slavery Act means framework. that companies are required to take action. Regulators and enforcement agencies Those with a turnover above £36m must are increasingly calling for companies to report on steps they are taking to eradicate strengthen internal controls, perform audits slavery and human trafficking in their and investigate both internal and third- supply chain. Different groups must be

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 21 FEATURES Litigation & Dispute Resolution

Dissolving discord: shareholder dispute resolution in the UK

BY FRASER TENNANT

ven the best business partnerships They are also increasingly prevalent. In With the number of companies being go through rough patches. the UK, for example, shareholder disputes formed in the UK continuing to increase (a However, the trick is to not allow are common. “A key driver for this is the record 657,790 new ﬁrms were launched difﬁculties, such as a dispute entrepreneurial culture in the UK, which in 2016, according to UK government Ebetween shareholders, to erupt into results in start-up companies which can data), the extent of shareholder disputes anything inherently damaging. rapidly grow in value,” says Ed Weeks, is also likely to rise. “Shareholder disputes The whys and wherefores of a shareholder a partner at Cripps. “Such rapid growth can hamper growth and even lead to dispute can vary, but they typically involve can mean relations between shareholders insolvencies,” notes Jonathan Lea, founder disagreements over company strategy. become strained and interests diverge.” of The Jonathan Lea Network. “The

22 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com FEATURES Litigation & Dispute Resolution

main driver of disputes is a lack of good governance, whereby shareholders fall out over how the company should be managed.” IN MANY INSTANCES, MEDIATION IS A SUITABLE PORT OF CALL,

Resolutions ESPECIALLY WHEN A COMPANY’S SURVIVAL IS THE PRIORITY OF The first attempt at resolving disputes between shareholders is usually made via ALL SHAREHOLDERS. articles of association and shareholders’ agreements. “If these are well-drafted they may provide a mechanism to resolve all but the most knotty of disputes,” suggests Mr Weeks. “What you want are clearly structured provisions dealing with shareholder expectations, obligations and exits. An appropriate dispute resolution mechanism – such as expert determination ‘‘ ’’ of share valuation on the compulsory purchases of shares or mediation of disputes generally – can prevent disputes from escalating, saving everybody “The factors remain constant as they are Strong emotions significant time and money.” essentially about relationships between Of course, a dispute invariably involves A company’s constitution comprises people,” says Mr Weeks. “Shareholders strong emotions, leading to nerves being its articles of association, as well as any fall out because that personal relationship frayed and reason under siege. Shareholder shareholders agreement. “This is why both breaks down, or trust and confidence is disputes are no exception. “Priorities are often used,” says Mr Lea. “Within lost or because there is a fundamental are sometimes at polar opposites when the constitution you can include such disagreement about the future direction of emotions come into play,” says Mr Weeks. provisions as vesting arrangements, good the business. The triggers can be a company “One shareholder may express a willingness and bad leaver clauses and other forced performing well, performing badly or just to take the company down rather than buy-back mechanisms, as well as clear bumping along. Tensions under the surface allow others to have it.” procedures on how certain key decisions between, for example, the world view of an With mediation often being successful are made. The sum effect of such well- investor versus the world view of a founder, in highlighting commercial realities and considered and drafted terms is that can bubble up at any time. The challenge helping parties to work through their disputes are avoided because resolutions is to understand the cause of the dispute, emotional angst, the resolution of a have effectively already been pre-agreed.” as only then can the law or any agreed shareholder dispute through this channel In many instances, mediation is a suitable mechanism be applied to resolve it.” can, according to Mr Weeks, be said to be port of call, especially when a company’s More often than not, companies neglect “one part law, one part accountancy and survival is the priority of all shareholders. to seek good legal advice in respect one part psychology”. “Mediation is a formal and flexible process of establishing protective and secure under which a skilled and experienced constitutional documentation that helps intermediary, the mediator, is employed by resolve shareholder disputes. “Every all parties to help them reach a settlement,” company needs to ensure that it is clear affirms Mr Weeks. “Most disputes referred as to when and how a discordant or to mediation settle on the day or shortly non-participating shareholder can be after.” easily bought out, as well as have in place comprehensive provisions in respect of Future drivers how material decisions are made between While more new UK companies may shareholders,” advises Mr Lea. “As well mean a corresponding increase in crowdfunding platforms now integrate shareholder disputes, what is largely secondary market characteristics, in beyond doubt, and unlikely to substantially the future there may be more liquidity change, are the factors which cause such for shareholders of private companies, disputes in the first place. although such developments will still need to be adopted by the board.”

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 23 FEATURES Corporate Tax

Ongoing evolution of transfer pricing

BY FRASER TENNANT

apid change is the norm in the and Development’s (OECD) base erosion Internet of Things (IoT) will increase the world of transfer pricing (TP). and proﬁt shifting (BEPS) Action Plan data available to business, consumers and Uncertainty has also become – signiﬁcantly impacting the TP landscape. governments. Second, globalisation of tax. something of a standard, with In ‘Top 5 Transfer Pricing Trends for The OECD and the Automatic Exchange Rpopulist shocks in the US and the UK, as 2018’, Thomson Reuters offers its take of Information (AEOI) means an uptick in well as tax overhaul legislation – such as on the trends shaping TP. First, data compliance requirements. Third, internal the Organisation for Economic Cooperation management. Cloud solutions and the collaboration – teams across the globe need

24 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com FEATURES Corporate Tax

to understand and align with company TP According to Eduardo Gracia, a partner policies. Fourth, increasing threat of audit at Ashurst, in a post-BEPS world, it is and litigation. Both are likely to increase likely there will be greater scrutiny by with country-by-country reporting (CbCR). national tax authorities as to where added WHILE MANY TAXPAYERS Finally, TP and brand hand-in-hand. TP value is generated in the value chain, in is a political tool, interlinked with brand, order to avoid profit shifting through TP TRY TO MINIMISE THEIR and an essential part of a company’s public policies. “For taxpayers, this will entail relations. enhanced documentation efforts and new TAX BURDENS WITHIN THE “In the last few years we have seen reporting obligations, for example tax BOUNDARIES OF WHAT significant changes in the TP landscape,” ruling exchanges and CbCR obligations says Ryan J. Kelly, a partner at Alston and exchanges,” he contends. “However, THE TAX LAW ALLOWS, IN & Bird LLP. “Organisations such as the subjectivity in the interpretation of data may OECD have created action plans that generate legal uncertainty.” TP, GETTING TO THE ‘RIGHT call for increased transparency between ANSWER’ IS NOT ALWAYS AS taxing authorities, resulting in additional Tax efficiencies and compliance compliance burdens on companies. As For many companies, accurately assessing CLEAR AS BLACK AND WHITE. tax authorities start sharing information the level of information disclosure required ‘‘’’ with one another, it is important for by TP guidelines and tax authorities in multinationals to have sound TP policies in order to remain compliant is perhaps the place. It is also important for legal, finance most difficult challenge they face. “What and tax departments to be aligned to ensure used to be acceptable five years ago in TP policies are implemented and followed terms of disclosure would probably be consistently.” insufficient today for many tax authorities,” EU borders, European Court of Justice says Mr Gracia. “This suggests that (ECJ) developments on state-aid files that Trends and strategies companies’ in-house tax counsel need have been appealed, and the continued Another trend that has recently emerged to request additional resources in order development of the arbitration procedure in the TP space is an increase in litigation. to continuously monitor this aspect of provided for in the Multilateral Instrument In the US, for example, cases involving compliance.” (MLI). companies such as Altera, Amazon, For Mr Kelly, the tax regulations that “The TP environment will continue to Medtronic, Coca-Cola and Facebook govern TP are among the most complex become more complex,” says Mr Kelly. are influencing how organisations go sets of rules. “While many taxpayers try “However, it is likely that many tax about implementing their TP strategies. to minimise their tax burdens within the authorities will have insufficient resources to Furthermore, the recent passage of the Tax boundaries of what the tax law allows, in TP, handle the number of TP matters that exist.” Cuts and Jobs Act (TCJA), which includes getting to the ‘right answer’ is not always as Whether there is adequate official significant changes to Internal Revenue clear as black and white,” he suggests. “As oversight or not, the upshot is that Code sections 367 and 482, may serve to a result, taxpayers and tax authorities often companies need to get to grips with an embolden the Internal Revenue Service have differing views over what constitutes an evolving TP environment, by ensuring (IRS) to continue its high-profile TP arm’s length transfer price. The complexities compliance with new tax legislation and activities. of the various TP rules across different dedicating time to high-value-added “Prior to the TCJA, many US-based jurisdictions can make it challenging for activities. multinationals implemented tax-planning taxpayers to legally minimise their taxes, strategies to move profits into jurisdictions while also remaining compliant with the outside of the US with lower tax rates, rules as interpreted by tax authorities.” and to take advantage of the deferral of tax on foreign earnings,” says Mr Kelly. Future trends “However, with the recent passage of Going forward, there are a number of the TCJA and lower tax rates in the US, developments expected to substantially some multinationals have changed their impact the TP space. These include the tax-planning strategies. This may result in outcome of profit split method (PSM) changes to organisational structures and discussions, TP on related-party financial where intangible assets are located. The transactions, the result of the ongoing TCJA has also incentivised many US-based peer review on the implementation of multinationals to repatriate cash held BEPS Action 5 regarding the exchange overseas.” of information on tax rulings beyond

www.ﬁnancierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 25 COVER STORY Boardroom Intelligence

Breaking down barriers: diversity and inclusion in the C-suite

BY FRASER TENNANT

he path to the C-suite is not an roles is highlighted, with 33 percent of Research consistently demonstrates a established, linear journey. On women in senior positions by 2020 the link between diversity and inclusion and the contrary, it is challenging and voluntary target. A similarly themed 2018 a company’s operational and financial oblique. This is especially so for review by the Allegis Group – ‘Talent, performance. Indeed, a 2018 McKinsey Twomen, ethnic minorities, the disabled, and Business, and Competition: A New World report – ‘Delivering through diversity’ the lesbian, gay, bisexual and transgender of Diversity & Inclusion’ – found that – highlights a strong link, finding that (LGBT) community. in Fortune 500 companies, women and companies in the top rank for executive Testifying to the extent of the struggle minorities hold 31 percent of board seats. team gender diversity were 21 percent facing this large slice of the population is a Although this figure is slowly improving, more likely to experience above-average wealth of studies and analyses, and reams overall, almost 80 percent of board profitability than less-inclusive companies. of anecdotal evidence, much of which members are male. In terms of ethnic and cultural diversity, characterises senior management teams as In terms of LGBT representation at McKinsey found a 35 percent likelihood of utterly lacking in diversity and inclusion. C-suite level, many studies reveal that increased financial performance. For example, the 2017 ‘Parker Review’ LGBT workers continue to experience To disrupt the status quo and embrace the of the ethnic diversity of UK companies discrimination in the workplace, there being positives that greater diversity and inclusion revealed that over half of all FTSE 100 numerous barriers to entry. According to in the C-suite can bring – such as money firms do not have a single director from an the Center for Talent Innovation’s (CTI) savings, revenue boosts and sustainable ethnic minority background, with only 8 2016 report ‘Out in the World: Securing long-term value – attitudes, cultures and percent of these firms’ 1087 directors being LGBT Rights in the Global Marketplace’, systems clearly need to change. of non-white origin. one of these barriers is the often anti-LGBT In another review, the UK government laws of the countries in which companies Ethos commissioned ‘Hampton-Alexander Review do business, which can have a detrimental Some commentators believe the reason 2017’, the extent of the work needing to be impact on the ability to attract and retain why the C-suite typically lacks an ethos of done to recruit women into senior business top LGBT talent. diversity and inclusion is rooted in history

26 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com COVER STORY Boardroom Intelligence

TO DISRUPT THE STATUS QUO – when many of the world’s top companies and education, have not allowed room were created against a backdrop of a for the diverse thoughts and opinions AND EMBRACE THE POSITIVES struggle for rights and freedoms in various of marginalised groups to take root and shapes and forms. grow or even be thought of as valuable. THAT GREATER DIVERSITY AND “People of colour, in the US and around Therefore, we find ourselves where we are INCLUSION IN THE C-SUITE the world, have been fighting for their civil today, the most diverse global society to rights for hundreds of years,” says social date, yet, there are only 24 women chief CAN BRING, CULTURES AND impact consultant Laura K. Wise. “Women executives and three chief executives of continue to demand the same wage for the Fortune 500 companies.” SYSTEMS CLEARLY NEED TO same work and the LGBT community is Others, however, see change afoot, albeit CHANGE. also still fighting against discrimination. slow change. “With significant monies The systems that surround the business being spent and programmes sponsored ‘‘’’ community, primarily personal networks by senior management, I do not believe www.financierworldwide.com FINANCIER WORLDWIDE AUGUST 2018 27 COVER STORY Boardroom Intelligence

there is a lack of an ethos for diversity “Multiple studies demonstrate that “Effective recruitment strategies are and inclusion by the C-suite,” says Janice less skilled, more heterogeneous group targeted at the specific communities a Ellig, co-chief executive of the Ellig Group. make better decisions than more skilled company wants to attract,” explains Ms “However, while actions are there and have homogeneous group,” says Ms Ellig. Ellig. “Employees are integral to these been for decades, accountability is lacking. “Homogeneity breeds ‘groupthink’ and strategies and should be utilised in driving Like the issue of accelerating the pace of thwarts innovation. When companies recruitment efforts. When looking to change for women on boards, unless chief draw from all backgrounds, they are attract women, African-Americans, Asians, executives and boards make gender parity a more innovative, as they bring forth Hispanics, LGBT, veterans and those with priority, it will not happen.” the ideas of many. Additionally, when disabilities, a company’s employee resource According to Ms Ellig, companies companies embrace all their constituents groups and senior-level executives must be should do five things to make diversity – employees, customers, shareholders and actively recruiting in these communities and inclusion a core driver of their overall the communities in which they operate to attract candidates. Women and diverse business strategy. First, overhire where – people acknowledge this and place more candidates will not be attracted to certain groups are underrepresented, ‘trust’ in that company. Such perceptions companies unless they can ‘see’ an inclusive from entry to senior levels, including can greatly benefit companies when it culture – an environment where there are the board. Second, focus on retention comes to attracting talent, customers and others like them who not only survive, but of underrepresented groups and ensure shareholders. Companies have so much to thrive and succeed. Companies with more policies do not have an adverse impact. gain and so much to lose. Diversity and inclusive, welcoming, safe, empowering Third, measure progress annually and inclusion is an easy solution to gaining a environments attract the best talent and where shortfalls occur, increase the hire competitive edge.” become the best companies.” and retention of those underrepresented The attainment of a C-suite position by Some hold the view that it is the failings groups. Fourth, hold the chief executive someone from an underrepresented group of the recruitment process itself which and senior management accountable undoubtedly sends a powerful message: that leads to a lack of diversity and inclusion. for diversity and inclusion results and those from a similar background also have “Recruiters are typically not as diverse shortfalls. Finally, celebrate success with the potential to someday make it to the top or as representative of the candidate stories and transparency. table. “Whether someone knows they are a pool and the world as they need to be, For Jennifer Brown, founder and chief role model or not, they are, because there so that needs some attention,” suggests executive of Jennifer Brown Consulting, the are a lot of eyes on them and they offer a Ms Brown. “However, if you are being makeup of the C-suite is often preordained. powerful example,” says Ms Brown. “In interviewed by somebody that shares your “Who you know has largely determined the meantime, we need to point out bias diversity story and talks in an authentic and how high you rise within a hierarchy,” she at every moment in order to effect change. compassionate way about the commitment explains. “Relationships do not necessarily The makeup of the C-suite sends out signals that the company has to inclusion, it is trump experience, but being an insider about what is important to a company. We going to go a long way toward swaying often gives someone a path to the C-suite. are not going to make change at the pace a candidate to accept a job. So we need Those in leadership positions, who tend we need to if we do not make diversity and to ask, who is the interviewer and how to be white, straight men, still typically inclusion a priority.” do they either represent diversity to the promote candidates who come from diverse candidate or speak about it with within their sphere of influence. Such Recruitment compassion, conviction and knowledge?” leaders are used to working in an exclusive How companies adapt their existing Another recruitment issue is that job environment. The problem is there are still recruitment strategies in order to address descriptions often display unconscious bias, many that do not see a problem with that.” underrepresentation of certain groups at full of gender language that discourages C-suite level is a key component in creating female candidates from applying for Advantages a more diverse and inclusive working high-level positions. A recent BBC report The business case for improving diversity environment. Adding to the recruitment highlighted this disinclination, noting that and inclusion in the C-suite is compelling – mix are networks such as Jopwell, a an analysis of hundreds of millions of cash flow per employee is 2.3 times higher career advancement platform for black, job advertisements indicated that certain in US companies with mature diversity and latinx and Native American students terms – such as ‘coding ninja’, a common inclusion programmes, according to the and professionals, which are helping to phrase in Silicon Valley job advertisements Allegis Group – with a company’s decision- establish a pipeline of qualified and diverse – carried negative connotations for women making faculty a particular beneficiary. candidates. and thus made them reluctant to apply.

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“The good news is there are technologies which can help tackle biases when writing job descriptions by suggesting less-gendered words,” adds Ms Brown. “This will help us HOW COMPANIES ADAPT THEIR EXISTING RECRUITMENT mitigate unconscious biases until such time as we can navigate them consciously.” STRATEGIES IN ORDER TO ADDRESS UNDERREPRESENTATION

Momentum OF CERTAIN GROUPS AT C-SUITE LEVEL IS A KEY COMPONENT High-profile appointments such as Gina IN CREATING A MORE DIVERSE AND INCLUSIVE WORKING Haspel as the first female director of the Central Intelligence Agency (CIA), Stacey ENVIRONMENT. Cunningham as the New York Stock Exchange’s (NYSE) first female chief executive and Adena Friedman as chief executive of the National Association of Securities Dealers Automated Quotations (NASDAQ) do much to build momentum, ‘‘ ’’ and intensify the pressure on companies to build a more diverse and inclusive working environment, encompassing not only the C-suite, but every facet of a company’s people so that you can hit some kind of In the view of Ms Wise, the pressure on operations. metric, when they are either not ready or companies to make diversity and inclusion “These are significant appointments,” says not going to be sufficiently supported, can a key operational focus will continue to Ms Ellig. “So, I am cautiously optimistic. lead to disaster. When you are grasping mount. “Companies will have to become As companies are honoured for their at straws to appear more diverse, it can more diverse if they want to survive and inclusive and diverse cultures, other lead to more high-profile failures. Instead, build a positive legacy and reputation over companies will not want to be left behind. companies need to make a disciplined, the next 25, 50 or 100 years,” she suggests. Moreover, companies will not want to lose repeatable and strategic investment toward “Most importantly, they will have to create out in attracting top talent, will not want to diversifying their pipeline and making sure cultures that are inclusive and that welcome be liable for discrimination claims and will their culture is inclusive.” the diverse talent they are looking to not want their reputation tarnished in any attract.” way. The emphasis on moving the needle Awareness In order to create workplaces in which forward will only increase as quotas and With greater scrutiny now surrounding a culture of diversity and inclusion is part legislation put pressure on companies to what companies are doing to create a more of the fabric of business, these traits need achieve greater diversity overall.” diverse and inclusive C-suite, policies to be considered the norm rather than the On the flipside, if C-suite leaders are and procedures are being adapted to exception. Furthermore, to truly break being hurried into making decisions embrace a changing environment. “The the shackles of myopic viewpoints and because the company pipeline has been #MeToo movement from the US, as well as outdated codes of conduct, companies need neglected and they are under pressure initiatives such as the legislatively required to reconfigure their mindsets, expand their to choose from a more diverse pool of gender pay gap reporting in the UK, are recruitment scope and make the journey to candidates, then care must be taken, as causing C-suite members to consider the C-suite a potential destination for more decisions made in haste are rarely good what changes are needed, including than just a privileged few. ones. among themselves,” says Steven Cox, “If the court of public opinion criticises vice president of diversity and inclusion a company for a lack of diversity in the at Fujitsu. “C-suites should be careful C-suite, that company could choose to to develop plans that address all aspects aggressively hire diverse candidates into of diversity, not just the one or two that senior positions, but that is not something are receiving the most media or investor that should be done lightly,” advises Ms attention.” Brown. “Rushing into over-promoting

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ROUNDTABLE: RISKS FACING DIRECTORS & OFFICERS

In a world of change that is driving companies to the very limits of their adaptive capacities, risk is a consistent theme, especially for directors & ofﬁcers. When a disruptive event cascades through interrelated systems – environmental, economic, technological and operational, for example – the damage can be catastrophic. Since the potential repercussions of poor decision making have never been greater, D&Os are under pressure to understand the range of risks they face, their materiality and the various approaches available to mitigate them, to limit the personal liability they face.

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THE PANELLISTS

Stephen Surgeoner Stephen Surgeoner has more than two decades of experience advising clients on all forms Partner, Dechert LLP of commercial dispute resolution, with a focus on the banking, funds, insurance, energy T: +44 (0)20 7184 7877 and telecommunications industries. He has considerable experience in assisting clients E: [email protected] with high-value, cross-jurisdictional complex commercial litigation. Mr Surgeoner also www.dechert.com advises ﬁnancial institutions and corporate enterprises on risk mitigation, including the use of insurance products, such as political risk, credit, directors and ofﬁcers, and warranty and indemnity insurance.

Howard S. Suskin Howard S. Suskin is a litigator with substantial first-chair experience in civil and criminal Partner, Jenner & Block securities matters. He is co-chair of the firm’s securities litigation and enforcement practice T: +1 (312) 923 2604 and the class action practice. Individuals and businesses seek his counsel in such matters E: [email protected] as class actions alleging securities fraud and misrepresentation claims, derivative actions www.jenner.com claiming breach of fiduciary duty, contests for corporate control, and shareholder demands for corporate books and records.

Steven Hadwin Steven Hadwin is a dispute resolution lawyer based in London, advising on insurance Head of Operations – Risk Advisory and matters. He has experience in dispute resolution, coverage advice, policy reviews and Cyber Security, Norton Rose Fulbright LLP policy drafting. Mr Hadwin has experience in relation to a number of classes of insurance, T: +44 (0)20 7444 2290 including directors and ofﬁcers’ liability insurance, crime insurance, professional E: [email protected] indemnity insurance, warranty and indemnity insurance, cyber insurance, employment www.nortonrosefulbright.com practices liability insurance and excess wordings.

Allen Lanstra Allen Lanstra’s diverse practice focuses on complex, high-stakes litigation. From his Partner, Skadden, Arps, Slate, Meagher & extensive experience handling high-proﬁle and discreet matters for large institutions, Flom LLP corporate leaders and public ﬁgures, Mr Lanstra has developed a reputation as a tested T: +1 (213) 687 5513 and trusted counsellor during a crisis. E: [email protected] www.skadden.com

Deborah Hicks Midanek Well known for her turnaround expertise, Deborah Hicks Midanek has consistently President, Solon Group positioned businesses for accelerated growth. Ms Midanek has diagnosed and remedied E: [email protected] problems for over 60 corporations plus furthered growth of nearly 30 ventures. Once www.solongroup.com described as a ‘pure thinker’, she can quickly gain a deep understanding of complex problems, while exhibiting sensitivity to all parties involved and an extraordinary ability to assimilate and craft lasting solutions.

32 AUGUST 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com ROUNDTABLE Risks Facing Directors & Ofﬁcers

FW: Could you provide an overview of the landscape applicable to companies is shifting years? What major new risks have arisen current risk landscape as far as D&Os are quickly and D&Os need to adapt to this. in recent times, to keep D&Os awake at concerned? What factors are driving these There has been an increasing number of high night? risks? profile, adverse cyber incidents that have brought the potential consequences of cyber Suskin: We have seen a rise in shareholder Midanek: We live in an ever-more risks to light. Threats to companies are well campaigns, including demands for books interconnected world, in which acceleration known and incidents that have led to loss and records under Delaware’s General of change is pushing the adaptive capacities of profits, reputational damage, regulatory Corporation Law Section 220 and analogous of institutions, communities and individuals liability and litigation have been reported statutes in other states, shareholder to their limits. Humanity faces systemic worldwide. derivative demands and shareholder challenges, including fractures and failures derivative lawsuits. The subject matters affecting the environmental, economic, Lanstra: The landscape is increasingly of the campaigns has been wide-ranging, technological and institutional systems on complex and uncertain for directors including issues concerning accounting which our future rests. When a disruptive and officers as regulatory efforts and internal controls, internal controls relating event cascades through these interrelated business challenges continue to broaden to cyber breaches, FCPA violations and systems, the results are likely not just to the oversight accountability of corporate allegedly excessive compensation of D&Os. be incremental damage, but catastrophic leaders. In addition to historic filing rates A relatively recent development has been damage on a hard-to-imagine scale. At the for securities class actions, plaintiffs are that increasingly this activism is supported same time, boards of directors, responsible aggressively pursuing lawsuits concerning by litigation funding firms. The consequence for the corporations which now control data breaches, major event-driven losses of that is that the opposition can afford to be the majority of the wealth of the world, are to the company, cryptocurrency issues more aggressive and has considerable added embattled. Dealing with challenges from and workplace harassment, which are staying power to remain in the fight and regulators, shareholders, cyber criminals and becoming increasingly existential threats demand a higher award. complex capital markets, in addition to the to companies’ infrastructure, operations business challenges of managing talent, cost, and reputation. Government regulators Hadwin: A key factor is legislative change, competition and sales growth, keeps them such as the Department of Justice such as the GDPR, which imposes enhanced constantly playing defence. Meeting only (DOJ) and the Securities and Exchange obligations on organisations that control or occasionally and dependent on information Commission (SEC) in the US continue to process personal data in a European context. distilled for them by management, many view individual accountability as a core Penalties for non-compliance with GDPR directors do not fully understand their principle in enforcement matters and think are severe, with potential fines on companies responsibilities, their authority and how pursuing individuals to be the rule, not the of up to 4 percent of annual global turnover to go about doing the critically important exception. In addition, plaintiffs’ attorneys or €20m, whichever is greater, in certain job that is uniquely theirs: protecting the are frequently piggybacking civil actions off circumstances. Risks to the company often corporation and its sustainable future. of government enforcement actions. Finally, translate into risks to board members. state regulators and legislatures in some For example, activist shareholders may be Suskin: The increased number of securities parts of the US are filling regulatory arenas increasingly willing to put pressure on board class action filings remains a concern. being vacated at the federal level. members to manage cyber risk effectively, 2017 was a record year for such filings. including, in the most serious circumstances, The complaints are both event driven, such Surgeoner: The landscape for D&Os by way of shareholder derivative lawsuits. as stock drop cases, as well as litigation continues to evolve in an ever-increasing following announcements of M&A activity. risk matrix. The extension of the senior Lanstra: Corporate leaders seem focused Additionally, derivative lawsuits continue managers’ regime, shareholder activism, the on competition arising from market to be filed against D&Os alleging breaches increasing sophistication of collective actions disrupters, finding talent that can bridge to of fiduciary duty, particularly in Delaware. across Europe, the EU’s General Data the millennial generation, and navigating The alleged breaches can be based on any Protection Regulation (GDPR), data loss, political change and realignment. Each number of underlying factors, including alleged management failings in insolvency of these present uncertainties of risk to alleged failures to implement or oversee situations and cyber security all feature the foundations built and inherited by internal controls, approvals of allegedly strongly in the risk column. These risks are corporate leaders. It is a new world out excessive compensation and corporate set against increasing political tension and there. The recent risks that are preoccupying waste. economic uncertainty, driven by Brexit and responsible corporate leaders include cyber festering trade wars. security threats, workplace harassment, and Hadwin: D&Os face a more challenging regulatory discretion and uncertainty. landscape than ever before when it comes to FW: How would you say the risks facing liabilities arising out of cyber risks. The risk D&Os have evolved over the past few

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Surgeoner: It is probably fair to say that FW: How would you characterise the may simply be to inquire as to whether a D&Os have found sleep challenging since extent to which D&Os are aware of the particular risk has been handled, which is 2008. The regulatory environment has range of risks and the extent of their not always an adequate way to proceed. continued to expand, along with a robust responsibility for managing and mitigating While many boards and directors do enforcement regime. Previously emerging them? In general, do you believe risk understand that the buck stops with them risks, such as cyber, have continued to management frameworks are adequate? in terms of being sure that effective risk evolve and become more severe. Data losses assessment and mitigation procedures and breaches have risen high up the agenda. Hadwin: Cyber risk has emerged as a are in place, it seems that many more do The precarious nature of reputation and how key boardroom concern in recent years, not understand that the responsibility is it can be lost from bribery and corruption and there is an increasing appreciation theirs. While huge progress has been made allegations to #MeToo have dominated of the fundamental importance of having in thinking about and analysing risk of D&Os’ thoughts. Finally, depending on the robust security measures in place. However, many types, building an integrated view of nature of the business, political risk will be many directors face real challenges in different types of risk and how they relate to firmly on the agenda. understanding and mitigating this type each other, both inside the corporation and of risk for their companies. While there outside of it in the interconnected world in Midanek: The scale of possible does seem to be a growing awareness of which the corporation resides, remains an repercussions of making poor choices has cyber security risks, D&Os do not always intractable puzzle. The key area to focus on, never been greater. Thus fear is higher, just fully appreciate the extent of the liability to my mind, is on building resilience. While when calm judgment and reasoned decisions risks that they may be faced with. This thinking about how to do that has evolved are most important. The most obvious is particularly true for those who hold considerably, there is more to do, as in the issue to point to is cyber risk, whether positions on boards in multiple jurisdictions. end what we all want to see is organisations breakdowns may be the consequence In this respect, some risk management that know how to recover. of system disruption, cyber thieves or frameworks may not yet be adequate. cyber terrorism. Political uncertainty is Although D&Os may be well-informed Surgeoner: There is no ‘one size fits all’ also increasing as, love him or hate him, about the risks they face in certain countries, response to risk. D&Os of major businesses president Trump is shaking up the world, they should seek to familiarise themselves have a clear sense of responsibility for which was already undergoing significant with the position taken in all jurisdictions managing and mitigating risk and huge change. Litigation seems to be an ever- that the company operates in. progress has been made to map, analyse increasing threat, whether well founded and respond to risk. Risk management or not. Regulators, too, are rattling their Midanek: Awareness of specific and frameworks have improved significantly, swords, and activists continue to attack, general risks is easy to gloss over in although they benefit from regular review with some greater credibility in the eyes of infrequent meetings. And of course, if and stress testing. some. awareness exists, the approach to addressing Lanstra: D&Os vary widely in both their knowledge of the specific risks facing their companies and their willingness to accept a role in mitigating those risks. Risk management frameworks can be very effective if, and only if, those in an organisation are receptive to attentive risk management and value it. Where risk management is seen as a barrier to be disregarded or avoided, instead of a core function that drives and preserves value, it WHILE MANY BOARDS AND DIRECTORS DO UNDERSTAND THAT can create a false sense of protection that increases risk and exposure. Organisations THE BUCK STOPS WITH THEM, IT SEEMS THAT MANY MORE DO that value risk management tend to impose and expect their directors and officers to be NOT UNDERSTAND THAT THE RESPONSIBILITY IS THEIRS. aware of their responsibilities. Independence remains an important factor in success, as does continual training on risk management DEBORAH HICKS MIDANEK and written guidelines and policies. Solon Group

34‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com ’’ ROUNDTABLE Risks Facing Directors & Ofﬁcers

Suskin: D&Os are becoming increasingly aware of personal exposure resulting from new risks, and they understand the need to ask more questions of management IT IS HELPFUL FOR D&OS TO HAVE KNOWLEDGE OF POTENTIAL concerning risk exposures and contingency plans. Because of the increase in data RISKS, BUT MORE IMPORTANT TO HAVE PROCESSES IN PLACE FOR breach claims, for example, D&Os are THE ORGANISATION’S MEMBERS TO TENDER HAZARDS TO D&OS understandably more interested in whether management has developed adequate IT FOR EVALUATION AND JUDGMENT ON HOW TO NAVIGATE THEM. security measures, breach response plans and general infrastructure to address ALLEN LANSTRA post-breach matters. Post-breach issues Skadden, Arps, Slate, Meagher & Flom LLP include the means to notify customers, reconstruct lost data and attention to the inevitable business interruption following a data breach. Also, directors are far more attentive to policy limits for D&O policies, ‘‘ ’’ and now often insist upon the purchase of Side A-only coverage, which is dedicated to protect only the individual D&Os for non-indemnifiable claims. In the past, it seek the assistance of outside counsel and necessarily require a detailed individual was unusual for an individual director to be consultants to review current frameworks understanding of every technical issue. as interested in the scope and nature of the and identify vulnerabilities and blind spots, In terms of immediate action, there are a company’s insurance coverage as they are commit to risk management training, number of steps which D&Os can take in today. and develop a culture where everyone is order to manage cyber risk effectively and permitted to ask questions and raise their increase their understanding. D&Os should FW: For D&Os who may be concerned hands. This will push improvements, identify obtain input from those with appropriate about gaps in their knowledge and dangers and wrongful conduct, and help all expertise in order to understand fully the understanding of potential risks, what employees embrace risk management as part potential cyber risks. Also, establishing a immediate action would you recommend? of their core duties and prevent the types of cyber risk committee is often an effective widespread, fraudulent schemes that have means of ensuring that D&Os have access to Surgeoner: The watchword for D&Os is kept some companies in the headlines and in those with the required knowledge. collaboration. There are three key friends to court for all of the wrong reasons. a D&O who is concerned about gaps in their FW: To what extent are high-ranking knowledge and potential risks. The first Suskin: It behoves D&Os to be informed executives being held personally is an expert D&O insurance broker who as to any potential gaps in coverage they may responsible and liable for transgressions should be able to summarise the risk and face and they should take affirmative steps occurring within their company? provide a sound D&O policy that will help to address those gaps. to mitigate the risks. Second, it is important Lanstra: Simply put – increasingly. Laws, to build a relationship of trust with the Midanek: Study, and learn, both about regulations, shareholders and jurors all hold D&O insurer, with clear disclosure in the board’s responsibility and about the corporate leaders directly accountable for relation to the policy and ensuring the terms range of risks, their materiality, and various structural failures and egregious conduct. of the policy are clear and unambiguous. approaches to mitigating them. Plenty of And jurors presume that corporate leaders Third, it is almost certainly worth speaking help is available, but work to find the right have allowed or encouraged a culture with a lawyer specialising in directors’ duties help, and even then, scan the horizon, and where wrongful conduct is permitted if so that any industry-specific risks can be the backyard, relentlessly. hidden, and if it tends to further corporate identified. profit in the short term. Juror disdain for Hadwin: One of the biggest challenges corporate executives is at an all-time high, Lanstra: It is helpful for D&Os to have here is that many aspects of cyber risk and a lack of trust in industries that can knowledge of potential risks, but more require a working understanding of face sudden consequences, such as those important to have processes in place for the technology and the use of data, and in the life sciences that are susceptible to organisation’s members to tender hazards many company directors do not have adverse events from failed trials or adverse to D&Os for evaluation and judgment on this at present. However, although D&O regulatory action, can be viewed through how to navigate them. It may be prudent to engagement is essential, it does not conspiratorial lenses.

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Suskin: It is relatively rare for high-ranking Hadwin: To date, in the UK, despite Surgeoner: The recent tribunal comments executives to be held personally responsible the changing risk landscape in many in Arif Hussein v. Financial Conduct or liable. The ‘for cause’ provisions usually jurisdictions, the personal liability of Authority gave a strong hint regarding the present in executives’ employment contracts directors in this context has not been direction of travel for senior executives. are a high bar to meet. Additionally, particularly common. However, risks to Mr Hussein was a relatively junior trader most executives are indemnified by the the company often translate into risks to who was put under investigation in relation corporation’s bylaws to the fullest extent of board members, and there have been some to a limited number of chats which took the law, and are covered as D&O insurance shareholder derivative lawsuits brought place over a very short period regarding generally leaves them exposed to personal against directors in the US in the aftermath the manipulation of LIBOR. The tribunal liability only in instances of proven intent to of large data breaches. In recent years, expressed some concern that senior defraud. longstanding legal duties, such as fiduciary management had not been pursued for their duties to the company, have been joined by role in the matter. Midanek: There is a greater focus by greater regulatory obligations, particularly in regulators and others on identifying and the financial sector, and a greater willingness Midanek: The literally hundreds of men holding accountable for wrongdoing those on behalf of regulators to take action against whose alleged sexual misbehaviour in in a position of authority, whether they were individual directors. employment settings that has come to light actively involved or not. Regulators want to in the last year or so will presumably be discourage bad acting, both by punishing Surgeoner: To date, it has been rare playing out in the courts for some time. It those with authority to have avoided it or for high-ranking executives to be held will be enlightening for D&Os everywhere fixed the issued and failed to do so, and by personally liable. However, there has been to see how culpability of the corporation is deterring others by creating examples of increasing scrutiny, both politically and from determined and damages assessed. painful consequences. The chastising letters regulators, as to why senior executives are written to the former chairman of Wells not seemingly being held accountable. This Hadwin: The D&O implications of Fargo & Company, John Strumpf, early in is likely to increase the pressure on senior large scale, high-profile cyber attacks 2018, by the Federal Reserve regulators executives, particularly with the increase in were brought into focus by a number of offer an example. Possibly broadening use of regulations, such as the senior managers’ shareholder derivative suits in the US that the responsible corporate officer doctrine, regime. Increased shareholder activism, were brought in the aftermath of large data whereby in certain circumstances, criminal which specifically targets senior executives, breaches, essentially alleging that directors penalties may ensue simply by virtue of will focus the spotlight. had failed to manage and mitigate cyber being in the chain of command, offers risk adequately. Such claims can have another. FW: Can you highlight any recent claims significant settlement values and, even if against D&Os in which the outcome proved they are dismissed, often require defendant to be particularly significant? D&Os to incur significant defence costs. Such claims can also lead to the removal or resignation of key board members, even in circumstances where formal liability is not established.

Lanstra: The Delaware Supreme Court’s rulings in Corwin v. KKR and In re Cornerstone Therapeutics have been viewed as director-friendly decisions narrowing the contours of suits that will survive motions to dismiss, although large COMPANIES AND D&OS SHOULD WORK TOGETHER TO SCOPE settlements have been reached in numerous derivative actions alleging breach of THE RISKS THAT D&OS FACE AND COOPERATE TO ENSURE THAT fiduciary duty in Delaware. The life science and biotechnology industries are facing APPROPRIATE PROTECTIONS ARE IN PLACE TO MITIGATE THOSE an increase in securities class actions and RISKS. accompanying shareholder derivative suits. Finally, the recent securities class actions STEVEN HADWIN against Equifax and PayPal are noteworthy Norton Rose Fulbright LLP in the cyber security space.

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FW: How important is it for D&Os to ensure they have appropriate levels of D&O liability insurance coverage in place? How can D&Os accurately determine D&OS MUST BECOME MORE VIGILANT AS TO MANAGEMENT’S whether or not their insurance coverage is equal to the range of risk scenarios that OVERALL AND HOLISTIC EFFORTS TO MANAGE RISK. exist?

Suskin: D&Os must become more vigilant as to management’s overall and holistic efforts to manage risk. This includes not HOWARD S. SUSKIN only a closer look at the company’s D&O Jenner & Block insurance programme, which should include Side A-only coverage, but also other coverage programmes for errors and omissions, property, products, if relevant to the business in question, cyber and general ‘‘ ’’ liability. Consulting with outside insurance coverage counsel and insurance brokers is important in order to make an accurate determination whether insurance coverage posture, and of course the cost of insurance. FW: What advice would you give to is adequate. Remember, too, that insurance coverage in companies and their D&Os when they are itself can increase likelihood of litigation assessing the merits of a D&O liability Hadwin: D&O liability cover is of as its size can be tempting to experienced policy? Which elements should be fundamental importance and companies attorneys. considered of paramount importance? and D&Os should work together to scope the risks that D&Os face and cooperate to Surgeoner: It is vital for D&Os to Hadwin: A company needs to have cover ensure that appropriate protections are in review the level of D&O cover regularly. which is appropriate for its size, industry place to mitigate those risks. The liability Traditionally, this would be an annual and customer base. D&Os should scope risk can never be eliminated, so D&Os discussion with the insurance broker. But the risk the company is facing and should should always ensure they have adequate there is no doubt that these discussions have work with a broker to arrange cover which protection, ideally by way of an indemnity become more regular and important. The is appropriate for the company’s risk profile. for the company, for liabilities arising out truth is there is no fail-safe way to ensure As every company is different, an ‘off-the- of the conduct of their role or by way of that a D&O has insurance coverage equal shelf’ policy may not be the best policy to appropriate D&O insurance. to the range of risk scenarios that exist, but mitigate the specific risks a company is key considerations are the risk profile of the facing. As a general rule, it is, of course, Midanek: D&O insurance levels are business, industry-specific claim trends, loss essential that any policy has limits that are of course important, but perhaps more data and comparison to peer companies. high enough to reflect the potential risks important is understanding the structure that the insured is facing. In addition, it of the coverage available. Start with law Lanstra: An insufficient amount of is worth knowing that as well as D&O in jurisdiction of incorporation, review coverage can narrow strategic advantages insurance, cyber insurance policies can indemnification and related provisions. in litigation, affect corporate financial also provide a degree of cover to individual Move to review the certificate of planning, and inhibit the recruitment of D&Os, should they be the subject of a third- incorporation, corporate charter and bylaw quality D&Os. The worst time for D&Os party claim arising out of a cyber incident. provisions regarding indemnification and to discover that insurance coverage advancing of costs. From there, consider is insufficient is after litigation or an Lanstra: Companies should assume worst- requesting a specific indemnification investigation commences. Consider talking case scenarios for large events, not historical agreement between director and company, to multiple brokers to ascertain the data on average expenditures, and involve that specifically sets forth obligations and necessary amount of coverage, involve independent legal counsel to examine policy affirms them. Then look at the definition of management outside the chief financial exclusions and service issues. They should the actions covered and not covered, and at officer (CFO) suite, and ask plenty of recognise that risks often require a defence the list of actual D&Os identified as insured. questions about policy exclusions – all on multiple fronts, and that enforcement Consider the number of insureds, the nature analyses that should involve the advice of actions can last longer than class action and of the business, its litigation history and legal counsel. derivative litigation and are rarely part of

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a global resolution process, as can occur in greater likelihood of officers needing it than FW: With regulatory enforcement civil actions. Exclusions and the flexibility directors, which could exhaust the coverage targeting senior management, how should to retain counsel of choice are of paramount available for directors. This leads to the D&Os go about mitigating the costs that importance. Moreover, to the extent the second issue. In those very circumstances, can accrue for legal defence during an company has external managers or large D&Os may not have the same interests and investigation and beyond? stockholders with the ability to appoint defences, and may in fact be opposed to directors, it should consider what, if any, each other. Look, too, at alternate forms of Midanek: Regulatory enforcement does, endorsements might be necessary to cover coverage for uncovered acts or for directors for the record, seem increasingly willing them. vs officers. to target directors in addition to officers. The main issue in this regard, however, Surgeoner: In the modern world, it is Suskin: It is important to pay close is to consider whether separate coverage, difficult to identify circumstances where attention to key terms, exclusions and or segmented coverage, for each group, a company and D&O could conclude limitations of a policy. One aspect that directors and officers, might be wise. The that they should not have a D&O policy. is particularly important, and is often longstanding convention of D&O coverage Careful consideration should be given to overlooked, is with regard to insurer may be ripe for change. the indemnification language, ensuring control over the selection of counsel. D&Os that coverage is available for insolvency, normally prefer to be defended by counsel Surgeoner: In fairness to D&Os, this can regulatory investigations and cyber with whom they are familiar. But D&O be a time of maximum stress and it would insurance. The wording of any exclusions policies often give the insurer significant be easy to ignore careful management of should be given careful thought. It is worth influence or control over the selection of costs in implementing an effective legal checking any local law requirements for counsel, frequently in connection with the strategy. The key points are to check the D&O policies if relevant. Finally, spend insurer having negotiated significant rate D&O coverage that is available and to liaise time with the proposal form to ensure discounts with select panel counsel. D&Os with the insurer as necessary and also to that policyholders comply with the duty should examine whether their regular check any indemnification provided by the to provide a fair presentation of the outside counsel will be on the insurer’s company. It is then important to appoint risk and ensure advice is taken over the approved list and, if they are not, negotiate a lawyer in whom they trust, negotiate a circumstances in which the policy can be their inclusion at the policy inception. It comprehensive letter of engagement and avoided by the insurer. is usually difficult to get counsel approved seek to manage costs by careful use of later, and approval may be tied to significant alternative fee arrangements, such as caps Midanek: Consider whether separate concessions on rate discounts that the and fixed fees for appropriate elements of coverage for D&Os might be warranted, counsel may be unable or unwilling to the work. In many cases, this process will for two reasons. First, in circumstances in accept. require management with a D&O insurer which the coverage is needed, there may be who will be experienced in managing costs. The D&O must be careful to comply with the D&O policy terms.

Suskin: As a threshold matter, it is important that care be taken to avoid a problem in the first instance, including active oversight of internal controls and reliance on advice of outside counsel whenever potential issues or concerns arise. And it is critical, when reviewing their policies, that D&Os make sure that their IN THE MODERN WORLD, IT IS DIFFICULT TO IDENTIFY policies include coverage for investigations. Not all policies do, and some that do have CIRCUMSTANCES WHERE A COMPANY AND D&O COULD limitations that unrealistically underestimate the cost of conducting such investigations. CONCLUDE THAT THEY SHOULD NOT HAVE A D&O POLICY. Additionally, many policies do not cover responding to government subpoenas, including as non-party witnesses, but such STEPHEN SURGEONER responses can entail exceptionally high Dechert LLP costs, particularly where identification,

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recovery and production of electronically fundamental risk management tool and actions and D&Os could face potential stored information is involved. an important process to embed in a risk risks. It is difficult to imagine any scenario management framework. in which the risks facing D&Os will ever Lanstra: Consider a policy amendment disappear. that provides for coverage for internal Suskin: Simply stated, D&Os must do this, investigations, shareholder books and but they should not try to do this on their Lanstra: Risks will become more complex records demands, and shareholder litigation own. The board should engage separate due to the natural growth of regulatory or investigation demands. Hire the most counsel to regularly review their D&O states, the realignment of international effective counsel who understands that policies and indemnifications to identify comity and pacts, and the survival instincts small investigations or lawsuits often gaps and limitations in coverage in view of of government agencies and the plaintiffs’ become complex due to mimicking and ever-changing circumstances. bar. piggybacking. Appreciating how they become complex and, thus, how to cabin Hadwin: D&Os should review their D&O Hadwin: Heightened regulatory scrutiny them, is critical. To limit the need to face insurance to ensure that it adequately and higher shareholder expectations are here multiple shareholder derivative lawsuits, protects them from claims that may arise in to stay. The emerging challenge for directors a forum-selection clause is advisable. In a cyber security context. The policies should is understanding and dealing with emerging addition, for many cyber security and event- be stress-tested for effectiveness and kept risks, which in many respects are only going driven risks, liability often arises from D&O under review in order to reflect the changing to become increasingly complex and difficult acts or omissions once the attack occurs, not cyber risk landscape that the company will to deal with. Cyber risk is probably the best before. Crisis management protocols and inevitably be facing. The position, in terms example of this and, while cyber attacks action plans provide numerous benefits, one of both the liability risks and the appropriate against companies are the main headlines of which is to bridle liability for a company’s means of protection, should be kept under for now, we would not be surprised if in a response to an emergency. constant review, bearing in mind that the little while we are also reading about claims risk landscape is anything but static. against directors who did not do enough to Hadwin: Make sure triggers for cover protect their companies against the cyber are early enough. Regulators have, in Midanek: From the point of view of threat. recent years, increasingly made enquiries directors, I suggest a periodic review of D&Os in particular circumstances, in a of coverage available to them, from Midanek: The risks facing D&Os are way which falls short of being a full-blown jurisdictional law on up through likely to become more critical. Litigation is investigation. Ideally, D&O policies should indemnification and liability insurance big business and many people make a lot cover any costs incurred in responding coverage by an independent expert, typically of money from pursuing it, whether well- to those enquiries, notwithstanding an attorney well versed in both insurance founded or not. that a formal ‘investigation’, which was law and litigation. It is all too easy to look at traditionally the trigger for investigation coverage through the lens of management’s Surgeoner: The risks facing D&Os costs cover in many D&O policies, has been advisers, who may not focus on how the are here to stay and are becoming more commenced. Beyond this, D&Os should issues the board faces are different. complex. Collective actions and innovative ensure that their insurance policies provide litigation funding are likely to lead to a more appropriate cover for investigations and FW: How do you envisage the risks facing hostile claims environment. Gender pay gap enquiries, and for any respective outcome. D&Os will evolve in the months and years reporting will heighten issues over equal pay. to come? Are they likely to become ever- Cyber risk will continue to evolve, and it is FW: What advice would you impart to more complex and critical? a risk that is difficult to mitigate completely D&Os on regularly revisiting and reviewing with insurance cover yet, to catch up with their D&O policies and indemnifications Suskin: The trend in risks facing D&Os the risk that companies and D&Os face. to account for new developments and may depend on the level of government Climate change and related regulatory changing circumstances? enforcement actions. If such actions were requirements may lead to more corporate to decline under the current administration, boards being held accountable for failing to Lanstra: D&Os need to make revisiting that could well lead to a decline in private fulfil their duties. and reviewing their policies and litigation, because there will be fewer indemnifications a regular and meaningful publicised penalties and settlements to audit and risk management function. prompt follow-up from shareholders or consumers. Of course, if government Surgeoner: There is no doubt that enforcement actions increase at the state regularly revisiting and reviewing level in order to pick up the slack at the D&O policies and indemnifications is a federal level, this could prompt additional

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ad_check_template.indd 1 7/6/18 10:05:31 SPECIAL REPORT Technology in Business: Strategy, Compliance & Risk

SPECIAL REPORT: TECHNOLOGY IN BUSINESS: STRATEGY, COMPLIANCE & RISK

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FORUM: KYC technology for screening, veriﬁcation and monitoring

FW moderates a discussion on KYC technology for screening, veriﬁcation and monitoring between Matt Galvin at AB-InBev, Gwendolyn L. Hassan at CNH Industrial, Derek Ryan at Deloitte LLP, and Jane Grinblat at Reed Smith LLP.

THE PANELLISTS

Matt Galvin Matt Galvin joined AB-InBev in 2015 and is responsible for the company’s global Global Director, Legal and Compliance compliance programme. He is a New York and Hong Kong-qualified lawyer who practiced AB-InBev for 10 years at a number of leading international law firms, advising on anti-corruption, T: +1 (212) 503 2886 economic sanctions and other compliance risks. Mr Galvin is a leader in the use of data E: [email protected] analytics to manage corruption risk within multinational organisations and in 2017 was one of five leading in-house lawyers nominated by the Financial Times as innovative lawyer of the year in North America.

Gwendolyn L. Hassan Gwendolyn L. Hassan provides legal counsel, and has day-to-day operational responsibility Managing Counsel – Global Compliance & for the global compliance and ethics programme for CNH Industrial, the world’s third Ethics largest capital goods maker and second largest manufacturer of farming equipment. CNH Industrial Her expertise includes compliance programme structure and operation, compliance T: +1 (630) 887 2187 investigations, enterprise risk assessment and management, compliance strategy, E: [email protected] corruption prevention, trade compliance, policy development and training. She is a graduate of DePaul University School of Law and the University of Wisconsin – Madison.

Derek Ryan Derek Ryan is a partner in the forensic financial crime practice of Deloitte LLP in the Partner, Deloitte Forensic UK. He has over 15 years of experience in financial services, specialising in the delivery of Deloitte LLP large scale transformation programmes with technology, data and operations components. T: +44 (0)20 7007 8277 He has focused on building eminence in the financial crime domain with a foundation E: [email protected] in AML-KYC complex programme delivery, operating model design and establishing sustainable business as usual functions.

Jane Grinblat Jane Grinblat works from the Munich office of Reed Smith advising on English and Associate German law aspects of financing transactions. Her core practice areas include funds Reed Smith LLP financing, structured finance and real estate finance. She has undertaken a secondment T: +49 (0)89 20304 165 to the securitisation team of a major European bank. She also has a keen interest in E: [email protected] emerging technologies and how these can be deployed to improve clients’ businesses and her own practice. She is a member of the FinTech Team at Reed Smith and advises on the regulatory aspects of nascent financing forms.

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FW: Could you explain why it is so important for companies to know their customers against the backdrop of today’s regulatory environment?

Galvin: The regulatory environment has become less predictable and generally more strict. Markets such as China, Brazil, Guatemala and France have changed dramatically over the last few years. Many companies are more worried about what their service providers and customers are doing supposedly on their behalf than what their own people are doing. Companies should have strong controls not only on spend for their employees, but also with respect to third parties and business partners working on their behalf. Typically, company controls tend to be more focused on the former – so compliance is often put in the position of creating and implementing much of the controls around who companies worth with.

Ryan: Economic crime, identity theft and cyber crime are having a significant impact obligations contained in various laws through means of a presidential tweet. Add on society. The effects of human trafficking, and regulations has grown ever larger. to this the revelations of the Panama Papers terrorist financing and tax evasion are At the same time, the fines associated and the resulting focus on transparency also becoming more prevalent, and this is with a failure to observe the law have of ownership, and it has truly become driving ongoing changes in the regulatory also increased. For example, in the EU, imperative that companies understand environment. Regulators and enforcement pursuant to the Anti-Money Laundering exactly with whom they are doing business agencies have an expectation that Directive (AMLD), legal persons can incur at all times. € organisations should play a pivotal role in fines of at least 5m or 10 percent of total preventing economic crime and protecting annual turnover, which, for corporates with FW: In your experience, do senior customers’ interests. Organisations need consolidated financial accounts, could mean executives and boards need to be more to have a comprehensive understanding of the turnover of the group. There may also proactive when it comes to optimising their customers, and customer behaviour, be reputational damage as the respective KYC resources and functions? to ensure that they are not involved in these national competent authorities are required types of illicit activities. This allows them to publish information on the type and Ryan: KYC and compliance activities to make informed decisions about how, or nature of the breach and the identity of the have the attention of senior executives and indeed if, they should engage or continue to persons involved. In a world where change, boards, yet due to increased competition engage with them. flux and disruption have become the norm, in the market, organisations need to so long as ongoing customer monitoring differentiate themselves on customer Grinblat: Since the statement of the obligations persist, it is imperative that experience, simplicity and speed, and Basel Committee on Banking Supervision companies have a good understanding of reputation. KYC is a potential barrier on the “prevention of criminal use of their customers and the nature of their to this because the current process is the banking system for the purpose of businesses. cumbersome and not customer-centric. money-laundering” in December 1988, Institutions must avoid regarding KYC as a followed closely by the establishment of Hassan: Today’s regulatory environment compliance overhead. Instead, they should the Financial Action Task Force (FATF) is truly a reflection of our currently chaotic invest resources in optimising practices under the auspices of the Organisation for geopolitical climate. Companies are trying to deliver effective risk management, Economic Co-operation and Development to limit their risk in an environment where built on sustainable customer-centric (OECD) a year later, the sphere of persons they often first receive notice of new solutions. Advances in technology present caught by Know Your Customer (KYC) entities they may not do business with a good opportunity to achieve compliance

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in a more efficient way and, as a result, Hassan: I often hear how difficult it is for their customers and service providers. But rebalance some of the current, more people to convince their senior executives at the management level, there should be manual, and therefore resource-intensive and board members of the true value of an effort to ensure that those processes do KYC activities. However, institutions penalty avoidance. KYC functions and not overlap and that there is a single source have to be proactive in building a flexible, tools are seen as a non-income generating of truth in terms of data management. sustainable digital infrastructure, which ‘overhead’ for which a return on investment Third-party risk can best be managed when can evolve in line with regulations and cannot be calculated. This, in my view, there is a quality data set from which one customer expectations. This is particularly is very short-sighted. The return on can draw inferences and conclusions as part the case for the more mature institutions. investment for these tools and functions of a risk assessment. One-off risk snapshots This approach presents an opportunity. is immediately calculable in terms of will not always get the job done. As firms increase their understanding cost and reputational damage avoidance. of customers, they can better target the The Panama Papers alone have spawned FW: How can KYC technologies assist products and services they offer. In other worldwide regulatory investigations, companies in terms of their screening, words, they should start to see KYC as a and the expensive legal fees associated verification and monitoring requirements? business-enabler rather than a cost. therewith, and The Harvard Business Review has calculated that those firms Grinblat: Different stages of the KYC Grinblat: Often, regulatory requirements caught-up in the Panama Papers leak have process open up different opportunities are perceived as constraints on the ability collectively lost some $230bn in market for the application of new technologies. of business functions to do their job. The capitalisation. If those kinds of numbers These may be chat-bots guiding customers consequence of this is a knee-jerk and do not immediately justify the usually through the initial registration process or unsystematic response to the demands of moderate costs associated with a KYC smart technologies assisting with collating the law. While this may or may not solve function and tools, then I do not know and ordering collected information, for the problem in the short term, in the long what will. example machine translation which enables term this creates inefficiencies, as layer cross-border data processing or optical upon layer of compliance processes are Galvin: The responsibility for KYC can character recognition which makes data added. Moreover, this leads to a poor fall between different functions, depending searchable. Robotic process automation client experience, since client onboarding on the organisation, which means it does technologies can be used to validate data processes are often uncoordinated as a not always have a single owner and a by running checks against internal and result. It should be noted that in certain single group responsible for overseeing external databases, watchlists and publicly- circumstances senior executives and other all of it and having one view. But this is a available information. A combination of persons performing higher management process best done with a unified vision and data mining and recommender systems functions can be held personally liable for comprehensive data set. At board level, could then be used, for example, to failures to observe the applicable regulatory members should expect companies to have monitor the relationship and make requirements. processes and systems in place to know recommendations for action.

Galvin: Technological investment in this area is key. Many companies have invested in data aggregation and analytics to review and assess their business partners. Advantages can be obtained on the compliance side to aggregate and review risk trends in payment, risk adjudications in onboarding and investigation data and by combing that with the ambient DIFFERENT STAGES OF THE KYC PROCESS OPEN UP DIFFERENT risk of the jurisdiction and space where the third-party is operating. In other OPPORTUNITIES FOR THE APPLICATION OF NEW TECHNOLOGIES. words, companies must create a dynamic risk profile for their entire ‘universe’ of vendors. Companies must also look at ways to expand this network. As such a system matures, it will get more accurate as it JANE GRINBLAT learns from the adjudication of the risk Reed Smith LLP models, so it will become more efficient over time. 44‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.financierworldwide.com ’’ SPECIAL REPORT Technology in Business: Strategy, Compliance & Risk

Ryan: Integrated technology is critical in helping companies across the KYC lifecycle. Greater speed, efficiency and accuracy in verification, screening and INTEGRATED TECHNOLOGY IS CRITICAL IN HELPING COMPANIES monitoring helps institutions manage risk better. It can also have a positive impact ACROSS THE KYC LIFECYCLE. GREATER SPEED, EFFICIENCY AND on the customer experience. Customer ACCURACY IN VERIFICATION, SCREENING AND MONITORING verification during onboarding is moving toward digital processing, removing HELPS INSTITUTIONS MANAGE RISK BETTER. the need for physical documentation to prove identity. Facial recognition, optical DEREK RYAN character recognition (OCR), biometrics Deloitte LLP and geolocation techniques can streamline risk management processes and enhance the customer experience. The integration of technology platforms makes it easier to leverage data obtained at onboarding, ‘‘ ’’ which can then be used for verification, screening and monitoring. As the quality and completeness of data improves, screening alerts, and to determine whether required level of engagement with customer institutions are able to perform more the findings are relevant when assessing the data will differ, depending on whether accurate customer screening, and move client’s risk profile. customers display characteristics suggesting away from simple rules-based transaction a heightened or reduced risk in terms of monitoring systems, making better use Galvin: Automation in terms of data money laundering and terrorist financing. of customer profiling and behavioural aggregation and harmonisation is the By way of example, where customers are analytics. holy grail. The more companies can find regulated entities or listed on a regulated ways to streamline and ensure the quality market, they are likely to require less FW: In what ways could a greater of their data, the more every part of the detailed inspection. By contrast, persons degree of automation assist companies company will excel. But automation has linked to countries which are considered in understanding where their KYC risks the potential to backfill every part of the high risk or who are politically exposed lie and implement strategies to deal with process. Automation will make it easier persons (PEPs) will require a greater degree them on a day-to-day basis? for companies to analyse and prioritise the of screening and verification. Ultimately, risks flagged within their systems. the aim of automating processes should be Ryan: KYC processes are often manual to free up qualified and costly employee and fractured, involving multiple Hassan: I consider automation to be an time to deal with the more ‘unique’ cases; touchpoints with customers. This has intelligence multiplier. We all hire smart often these are high-risk customers, where resulted in poor customer experiences, people, but the smartest of people still enhanced due diligence requirements apply. high operational costs and a high level have only so many working hours each day. of client churn for some organisations. Automation in this space allows companies FW: What steps should companies take Process automation is one way to unlock to focus their limited resources in areas that when incorporating KYC technologies efficiencies. It replaces the human are truly a value-add. A tool can perform into existing business systems? How can operation of repetitive tasks, such as the repetitive, manual and lower-complexity they ensure processes are as efficient as collection and review of customer data screening and continuous monitoring tasks possible? to identify high-risk indicators, with on an automated basis, thus freeing-up robotics. By creating this operational valuable time for highly trained staff to use Hassan: The key to maximising the capacity, KYC analysts are able to spend their experience and training to resolve efficiency of KYC technology is to make more time on risk management activities more complex issues and tasks. Automated sure you are building into and leveraging that require human judgment. Looking to KYC tools can serve the valuable function existing business processes, as opposed to the near future, machine learning will be of ‘narrowing the focus’ of often scarce creating new or additional processes you another way to detect financial crime more human resources to the resolution of only then ask the business to follow. The more accurately. Machine learning has a range of higher risk and more complex situations. you can integrate into a system or process applications in identifying customer risks. your business is already using, the lower For example, it can be used to investigate Grinblat: The adoption of a risk-based the compliance burden will be. When you transaction monitoring or customer approach is central to the AMLD. The leverage processes already in use by the

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company and ‘insert’ your KYC tool and effectiveness and the user-friendliness of Hassan: There is no shortage of articles process in as unobtrusive a way as possible, the systems they have in place and consider decrying as ‘impossible’ compliance with you maximise your likelihood of adoption which technologies would best address both KYC and, for example, the General and success. the disclosed deficiencies. This may mean Data Protection Regulation (GDPR), but tapping into the know-how of a business I, for one, do not agree. That is not to say Galvin: Cross-functional support is process management tool to streamline it will be easy, however. There are certainly key to incorporating technology into an processes and optimise case management. many potential ‘traps’ companies can fall organisation. One needs to ensure ‘buy into if they are not careful and thoughtful in’ from key stakeholders across the Ryan: At some organisations, KYC in how they structure their programmes. organisation. For example, it does one little requirements and procedures do not reflect GDPR, for example, provides data subjects good to build a system and process that will the current expectations of customers, with the ‘right to be forgotten’ and to have work off one or more systems if IT plans on because they have not been developed their data removed from company systems. replacing that system next year. One needs and updated on an ongoing basis. This At the same time, of course, the updated to build these systems with a view toward presents a danger. Organisations struggle Markets in Financial Instruments Directive the future so that they are not swallowed when they look to incorporate technology (MiFID II) specifies record retention in an IT black hole as soon as they are into processes that are not working well, requirements of five or even seven years launched. But conversely, this concern can or into procedures that are inconsistent. for client information. While these seem lead to paralysis as IT plans tend to be Responding to this problem, companies contradictory, the GDPR does allow data dynamic and reactive to a multiplicity of need to look at the end-to-end business to be held ‘as long as required’ under other commercial, budget and licensing concerns. process from a customer perspective, to statutory retention periods. The key, in But since data aggregation is key, I would drive efficiency and create customer value, my view, will be to self-test and audit your counsel against creating additional systems by achieving goals such as frictionless own procedures. Have you accounted for to solve narrow issues such as KYC. It is onboarding. By improving this end-to-end these potential areas of overlap? Does your better to build together with other groups experience, they can build competitive process include a method for resolving to ensure longevity and acceptance. advantage. these types of regulatory tensions? If not, it should. Grinblat: One of the main weaknesses FW: With the likes of MiFID II and of KYC processes, especially in larger the GDPR radically altering regulatory Grinblat: The regulatory burden is not organisations, is the uncoordinated frameworks, how would you characterise only increasing, it is also shifting. Keeping approach, resulting in inefficiencies and the ability of companies to meet their abreast of developments can assist with delay. To maximise the benefits offered KYC obligations while balancing other staying on top of one’s legal obligations. by KYC technologies, a holistic approach regulatory demands? Here again, technology and innovation should be adopted. Companies should can be of assistance. Artificial intelligence take the opportunity to assess both the (AI) tools built around natural language processing can be brought in to identify and alert people, products and processes affected by legal and regulatory changes. Additionally, companies can and should build tailored solutions together with their legal advisers to ensure that the information the company receives is appropriate to its specific circumstances.

Ryan: We disagree with the consensus DEPLOYMENTS OFTEN FAIL FOR HAVING TRIED TO ACHIEVE that these regulatory requirements both contradict regulators’ KYC demands and EVERYTHING ALL AT ONCE. ORGANISATIONAL CHANGE make it harder for companies to meet them. This is because we see principles MANAGEMENT MUST BE A KEY PART OF YOUR DEPLOYMENT common both to MiFID II and the GDPR STRATEGY. on the one hand, and good KYC practice on the other. These include customer GWENDOLYN L. HASSAN control of data, a transparent risk model CNH Industrial for KYC procedures, decisions that support the customer interest, and an 46‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com ’’ SPECIAL REPORT Technology in Business: Strategy, Compliance & Risk

ongoing focus on protecting and delivering value to customers, through a greater understanding of their businesses and needs. Organisations that can integrate CROSS-FUNCTIONAL SUPPORT IS KEY TO INCORPORATING their approaches to meeting these different regulatory demands will create a ‘wow’ TECHNOLOGY INTO AN ORGANISATION. ONE NEEDS TO factor for customers and will achieve ENSURE ‘BUY IN’ FROM KEY STAKEHOLDERS ACROSS THE competitive advantage. ORGANISATION. FW: What advice would give to companies on deploying KYC technology MATT GALVIN that can unravel complex corporate AB-InBev structures, retrieve data on controlling entities and individuals, and identify beneﬁcial owners?

Grinblat: Workflow automation is key ‘‘ ’’ to bringing together information outputs from different sources to ensure nothing gets missed, reducing scope for human that it has not shown results, it means that be a key part of your deployment strategy. error and providing an audit trail of reports the company has had to encourage a great You can deploy the most sophisticated tool and notifications. This can be especially deal of organisational patience along the in the world, but if your business people do useful when dealing with complex way. not know how to use it, or it creates what is corporate structures. Companies should be perceived to be ‘more work’ and so will not aware, however, that as soon as they have Ryan: We advise against blind trust. use it, your deployment will fail. My advice identified the beneficial owners and start For example, these technologies are often would be to start simple. Look for ‘quick dealing with their personal information, effective for large companies, but limited wins’ and areas where automation can this may trigger their obligations under when it comes to small commercial immediately provide additional efficiency the GDPR, meaning that appropriate businesses, as there is not enough data and the most return on your investment in safeguards will need to be built into the to do sophisticated profiling. Technology terms of process improvement. Then, once process. It is important, in this context, to is not a silver bullet. Responsibility and those are in place and functioning well, remember that technology is merely a tool accountability for ensuring compliance look to add automation of the next area. and that the legal obligation will remain remain with the institution. Moreover, with the company and senior management transparency about the information FW: How do you see the application of to ensure its appropriateness for the task. and techniques used by technology to KYC technologies developing in the years reach decisions is essential. If an analyst ahead? What innovative solutions do you Galvin: There are three important things cannot explain in simple terms how the expect to emerge? to remember. First, identify the systems technology has arrived at its answer, they and take steps to aggregate the data from will not be able to understand the risks Ryan: The concept of user-owned, places that can help assess the problem. created by relying on it. In any case, KYC controlled and permissioned data sharing It is an obvious point that data analysis is technologies should ultimately be seen as will become ever-more important, only as good as the data. It is not always enhancing risk-based judgment by humans, because of both regulation and broader obvious where one can get the data to by creating more time for them to focus on concerns about data security and privacy. solve any particular risk in the company, value-adding analysis. It should definitely Technologies will need to be embedded but once you find it, make friends with the not remove humans from the equation into end-to-end digital customer journeys, owners and find a way to access the key altogether. A final issue requiring care as opposed to being siloed solutions to systems. Second, it can take time to build is that with data protection regulation specific points on the customer journey. the infrastructure of processes and controls evolving, companies need to ensure they We also forecast a growing availability necessary to create data sets that are have the right authorisation to source and of permissioned transaction data, and a usable. It is critical that the data inputs are hold data. greater use of advanced analytics to build accurate and clean or the most advanced behavioural profiles of customers and to system will crumble. Third, this will take Hassan: Deployments often fail for having understand networks in real time. Looking time to build well. If a company is in year tried to achieve everything all at once. at general principles, we see a paradigm two of a five-year plan, that does not mean Organisational change management must shift in the KYC solutions of the future.

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Solutions will be developed to optimise and corruption risk. I think that eventually, we see the greatest development in this user-controlled digital identity, and to the distinction between KYC and third- space. Once you have done that, running develop and maintain holistic profiles party due diligence will disappear and we solutions on the data will be relatively easy. of customers. Perhaps the most radical will see the rise of Know Your Business change will be a shift from solutions within Partners (KYBP), knowing detailed Grinblat: The RegTech sector has been individual organisations, to industry- information not only about our customers booming and further growth is expected level solutions that will enable better but also about those who sell for, supply as companies become more aware of identification and management of economic and service our companies, to give us the advantages of investing in the right crime risks and help institutions better a truly transparent view of those we do technology. RegTech can harness global protect their customers. business with. data sets, offering more slick and slender KYC management solutions. As legislators Hassan: I am increasingly convinced we Galvin: The key obstacle is aggregating and regulators pay more attention to data will see a use case for blockchain in the and harmonising disparate data sources protection and storage, RegTech will area of beneficial ownership; a type of self- to run a single, centralised set of learning also be able to offer new possibilities in evidencing ‘chain’ of ownership transfer algorithms to solve problems. Many terms of data encryption and security. An that will be immutable and will create a organisations have evolved through additional area to watch is the application reliably accurate chain of entity ownership. combination and acquisition. But corporate of blockchain technologies to KYC tools I am also excited about the potential of AI combinations tend to move far more and procedures, since blockchains offer an in the area of KYC. I can see, in the not too quickly than the underlying technological immutable and transparent record of up-to- distant future, the use of machine learning infrastructure of the companies, meaning date customer data. to gather, sort and interpret customer that most organisations have patchworks and ownership information, perhaps even of data. The greatest demand is therefore integrated with other diligence information finding ways to bring together and analyse including adverse media, political exposure those different networks and that is where

The challenges of the enterprise in the cloud

BY KIT BURDEN

rom one perspective, cloud services increased sophistication of cloud-based and ﬂexibility advantages of cloud-based are not new. Though it has become offerings have resulted in increasing take solutions become ever more apparent, fashionable to term something as up of cloud-based services. Initially, much we have seen organisations begin to push being provided on a ‘X as a service’ of this take up was at what might have been ever-more substantial and business critical Fbasis, the concept of what used be known termed the ‘commodity’ layer; that is, in elements of their functions and operations as ‘application service provision’ and the relation to lower risk, lower value functions into the cloud, and increasingly into both wider scope of remotely hosted services which would not have a disastrous impact public and private clouds. In doing so, has been around since the 1990s. However, upon the customer entity, were the services however, they may face some interesting increasing telecom capabilities and the to encounter issues. However, as the cost legal and contractual challenges.

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From one point of view, the provisions regarding the use of software products that go up to make a pure software as a service (SaaS) solution may not have changed CUSTOMERS MAY EXPECT TO SEE THE KINDS OF CONTRACT that much. The major software players have long had strong bargaining positions PROVISIONS WHICH WOULD ORDINARILY BE INCLUDED IN AN when it comes to the use of their software products. Accordingly, their base licence OUTSOURCING AGREEMENT, INCLUDING, FOR EXAMPLE, MORE terms, in relation to on-premise licence SUBSTANTIAL SERVICE LEVEL REGIMES. grants, would ordinarily be relatively restricted when it came to matters such as scope of warranties and related remedies, liability limits and the like. However, in moving to a cloud-based solution, as opposed to a traditional licensing arrangement, such providers are also now taking on a wider scope of service-style ‘‘ ’’ obligations, associated with the provision and support of the associated infrastructure between the parties (and therefore across all of its customers, and will want on which their software products will sit. influenced by the degree of bargaining to reserve the right to make changes if it This opens providers up to a new set of leverage that each party has), there are a believes this is necessary to enable it to contract requirements which they would not number which can create challenges from maintain overall market competitiveness. ordinarily have had to grapple with, such as a practical perspective, particularly in the Although such changes should generally IT security, business continuity and disaster context of a public cloud offering. Some of be to add additional functionality, there is recovery, data protection and the like. these can be found below. always the possibility that the developments The challenge, in this regard, is will go in directions that an individual exacerbated by the fact that the larger Audit provisions customer does not agree with or is not in its customer organisations (at least) For a business critical function, a customer interests. Suppliers may then be willing to will ordinarily have their own sets of would ordinarily want to have a right grant the customer a right to terminate, but expectations as to what kinds of contract of audit in order to satisfy itself, on a that is something of a phantom remedy for terms would apply to such services. Some proactive basis, that things are working as the customer, if it would then be put to the of the more sophisticated SaaS solutions they should. While this works fine when the potentially not insignificant cost of having in particular may appear to be more like supplier in question is providing its services to migrate to a new cloud platform (and outsourcing in another guise, and so the from a dedicated site and so may still be do- undertake a whole set of fresh integration customers may expect to see the kinds able in the case of a private cloud offering, efforts with the rest of its technology of contract provisions which would it becomes challenging in the context of a estate). ordinarily be included in an outsourcing public cloud solution, where the supplier agreement, including, for example, more in question will likely be utilising the same Compliance with policies substantial service level regimes (with real infrastructure and facilities to service Larger customer entities in particular ‘teeth’ in the event that they are not met, multiple clients, and so will be concerned as will have become used to imposing in the form of meaningful service credit to the possibility of service interruption or obligations upon suppliers to comply with provisions, linked also to termination breaches of confidentiality that may arise, their policies, particularly in relation to rights in the event of serious or persistent were a party to undertake an audit and matters such as IT security. However, cloud non-performance), wider scoping of service thereby impact upon service provision to providers will ordinarily push back on obligations to include those ‘reasonably’ or the supplier’s other customers. such requirements, given the fact that their ‘necessarily’ implied as part of the relevant various clients will potentially have very functions, lengthier lists of warranties Changes to the services different and even potentially conflicting and indemnities, and prescribed processes Customers are used to the position whereby requirements. The onus, therefore, switches that a supplier must follow in order to they acquire a software product or service to the customer and its internal teams to itself get relief from its own obligations on the basis of an agreed service description make practical assessments as to the delta (often known as ‘relief event’ or ‘excused or specification, which does not then between its own policies and what the performance’ clauses). change without their consent. However, in cloud supplier offers to its customer base While some of these provisions may be the SaaS world, the supplier will ordinarily at large. simply matters of commercial negotiation want to maintain a common code base

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Termination rights were less substantial in terms of value, be including in their cloud related contract When utilising business critical outsourced and less critical to the overall operations terms. We are, therefore, in an interesting services, the market norm has become for of the customer entity. However, we are time in terms of market dynamics, when we suppliers to have very limited termination seeing a dramatic increase in the range can expect past expectations and standards rights, often limited solely to non-payment and size of cloud-based offerings, with regarding ‘normal’ contract positions to of material amounts of undisputed deal values at times extending into the be regularly challenged and to develop fees. However, the expectations of the hundreds of millions and covering services quickly. It may be fair to say that for larger major cloud providers are diametrically which most definitely are business critical. scale cloud services in particular, there has opposed to this, with their contract terms In those circumstances, the ability of the rarely been a time when contract positions usually providing for the supplier to have customer entity to ‘take a view’ on the risks have been more in flux than they are now. extensive termination and suspension associated with the kinds of contract terms Interesting times, then, for the lawyers and rights, often linked to even non-material on offer from the cloud suppliers is far negotiators dealing with them. breaches of acceptable use policies which more restricted, especially in more heavily they impose upon their customers’ use regulated sectors, such as financial services, Kit Burden is a partner at DLA Piper. He of their cloud services. These kinds of where regulators such as the Financial can be contacted on +44 (0)20 7796 6075 disjuncts in expectations may have been Conduct Authority (FCA), the European or by email: [email protected]. easier for customers to live with, in the Banking Authority (EBA) and Monetary context of the early days of cloud services, Authority of Singapore have been very for example when the functions being specific as to the kinds of contract clauses entrusted to the cloud service providers that they expect their regulated entities to

Artiﬁcial intelligence

BY SIMON BRISKMAN

rtificial intelligence (AI) is set to back office processes and the number of adopting smaller suppliers, losing human transform the way many firms use cases is growing rapidly. For example, knowledge, locking in to new technologies work. The World Bank and PwC one professional services firm we have and seeing a major upheaval of their believe AI threatens 40 percent seen saved 40 full time equivalents (FTEs) workforce. Ato 80 percent of current jobs. There should solely by automating the routine aspects The risks presented by automation are be little doubt that AI is a disruptor like of on-boarding new recruits. Automation only magnified by broader AI deployment, none before. is also set to have a dramatic effect on such as customer chatbots, roboadvice For institutions to harness the potential offshore outsourcing, and many vendors and smarter Know Your Customer (KYC) of AI, they will need to understand not are committing to price reductions for processes. These applications are just the only how to exploit these new technologies application management, helpdesk and start of a more complex world in which but also how to control the emerging risks other services as automation becomes a key computers can understand our words and they entail. We are only just beginning component of their offering. expressions and their context like never to contemplate how to manage the risks The risks and regulatory concerns which before. In the world of AI, computers can involved. automation brings are largely new and rapidly assess data better than any human Some AI technologies are already require thought to uncover and deal with. in order to reach decisions. Siri, Alexa and being adopted at scale. Robotic process On the plus side, automation works 24/7, other digital assistants are the beginning automation is carrying out routine processes without human fallibility and frees up bright of a very different way for humans and from invoicing to provisioning disk space. and capable people to do more complex technology to interact. Automation is an ideal technology for many work. On the downside, organisations are

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Regulators are alive to the issues. As However, the upside of AI adoption will be to keep themselves busy on ever-more part of their pro-competition mandate, phenomenal for granting banks and their productive work. Institutions need to think the Financial Conduct Authority (FCA) is customers better, faster insights and higher about the people and skills they will need in generally positive about data exploitation, transactional efficiency. The outlook is for the AI world. machine learning and other AI phenomena. a more productive new economy based Hopes for new and interesting roles cannot The FCA is working with the Bank of around the many new technologies which, detract from the severe disruption to the England toward more automated reporting together, we call AI. workforce we are likely to see in the near and has been exploring its own use of AI as An analogy for greater adoption of AI future, however. Presently, there are no a regulatory enforcement tool. In the US, might be how cloud technologies have central government plans to change the way the Securities and Exchange Commission spread into institutions. We are entering we educate, train or redeploy citizens and (SEC) has been using machine learning a period where more firms are adopting it is likely that companies will have to learn for analysis in order to spot outliers and cloud technologies with greater ease. how to manage these changes in their own trends in compliance. However, the Federal There is better regulatory guidance, more long-term interests. Reserve, the FCA and other financial experience and more mature risk models. AI is advancing at a speed which makes it regulators are cognisant that once AI It can still take a conservative bank a long hard to understand how the world will look becomes consumer facing, or is deployed as time to close a cloud deal but the process in 10 years time. All the same, we already a regulatory tool by a firm, new risks follow. is becoming quicker and smoother. It helps know that AI can analyse data faster and They welcome the potential of these new that cloud vendors such as Amazon are better than humans. This will help in areas technologies, while signalling caution. offering better regulatory protection to such as medical diagnosis, legal research, In other sectors, there have been a their customers and institutions can be fraud detection and identifying market number of headlines which call into increasingly confident on the regulatory trends. AI, coupled with physical robots, question the speed of adoption of AI. In response to cloud implementation. can perform some complex tasks more 2016, Microsoft adopted an experimental If AI and automation follow a similar accurately than humans, from driving to ‘chatbot’ called Tay, which was subverted curve to cloud, expertise will grow and surgery. It can open up new ways of using by the online community into becoming adoption will become easier. In the computing through natural language and a racist, misogynist drug user until it was meantime, firms should incubate and grow gesture, allowing us to do much more easily taken down. Self-driving cars may rapidly AI at the right pace in order to reach wider what we want to do, from finding something be safer than human drivers, but we know adoption. AI will slowly but surely grow in on TV to shopping for a mortgage. AI can they have run through red lights and caused maturity. also perform routine tasks highly effectively. accidents while their AI is being tuned. In It ought to follow that for institutions to While there are many more use cases to be financial services, there will be a greater take on AI, they should implement new risk discovered, AI is probably less useful to need to understand and monitor these structures. A risk-based approach should help us through illness, invent a new kind of technologies, and a good deal of care will consider issues from vendor lock-in to loss corkscrew or ensure the range of systems a be needed to launch live trading or client- of knowledge on processes, and from data bank is using are fit for the next five years. facing technologies. protection to understanding risk of endemic The new roles we create will help us to Other risks from AI can be more errors. These are business, technology, understand human problems and devise mundane, though no less important. These procurement, legal and regulatory human solutions, to oversee choice of technologies are often being brought to challenges which require joined-up thinking. technologies and monitor what those market by a new range of FinTech and Ensuring cross-disciplinary teams can work technologies do. People are still likely to RegTech vendors, can be cloud based and seamlessly to deliver AI for the business be pivotal in ensuring the institutions of often leave no intellectual property rights means finding an integrated approach the future continue to attract and retain (IPR) in the hands of the customer. For toward assessing and managing the risks. business by providing the best possible many organisations, it will be important to While many AI projects will involve service. We need to evolve our organisations assess the potential longevity of these new displacement of people, in the long-term, to adopt new risk management structures vendors and their products before deciding new jobs will hopefully emerge. The capable of applying to these new whether to bring them into the fold; and Manufacturer reports that manufacturing technologies in their domain of application. to plan for the eventuality that a firm or has lost 800,000 jobs to automation in We should engage now in working out how its clients may need to migrate to different the UK and in the same period gained 3.5 AI-led organisations will emerge and what technologies over time. million higher skilled roles. In many other they should best look like in the future. No doubt there is some way to go areas, jobs are being created in response before we have established models for to new technologies, from social media Simon Briskman is a partner at Fieldfisher adopting AI in financial services. We managers and user experience specialists, to LLP. He can be contacted on +44 must expect a degree more conservatism Uber drivers. Since the industrial revolution, (0)20 7861 4145 or by email: simon. in the sector because the stakes are high. humans have shown a remarkable ability briskman@fieldfisher.com.

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Optimal data commercialisation: transforming raw data into revenue-generating insights

BY ZENAS J. CHOI AND CULLEN G. TAYLOR

t is no secret that businesses have But as these technologies develop, more The emerging arena of data started to amass a wealth of data. businesses can realise the benefits of data commercialisation focuses on taking raw And as innovative technologies offer commercialisation. data obtained from business operations and faster communication, greater storage A modern data commercialisation strategy converting it into a new source of revenue. Icapabilities and more robust analytics, will consider the value of company data, the Industries such as financial services have businesses now have the tools to turn their technology solutions required to enhance already taken the lead in providing new raw data into extremely valuable company the value of data and compliance with products and services with insights gained assets. But to capitalise on the disruptive regulatory regimes, and privacy and security from customer data. Revenue generated potential of data commercialisation, standards. from data commercialisation in the banking companies will need to develop a strategy and finance sector alone may already be that not only focuses on harnessing the The unseen value of your company data as high as $300bn per year. Virtually all power of new technology, but also captures Businesses might be prone to underestimate other industry sectors can benefit from the value that legal solutions provide. the ways in which their data can bring commercialising their data as well. value, both in improving performance Effective data commercialisation What is data commercialisation? internally, and through commercialisation includes challenges related to talent and Companies like Alphabet, Amazon, as a new revenue source. For example, technology. Leveraging company data Apple, Facebook and Microsoft have Microsoft streamlined its sales operations to turn, for example, a customer’s credit long understood the value of enhancing to decrease employee time devoted to card statements into a customised platter customer data to provide new insights each potential sale by 10 to 15 minutes by of rewards programmes and discounts and improve their products and services. centralising data on each sales opportunity. would require at least a small team of data With hundreds of billions of dollars of The data was then enhanced using scientists and programmers to develop combined annual revenue, these companies predictive analytics software to allow sales software to process that data. And for have demonstrated that with the right employees to gauge the likelihood that an companies taking the leap into processing technologies and the right data, they can opportunity would lead to a sale while also data from automotive sensor technology, process ordinary information about their providing them with critical information which, according to one company’s customers and transform it into powerful needed to make a successful sale. Here, estimate, might require data processing insights into their shopping habits or it was simply a matter of collecting capabilities of 25 gigabytes per hour, use predictive algorithms to anticipate information from internal sources to the demands for technical expertise and their customers’ product preferences. improve the efficacy of a sales operation.

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investment in technological solutions increase dramatically.

Technological considerations THE FULL ANALYTICAL POWER OF AI MAY STILL BE TOO COSTLY Three major technological developments are expected to drive signiﬁcant growth FOR SOME BUSINESSES TO IMPLEMENT IN THEIR DATA in data commercialisation: (i) the Internet of Things (IoT); (ii) blockchain and smart COMMERCIALISATION STRATEGY, BUT AS THIS TECHNOLOGY contracts; and (iii) machine learning and BECOMES MORE AFFORDABLE, MORE COMPANIES CAN artiﬁcial intelligence (AI). Each one of these innovations has already changed LEVERAGE ITS DATA-ENHANCING INSIGHTS. how companies manage their data sets, but the best strategies will consider using a combination of the three to get the most out of their data.

IoT devices ‘‘ ’’ According to one industry analyst, by 2020, formation of these agreements is essential contracts, which add pre-programmed the data received from the IoT will be more to increasing the ROI for a company’s data functionality and self-executing code to valuable to businesses than the profits commercialisation strategy and lowering the the blockchain verification processes, gained from the sale of an IoT device. risks of costly litigation. allow certain conditions to trigger certain Automotive companies will be in the corresponding actions. For example, business of selling the massive amount of Blockchain ledgers and smart contracts a smart contract can be programmed data collected from sensors located around As a company’s data commercialisation with payment processing capabilities to the car to other companies which might be strategy begins to develop new revenue automatically compensate IP owners when interested in that data in order to provide streams, the worst-case scenario would be certain conditions are met. This could real-time updates to highway conditions, for that data to be used by an unauthorised provide businesses which licence their data parking space availability or as test driving company to siphon off that new revenue sets to other parties with an immediate and models for use in self-driving vehicles. stream. Thus, strong IP protection of newly self-enforcing revenue stream. Biometric data, already being collected enhanced data will be critical to protecting via ‘wearable’ technology, will provide investments. Even though the technology is AI and machine learning companies in the healthcare and life still nascent, blockchain technology shows Over recent years, the technology sciences sectors with real-time information promise for providing more efficient means industry has devoted billions of dollars about an individual’s heart rate, fitness for a company to prove ownership of its IP. to developing AI and machine learning levels, temperature and blood sugar levels. Blockchain technology provides an in an effort to mature these technologies’ In order to manage all of that data ‘open, distributed ledger’ that facilitates commercial viability. Amazon’s ubiquitous effectively, companies will need to establish the secure transfer and record-keeping of first-wave commercial IoT product, Echo, partnerships with cloud service providers information. Once that data is recorded on relies heavily on AI and machine learning and analytics companies. In entering into the public ledger, it is difficult to alter the to adapt to its user’s voice commands and these partnerships, businesses will want record without verification from the entire preferences. Through its use in the home, to ensure that their partners protect the distributed network. For IP purposes, this this IoT device gathers data directly from data that they are sharing and maximise could mean that business may be able to the consumer’s commands and processes their commercialisation opportunities. record a large number of verified entries the data to recommend consumers better This will include protections from on the ledger, in turn creating a blockchain products and services. Here, the AI theft by a cyber attack or data breach, time-stamp of ownership at a fraction of supplements the data-gathering capabilities business continuity and service level the cost. For large amounts of data, this of the IoT device, and in turn, eliminates commitments, intellectual property can prevent unauthorised use by parties not the need to work with partners or vendors (IP) rights protections that prevent the bound to an agreement. which enhance the data for a price. transfer of data to an unauthorised user, Smart contracts, another emerging The full analytical power of AI may guarantees that anonymised data will technology operating on the blockchain, still be too costly for some businesses to remain confidential, limitations on further can provide added functionality and implement in their data commercialisation sharing of data and restrictions on the enforcement mechanisms to the terms of strategy, but as this technology becomes ability to reverse engineer data to derive any agreement your business may have more affordable, more companies can valuable source algorithms. Thoughtful with another party using your data. Smart leverage its data-enhancing insights. In the

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meantime, companies might want to focus Companies will have to design or employ Working toward a complete and on building a strong talent pool of data data commercialisation tools with these revolutionary data commercialisation experts and perfect their data management rights in mind and provide mechanisms for strategy operations. individuals to exercise such rights where AI The potential for businesses to capitalise outputs may include personal data. on new revenue streams from data The changing legal and regulatory Those seeing patents and copyrights to commercialisation is becoming increasingly landscape protect IP rights as creators of novel works important to maintaining a competitive The General Data Protection Regulation in data commercialisation tools and outputs edge. In today’s fast-moving business (GDPR) will have wide-ranging can face certain challenges. Evolving data environment, it is critical to keep pace with implications for many companies’ data commercialisation strategies implicate these evolving technologies, while being commercialisation strategies. The GDPR complex questions of inventorship and mindful of existing legal and regulatory defines personal data broadly enough to ownership. For example, when an AI ambiguities. However, navigating these potentially implicate data processed by system creates visual, audio or textual waters can prove to be a lucrative pursuit automated systems like AI, and requires compositions, a question yet to be clearly for those able to develop a winning data data controllers to provide individuals resolved is whether a non-human can commercialisation legal strategy. with privacy notices. For example, where be considered an author for copyright the data processing involves “automated ownership purposes. Similar questions arise Zenas J. Choi and Cullen G. Taylor are decision-making, including profiling”, the when AI algorithms develop new algorithms partners at Hogan Lovells. Mr Choi can privacy notice must include “meaningful or other materials, including improvements be contacted on +1 (703) 610 6175 or information about the logic involved”. in the machine learning context. Moreover, by email: zenas.choi@ hoganlovells.com. The GDPR also requires data controllers if technical developments are created Mr Taylor can be contacted on +1 (703) to provide individuals with rights of through algorithms of an automated system, 610 6177 or by email: cullen.taylor@ access, rectification, erasure, restriction it is debatable whether human developers hoganlovells.com. of processing, data portability and of the underlying system should be deemed objection to certain types of processing. the inventors of the automated output.

Lessons learned – contract renewals and exit management

BY SAM DE SILVA

he expiry and re-bidding of support a competitive re-procurement or having (in theory) the right to terminate outsourcing contracts provides renewal of the contract. an outsourcing contract for breach upon some harsh lessons about the Although it may appear counterintuitive, 30 days’ notice or the right to terminate at content of outsourcing contracts it is extremely important that considerable convenience upon three months’ notice. Tthat were signed years ago. One of the main thought is given to the position upon However, if, in reality, any genuine re- issues is about the need for information termination or expiry at the outset of the tendering exercise is likely to take at least from the incumbent service provider to outsourcing contract. It is all very well six to 12 months to undertake (especially

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if the customer is a public or quasi-public disengagement provisions to apply to time, anticipating how they will need to be sector body and is therefore subject to some all disengagement scenarios, or a range transferred (and any likely constraints on form of compulsory competitive tender of disengagement provisions to apply to doing so) and determining how they are to regime, such as applies in the European different disengagement scenarios. For be valued. Community) then the customer is going to example, upon the expiry of the contract, To ensure that the process of identifying be very reliant upon the incumbent service or where the contract is terminated by the and transferring assets works smoothly in provider for a considerable period of time. service provider for the customer’s breach, practice, it is sensible, from the customer’s Many customers have learned, to their the service provider could be entitled to perspective, to require the service provider cost, the need to be comprehensive and charge its standard rates for disengagement to maintain a register of assets. exact about the assistance they may require services. By contrast, where the customer from an incumbent service provider on terminates the contract for the service Third-party contracts expiry or termination. It is an area where provider’s breach, the service provider The service provider may have a range of best contract practice has moved on could be required to provide disengagement service or supply contracts in place with considerably in the last three or four years. services at no cost to the customer. third parties in relation to the services, The general obligations of support and for example software licences, hardware assistance are, these days, supplemented by The exit plan and software maintenance contracts, even longer and more exact specifications The outsourcing contract should include a telecommunications agreements and of the type and extent of assistance, procedure by which the exit strategy agreed disaster recovery contracts. information and services required. between the parties can be documented The exit strategy needs to include a The customer should ensure that in an exit plan at a relatively early stage mechanism to: (i) identify the contracts the migration of the services from the during the life of the outsourcing contract. the customer wishes or needs to take over incumbent service provider, either back to Furthermore, it requires periodic review on exit, bearing in mind that some or all the customer or to a replacement service and update of the exit plan by the parties, of these contracts may not be specific to provider, occurs with the least possible for example it should be reviewed at least the customer but may be applicable to the disruption. It is important that the customer annually and at least six to 12 months prior service provider’s customers generally; (ii) focuses on its requirements for exit at an to expiry. The customer should be aware identify how those contracts should be appropriate stage in the negotiations and that whatever the requirements of the transferred, for example whether they can that the outsourcing contract sets out a outsourcing contract, the reviews of the be assigned or novated; (iii) reconcile any clear exit strategy. exit plan may not always take place when payments made in advance or arrears; and planned (if at all) and may not reach an (iv) allocate responsibility for any actions or Termination or expiry agreement. It is therefore important to put omissions (which could give rise to claims An outsourcing contract may end, for a in place appropriate contract management under the contracts concerned) taking place variety of reasons, such as: (i) the expiry procedures to ensure that these reviews do before or after exit. of the fixed term (and the parties being take place. It is useful if the outsourcing contract unable or unwilling to agree upon the terms Some of the challenging areas to address includes an obligation on the service for its renewal); (ii) termination by the in an exit plan are discussed below. provider to ensure that its agreements customer for convenience; (iii) termination with third parties can be assigned to the by the customer as a result of the service Assets customer or a replacement service provider provider’s material breach or insolvency; There may be numerous assets that need without restriction and at no cost. However, (iv) termination by the service provider for to be transferred to, or accessed by, the the customer should be aware that in some the customer’s material breach, for example customer or replacement service provider cases the service provider may be unable to non-payment of fees; or (v) force majeure. on exit. When formulating an exit strategy, secure these arrangements with its third- In theory, the customer’s practical the types of ‘assets’ which the customer party service providers or the cost of doing requirements for the exit strategy should consider include: hardware, so may be prohibitive. Whatever the case, will be the same in each of the above software, intellectual property rights, third- the customer should ensure that the service circumstances. In practice, the party supply contracts and licences, and provider reverts to it on these decisions to circumstances in which exit could occur other physical items of equipment and data. ensure that the viability of the exit strategy need to be considered as they are likely to However, in many cases it is difficult or is maintained. significantly affect the willingness of both impossible to identify in detail, at a time parties to cooperate on exit, the timing of when the outsourcing contract is being Data the required activities and the attitude of negotiated, what assets the customer or The customer should consider what data the parties to paying for the cost of exit. replacement service provider will require will have to be transferred from the service Having considered the possible on exit. The key is to establish the process provider on exit (or accessed from it after scenarios, the parties may agree general for identifying the assets at the relevant exit). This might include data actually

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handled or processed for the customer as and the parties’ preferred approaches in the charges already paid by the customer part of the services, for example payroll each case, there are a number of reasonably (this is more likely to be relevant to data, data about the way the services are common disengagement procedures that project contracts); and (iv) to solicit the delivered, such as records of service level may be applied. service provider’s employees involved in performance, or data about the personnel The provisions can be broadly categorised performance of the contract. involved in service delivery. as obligations of the service provider and The outsourcing contract should make it rights of the customer. The obligations of Summary clear who owns the data and what rights the service provider include: (i) preparing Before entering into an outsourcing the parties have to use and access it. The a disengagement plan; (ii) continuing contract the parties should consider the customer should focus its attention on the to perform all or part of the services as potential disengagement scenarios and data genuinely needed to enable a smooth required by the customer; (iii) providing develop appropriate tailored disengagement transition to the replacement service assistance and information as required by provisions. provider. the customer to transition the project or Appropriately drafted disengagement The customer should also consider how service to a replacement service provider, provisions will assist in effecting a smooth the data will be accessed or transferred. for example work in progress reports, disengagement and transition upon the A procedure may be necessary for data handover reports and so on; (iv) returning expiry or termination of the contract, with handover, including detailing the format the customer’s property, including the parties being clear about their respective of the data to be transferred and the customer’s intellectual property and rights and obligations and with minimal testing arrangements to ensure that there conﬁdential information; (v) cooperating disruption to the customer’s business and is no data loss or corruption, which is with the customer and the customer’s other operations. particularly important in the case of live, service providers; and (vi) minimising operational data. If the incumbent service disruption to the customer in transitioning Dr Sam De Silva is a partner at CMS provider is to retain certain data after exit, the project or service. Cameron McKenna Nabarro Olswang LLP. arrangements should be put in place to The rights of the customer include: (i) He can be contacted on +44 (0)20 7524 ensure that the relevant data is retained for using the service provider’s property, 6223 or by email: sam.desilva@cms-cmno. the necessary periods and that appropriate including a licence to use relevant com. rights are granted to the customer and the intellectual property, to complete the replacement service provider to access that project or continue to perform the services; data as and when necessary. (ii) to purchase assets of the service provider used by the service provider to Disengagement perform the contract; (iii) to reject any While speciﬁc disengagement requirements desirables provided by the service provider will depend on the nature of the contract prior to termination and obtain a refund of

BEFORE ENTERING INTO AN OUTSOURCING CONTRACT THE PARTIES SHOULD CONSIDER THE POTENTIAL DISENGAGEMENT SCENARIOS AND DEVELOP APPROPRIATE TAILORED DISENGAGEMENT PROVISIONS. 56‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com ’’ SPECIAL REPORT Technology in Business: Strategy, Compliance & Risk

Website consent management solutions under the GDPR

BY LISA GRADOW, MISCHA RÜRUP AND ANDREAS SPLITTGERBER

onsent in daily life appears to be Consent management for websites comply with the requirements of freely- simple: it is a yes or no question. A simple situation that becomes complex given consent. Consent in legal terms, and in under the GDPR is visiting a website. If Loading before opt-in and after opt-out. It particular the consent introduced a website has integrated tags, it needs the should be possible to load the technologies Cby the General Data Protection Regulation consent of the website visitor if its purpose that require consent, only after a valid opt- (GDPR), is rather complex. Strict is tracking, retargeting and profiling, as the in. After opt-out, the technologies should requirements are tied to a valid consent data collected by tags is considered personal not be loaded anymore, not even the opt- imposing practical challenges on what data under the GDPR. Obtaining and out itself. Sending the user to an external appear to be simple daily life situations. documenting the informed, free, concrete, third-party provider website for an opt-out Under the GDPR, consent has to be explicit, prior and easy-to-opt-out consent is not reasonable and does not constitute an informed and given freely. That means of website visitors requires a technical easy withdrawal. that a data subject must have an informed solution. This can be done in-house, but as Granularity. The principle of concreteness choice as to whether data processing will it is a whole product of its own requiring can be interpreted as a requirement for take place or not. Furthermore, consent has a lot of maintenance, monitoring of granular consent to certain technologies to be concrete. General or broad consents jurisdictions and entails high liability risks, used on the site. Also, resulting from the do not constitute effective consent. it does make sense to outsource consent principle of minimalism, consent should Additionally, the GDPR requires consent to management to a specialised provider. only be obtained for technology that is be explicit. A data subject has to consent actually in use on a website. Obtaining actively – pre-ticked boxes and similar Criteria for selecting a consent consent for a complete list of over 350 circumstances would make a given consent management platform (CMP) vendors, as the Interactive Advertising non-binding under the GDPR. As CMPs for website technologies are Bureau (IAB) solution imposes, is difficult The GDPR also manifests the obligation a recent development, below are some to justify. to offer the possibility to withdraw objective criteria resulting from legal Piggybacking cases. The CMP should also consent at any time. Taking it even further, and technical implications that should be detect and cover piggybacking cases, such withdrawing has to be as easy as it was to considered when selecting a CMP. as a tag on the website which automatically give consent. Prior to giving consent, a data Documentation and servers. Resulting transfers data to other piggybacked tags subject has to be informed thereof. The from the obligation to document and proof that are not on the website themselves, e.g., toughest requirement comes with Article 7 the consent, server-side and not client-side affiliate tags, which are partially reloaded. (1) of the GDPR, which places a controller storage of consents is important. If possible, Not only cookies. The requirement of under an obligation to prove that consent the consent data should be stored on consent should not only be considered for was given. This entails proving that it was servers in the EU. The CMP should also be tags, but also for other web technologies given in an informed, free, concrete and able to offer on-premise hosting of consent such as plug-ins and integrated content explicit way, as well as being obtained data. (e.g., embedded YouTube videos and prior to data processing (if the legal basis Voluntariness. The user should initially Google fonts). The obligation to obtain for processing is consent). This obligation be given both the option of accepting and consent might result from factors such as if inevitably leads to consent management in rejecting. A cookie wall that leaves the user they entail a data transfer to a third country, some form. with no other option but to agree does not such as the US. In any case, are they subject

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to the information obligation pursuant to certain technologies such as pure web the GDPR? analysis tags without consent. However, if Privacy by design. To prevent the CMP the verdict of a data authority is to prohibit from becoming the next ‘data octopus’, that, a quick switch to a zero cookie load client data should be stored separately setting must be possible. during the processing. That can be retrieved by not tracking and connecting user agent Is your organisation affected? data, meaning, if the identical user gives Organisations located in the EU and consent on one website, the CMP should by European Economic Area (EEA) need to default not be able to map that consent to comply with the GDPR, and rules on the consent on another website, as this would use of cookies and similar technologies. be profiling pursuant to Article 21 of the However, under Article 3 of the GDPR, GDPR, which itself requires consent. generally all websites globally have to IAB consent framework. The IAB comply with the GDPR where tracking transparency and consent framework is or profiling technologies are applied to the first standard guiding how consent can EU users. All organisations globally that be transferred globally. The selected CMP use such technologies will need a consent should support the IAB standard, as in the management solution – either to comply future personalised advertising will only with the GDPR or to block EU/EEA users be controlled with ConsentID in the bid and stay out of the GDPR. request. Reviewing possible CMP providers and Compatibility. The CMP software should implementing solutions is the right step be developed agnostically, so that it is toward preparing for e-privacy regulation compatible with any tag management and that will write the next chapter in the book website system. of EU data protection reforms. Integration in privacy policy. As the controller has to comply with the Lisa Gradow is co-founder and chief information obligation, it is useful to be protection officer and Mischa Rürup able to integrate the legally-relevant texts of is founder and chief executive at CMP the web technologies (automatically) into Usercentrics. Dr Andreas Splittgerber a general privacy policy, e.g., through an is a partner at Reed Smith LLP. Ms iFrame. Gradow can be contacted by email: Design and UI/UX. The CMP should offer [email protected]. Ms Rürup can be to customise the frontend, because this is contacted by email: [email protected]. the only way to ensure that website visitors Dr Splittgerber can be contacted by email: do not feel irritated and annoyed by cookie [email protected]. popups and banners which would thwart the laboriously designed CI and UI/UX efforts. Business purpose of the CMP provider. The sole business purpose of the provider should be to obtain consent so that the use of the CMP can be based on Article 6 (1)c of the GDPR. If a provider pursues further business purposes, it can be assumed that consent data will be used for business purposes. Therefore, either a proprietary development with a separate neutral company, or an external provider with privacy-by-design is recommended. Flexibility. It is very important to be able to control and change the rules for loading tags. In some cases, a company might want to implement ‘soft’ settings – e.g., to load

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Q&A: Global digital transformation

FW moderates a discussion on global digital transformation between Claudia Milbradt at Clifford Chance Deutschland LLP, Deborah Sherry at GE Digital Europe, Russia and CIS, and Andrew Copland-Cale at Siemens AG.

THE PANELLISTS

Claudia Milbradt Dr Claudia Milbradt heads the German intellectual property (IP) practice of Clifford Partner Chance. Ms Milbradt has been a partner in the Düsseldorf office since 2005 and advised in Clifford Chance Deutschland LLP the IP field since 1999. She is also a member of the Clifford Chance global tech group. She T: +49 (211) 4355 5962 has significant experience in technology transfer, patent licence agreements, research and E: [email protected] development and joint venture projects in highly complex technology fields. Ms Milbradt is also a specialist in patent and trademark litigation.

Deborah Sherry Deborah Sherry is the senior vice president and chief commercial ofﬁcer of GE Digital Senior Vice President & Chief Commercial in Europe. Her mission is to deliver the next industrial revolution. Her division delivers Ofﬁcer edge to cloud-based solutions that connect industries and transform industrial companies GE Digital Europe, Russia and CIS into digital industrial leaders by turning data into intelligence that drives step-change E: [email protected] improvements in productivity.

Andrew Copland-Cale Andrew Copland-Cale has worked for Siemens AG since 1997 and performed multiple Legal & Compliance and Head of Risk roles, including accounting, planning & controlling, procurement, product management, Management & Mitigation project management, consulting, region management and corporate development. Over Siemens AG the past 10 years he has spent three years in a corporate audit function in the area of T: +49 89 636 00 forensic accounting and four years in compliance investigations. Three years ago he took E: [email protected] on his current role within legal & compliance, as head of risk management and mitigation.

FW: To what extent are you seeing Sherry: Digital transformation allows that are driving this are not new; we are more companies explore and embrace organisations to evolve continuously and seeing digital transformation take place digital transformation? What factors are adapt quickly to the changing market quickest in highly competitive markets compelling them to do so? environment, which is vital in today’s where companies are pressured to innovate competitive business landscape. The factors in order to compete. This is driving the

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wider adoption of digital transformation Things (IoT), artificial intelligence (AI) and commercialisation and improved decision in the industrial space where organisations blockchain applications. making. By having access to a broader are under a lot of pressure to increase set of data and by having the means and efficiency and reduce costs, while enabling Copland-Cale: Without question there tools to generate and process such data, continuous innovation. Without digital is a marked interest and increasing companies are able to use this as part of the transformation, organisations would not willingness to explore and embrace digital decision-making process. Finally, improved be able to survive the pressures of the 21st transformation. Digitalisation is very reach. Digital transformation makes century marketplace and would not be present in the media and nowadays there businesses available to customers, basically able to evolve their products and services is a broad consensus that the impacts from anywhere. to respond to the changing expectations on businesses are vast. Leaders do not of their customers. All companies, to want to miss out on any game changer. Copland-Cale: For compliance, some degree, are going through some sort Therefore, considerable efforts are being ‘digitalisation’ has the greatest benefit when of digital transformation. But the ones made in corporations, large and small. it can be applied to automate repetitive which really feel the benefit are driving The compelling factor is increasing tasks for process efficiency or greater this process at the enterprise level and at efficiency – increased throughput, better process coverage. In addition to increased a scale which is creating real business and decision making and risks coverage – to efficiency, the use of the latest data bottom line benefit. We are seeing strong ultimately reduce costs or leverage superior analytics methods also allows enhanced traction in the fast-moving consumer goods characteristics, such as quality, speed, risk identification. The freed capacities (FMCG), industrial manufacturing and flexibility and innovative capacity. resulting from higher efficiency, combined automotive sectors, as well as in energy, with improved risk identification, enables aviation, healthcare and oil & gas. FW: What are the main benefits targeted risk coverage – leaving only companies may derive from digitalising complex decisions for experts and the rest Milbradt: More companies are getting their operations? for machines. involved in ‘industry 4.0’ topics and are embracing the effects and impacts of digital Milbradt: The digitalisation of businesses Sherry: Digital transformation allows transformation. Since technology and Big or, more precisely, of certain operations organisations to increase productivity and Data have an extra potential innovation within these businesses, leads, in general achieve significant efficiency gains. It can dynamic, companies which understand this terms, to an improvement of the following also help them to improve the quality and environment and are agile enough to adapt corporate business characteristics. safety of their operations. By connecting will have a huge advantage. The key drivers First, improved efficiency via process and creating visualisations of data from for this development are, among others, improvements and automated workflows. across the enterprise, companies can Big Data and analytics, the Internet of Second, new business models. Technology uncover insights which will help them to allows new paths of development, make better decisions. By using AI and machine learning algorithms, those insights can be coupled with policies that either automate the operation of an industrial process or flag up potential issues for review by a technical specialist. In the industrial world, digital transformation is largely driven by the adoption of the industrial internet. In fact, the industrial internet can add billions to Europe’s economy. Conservative estimates suggest the industrial internet market is about THE APPLICATION OF TECHNOLOGIES ALONE WITHOUT CLEAR £173bn globally, compared to the consumer internet, which is about £131bn. GOALS WILL BE OF NO BENEFIT. IT IS IMPORTANT TO FIRST By embracing the industrial internet, businesses will be able to extract valuable DEFINE THE PROBLEM AND THEN CHOOSE THE TECHNOLOGY, insights from their physical assets and NOT THE OTHER WAY AROUND. transform operations to enable innovation and open up new business models. For ANDREW COPLAND-CALE instance, the biggest steel manufacturer in Siemens AG the Americas, Gerdau, managed to prevent 130 hours of downtime and avoided costs 60‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.financierworldwide.com ’’ SPECIAL REPORT Technology in Business: Strategy, Compliance & Risk

of over $1.5m within a few months of adopting predictive maintenance across its plants.

FW: Based on your experience, what are the biggest challenges and risks that typically arise during a digital transformation process?

Sherry: There are two main challenges – cultural and technical. Digital transformation requires a significant cultural shift but many industrial companies are not prepared to reorganise quickly enough, either structurally or culturally, to be able to take advantage of the great opportunities digital transformation offers. This cultural ‘friction’ often takes place between digital culture where products and projects are released in fast, imperfect iterations, and industrial culture where products and projects are released slowly, methodically and are often over-engineered. This makes a lot of sense, because industrial assets, such as jet engines and wind turbines, need to be safe, and they can cost millions to fix if they go wrong. A bad book recommendation from Amazon, however, applications. Considering the example of requirements, and the development and use is unlikely to cause significant problems, AI, the biggest challenge is getting suitable of AI must be designed by diverse teams in so developers can afford to ‘fail fast’ with data that allows the application of this order to ensure that systems are not biased. their product launches as long as they can advanced technology. Before an AI can react quickly. Another challenge is that assist, or ultimately take over, a decision- FW: Do you believe boards and the majority of the industrial organisations making process, the knowledge has to be executives fully appreciate the impact are at a much earlier stage in their produced and structured in a format that on company culture that a digital digital transformation journey compared is ‘digestible’ for a machine. This includes transformation process can have? What to most consumer organisations. This the ‘legacy data’ stored within a corporation steps can they take to manage this aspect? makes challenges such as upgrading old that is not easily digitised, such as paper legacy systems and bridging operational format, and requires high levels of manual Copland-Cale: It is essential to get an silos much more complex and risky. intervention before it can be used to train organisation to be ‘digitally aware’ and Furthermore, technology fragmentation and an AI. To illustrate this using third-party people to accept and adapt to increasing the complexity of large-scale technology due diligence, the machine does not know complexity, as well as accepting to do deployments are creating a lot of resistance which text elements are critical in the things differently. The increased complexity to digital innovation. context of corruption, and there is no way and interdependency of the business for an AI to initially work this out on its environment makes it impossible to Copland-Cale: The application of own. Humans first have to undertake large foresee all possible impacts of a decision. technologies alone without clear goals efforts to classify information as critical Therefore, I think it is vital to also allow an will be of no benefit. It is important to before it can be learned and applied by a incremental ‘trial and error’ mentality. The first define the problem and then choose machine. impact on culture will further depend on the technology, not the other way around. how disruptive the specific technology will It is tempting to think that we have to Milbradt: The three main challenges cause change and on the speed of change. use AI only because it is the latest trend. of a digital transformation process are As a start, management and employees But it is wrong to think of a specific that people need to accept changes, the need to be trained to become ‘digital savvy’. technology such as AI and then find process must be in line with regulatory

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Milbradt: Executives do, of course, the challenges of their market environment better-defined workflows and a top-down welcome the benefits of more profitable and stay ahead of the competition. approach to establishing data-driven technical applications, but fear the processes across the organisation. To consequences of disruption to their own FW: How important is it to ensure achieve this, business leaders need to business. Thus, it is of utmost importance that the right people are tasked with understand their business and hire the that companies start early to elaborate overseeing digital transformation and right people. This means bridging the gap threats and opportunities. This will also driving the process forward? What advice between old and new technical knowledge have a positive influence on company can you offer on assigning roles and and building teams which combine the culture because it shows an active responsibilities? experience of the people who built the old participation in this transformation process. legacy systems and ‘new’ tech experts, such Milbradt: The digital transformation as data scientists and AI programmers. Sherry: Most senior decision makers process must be executed in a balanced And finally, it is important to understand are aware they need to make significant way, by creative, open and trustworthy that digital transformation is a journey, organisational changes to enable digital people who take the fears of employees so businesses need to think long-term transformation. To be able to accelerate seriously, but who are also not scared to and drive strategic partnerships that innovation and business change, leaders follow new paths. The right people will will allow them to deliver incremental need to move faster. They need to create also have a diverse background in order value. Companies should look at the a business structure that is adaptive to ensure that any digital transformation outcomes they want to drive and work to change and speed – and that brings process will be designed by an open-minded back from them, assigning people and together the IT and operational technology and diverse team. building partnerships that deliver on these (OT) parts of the organisation. This outcomes. means moving away from the traditional Sherry: Executive leadership is vital, but command/control management style so is strong teamwork between the chief Copland-Cale: I recall seeing a talk that dominates traditional working digital officer (CDO) or chief information recently that cited a story of an unnamed environments and adopting agile officer (CIO) and the chief operating CIO who rejected cloud computing and frameworks for managing IT projects and officer (COO) and their respective teams. said “let’s wait to see how it develops”. organisational change. This requires taking In the surge toward modernisation, some Since 2016, cloud computing has people out of their functional domain companies run the risk of overlooking accounted for more than 50 percent of and incentivising them to work together the fundamentals of operational success, all stored data. I think this demonstrates across silos. By adopting an agile approach specifically the teams that must work with how important it is to have the right to business management, organisational each other and the technology itself, as people in charge. It is not the knowledge change and technology innovation, traditional production processes rapidly of all the details, but the understanding businesses will be able to better respond to change. Maintaining optimal performance of the implications, as well as openness over time requires more streamlined and to challenge a potential ‘status-quo’. For specific tasks and projects in the area of digital transformation, it is important to foster a network of ‘right people’, meaning also allowing the involvement of external parties, including crowd sourcing. In many cases, very specific knowledge is required and this will often not be available in the department or be inefficient to build up, especially just for one task. Therefore, cross-silo collaboration is key to finding the THE DEEPER MESHING OF THE DIGITAL WORLD WITH THE necessary skills. Ultimately, teams working on digitalisation topics should enjoy the WORLD OF MACHINES HOLDS THE POTENTIAL TO BRING ABOUT necessary independence and freedom in order to circumvent the ‘innovator’s PROFOUND TRANSFORMATION TO GLOBAL INDUSTRIES. dilemma’ and allow even disruptive change within corporations.

DEBORAH SHERRY FW: Given the extent of the inevitable GE Digital Europe, Russia and CIS complexities, what practical strategies can businesses deploy to help deliver 62‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.ﬁnancierworldwide.com ’’ SPECIAL REPORT Technology in Business: Strategy, Compliance & Risk

transformational change across their digital operations?

Sherry: As tech analyst Gartner often IT IS CRUCIAL THAT IT TEAMS ARE SEEN AS AN INTEGRAL says, ‘think big, start small, scale fast’. ‘Think big’ because the true value of PART OF BUSINESS, WITH IDEAS FROM EMPLOYEES AND transformation happens at enterprise level. CUSTOMERS, AND DIGITAL INSIGHTS FROM OTHER SOURCES The best companies have a clear vision in mind, which helps avoid wasting resources INCLUDED IN THE DIGITAL STRATEGY. on multiple pilots that are not scalable beyond the factory floor or production line. CLAUDIA MILBRADT ‘Start small’ because demonstrating quick Clifford Chance Deutschland LLP wins to the organisation is important, and companies should attempt to bite off more than they can chew. And finally, ‘scale fast’. Once the value has been proven at pilot level, companies should move quickly ‘‘ ’’ to roll out globally. Every day that these productivity gains are not being realised Copland-Cale: Without a crystal ball this Sherry: The deeper meshing of the digital is a day where you are wasting money. In is impossible to answer. Nevertheless, data world with the world of machines holds my experience, it can be hard to calculate and use of data is a key success factor today the potential to bring about profound precise ROI at the start of a transformation and will be ever-more important going transformation to global industries. project. There are too many variables. forward. Companies and functions that can Through software, we will reduce energy However, I have never seen anyone lose harness data will have a strong competitive and water consumption and manufacturing any money, and the results can be very advantage. waste, and boost productivity. The most significant. There is always strong ROI competitive companies will be the ones even if it cannot be precisely predicted Milbradt: Looking at the potential of that adapt the fastest and others will beforehand. Investing in technology can digital transformation and the impact be forced to follow. Our own estimates drive continuous improvement across the digitalisation has already had, the suggest that digital technologies will deliver business, so the long-term benefits must following key predictions are likely to $8.6 trillion in productivity gains in the be considered. The investment in digital become relevant in the future. First, digital industrial world over the next decade. should always be considered in the wider transformation and, more precisely, the These innovations promise to bring greater sense of how it helps organisations achieve business opportunities related and linked speed and efficiency to industries as diverse their long-term business objectives. to areas of digital transformation, will as aviation, rail, power generation, oil and become the centre of many corporates’ gas development and healthcare delivery. Milbradt: It is crucial that IT teams are strategy. Second, digital transformation This will have a profound impact on seen as an integral part of business, with will require new skills, thus a new type of organisations. Business models will shift ideas from employees and customers, and workforce will be created and linked to more toward ‘as a service’ models and digital insights from other sources included this more IT-focused workforce. A shift services and operations will be completely in the digital strategy. Furthermore, to IT investments is likely. Third, Big reshaped by digital transformation. developing digital skills, such as data Data analytics will serve as a foundation science skills and digital product of the implementation of many digital management practices, in your company transformation processes and strategies. is also important. Businesses need to be Fourth, creation and implementation of flexible and watch their digital growth and the IoT in the daily life of people and culture, as well as the market. the rise of AI gadgets and solutions will create numerous business opportunities by FW: Looking ahead, what are spreading the idea of digital transformation your predictions for global digital in all corners of the economy. We will also transformation and its impact on see a stricter regulatory environment to companies over the coming months and regulate the application of AI. years?

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ORGANISATION GLOSSARY

ANHEUSER-BUSCH INBEV

Anheuser-Busch InBev (AB InBev) is a Belgian- Matt Galvin Brazilian transnational beverage and brewing New York, NY, US company with global headquarters in Leuven. +1 (212) 503 2886 Committed to helping farmers, retailers, [email protected] entrepreneurs and communities to grow, AB InBev drives growth that leads to better living for more people in more places. Through its diverse portfolio of well over 500 beer brands, including global brands Budweiser, Corona and Stella Artois, AB InBev brings people together and is an integral part of consumers’ lives.

CLIFFORD CHANCE

Clifford Chance is one of the world’s pre- Claudia Milbradt eminent law firms, with significant depth and Düsseldorf, Germany range of human and IT resources across five +49 (211) 4355 5962 continents. The firm is always striving to exceed [email protected] the expectations of its clients, which includes banks and other financial institutions, corporates from all the commercial and industrial sectors, governments, regulators, trade bodies and not- for-profit organisations. Providing the highest quality advice and legal insight, Clifford Chance prides itself on its approachable, team-based and tech-savvy way of working.

CMS

CMS is a full-service top 10 international law Sam De Silva ﬁrm, based on the number of lawyers (Am London, UK Law 2016 Global 100). With 74 ofﬁces in 42 +44 (0)20 7524 6223 countries across the world, employing over 4500 [email protected] lawyers, CMS has longstanding expertise both at advising in its local jurisdictions and across borders. CMS acts for a large number of Fortune 500 companies and the FT European 500 and for the majority of the DAX 30.

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CNH INDUSTRIAL

CNH Industrial is a global leader in the capital Gwendolyn L. Hassan goods sector that, through its various businesses, Burr Ridge, IL, US designs, produces and sells agricultural and +1 (630) 887 2187 construction equipment, trucks, commercial [email protected] vehicles, buses and specialty vehicles, in addition to a broad portfolio of powertrain applications. Present in all major markets worldwide, CNH Industrial is focused on expanding its presence in high-growth markets, including through joint ventures.

DELOITTE

Deloitte has one of the largest Forensic practices Del Nadarajah in the world with approximately 1400 dedicated London, UK practitioners in over 30 countries. Our Forensic +44 (0)79 4663 5025 Financial Crime practice can help with expert [email protected] solutions for the current top six ﬁnancial crime threats including anti-money laundering, anti- Daniel Apple bribery and corruption, e-crime prevention, London, UK integrated ﬁnancial crime, sanctions and fraud +44 (0)78 2590 6901 prevention. Our practice includes legal and law [email protected] enforcement specialists, business intelligence, regulatory and change experts applying state-of- Jane Cunningham the-art technology to provide business focused London, UK solution to our clients, globally. +44 (0)77 7582 4941 [email protected]

DLA PIPER

DLA Piper is a global law firm capable of taking Kit Burden care of the most important legal needs of its London, UK clients wherever they do business. With lawyers +44 (0)20 7796 6075 throughout the Americas, Europe, the Middle [email protected] East, Africa and Asia Pacific experienced in arbitration, banking, competition and trade, corporate crime, corporate finance, intellectual property, M&A and technology, the firm represents more clients in a broader range of geographies and practice disciplines than virtually any other law firm in the world.

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FIELDFISHER

Fieldfisher is an international law firm with Simon Briskman one of the world’s leading technology and London, UK privacy law practices. With offices in London, +44 (0)20 7861 4145 Manchester, Brussels, Paris, Dusseldorf, simon.briskman@fieldfisher.com Hamburg, Munich, Silicon Valley and Shanghai and a network of privacy specialists in over 50 countries, we can service your privacy needs globally and help you thrive in a global economy.

GE is the world’s digital industrial company, Deborah Sherry transforming industry with software-deﬁned United Kingdom machines and solutions that are connected, [email protected] responsive and predictive. The ﬁrm is organised around a global exchange of knowledge – the ‘GE Store’ – through which each business shares and accesses the same technology, markets, structure and intellect. Each invention further fuels innovation and application across our industrial sectors. With people, services, technology and scale, GE delivers better outcomes for customers by speaking the language of industry.

HOGAN LOVELLS

Hogan Lovells advises businesses, financial Zenas Choi institutions and public sector bodies in all fields Northern Virginia, US of domestic and international commercial law. +1(703) 610 6175 Over 2800 lawyers in more than 45 offices [email protected] advise in every major jurisdiction and financial centre across the globe. In Germany, the firm Cullen Taylor has over 350 lawyers in its offices in Dusseldorf, Northern Virginia, US Frankfurt, Hamburg and Munich. The firm’s +1(703) 610 6177 corporate team advises on national and cross- [email protected] border M&A transactions, public takeovers, joint ventures, restructurings, management buyouts and squeeze-outs.

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REED SMITH

Reed Smith is a global relationship law firm Andreas Splittgerber with more than 1700 lawyers in 28 offices Munich, Germany throughout the US, Europe, Asia and the Middle +49 (0)89 2030 4152 East. Founded in 1877, the firm represents [email protected] leading international businesses, from Fortune 100 corporations to mid-market and emerging Jane Grinblat enterprises. The firm’s five main industry Munich, Germany sectors are financial services, energy and natural +49 (0)89 20304 165 resources, entertainment and media, shipping [email protected] and life sciences.

SIEMENS

Siemens is a global technology powerhouse that Andrew Copland-Cale has stood for engineering excellence, innovation, Munich, Germany quality, reliability and internationality for +49 89 636 00 170 years. The company is active around the [email protected] globe, focusing on the areas of electriﬁcation, automation, digitalisation and medical equipment. In ﬁscal 2017, which ended on 30 September 2017, Siemens generated revenue of €83.0bn and net income of €6.2bn. At the end of September 2017, the company had around 377,000 employees worldwide.

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FW_CD & RC Advert 2018.indd 1 11/7/18 10:37:55 TALKINGPOINT

TALKINGPOINT:

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MERGERS & ACQUISITIONS Impact and treatment of IT assets in M&A

FW speaks with Mark Steele at Deloitte LLP about the impact and treatment of IT assets in M&A.

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THE RESPONDENT

Mark Steele Mark Steele has over 18 years experience in delivering carve-out and post-deal Partner programmes for leading corporate organisations and private equity. Over the last Deloitte LLP decade he has led some of the largest technology deals. He has also led all aspects of T: +44 (0)20 7303 5393 the technology deal programme, including deal negotiation, technology, strategy and E: [email protected] architecture (TSA), cost modelling, solution design, planning and execution. He has also led mainstream business and technology transformation activities, delivering right sized and process and MIS change programmes.

FW: In what ways have technology dependency on technology-driven business It continues to be the case that defensive assets become a key lever for businesses and innovations, it is essential that business acquisitions are the least appealing undertaking mergers & acquisitions executives understand technology in deals to M&A leaders, and increasingly, (M&A)? How would you characterise the order to make broader strategic decisions organisations both within the technology role technology is playing in transaction within an M&A context. Furthermore, sector and outside of it are buying assets processes? the ever-increasing importance of data is at earlier stages of their development, in driving change on how technology assets order that they may realise the innovative Steele: In 2017, deals undertaken by are assessed within the transaction as market opportunities these organisations non-tech firms buying technology assets considerations are broadened to not only offer. Such acquisitions offer significant exceeded acquisitions by technology include the technology environment but benefits and risks to the merger integration companies. This shift was the result of also the regulatory landscape it sits within. strategy, to the management of talent and robotics, FinTech, artificial intelligence The second implication of technology is to the focus of businesses research and (AI), the Internet of Things (IoT) and that the way professional organisations development (R&D). Some key lessons analytics, all of which are now significant are undertaking their diligence is changing can be seen in integrations by ensuring value drivers for non-tech organisations. radically, with organisations now using synergies are achieved, but equally in Additionally, the implications of technology high-powered analytical tools. M&A ensuring the unique benefits and talent as a disrupter to traditional businesses practitioners and operational experts are within the acquired organisation are have now become a significant factor in able to deliver faster and more insightful retained. We are increasingly seeing acquisition strategy; people have moved analysis to management teams. This integrations which accommodate a from owning the aisle to owning the analytical capability, mixed with mapping maximising value rather than cost synergy customer. This shift is a consequence of and presentation technologies, means that ethos. More broadly, these types of technology and the maximisation of data management teams, bankers and buyers acquisitions are creating differing business as a business asset. This has had two are being given a richer insight and a risks with the potential to introduce new implications for the deal process. First, greater ability to challenge and undertake cyber threats to businesses as a result of diligence is now focused on the revenue scenario analysis on their M&A assets. their acquisition strategy. Increasingly, implications of technology as well as the This is a significant shift from traditional security diligence is a specific addition to efficiency it brings and there has been a diligence and is changing the roles of M&A the portfolio of diligence requirements. significant rise in the need for data analytics professionals. and General Data Protection Regulation FW: To what extent is technology (GDPR) or data security diligence, which FW: How have disruptive technologies altering the approach businesses take takes a fundamentally different approach changed the M&A landscape in recent to divestments, extracting synergies and to what has historically been called IT years? What are the implications for how post-deal integration? What do M&A diligence. Historically, technology due transactions are pursued? practitioners need to consider as part of diligence focused on identifying cost such processes? synergies and enabling an integration Steele: Disruptive technologies are or separation. As companies invest and constantly driving change in the M&A Steele: The approach businesses have divest technology assets and continue landscape, prompting investors and taken to divest, integrate and identify cost to make investments with an increasing impacting the strategic choices of buyers. synergies have always been underpinned

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by technology. M&A practitioners continue Steele: There are two drivers for FW: With technological innovation to make technology one of the key aspects technology. Value one is being clear on the continuing to shake up and redefine to any transaction and, as a result, any revenue and customer experience delivered business models, what essential advice IT integration or separation continues to to clients to create value. The move to would you offer to companies in terms of require significant planning. Investment ‘owning the customer’ means the data utilising technology to push the boundaries around any major system cutovers typically and customer asset has greater business and remain competitive? takes the focus in M&A transactions. For value, while the mobile and internet example, historical data is commonly a key engagement of clients through technology Steele: Essential advice would be to talking point between sellers and buyers is a significant factor in medium-term remember it is about the customer and that which consists of discussions over costs, business performance, and business technology and innovation, even the most resources and infrastructure constraints value. Undertaking diligence around the disruptive innovations, are about doing in order to understand ownership and user experience, customer engagement the right thing for the customer if they access historical data. It is essential for and customer data are all factors which are to be successful. You must ensure that practitioners to ensure considerations like impact value. Equally, how the diligence your technology and innovation reflects these are made as early as possible within is undertaken and the use of leading this. Ensuring that you select and align the a transaction in order to ensure there is a analytics and presentation technologies to correct technology to suit your business smooth transition between the buyer and properly analyse and realise the value of model will help deliver success. Delivering seller. However, technology is affecting how the information held by organisations is an a good idea badly can prove very costly, sell-side M&A is being undertaken, with important factor in the presentation of asset so focus on executing the integration and data analytics and data scientists helping to value. implementation well and in line with your deliver richer and more insightful analysis business model to ensure asset value is not of business performance than previously FW: Are traditional risks and sources lost. seen. What would have taken months of value for technology in a deal still as previously is now taking just weeks, and important? FW: Looking ahead, what are your as such the analysis and insight of sell-side predictions for the evolution of technology teams which use modern technologies Steele: The traditional risks and sources and its impact on future M&A trends? to support their work is significantly of value are still highly relevant; these increasing and is helping organisations have not gone away, despite the increased Steele: The key future technology better position their sell-side value story. use of bots and AI. Technology is simply drivers will be focused on AI and a means of amplifying the impact and business information analytics, on FW: What should businesses be doing to value of traditional business drivers and blockchain-type technologies and the use increase their understanding of technology performance. Data is only king if it has a of analytical robotics to better and more as a source of strategic value in an M&A business which is valued by its customers. accurately sift through the growing data transaction, in order to maximise returns? Thus, technology remains an enabler, lakes organisations are building. As a though its impact is more widespread consequence, protection and IT security are than 10 years ago. Consideration for the essential. Reputation risk will increasingly stability, sustainability and scalability of be an issue and consumer trust can be technology is still highly relevant and fickle, so ensuring chief information officers should not be ignored. If the technology (CIOs) have the right housekeeping of the ENSURING THAT YOU SELECT stops, then so might the entire business IT estate will be equally important. supply chain; therefore understanding the AND ALIGN THE CORRECT basics as well as the more recent technology phenomena are equally important. But TECHNOLOGY TO SUIT YOUR the need for scalability and sustainability BUSINESS MODEL WILL HELP of IT environments, where information governance policies and frameworks such DELIVER SUCCESS. as security measures, technology, strategy and architecture (TSA), day one planning activities and data centre management, MARK STEELE remain critical. ‘‘’’Deloitte LLP

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PRIVATE EQUITY Creating value in private equity carve-outs

FW moderates a discussion on creating value in private equity carve-outs between Mark Bunker, Jason Caulﬁeld, Mo Habbas, Jan Rattay and Jason Spencer at Deloitte LLP.

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THE PANELLISTS

Mark Bunker Mark Bunker is a partner within Deloitte’s transactions practice based in London. He has Partner, Transaction Services over 17 years’ experience of advising both private equity and corporate clients. Mr Bunker Deloitte LLP specialises in leading high proﬁle, international acquisitions, disposals and carve-outs. He T: +44 (0)20 7007 4395 is a chartered accountant and fellow of the ICAEW. Mr Bunker graduated from Imperial E: [email protected] College with a degree in Mathematics and Physics.

Jason Caulfield Jason Caulfield is the global leader for M&A Operations and Value Creation Services Partner, M&A Operations and Value at Deloitte. He has over 20 years experience in identifying and delivering performance Creation Services improvement and EBITDA/cash improvements in complex carve-outs for corporate and Deloitte LLP private equity. He has a DPhil in Physics from Oxford University. T: +44 (0)20 7303 4883 E: jcaulfi[email protected]

Mo Habbas Mo Habbas is a partner with over 20 years of operations and consulting experience in Partner, Value Creation Services value creation. His focus is value creation planning and implementation for private equity Deloitte LLP acquisition targets and portfolio companies. His experience in value creation covers rapid T: +44 (0)20 7007 1515 diagnostics, large and complex transformations and cost reduction programmes. He has an E: [email protected] MBA from INSEAD.

Jan Rattay Jan Rattay is a partner in the M&A Operations team in London. He works with clients on Partner, M&A Operations pre-deal, full value potential assessments, carve-outs, assessing and executing synergies, Deloitte LLP and delivering value during the ﬁrst 100 days of ownership. T: +44 (0)20 7303 8973 E: [email protected]

Jason Spencer Jason Spencer is a partner in Deloitte’s Technology M&A team, with over 20 years of Partner, M&A Technology industry, consulting and transactions experience. He focuses on technology due diligence Deloitte LLP specialising in pre-deal separation and integration, IT assessments, business systems T: +44 (0)20 7007 9603 diligence, IT operating models, data analytics and post diligence integration. Sector E: [email protected] experience includes retail, manufacturing, FMCG and supply chain.

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FW: To what extent have you seen a ‘corporate unloved-child syndrome’ and rising level of activity involving carve-outs resetting the strategy of the business as an sold to private equity (PE) firms? What independent company to drive earnings are your expectations for such activity over growth. In the first instance, private DELIVERABILITY OF the months ahead? equity is generally focused on assessing whether the business to be carved out THE CARVE-OUT AND Caulfield: The M&A market has has a product or service that is a strong continued to be robust in the first half of proposition relative to competitors, MANAGING DIS-SYNERGY 2018 and current indications point to that operates in a compelling growth market, SEPARATION RISKS ARE KEY continuing into the second half of the year. and has a capable management team in Private equity is one of the driving forces. place. Thereafter, attention quickly turns CONSIDERATIONS. Global private equity-backed M&A is up to assessing the carve-out opportunity 48 percent in the first half of this year for accelerating revenue growth and and there is a record level of ‘dry powder’ cost optimisation under a new capital MARK BUNKER to deploy. Corporate divestments have structure with a management equity plan Deloitte LLP continued to be a major driver of M&A in place. Deliverability of the carve-out and activity. In our recent business survey, managing dis-synergy separation risks are ‘‘’’ 70 percent of respondents said that they also key considerations. Ultimately, in a expected to make at least one divestment carve-out situation, a private equity investor in the next two years. Activist investors are needs be comfortable that value can be also playing an increasingly large role in created by separation and the business can driving divestments. In Europe, deployed be operationally standalone from day-one. to zeroing in on the key issues and not capital has doubled and, according to our getting distracted from the opportunity to research, 37 percent of activist campaigns Rattay: Carve-outs are often opportunities create value after getting through the main targeted divestments or growth M&A. Our for a new PE owner to ‘reset’ the cost separation activities. expectations are for a continuation of these structures for the business they are activity levels. acquiring, taking away group-driven FW: In terms of sourcing attractive operating and reporting structures and targets, what considerations are PE players Rattay: M&A volumes are very high at adopting these on a standalone, fit-for- making when assessing a potential carve- the moment. There has been an increasing purpose basis. They are also situations out for acquisition? volume of large-scale divestments from where the performance of underinvested major corporates with PE actively businesses can be put on an accelerated Rattay: PE firms need to have a strong participating in these processes as serious development track with the right belief in the commercial proposition of bidders. A number of large-cap PE firms investments. Finally, carve-outs often serve the carved-out business – without this, have demonstrated a track record in value as platforms for the new PE owners to the deal will not fly for them. Once this creation of carved-out business and are consolidate platforms through a buy-and- has been grounded, PE firms are looking using these blueprints to help identify build strategy. for a clear and deliverable separation plan additional upsides to help them win deals. to transition the carve-out business to With more corporates looking to optimise Caulfield: Naturally, the carve-out asset a fully standalone operation. Flexibility their portfolios and the rise in activist presents opportunities for value creation from the vendor on transitional service shareholders pushing for value realisation as it may have lacked focus and capital. agreements (TSAs) in terms of scope is also of underperforming or misaligned business However, for PE, a carve-out is a much an attractive transaction consideration. In units or divisions, there looks to be a steady greater transaction risk than for a corporate summary, the more standalone the business stream of carve-outs in the months ahead. buyer, as PE will have to create a fully is and the more robust a commercial plan standalone business with a hard deadline, the carved-out business can demonstrate, FW: What opportunities do carve-outs versus a merger or tuck-in. Also, often a the more attractive it will be for PE. offer to savvy PE firms, from a value- seller will not have private equity in mind creation perspective? and rarely will have undertaken a major Caulfield: We see that a number of the carve-out, resulting in poor data, financials larger, sector-agnostic PE firms invest in Bunker: At face value, corporate carve- with lots of allocated central costs, shared businesses which, while looking dissimilar outs are attractive for private equity for a services IT and contracts, and two sets of from an industry perspective, may be number of reasons. These include, among management teams to deal with. Being facing similar challenges. One common others, the value creation opportunity that experienced in executing carve-outs, theme is IT separation, where there is could be associated with reversing the or having experienced help, is critical often ambiguity in the activity and cost

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required to stand up the carved-out entity’s channels or geographic presence while also important, avoiding any surprises. IT function and in turn what that means separating allow much quicker value Balancing the autonomy of management for costs going forward on a standalone creation to be realised. versus the desire to control management basis. As such, this has become an area decisions, particularly in areas where where several PE firms have built up strong FW: What challenges is a PE firm likely PE may want to reduce costs, are where in-house expertise, further supplemented by to encounter when trying to unlock the full management may provide some resistance. external advisers. potential of a carved-out business? What PE firms are increasingly having their strategies are they deploying to overcome transaction and value creation personnel Spencer: Historically, PE has looked to these issues? seconded to portfolio companies to mitigate complete the carve-out almost entirely prior this risk, however the risk of ‘going native’ to actively pursuing accelerated revenue Caulfield: There are four main challenges. is a real one that can often hinder PE firms’ growth and cost optimisation. This is First, and perhaps obviously, is the need ability to drive rapid cost reduction. traditionally due to complex operational or to clearly understand what you are getting technology-centric separation programmes in the transaction perimeter – such as Rattay: Carve-outs always involve running under sometimes extreme legal entities, staff, contracts, assets, business change which can be hard to deadlines limiting opportunities for initial technology, intact processes, costs, and execute. For very complex carve-outs, business-wide transformation. This usually so on – and what you are not getting completely new legal structures need to delays value creation and ultimately puts which the parent provides today. Also be set up, new sets of financial accounts the target on a long, sometimes distracting important is understanding what sell-side created, most of the employees selected and path of business change. PE players are preparations have been carried out and the transferred, new operations and facilities now more than aware of this and are extent of any external diligence conducted set up and IT systems either cloned or looking at minimising the business impact – and crucially, the key operational risks newly created. A carve-out is in essence a of carve-outs and, more importantly, to flagged as part of diligence. In carving out complete corporate transformation at the business areas where incremental revenue businesses, core support services including complex end. Many PE firms which are growth can be focused on alongside a treasury, IT, finance, and so on, are left serial carve-out acquirers have developed separation programme. Technology is behind in the process – interruption in a carve-out playbook that they use to typically the key driver behind this different these processes can often impact day one plan and execute the separation. PE firms approach. For example, technology business operations. Second, the transition also tend to shy away from deals where platforms and environments that can post-transaction is often overlooked and there is an underprepared vendor which leverage cloud services to quickly transition can cause serious disruption. Being ready has not thoroughly developed the target systems and departments, potentially for day one is essential. Focusing on the operation model, associated headcount limiting business impact, are now key day one business critical systems, processes and cost structure and transition plan. buying considerations. Investments in and governance structures will ensure a Many PE firms mitigate against the risks of customer-facing technologies to expand smooth transition into new ownership, carve-out through a robust 100-day plan, creating a lasting positive first impression which covers, firstly, the key value driving with major stakeholders. Third, understand initiatives of the deal, secondly, early stage complex costs such as pension obligations, investment in the business typically aimed IT licences, leases and other significant at catching up with underinvested divisions contracts. Without doing so, you may find or operating companies, and thirdly, the GETTING CLARITY ON THE ASSETS costs have been ‘omitted’ from the income separation plan to make the business fully statement which are otherwise required for standalone. BEING DIVESTED AS PART OF THE business as usual. Items such as software licences, insurance and premises or FW: In what scenarios might a carve-out DEAL AND CLEAR FINANCIALS facilities costs may not be transferring with prove unsuccessful or unsuitable for the WHICH ALLOW LENDERS TO the carved-out business, and you may find PE value-creation playbook? yourself having to buy or build additional ASSESS THE PERFORMANCE OF capabilities, not otherwise reflected in the Caulfield: There are no specific scenarios vendor’s view of EBITDA. Finally, carefully in which a PE approach should be ruled THE DIVESTED BUSINESS ARE consider the use and content of TSAs to out, however there are indeed factors that BOTH KEY. ensure seamless business continuation can derail a successful carve-out. Often post-transaction, until you have established, these are based on unrealistic assumptions implemented and tested replacement of what the PE firm and management ‘‘’’JAN RATTAY systems and process. Keeping a close eye can achieve in the forecast period, in a Deloitte LLP on the pricing of any such agreements is short space of time, particularly around

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headcount reductions and the ability to performance of the divested business are maintain day-to-day operations, all while both key. Dependencies with the parent preventing revenue erosion. In other company need to be clearly set out, as these areas there may be more macro factors can often move from internal to market- THE INVESTMENT THESIS at play that impact a business’ ability to standard terms – frequently resulting in remain competitive, be it foreign exchange significant changes in profitability margins WILL BE PREMISED ON AN movements or new protectionist actions for the carved-out business. or tariffs, such as those we are currently OPPORTUNITY TO DRIVE witnessing in the US. Spencer: Understanding what is in VALUE FROM THE TARGET the perimeter and coming across is key. Rattay: The lack of a robust and evidence- However, sometimes it is more important ASSET. based commercial plan is often a roadblock for PE to know what is not in the perimeter for PE in a carve-out scenario – as is the but will be required for day one and case for any standalone investment. The beyond. More often than not, PE will MO HABBAS lack of a well-developed standalone cost most likely have to stand up new business Deloitte LLP base and carve-out plan can put off some functions to support those services not buyers, but the more experienced PE funds included in the perimeter. One area that ‘‘’’ are typically able to see through the fog and typically causes unique issues are ‘shared develop their own view of the separation services’ environments which can provide plan during the due diligence process. This business services such as finance, HR, is then validated in the 100-day planning customer services, IT and facilities. While process before deal completion, and in the TSAs can usually provide support for day of pre-deal identified key initiatives, subsequent execution phase. one, there are often some business services identifying any additional key initiatives, that sellers will not offer. Being able to and prioritising those that will drive the FW: When structuring and financing identify what these new business services majority of the value – 80/20. Clients the deal, are there any unique issues will cost to implement and run, as well often make the mistake of not developing that should be examined in the context as the timescales and risk involved, is key value creation plans that are pragmatic, of a carved-out business? For example, when structuring an investment. actionable and measurable in hard cash and how important is to fully understand the EBITDA benefits, while also having a sharp perimeter of the entity in relation to its FW: At what stage in the M&A cycle focus on quick wins in the early stages of former parent company? should you start considering value new ownership, particularly in cash and creation? How do you identify the key working capital management. Identifying Bunker: It is extremely important to drivers of value and how do you ensure the drivers of value occurs through detailed understand the precise perimeter – both they are delivered? work with the management team who are the legal entity and operational perimeter. all stakeholders in the business, review of Some of the most complex carve-out Habbas: Value creation starts from the financial information, and previous transactions involve situations where the the very outset of the M&A cycle. The experience across multiple businesses. In legal entity and operational perimeter investment thesis will be premised on an order to deliver the value, it is fundamental need to be aligned with TSAs post opportunity to drive value from the target to follow a pragmatic approach, addressing deal. The structure of the TSAs needs asset. Having clarity around the set of key the key drivers that have the greatest to be thoroughly addressed in the deal value-creation initiatives and a strategy, as impact on the business first – either negotiation process – for example, do the well as understanding, of how to deliver opportunity value or risk – before then TSAs cover the right services, provide for a them, will underpin the investment thesis. moving on to the lower-priority drivers. sufficient time frame, and at an appropriate As the M&A cycle progresses, it becomes Providing clarity on the actions to be cost? Protecting against value-leakage increasingly important to develop a more taken, visibility of both financial and non- during the TSAs negotiation process is detailed view of how to achieve the value financial results, and accountability is key often a high-value part of getting a carve- and also any risks or issues that might to ensuring delivery of the value into the out right. prove stumbling blocks to achieve them. business. Typically, the opportunity to deep dive into Rattay: Value can often be created the detail becomes available once the deal FW: Could you outline some of through efficient structuring of the carve- completes, known as the 100-day planning the essential due diligence and risk out. Getting clarity on the assets being stage, through greater management and management aspects that should be divested as part of the deal and clear data access. The post-completion value incorporated into the transaction? financials which allow lenders to assess the creation planning emphasises validation

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Caulfield: Naturally, some due diligence financial implications of the separation, activities have become somewhat the transition plan and associated one-off standardised on both buy-side and sell-side, costs and the required TSAs to facilitate for example financial due diligence. Value the move to a fully standalone operation. UNDERSTANDING WHAT creation, however, still appears to be an This is on top of the usual commercial, area which is covered to varying degrees financial, legal and tax due diligence IS IN THE PERIMETER AND in due diligence products on both sides of requirements, so it is a much more complex the transaction. In terms of diligence of the due diligence process. Also, the position COMING ACROSS IS KEY. business plan, the underlying assumptions of the carved-out business during the due HOWEVER, SOMETIMES IT IS are typically covered under financial due diligence is often ‘theoretical’, with many diligence and impact of forecast cost saving operational step changes that still need to MORE IMPORTANT FOR PE programmes in operational due diligence. be implemented. So, a PE bidder will need One area that seems to get less attention to invest time in very detailed due diligence TO KNOW WHAT IS NOT IN is the detailed mechanics of how capex and benchmarking to assess whether the THE PERIMETER BUT WILL BE investment and operational improvement picture presented by the vendor really translate into positive cash-flow impact in stacks up. Given the operational change of REQUIRED FOR DAY ONE AND the forecast period. This quantification of carve-outs, transaction completion is also ‘‘’’ these improvement initiatives – never mind much more complex than on a standard BEYOND. the delivery of them – can be significantly buyout. In order to mitigate risk around more complicated than simple assumptions this, successful PE buyers develop and JASON SPENCER based on previous experience, as forecasts execute a detailed day one plan and link Deloitte LLP are often based on entering new markets, clear obligations of this day one plan to which are inherently less certain. For the vendor. The final risk mitigation is a businesses where significant operational good and capable management team that change is required to deliver the returns is on top of driving the business during the indicated in the investment thesis, we separation process, as this can be disruptive would expect the achievability of the for the business. After all, the best executed forecast savings to be an increasing area of carve-out is useless if the management team focus in the diligence process, rather than takes its eye off developing the topline. something left to wrestle with post-closing. FW: What steps can PE players take from Rattay: A divestment from a corporate has the outset to prepare a carved-out company the added complication of requiring due for exit and generate expected returns? diligence on the target operating model, Rattay: Getting an early view of management’s own plans to transition to standalone and forecast improvement initiatives is key. Often the level of supporting detail will be minimal, and ONE AREA THAT SEEMS TO GET so assumptions should be challenged extensively to test their reasonableness. LESS ATTENTION IS THE DETAILED Post completion, there will be many other issues that arise that could derail the MECHANICS OF HOW CAPEX focus on value; effective prioritisation of INVESTMENT AND OPERATIONAL initiatives during the development of the 100-day plan can help mitigate this. IMPROVEMENT TRANSLATE INTO POSITIVE CASH-FLOW IMPACT IN THE FORECAST PERIOD.

‘‘’’JASON CAULFIELD Deloitte LLP

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PROFESSIONAL INSIGHT

MERGERS & ACQUISITIONS Cross-border M&A driving surge in innovative structures

BY JAN WILLEM VAN DRIMMELEN

ross-border M&A activity is use of complex acquisition structures and Global economic growth has created enjoying a boom, with deal other measures designed to mitigate risk benign conditions for corporates, leading volumes at record highs. to provide much needed assurances to all to higher earnings and leaving companies However, underlying drivers and parties while getting the deal done. with excess cash on their balance sheets Cincreased risk factors have created new The drivers supporting cross-border M&A that they are looking to put to work. Many challenges in successfully closing deals. The activity stem from long-term trends in both US corporates have also repatriated cash result has been a dramatic increase in the the economic and business environment. as a result of US tax reforms. Perhaps most

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importantly, prevailing low interest rates resources to ensure the set-up of a robust regulation presenting clear and present have provided companies with access to and sustainable structure. challenges to international business. cheap capital to support their dealmaking The structures that parties use to mitigate Despite all this, incentives for businesses to activity. some of these risks vary immensely, expand through cross-border M&A show While economic conditions have provided with the most appropriate acquisition no signs of abating. As such, technical the necessary fuel for dealmaking, global structure in a given situation dependent solutions will be sought after and invested business trends have increased businesses’ on legal, commercial, tax and financial in, and through hard work and innovation, incentives to carry out cross-border M&A considerations. Generally speaking, BidCos companies and their advisers will continue as part of a search for long-term sustainable or acquisition vehicles help businesses to to find a way to mitigate risk while realising growth. Technological disruption, for manage risk, comply with local laws and their international ambitions. example, has led many companies that regulations and create efficiencies from a previously did not regard themselves financial, risk and security perspective, as Jan Willem van Drimmelen is global head as technology businesses to acquire well from an organisational perspective. of corporate clients at Intertrust. He can intellectual property to modernise their Typically, investors set up a local BidCo in be contacted on +31 (20) 521 4626 or by business models. Similarly, globalisation the jurisdiction of the target company, and email: janwillem.vandrimmelen@intertrust presents increased opportunities for depending on the way the deal is financed group.com. even small companies to leverage M&A it may be required to set up multiple legal to expand into new markets. Of these, entities, in order to provide adequate emerging markets are playing a particularly security collateral to the banks and to ring- important role as positive demographics fence any risks. and economic catch-up present companies Another useful tool in the cross-border with significant growth opportunities. toolkit is escrow services that allow a third- In contrast, barriers to cross-border party to hold and regulate the payment of M&A are also mounting. Trade wars, funds required between two parties in a tariffs, protectionism, physical conflict and transaction. Escrow services benefit both instances of rising nationalism are just a the buyer and seller as it ensures that they few examples of the sorts of geopolitical are protected equally by an independent risks that can have significant impacts on agent that will see to it that the agreement markets and increase the costs and risks is followed in accordance with the escrow of conducting cross-border deals. When mechanism as agreed by parties. investing in countries where there are Many of these solutions have existed for relatively high geopolitical risks, one should several years, but we are observing a boom carefully consider whether there are any in their frequency, complexity and the types bilateral investment treaties that could be of companies deploying them. Escrow used as a risk management tool. services, for example, are not in themselves Furthermore, the ever-increasing burden a new innovation, but we are now seeing of regulation, both at a national and increasing demand, particularly in markets international level, and changing tax such as Singapore, the UK, the Netherlands laws have added further complexity to and Turkey. structuring deals. This makes it critical While in the past BidCos were the reserve to ensure that any legal structuring is of large multinationals seeking major thoroughly analysed and the relevant acquisitions, the profile of parties using acquisition structures are set up in a robust such structures is shifting. Many parties and sustainable manner. using these structures are now small and With drivers and barriers both at all-time medium-sized enterprises (SMEs), and highs, this creates a paradox in cross-border come from a wide range of fast-growing M&A – never before have deals been so sectors such as video gaming, online easy, or so hard. In response, parties are retailers and nutrition companies seeking becoming a lot more aware of the risks cross-border deals. of cross-border M&A and that setting up While the outlook for cross-border the right acquisition structure can have a M&A looks good, with another strong material impact on the overall success of a year forecast for 2018, the world looks transaction. As a result, market participants like an increasingly unpredictable place, are more willing than ever to commit with geopolitical events and increasing

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MERGERS & ACQUISITIONS Liabilities arising from Canadian immigration in mergers & acquisitions

BY JACQUELINE BART AND CARRIE WRIGHT

ergers & acquisitions (M&A) of temporary foreign workers are expected While an employer who is found non- are notable components of to comply with a number of conditions, compliant with any of the above conditions a free market. From a legal including: (i) the conditions included in an may defend its actions to mitigate liability, perspective, they involve offer of employment or a labour market the justifications for non-compliance are Mcorporate due diligence to ensure that impact assessment (LMIA), including, very limited and are specifically delineated the merger or acquisition is financially but not limited to, the foreign national’s in the IRPR. Justifications include changes prudent, viable and of minimal legal and title, job duties, remuneration, benefits in federal or provincial law, changes to financial risk. One aspect of due diligence and hours of work; (ii) the federal and collective agreements, a dramatic change that requires specific attention and provincial laws that regulate employment, in economic conditions, a good faith cannot be overlooked is immigration due and the recruiting of employees; (iii) error of interpretation of the employer’s diligence on all such transactions. A failure making reasonable efforts to provide obligations, an unintentional accounting of immigration due diligence in M&A a workplace that is free of abuse; (iv) or administrative error, force majeure or transactions can result in exposure for the demonstrating an offer of employment is similar circumstances. acquiring company or significant errors in genuine; (v) remaining actively engaged in Approximately one in four employers of valuation of targeted companies. the business in respect of which the offer temporary foreign workers are randomly In this article, we outline Canadian of employment was made; (vi) ensuring audited by Immigration, Refugees and immigration law as it relates to M&A that the employment of the foreign national Citizenship Canada (IRCC), Employment transactions, and the risks associated with will result in benefits to the Canadian job and Social Development Canada (ESDC) overlooking immigration in an M&A due market outlined in an application for a and Service Canada (SC) on their diligence process. LMIA, including direct job creation or job obligations under these regulations. Any retention for Canadians, the development findings of non-compliance will leave Canadian immigration law on employer or transfer of skills and knowledge for the employers open to significant penalties, compliance benefit of Canadians, and the hiring or including any or all of the following: (i) Canada’s Immigration and Refugee training of Canadians or making reasonable administrative monetary penalties, ranging Protection Regulations (IRPR) provide efforts to do so; and (vii) maintaining from $500 to $100,000 per violation, to a a robust system for ensuring employers’ all documentation confirming the above maximum of $1m per year per employer; compliance with the terms and conditions conditions for a period of six years from (ii) a ban period of ineligibility on future outlined in an immigration application for the date that the foreign national began LMIA and work permit applications, for the entry of a foreign worker. Employers employment. a period of one, two, five or 10 years, or

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permanently for more serious situations outlined in the IRPR, including extensive As a result, after a corporate restructuring, of non-compliance; (iii) the revocation or fines and programme bans. a new LMIA may be required by the new cancellation of current and pending LMIA The obligations of employers with respect organisation and the temporary foreign and work permits; and (iv) publication to their temporary foreign workers do not worker would require a new work permit. of the employer’s name on a public cease immediately upon the completion For workers under the IMP, the extent of government website for an indefinite period of a corporate restructuring. Instead, if the impact a corporate restructuring may of time. there is a new organisation that can be have on a foreign worker’s authorisation In addition to these regulations, employers considered to be a “successor in interest” to continue will depend in part on the can also be liable for offences under the to the previous employer, that organisation specific programme under which the Immigration and Refugee Protection Act becomes responsible for ensuring that all work permit was issued. For example, a (IRPA). Under Section 124(1), it is an of the conditions outlined in the IRPR are temporary foreign worker who obtained a offence to employ a foreign national in a met. work permit as an intra-company transfer capacity in which the foreign national is not Employers of temporary foreign workers must demonstrate that there is a qualifying authorised under the IRPA to be employed. must be able to demonstrate compliance corporate relationship between their foreign Section 124(2) of the IRPA demonstrates with the terms of a foreign worker’s employer and the Canadian employer. If the long arm of this offence, stating that a employment for up to six years after the this relationship is severed as a result of a person who fails to exercise due diligence temporary foreign worker is issued a work corporate restructuring, there is no longer a to determine whether employment is permit. If the compliance history of the basis upon which that worker may work as authorised is deemed to know that it is not targeted company is not properly vetted at an intra-company transferee. authorised. If found guilty, a person can be the due diligence stage, acquiring entities In addition, temporary foreign workers liable for a maximum term of imprisonment may unwittingly become responsible for under both the TFWP and IMP typically of two years and for a fine of up to large fines and other consequences without hold employer-specific work permits. $50,000. having directly hired temporary foreign Corporate changes may therefore require Employers and temporary foreign workers workers, solely on the basis that the entity that temporary foreign workers cease can also be found guilty of offences assumed the liabilities of the temporary employment until new work permits can of misrepresentation or counselling foreign worker’s previous employer. be issued for the new organisation. New misrepresentation, which are broadly Justifications for non-compliance are also organisations that fail to verify whether defined offences that can result in very limited, and a lack of due diligence temporary foreign workers will require new imprisonment for a maximum of five years prior to purchase will be insufficient to work permits to continue working after and a fine of up to $100,000. A finding shield an acquiring entity from liability. a restructuring risk liability for Canadian of misrepresentation can also result in immigration offences. the issuance of a removal order against a Existing temporary foreign workers temporary foreign worker and a bar from The second important consideration in Conclusion entering Canada for a period of five years. any M&A transaction is whether the It is essential that Canadian immigration restructuring will have an impact on the counsel be retained during the due diligence Factors to consider in an M&A transaction authorisation of temporary foreign workers stage of an M&A transaction to assess It is clear from the law that penalties for to continue to work in Canada. any potential immigration compliance failing to follow Canadian immigration law Temporary foreign workers fall into two issues before the transaction is completed. can be severe. It is therefore essential that major categories: those employed under This will ensure that acquiring entities all relevant factors be considered at the the Temporary Foreign Worker Program are aware not only of financial liabilities due diligence stage to ensure that the new (TFWP), pursuant to an LMIA, and that may arise, but also penalties such as organisation has a full understanding of the those employed under the International jail terms or bans from utilising Canadian impact of a corporate restructuring on their Mobility Program (IMP), exempt from the immigration programmes. The imposition exposure to penalties for any prior non- requirement to obtain an LMIA. The latter of a ban on the hiring of temporary foreign compliance and on a targeted company’s category includes a number of programmes, workers or the transfer of foreign nationals existing temporary foreign workers. including NAFTA professionals, intra- to a Canadian entity can prevent an company transferees and certain youth acquiring company from training new staff, Employer compliance regulations employment programmes. maintaining Canadian clients, expanding The first important consideration in any For workers under the TFWP, the business or increasing profits, all of which M&A transaction is the compliance history employer which first applied for the LMIA may have formed the basis for concluding of the targeted company. Without verifying must contact ESDC and SC to inform them an M&A deal. this history, an acquiring entity may of the change in the corporate structure. In addition, without taking proper unknowingly open itself up to the penalties This is essential, as LMIAs are issued for a steps at the due diligence stage, an M&A specific position with a specific employer. transaction can not only put the resulting

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entity at risk, but also temporary foreign their ability to travel to Canada and even Solicitors. Ms Bart can be contacted on +1 workers of any former entity involved in the their freedom. Above all, this cost is far (416) 601 1346 or by email: transaction who intend to continue working too high to be ignored on any M&A due [email protected]. Ms Wright can be for the successor organisation. A completed diligence checklist. contacted on +1 (416) 601 1346 or by M&A transaction that does not involve email: [email protected]. a complete assessment of immigration Jacqueline Bart is the founder and Carrie obligations can cost a temporary foreign Wright is a senior associate at BartLAW worker their ability to work in Canada, Canadian Immigration, Barristers and

FINANCE & INVESTMENT Tax Reform Act provisions impacting the real estate investor

BY BOB BAUER, JILL STARRS AND JOHN WARNER

he most substantial tax law 34 percent, whereas, had that real estate The top tax rate on ordinary income, for changes in 30 years were enacted been owned through a flow through entity, individuals, was changed from 39.6 percent by the US Congress in December the sale could have been subject to a more to 37 percent, and if the income qualifies 2017. The Tax Cuts and Jobs preferential capital gain rate of 20 percent. for the new 20 percent deduction their top TAct (TCJA) significantly changes how US Under the prior law, some investors were tax rate on trade or business rental income entities are taxed. willing to pay the 14 percent difference becomes 29.6 percent. This 25 percent in tax because of the benefits the blocker reduction of tax is substantial and smart Tax rate changes structure offered. With the enactment of entrepreneurial owners will find ways to Many foreign investors have held their the recent Tax Act, the corporate tax rate maximise their savings. The QBI deduction ownership stake in real estate through a has been lowered to 21 percent, which is provides taxpayers the opportunity to make corporation. The corporate structure allows only slightly higher than the individual rate operating, legal and accounting changes to them to limit their estate tax exposure and of 20 percent. Therefore, we expect to see their businesses in an effort to maximise the they are not required to file an individual many more foreign owners hold their US deduction. US income tax return, so it provides some real estate interests in a corporate form. confidentiality. As opposed to a flow US residents usually invest in real estate Cost recovery through entity, a US corporation owned by directly or through a partnership and, One of the most favourable taxpayer a foreign owner ‘blocks’ the tax obligation therefore, are taxed on income from the aspects of the TCJA are the cost recovery at the corporate level. This means that property as an individual. Under the TCJA, changes. The expansion of bonus the corporation, not the foreign owner, is the individual tax brackets have been depreciation and section 179 expensing subject to US tax. Historically, with this expanded and tax rates reduced in each allows owners to recover the cost of their corporate ownership structure for real bracket, meaning more of a taxpayer’s capital investments much faster. Section estate, sale of the property was taxed at income will be taxed at a lower rate. 179 can now be used to deduct building

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systems in non-residential property. Many that this will be addressed in a technical qualify for the deduction. The deduction is non-residential real estate owners can corrections bill which presumably will limited to the lessor of 20 percent of their now fully deduct the replacement cost of be made retroactive to 1 January 2018. qualified business income or 25 percent of their new roofs, HVAC systems and fire However, until the change is made, or more employee wages paid by the rental property, protection and alarm systems compared to guidance is issued, the significant benefit plus 2.5 percent of the unadjusted basis depreciating them over 39 years under the taxpayers would receive from being able of qualified assets used in the rental trade prior law. to take a bonus on QIP is in question and or business. The unadjusted basis test Bonus depreciation has been substantially taxpayers should await further guidance does not include land cost, and buildings expanded as well. Under the TCJA, new before determining if they will take bonus and their components are included in the and used property with a 20 year or less depreciation on QIP for 2018. unadjusted basis amount to the extent they recovery period now qualifies for 100 are still within their depreciation recovery percent bonus depreciation. This expansion Deductions and limitations period (27 and a half years for residential of bonus depreciation, to include used An individual taxpayer may receive a 20 property and 39 years for nonresidential property, allows property owners the percent deduction for Qualified Business property). Owners of older properties that opportunity to substantially increase their Income (QBI) – the net amount of items of have been in service for longer than their write offs in the year of purchase. Cost income, gain, loss and deductions relating recovery period may want to purchase new segregation studies should be performed to to a qualifying business. The new deduction assets or pay more wages before year end to document that the assets qualify for bonus is not available to a corporation. Real maximise their deduction. depreciation. estate owners should review the level of Prior to 2018, taxpayers could generally For non-residential property, there is a activity within their rental property to make deduct 100 percent of their business class of property which was created prior sure their operations qualify as a rental interest expense. Starting in 2018, a to the TCJA called Qualified Improvement real estate trade or business. While the taxpayer’s interest deduction is limited to Property (QIP). QIP is any improvement, Department of Treasury has yet to provide 30 percent of adjusted taxable income, after the property has been placed in guidance on what types of rental activity plus business interest income for the year. service, to the interior of a non-residential will qualify as a trade or business, current Any disallowed interest expense is carried building, except for improvements related law suggests you need to have regular, forward indefinitely. The new business to structural framework of the building, continuous and substantial activity to be interest limitation rules can apply to elevators and escalators, or expansion of considered in a rental property trade or leveraged real estate entities if the entity’s the building. Before the TCJA, QIP was business. Owners might want to consider average gross receipts over three years is treated as a 39 year asset and was eligible taking back some of the management more than $25m. for bonus depreciation. The TCJA changed responsibility of the property by assuming Many property owners will not exceed the the language in the statute and Congress activities and expenditures such as $25m gross receipt threshold on a single intended to reduce the depreciable recovery insurance, taxes, maintenance and cleaning property, and if they are invested in just one period from 39 years to a 15 year life. for the rental property. property these rules will likely not apply to However, final language in the statute In addition to having a qualified business, them. However, those entities which have did not reflect this change. This oversight limitations apply to high income individuals institutional investors in their ownership means QIP property is not currently eligible and most rental real estate owners will structure, or owners who have investments for bonus depreciation. It is anticipated have to meet a wage and capital test to in multiple properties, could be subject to the business interest limitation. The limitation requires investors to aggregate the gross receipts they have within an affiliated group to determine if they meet the $25m gross receipts threshold. With an institutional investor you might be required to include income from other entities in the gross receipts test, and it could pull DECREASED TAX RATES, ALONG WITH ACCELERATED COST a smaller real estate property into the RECOVERY PROVISIONS, MAKE FUTURE INVESTMENTS IN REAL limitation. Real estate businesses may choose to elect ESTATE MORE ATTRACTIVE. out of the limitation. The election out is irrevocable and it comes with a cost to the entity. The election requires the taxpayer to change their tax depreciation on residential property, non-residential property and 84‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.financierworldwide.com ’’ PROFESSIONAL INSIGHT Finance & Investment

qualified improvement property to the need to be aware of the new rules and to maximise your current depreciation ADS method of depreciation, which could perform some analysis to determine the tax deductions. substantially slow down their current cost of the reduced depreciation expense Review the new business interest depreciation deduction. The Department compared to the tax cost on the interest limitation rules to determine if you are of the Treasury is expected to issue expense limitation. An alternative might subject to the limitations. If you are, start guidance on how this method change will be to consider making additional capital planning today to minimise the impact and be accomplished, which is important to contributions to pay down debt and avoid determine if you are eligible to elect out of determine the full impact of this election. the interest deduction limitation. those rules. It is important to note that a change to Take the time to learn and understand the ADS system will eliminate the use of Planning considerations how the new tax law applies to your bonus depreciation for some of the assets Decreased tax rates, along with accelerated situation. Start planning now in order to that might have otherwise qualified. Thus, cost recovery provisions, make future fully maximise those benefits for 2018. computations of this impact need to be investments in real estate more attractive. considered before a decision to elect out of Start reviewing your rental property Bob Bauer is a tax partner, Jill Starrs is a the interest limitation rules can be made. business practices to determine if, by principal and John Warner is a senior tax For example, residential properties in changing any of your operating, legal or manager at UHY Advisors. Mr Bauer can service before 31 December 2017 might accounting practices, you can improve your be contacted on +1 (314) 615 1238 or by have their recovery period extended from chance to qualify as a real estate trade or email: [email protected]. Ms Starrs can 27 and a half years to 40 years, under business. be contacted on +1 (314) 615 1272 or by current law. For non-residential property, Plan for the timing, amount and character email: [email protected]. Mr Warner can switching to ADS life will only extend the of capital improvements to your property. be contacted on +1 (314) 615 1278 or by recovery period from 39 to 40 years, so When acquiring additional properties, email: [email protected]. the impact is not nearly as great. Taxpayers consider obtaining a cost segregation report

FINANCE & INVESTMENT National security investment reviews go global: key policy themes and recommendations

BY MARIO MANCUSO, LUCI HAGUE AND SAM MOSS

he historic Western consensus past year, Australia, Canada, the United review inbound investments. In large part, that foreign direct investment Kingdom, the US and the EU have taken these measures reﬂect a shared concern (FDI) is an unalloyed good meaningful steps to adopt, upgrade and with the long-range impact of Chinese Tis beginning to crack. In the implement more stringent measures to industrial policies, including Made in

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China 2025, that have been implemented UK has adopted new measures to expand mitigated through traditional mitigation in part through acquisitions of US and the UK government’s ability to review measures (e.g., visitation restrictions, EU companies in sectors traditionally transactions implicating certain advanced physical access controls and export considered sensitive as well as economically technologies and export-controlled restrictions, etc.). In contrast, traditional significant (e.g., semiconductors, robotics). products, which became effective on mitigation measures are less likely to be Because every transaction has a unique 11 June 2018. Just one week later, the effective in protecting data. For example, national security risk profile – and UK Competition and Mergers Authority a target company’s data could be scraped views about a nation’s macro security announced that it would intervene under and transferred virtually instantly anywhere environment may evolve rapidly inside the new regime in the $58m acquisition in the world – with no way to undo the governments – national security reviews of a UK aerospace company by a Chinese harm. In the US, the assistant secretary of inject an element of uncertainty in investor. the treasury for international markets and transactions that is often difficult to avoid. investment policy stated that “the digital, That said, concerns inside Western capitals Infrastructure data-driven economy has created national have generally crystallised around certain While infrastructure transactions have security vulnerabilities never before seen”. key themes. long been of interest to national security Concerns about exploitation of large sets Listed below are four of these, with some review regulators, they have taken on new of otherwise benign commercial data have general recommendations to mitigate sensitivity in recent years, in part due to prompted the delay or abandonment of associated transaction risks. shared recognition that investments in several high-profile public transactions. infrastructure provide increased access to In June 2018, the French Ministry for the Protection of ‘foundational’ technologies population centres and facilities, and thus Economy and Finance introduced proposed Much of the current discourse regarding expanded opportunities for parties with legislation to expand the jurisdiction and striking the right balance between the malign intent to engage in sabotage or powers of its national security review economic benefits of an open investment surveillance. regime. The draft legislation would require policy and national security priorities are Australia’s Foreign Investment Review notifications of certain foreign investments reflected in proposals that key domestic Board (FIRB) has been especially active in industries deemed “strategic”, including technologies ought to be preserved from in reviewing these investments, rejecting Big Data storage businesses, and would acquisition, appropriation or exploitation bids from State Grid Corporation (China) expand French authorities to impose by foreign parties. In the US, Germany and and CKI Holdings (Hong Kong) for the measures to mitigate identified national elsewhere, government stakeholders have long-term lease of a 50.4 percent interest security risks, including divestment of called for the preservation of such ‘critical’ in electricity distribution network Ausgrid. assets. technologies to be codified as a key element The UK government has stated that, of of a country’s broader national security the sectors that attract FDI in the UK, Supply chain integrity policies. it is “most focused on” infrastructure Certain recent transactions have made clear For example, in the US, proponents of investments. Germany and Belgium that governments increasingly pay attention legislation to reform the Committee on have raised concerns about proposed to investment in third-party companies that Foreign Investment in the United States minority investments by China’s State Grid do not sell a finished product directly to (CFIUS) have highlighted the lack of Corporation in their respective countries’ government customers, but instead provide coverage in the CFIUS regulations of electrical grids and power networks. A parts, components, technologies or services new technologies that have not yet been pending European Commission proposal to that are integrated into or used for finished classified for export control purposes introduce an EU-wide investment screening products. On 23 May 2018, Canada but are essential for US national security. mechanism for transactions that may blocked a proposed $1.5bn takeover of These ‘foundational’ technologies are implicate the national security interests of construction firm Aecon Group by China widely seen as critical to preserving US multiple EU member states would likely Communications Construction Co. In military ‘overmatch’ capabilities. Germany increase potential scrutiny of infrastructure, December 2017, the German Ministry of strengthened its national security review energy and transportation transactions. Economics initiated a national security infrastructure in July 2017 in reaction to review of the proposed acquisition of a perceived wave of Chinese takeovers of Big Data Cotesa, an aerospace supplier, by China- German technology companies considered There is increasing recognition that based Advanced Technology & Materials, to be the ‘crown jewels’ of German vulnerabilities arising from access to data in part due to concerns about Cotesa’s industry, explicitly empowering the are fundamentally different, and more supply of products to aerospace and German government to intervene in more challenging to mitigate. Risk presented defence customers. The transaction was technology transactions. by foreign acquisition of a manufacturing ultimately approved. And in September As part of a broader effort to strengthen facility producing a key material for a 2017, president Trump blocked the its national security review mechanisms, the country’s government can potentially be takeover of Lattice Semiconductor Corp.

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by Canyon Bridge, citing “the importance Be thorough, thoughtful and consistent. if any, may be available to help mitigate of semiconductor supply chain integrity to Transaction parties should assume that concerns. the US government”. The action followed information submitted in connection with With early strategic assessments and Department of Defense (DOD) concerns national security reviews will be checked careful planning, buyers and sellers can about Chinese investments in US startups against public and non-public information often accurately assess deal feasibility, – which remain a top priority for DOD, as (e.g., derived through intelligence and take steps to enhance deal certainty, well as president Obama’s December 2016 activities), and potentially (subject to minimise delays and complications, and executive order prohibiting the takeover of applicable laws) shared with third-country avoid embarrassment. Aixtron Corp. by a consortium of Chinese regulators. investors on similar grounds. Consider the timing and content of public Mario Mancuso is a partner and Luci announcements. Transaction parties should Hague and Sam Moss are associates at Recommendations carefully consider whether and when to Kirkland & Ellis LLP. Mr Mancuso can Think holistically, applying national publicly announce transactions that may be contacted on +1 (202) 879 5070 or by security expertise and insight to the facts. undergo national security review or raise email: [email protected]. Ms The above list of areas of interest is not questions from regulators. Hague can be contacted on +1 (202) 879 exclusive. National security considerations Red-team alternative deal structures 5195 or by email: lucille.hague@kirkland. can arise in unexpected and counterintuitive to assess degrees of risk. Most national com. Mr Moss can be contacted on ways, and each prospective cross-border security regulators perceive China to be +1 (202) 879 5254 or by email: sam. transaction should undergo a bespoke in a ‘category of one’ for risk. Transaction [email protected]. review of its national security proﬁle with parties should carefully evaluate what deal the assistance of qualiﬁed advisers. structures and commercial arrangements,

BANKING & FINANCE The disruptive power of FinTech and what it means for boardroom leadership

BY YANOUK POIRIER

nnovation is moving up the corporate Technologies, such as Big Data, cloud investment across a diverse range of agenda in the financial services world technology, artificial intelligence and sectors. It could change the way that and is transforming businesses. blockchain, are constantly evolving, with every industry in the world economy does Having faced extensive change and pioneering FinTech start-ups starting to business and how companies interact Iupheaval over the past decade, a major threaten prevailing business models and with their customers and employees. The current challenge is adapting to and traditional job roles. financial services industry is no exception, embracing the disruptive potential of Over the past couple of years, blockchain with the advent of ‘open banking’. By FinTech. technology has attracted massive cutting out the middleman, it has the

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potential to revolutionise the efficiency Leaders must be able to set strategy of the more traditional functions are under and security of transactions, simplify and get buy-in across every level of the threat. compliance and ensure anonymity. The organisation if they are to compete and Values such as curiosity, openness to application of blockchain technology is thrive in this business environment. others, assertiveness in challenging how creating new commercial opportunities and One of the biggest challenges is finding things are done, collaboration, adaptability could make old business models redundant. people who fit the company culture. So and agility all need to be integrated into the The financial services sector needs it is important to fully understand the workforce if an organisation is to respond visionary leaders to take advantage of organisation’s vision, business model, and succeed. the opportunities these advancements strategy, competencies and needs. in technology present. And if they are to The future compete with the new players entering Digital leadership Adapting to these disruptive changes the marketplace, it is vital for them to What does the C-suite leadership style and harnessing the potential offered by stay ahead of the curve and anticipate and required to embrace disruptive technologies FinTech will require leaders with vision, embrace future technological changes. look like? So-called ‘digital leadership’, the ability to drive growth, identify new All businesses need to act fast and find popularised in Silicon Valley, is increasingly revenue streams and embrace emerging innovative leaders with the ability to deliver being integrated into traditional technologies. Ultimately, it will be the effective solutions to these new business organisations. ability to drive transformational change that challenges. Digital leadership is an approach that will separate the winners from the losers in has dramatically redefined strategy and the financial sector. Driving change from the top management. It relies on agile management Financial services businesses require a and leadership principles that include Yanouk Poirier is chair of the technology, new approach to leadership to prepare for allowing more decisions to be taken media & telecoms group at Penrhyn these challenges. They will need boardroom at lower levels of an organisation, and International. He can be contacted on leaders in place with the capability and delegating responsibility to small teams. +1 (514) 864 5459 or by email: yanouk. vision to embrace disruptive technologies. This style of leadership is collaborative [email protected]. While the sector is appointing an and transparent, offering unrestricted increasing number of board members communication, real-time problem-solving with digital backgrounds, capitalising on and quick, creative thinking. Digital leaders this disruption requires much more than are often thought of as coaches tasked digital comprehension. A company’s senior with creating the right conditions for their leaders need a wide range of new skillsets teams to perform at their best. Their focus to tackle the threats and harness the is on driving disruptive vision, delegating wealth of opportunities offered by evolving authority, fermenting new cultures and technology. concentrating on a client-centric execution Understanding the potential of new of business strategy. technologies and a readiness to adapt in FinTech leaders must have the flexibility to this fast-changing environment demands mix this new leadership style with elements people with core competencies in change of other, more traditional authority-based management, innovative thinking, the and high-performance leadership styles. ability to drive values and build trust, and, of course, some entrepreneurial spirit. Outside the boardroom In order to create a high performance An advisory board can be a useful executive team that is accountable, complement to digital leadership. A good empowered and aligned with business mix of advisers can give access to additional strategy and vision, it is important to hire expertise and contacts, offer fresh for values as well as talent. Trust and perspectives, help with the hiring of key transparency are critical. players and provide a sounding board for The new breed of financial services C-suite leaders when making key strategic executive needs self-awareness and decisions. confidence in her leadership style to Change is also happening to the influence other people, drive her teams and composition of the workforce in many organisations and make the right strategic financial organisations, with new roles decisions, while recognising her own being created and filled quickly, while some limitations.

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BANKING & FINANCE The new Mexican FinTech law – balancing innovation, security and stability

BY GABRIEL FRANCO FERNÁNDEZ, JORGE GAXIOLA MORAILA AND ALEXIS LEON TRUEBA

everal factors have contributed to technologies offer, spread fast and usually applicable to FinTech companies. Mexico becoming fertile ground without proper supervision. Consequently, However, this is less restrictive than for FinTech companies. As in consumers are exposed to several risks, financial consumer protections. In addition, other countries, the demand for few protections and unclear legal remedies. FinTech companies may also be required Scheaper loans, greater returns and more Meanwhile, as the traditional financial to comply with the commercial anti-money agile financial services, combined with system has continued to invest and create laundering law, which does require certain sentiments of distrust toward traditional units focused on the development of Know Your Customer (KYC) and reporting financial intermediaries and large sectors of digital banking solutions, they remain obligations, but which does not require the the population left (or feeling) unattended, constrained by restrictions imposed by implementation of systems, review against have resulted in business opportunities for laws and regulations directed to ensure the sanctions, blacklists or compliance with these enterprises. FinTech websites and stability and security of the financial system corporate bodies. apps have become widespread, with some and its consumers, as well as to prevent From a financial perspective, laws of them even developing agencies within financial crime. This makes it harder for applicable to banks, broker dealers, corner stores – which make their services traditional financial companies to compete insurance companies, investment funds, available to those who lack access to with unregulated new business models money transmitters and other financial technological devices. such as FinTech activities that usually entities contain strict rules regarding According to Finnovista, Mexico became escape the scope of financial regulations authorisation to provide financial the Latin American FinTech leader in 2017, and sometimes fall within laxer commercial intermediation services, including e- with more than 200 FinTech startups, regulations. channels. However, as a civil law country while a 2017 study by EY puts Mexico in As far as e-commerce is concerned, that emphasises legislative and regulatory second place, behind Brazil. Considering the Federal Civil and Commercial Codes enactments, any activity that is not access to internet and low-cost technology contain chapters that recognise electronic expressly covered by law or regulation – with about 81 million mobile lines with channels as valid and legitimate means may be validly pursued by private parties. access to broadband internet reported in to express consent and give birth to Definitions applicable to financial the first quarter of 2017 – the number of obligations and rights among the parties, as services were developed before the new startups is expected to increase together well as being enforceable in court, without technological revolution, and activities such with consumer adoption and use of FinTech imposing the strict regulations applicable to as deposit taking, securities intermediation products. electronic banking. The Federal Consumer and money transfer fall short of covering However, information, as well as Protection Law (not applicable to financial e-wallet services, crowdfunding and misinformation, regarding the advantages entities) also provides the groundwork on e-payment platforms. Thus, without and opportunities that these new which e-commerce may operate, and is habilitating laws, financial regulators

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are unable to act. This is true even if the security of client information. On their co-ownership or royalties) and electronic FinTech conduct or service clearly falls side, FinTech companies argued that payment (including e-wallets). Both types within the nature of their mandate, the regulatory requirements and costs would are subject to consumer protection, anti- services are equal to those offered by hinder innovation and reduce competition, money laundering and prudential rules, financial intermediaries or could represent and that APIs should be subject to few which are to be defined in secondary a risk to consumers. These loopholes and restrictions allowing the development of regulations. grey areas have been exploited by FinTech new products and services. Second, it establishes that FinTech companies, leaving regulators on the By September 2017, a new draft of companies will be regulated by the National sidelines. the initiative was digitally published on Banking and Securities Commission In this context, financial regulators the Federal Regulatory Improvement and the Central Bank, and will require became worried as FinTech products Commission’s website for public authorisation from the Commission to offer offered little or no legal security, uncertain consultation. At that time, the draft, their services in Mexico. tax consequences and no consumer which complied with the guidelines Third, it states that crowdfunding protection rules. Also, they represented issued by the Financial Stability Board, companies will be liable for damages risks due to a lack of supervision, its received support from both the FinTech should their clients fail to comply with their potential effect on the financial system and bank associations, and few comments obligations (e.g., client profiling and issuing and as an opening to money laundering from private parties. The initiative was investment and debtor selection criteria, and financial crime activities. Thus, in then introduced to the Senate, which among other characteristics). 2016, the Mexican federal government received recommendations from the Fourth, it establishes that payment undertook the challenge of drafting a law Federal Competition Commission. These companies may, subject to authorisation, that would allow technological innovation, were mostly directed toward including offer money transfer services and cash while offering consumer protection and regulations that aimed to ensure that withdrawals (but may not pay returns or financial prudential requirements, without FinTech companies were able to compete interest), among other characteristics. creating unjustified administrative and with traditional intermediaries through Fifth, it states that entities that are regulatory burdens to FinTech companies access to information and financial services, currently offering services that fall within and start-ups. Drafts of the law were which the Commission defined as essential the scope of crowdfunding or electronic discussed with both the banking and assets. The initiative was approved by the payment companies may continue to FinTech sectors which, at times, requested Senate with minor changes, and later by the operate on the understanding that they opposing changes and rules. Banks sought, Chamber of Deputies. It was then sent to must request authorisation within 12 among other issues, a level playing field the Executive, signed and published in the months of the issuance of secondary – including more flexibility to offer services Official Gazette of the Federation in March regulations by the Commission. If they through electronic channels, as regulations 2018, thus becoming law. fail to request such authorisation or if the curtailed innovation by traditional Among other matters, the FinTech same is denied, they will be required to intermediaries – permission to invest in law (Ley para regular las instituciones stop offering their services and will only FinTech companies and take advantage de tecnología financiera) contains the be authorised to perform such actions of synergies, and strict requirements to provisions listed below. necessary to conclude any transactions in access application programming interfaces First, it regulates two types of FinTech place. (APIs) by third parties, to guarantee the companies: crowdfunding (debt, equity, Sixth, it states that only financial entities and FinTech companies can transact with such currencies when authorised by the Mexican Central Bank. However, this law does not regulate cryptocurrencies themselves. Secondary regulations will set forth the characteristics to be met by permitted cryptocurrencies. Seventh, it makes it mandatory for OMISSIONS AND LOW STANDARDS APPLICABLE TO financial institutions and FinTech INFORMATION COULD INCREASE THE RISK OF FRAUD, AMONG companies to develop APIs which they may share with other institutions, FinTech OTHER FINANCIAL CRIMES, WHICH COULD ADVERSELY, companies and, in general, entities specialised in information technology IRREVERSIBLY AFFECT THE STABILITY OF THE SYSTEM AND (there is currently no definition of what CONSUMER LIVES. constitutes an entity specialised in information technology) the following 90‘ AUGUST‘ 2018 FINANCIER WORLDWIDE www.financierworldwide.com ’’ PROFESSIONAL INSIGHT Banking & Finance

information: (i) public information and data services). There is also the types of reports), performing KYC (e.g., branch locations); (ii) aggregated matter of the international treaties and processes, holding records and processing transaction data; and (iii) transactional conventions signed by Mexico regarding clients and transactions against government information of clients and prior prevention of crimes, money laundering lists. Homogeneous requirements guarantee authorisation from such clients. Financial and terrorism financing, among others, that the system is protected, and lighter entities may charge fees regarding such that should also be applicable to FinTech regulations could mean a gateway for crime information exchanges. However, the law companies as the unlawful use of their to an otherwise closed system. provides that such fees must be transparent services could facilitate any such activities. In addition, there is an argument to be and may not constitute entry barriers. Regardless of any other considerations, made from a justice perspective. Traditional Finally, it creates a regulatory sandbox these recommendations and compromises intermediaries have worked hard to reach framework for innovation services, by the Mexican government translate in consumers and innovate while complying accessible by FinTech companies and regulations. with the burden of strict regulation. Losses financial entities. From a local standpoint, experience has have been suffered to develop databases Since several matters have been left to guided the evolution of regulations and of clients who fulfill their obligations. secondary regulations, tough negotiations has forced traditional financial entities Constant changes to rules have required between authorities, the traditional to accept them. Mexico suffered a deep additional investment and required time- financial sector and FinTech associations economic crisis in 1994 (just four years consuming capacity-building processes. are expected. As happened with the after the privatisation of banks in 1990), in Negotiations have also been held to allow negotiations regarding the FinTech law, part due to unlawful activities by Mexican the use of new technologies. This opens common ground between the main banks. Also, several incidents affecting the market to new players who may not be players is scarce. FinTech companies are clients have occurred, including cases of subject to the same regulatory costs or have likely to push for flexible regulation and fraud and bankruptcy caused by agency access to authorisation from regulators and supervision, as well as access to financial problems within the traditional financial information produced by intermediaries services and information held by traditional sector. From these experiences, regulators and consumers of the financial system. intermediaries to innovate, grow, compete and intermediaries have adapted rules, This could incentivise regulatory arbitrage, and thrive in an already competitive policies and procedures to promote the deter investment by traditional financial market. They are also likely to push for stability of the system and its entities, as entities and, as a matter of principle, result light corporate governance including well as consumer protection. These changes in opposition. compliance bodies, access to consumer have required a difficult transformation in Regarding APIs and information information, small mandatory capital and the corporate culture of such companies, exchange, to guarantee the safety of the broad space to develop and experiment as well as high administrative and financial system and consumers, FinTech companies with new technologies. Excessive corporate costs. While the return to these investments must share the costs and burden of security and capital requirements will hinder the has led to more stability (Mexico was mechanisms. All parties involved should possibility for new startups, especially the barely affected by the 2008 international be able to recuperate the investment made garage type, while technological requisites financial crisis) and higher acceptance by to develop interfaces and the value of could become a barrier to innovation consumers (even if slowly achieved) there databases. Also, authentication mechanisms and a pretext to deny access to the is still distrust in traditional entities and the should be in place to guarantee the identity financial system and information. FinTech unavoidable risk of a new financial crisis is of any person who authorises the disclosure companies’ requests should be understood ever-present. of information. As this involves some of the as legitimate demands if the law is to External factors, such as a high crime most sensitive information of any person, achieve its purpose. rate, and very public compliance scandals as acknowledged by the Mexican personal Notwithstanding, regulators, traditional involving, among other matters, money data authority, its regulation should not intermediaries and international bodies also laundering crimes, have affected the be developed favouring cost-efficiency or have genuine and valid concerns, stemming perception of the Mexican financial innovation. Omissions and low standards from experience and international system. This situation has resulted in applicable to information could increase the practices and agreements. For example, barriers to interaction with international risk of fraud, among other financial crimes, the Financial Stability Board identified intermediaries, even when Mexican entities which could adversely, irreversibly affect several issues that merit attention, including are subject to strict regulations compliant the stability of the system and consumer mitigating cyber risks, monitoring micro with international recommendations. lives. financial risks (funding flows on FinTech) Mexican financial entities must endure high Mexican authorities have a constitutional and managing operational risks from costs to comply with anti-money laundering mandate to seek financial stability. third-party service providers (which are regulations, including having compliance However, failure to set the boundaries becoming more prominent and critical, bodies and systems, filing reports (banks, in which FinTech companies can act is especially in the areas of cloud computing for example, must file up to six different certainly a loss for the public and an

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invitation for actors that seek to operate group’s experience in developing strategies Jorge Gaxiola Moraila is founding partner outside the legal framework. Thus, that allow the strength of traditional and Alexis Leon Trueba and Gabriel Franco regulators must listen to all parties involved banking to be combined with technological Fernández are partners at Gaxiola Calvo and find a balance that benefits both the innovation and the flexibility of FinTech Sobrino y Asociados, S.C. Mr Moraila can consumers and the system. While there is business models. be contacted on +52 (55) 5682 6178 or by sure to be a compromise, it is, however, While it is too soon to judge the positive email: [email protected]. Mr Trueba imperative that such compromise does not and negative effects of the FinTech law, can be contacted on +52 (55) 5682 6178 represent a vulnerability to the strength of it is clear that it will change the Mexican or by email: [email protected]. Mr the whole system. For Mexican banks, many financial system and its players. Regulators, Fernández can be contacted on +52 (55) of which are subsidiaries to international financial entities and FinTech companies 5682 6178 or by email: [email protected]. entities, the FinTech law is an opportunity must understand, evaluate and agree on mx. to develop new tools and technological the scope of its regulation, and its possible means to improve the consumer experience, impact on consumers and the system. by taking advantage of their international

FRAUD & CORRUPTION The rise in civil remedies for the growing criminalisation of business practices

BY IAN HARGREAVES AND STEPHANIE SARZANA

orporations and companies is increasingly falling within the purview of (proved to the civil standard of ‘the balance worldwide thrive on financial civil courts. of probabilities’), but does not require a profit, and organised crime is The current building blocks for laundered conviction. This allows for asset recovery no different. Starving criminal asset confiscation, the Proceeds of Crime where criminal conviction may prove Corganisations and terrorists of financial Act 2002 (POCA), sets out the asset difficult, either because the crime occurred livelihood prevents them from recruiting recovery framework via four routes: one outside the UK and could not be prosecuted and functioning. As a major and complex criminal (confiscation), the rest civil (civil in the UK, or the assets were too removed financial hub, it is crucial that the UK recovery, cash forfeiture and seizure, and from the criminal conduct. In particular, possess the means to accurately trace and taxation). civil recovery proceedings touch upon the recover the proceeds of crime – the social Setting aside taxation for now, the property itself (i.e., in rem) rather than the and economic costs of which are estimated two main POCA civil asset recovery individual suspected of criminal conduct. at £24bn a year. Despite the general mechanisms are civil recovery and cash Enforcement agencies need not prove a criminalisation of business practices, seizure and forfeiture. Civil recovery is particular type of unlawful conduct but however, one important aspect in the fight the process of recovering the proceeds of do need to establish a link between the against money laundering, asset recovery, unlawful conduct in the UK High Court

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asset and the criminal conduct for it to be recoverable. Cash forfeiture orders are civil injunctions brought before the Magistrate’s Court, WHILE THE PROLIFERATION OF CIVIL INJUNCTIONS IN AID OF and, similarly to civil recovery, are taken against the asset itself (here, cash) and not CRIMINAL PROCEEDINGS AND INVESTIGATIONS CAN ONLY BE an individual. Specific conduct need not be proven. The enforcement agency only APPLAUDED, THEIR EFFECTIVENESS REMAINS TO BE SEEN. needs to establish that the relevant cash is ‘on the balance of probabilities’ related to a number of different types of activities, any one of which could be unlawful. Confiscation orders, whose regime is set out in Part 2 of the POCA, aim to recover the financial benefit that an individual has To address this issue, parliament respondent complies with the terms of the gained through their crime. A confiscation introduced additional civil asset recovery UWO, the enforcement authority is able to order can only be requested upon criminal ‘schemes‘ in the Criminal Finances Act 2017. pursue recovery of the respondent’s’’ assets conviction via the Magistrate’s and Crown These include the Unexplained Wealth further to the civil recovery process in Part Court, and enables the Treasury to recoup Order (UWO) and forfeiture of moveable 5 of the POCA. The relevant agency will a sum equivalent to the value of the benefit property and bank accounts, shoehorned merely have to show that “on the balance obtained. The court must determine into POCA’s civil recovery and forfeiture of probabilities” the respondent’s property whether, on the balance of probabilities, architectures. was obtained through unlawful conduct. the defendant has a ‘criminal lifestyle’ or The UWO is an order, granted by the High The Criminal Finances Act also provides benefited from ‘general criminal conduct’. Court at the request of an enforcement for a new procedure for the detention and A confiscation order does not provide for agency – such as the Serious Fraud Office forfeiture of money held in bank accounts the confiscation of particular property, (SFO), the National Crime Agency (NCA), and of moveable property, such as artistic but rather orders the defendant to pay the Crown Prosecution Service (CPS), the works, precious stones, jewellery or a set amount – equivalent to the benefit Financial Conduct Authority (FCA) or HM precious metals. A senior officer, or officer gained from the criminal activity – out of Revenue & Customs (HMRC) – requiring authorised by a senior officer, may apply whatever resources are available to him the owner of property worth more than for an account freezing order (AFO) in the or her. Therefore, it is not an injunction £50,000 located in the UK to explain Magistrate’s Court if they are satisfied that taken against a particular asset, but against how the property was paid for. Crucially, there are “reasonable grounds to suspect” the individual (in personam rather than in the enforcement agency need only prove that the money in the bank account is rem). that there are “reasonable grounds for recoverable property or is intended to be These civil and criminal measures, suspecting that the known source of the used in unlawful conduct. Similarly to however, have been deemed insufficient to respondent’s lawfully obtained income civil measures, the standard of proof to be combat money laundering effectively. The would have been insufficient for the applied is “on the balance of probabilities”. UK National Risk Assessment of money purposes of enabling the respondent to An application can be made by an officer of laundering and terrorist financing singles obtain the property” and the respondent is HMRC, a police officer, an SFO officer or out POCA’s failure to prevent criminal either a non-EEA politically exposed person an accredited financial officer. use of legal services and estate agency to or is involved in (or connected to someone While the proliferation of civil injunctions secure UK property with criminal proceeds. involved in) serious crime (UK or foreign). in aid of criminal proceedings and This could be explained by the fact that Once satisfied on these matters, the High investigations can only be applauded, under POCA, it was up to law enforcement Court issues the UWO requiring the their effectiveness remains to be seen. agencies to prove that the asset was the respondent to provide certain information For example, to date, only two UWOs instrument or proceeds of crime. This and documents within the “response have been secured. In February 2018, could be a significant hurdle – even on period” set by the court. The burden thus the NCA was granted two orders worth the lower civil standard of the ‘balance of shifts onto the respondent to prove the £22m ($30m) combined relating to two probabilities’ – given limited enforcement source of funding. UK properties and freezing the assets of agency resources, reliance on mutual In support of UWOs, the High Court may the ultimate owner, whose identity was not assistance from other (sometimes corrupt) also grant an interim freezing order (IFO) released. Similarly, only one bank account jurisdictions and potential remoteness of necessary to avoid the risk of any recovery forfeiture order has been granted so far (on the criminal activity. order being ‘frustrated’ by the dissipation a mechanic in Ipswich). of assets. Irrespective of whether the

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According to the National Risk It is likely that once an order has been the government must show commitment Assessment of Money Laundering and granted by the Magistrate’s Court, it will be for the new measures by appropriately Terrorist Financing, criminal confiscation appealed in the High Court, with significant allocating resources and training. If the new orders under the POCA remain the most added cost. Thus, for applications to be measures are left unsupported, they will not common asset recovery mechanism, despite worthwhile, cases must be well put together work in practice. the existence of civil recovery. Admittedly, by experienced practitioners. Second, this is in large part because schemes such improved inter-agency cooperation will be Ian Hargreaves is a partner and Stephanie as the UWO and bank accounts forfeiture necessary to share expertise, reduce costs Sarzana is special counsel at Covington are still in their infancy. Civil measures and enhance applications’ success rate. & Burling LLP. Mr Hargreaves can be may take the upper hand over the next few Third, the High Court will have to balance contacted on +44 (0)20 7067 2128 or by years. money laundering risks with human rights email: [email protected]. Ms Sarzana To ensure their success, however, other considerations carefully for the orders to can be contacted on +44 (0)20 7067 2351 elements must fall into place. First, be seen as legitimate. In the case of UWOs, or by email: [email protected]. enforcement agencies will need to select the shift in burden of proof to the assets’ their targets carefully. Cash-restrained owner to establish proof of funding has and time-pressured, they will have to come under fire from legal practitioners face off against wealthy individuals with as going against the presumption of extensive means to challenge the orders. innocence. Fourth, and most importantly,

FRAUD & CORRUPTION Employment agreements subject to criminal penalties – DOJ targets no-poach and wage-ﬁxing deals

BY ELIZABETH PREWITT AND DINA HOFFER

n October 2016, the antitrust agreements. A no-poach agreement is where be obvious to many employers since most division of the US Department of companies agree not to compete for each antitrust compliance programmes do not Justice (DOJ) and the Federal Trade other’s employees by soliciting or hiring, focus on HR professionals and warn against Commission issued joint guidance whereas a wage-fixing agreement concerns agreements between competitors, but Iannouncing the DOJ’s intention to setting employees’ terms of compensation, companies that compete for employees do thereafter, and for the first time, criminally either at a specific level or within a range. not necessarily compete in the marketplace prosecute ‘naked’ no-poach and wage-fixing The potential for antitrust liability may not for sales of products or services. The DOJ’s

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recent remarks promising forthcoming guidance, however, no-poaching agreements but did not bring criminal charges, instead criminal cases indicate that the DOJ fully will now be investigated as criminal citing prosecutorial discretion because the intends to prosecute such agreements as antitrust violations with serious monetary no-poach agreements were both discovered hardcore cartel offences just like classic penalties and the possibility of jail time. by the DOJ and terminated by the parties price-fixing. While the full reach of the Although DOJ scrutiny of this area is before the issuance of the October 2016 guidance remains untested, companies not new, its announcement of criminal guidance. The DOJ stressed, however: “The should take measures to reduce the risk of enforcement is a major development. department has made clear that it intends liability. to bring criminal, felony charges against Agreements between companies that limit ‘Naked’ no-poach and wage-fixing culpable companies and individuals who employees’ mobility have drawn increasing agreements to be treated as hardcore enter into naked no-poach agreements... attention from the DOJ in recent years. criminal cartels where the underlying no-poach agreements With employment mobility at its peak, The DOJ has staked out its position began or continued after October 2016.” several companies have attempted to reach that ‘naked’ no-poach and wage-fixing DOJ officials have publicly reiterated that agreements with their competitors not agreements, like classic price-fixing and the DOJ is actively investigating these to hire or solicit each other’s employees. customer allocation, are illegal, meaning types of agreements as criminal offences, The Justice Department has investigated that the DOJ may prosecute these stating that charges may be brought such agreements and, in several cases, has agreements without considering their in the coming months. The potential brought civil suits against the companies justifications or competitive effects. consequences of criminal prosecution are involved. For example, in 2010, the DOJ While the DOJ has not yet brought severe. Both companies and individuals filed a high-profile civil suit against several any criminal charges involving these may be prosecuted and punished by high-tech companies, including Apple, agreements, in January 2018, assistant fines of up to $100m for corporations Adobe, Google, Intel, Intuit and Pixar, attorney general Makan Delrahim and $1m for individuals. The maximum which had reached understandings not to announced that the antitrust division had jail sentence is 10 years. Any agreement solicit each other’s employees. Similar suits criminal cases in the works involving no- limiting competition for employees risks followed against Lucasfilm and eBay, as poach agreements. Then, in April 2018, the criminal prosecution, whether it is formal well as follow-on civil class actions filed on DOJ announced the settlement of its first or informal, spoken or unspoken, written behalf of the affected employees. case involving no-poach agreements since or unwritten. Moreover, an agreement can The DOJ determined that the companies the issuance of the guidance. be inferred from evidence of discussions reached “facially anticompetitive” or In United States v. Knorr-Bremse, two and parallel behaviour. If an agreement is ‘naked’ agreements that eliminated a leading rail equipment manufacturers “separate from or not reasonably necessary significant form of competition to the settled charges by the DOJ that they had to a larger legitimate collaboration between detriment of employees who lost access entered into a series of unlawful no-poach employers, the agreement is deemed illegal to information about salary levels and agreements between 2009 and 2016. The without any inquiry into its competitive better job opportunities. It concluded DOJ alleged that the companies competed effects”. that the non-solicit agreements between with one another to attract, hire and retain the companies were naked restraints of skilled employees, including engineers, Uncertain times for franchises and joint trade that were unlawful under federal project managers, business unit heads, ventures in the wake of no-poach guidance antitrust laws. In the government’s view, the sales executives and corporate officers. In the wake of the guidance, class action impact of these agreements was to depress According to the complaint, the companies plaintiffs filed a series of complaints salaries artificially, as employees could not agreed not to solicit one another’s against fast-food franchisors alleging leverage competing employers against each employees and, in some instances, not that the defendants violated Section 1 of other. Notably, these agreements were not to hire one another’s employees without the Sherman Act by imposing no-poach “ancillary to any legitimate collaboration”, approval. Noting the “high demand for agreements on their franchisees. Relying, such as a joint venture or research project. and limited supply of skilled employees in part, on the guidance, each of these The DOJ civil suits ended in settlements who have rail industry experience”, lawsuits alleges unlawful restraints of trade. that broadly prohibited the companies the DOJ asserted that the agreements Until recently, the string of class action from entering, maintaining or enforcing restrained competition to attract workers lawsuits appeared to be a harbinger of more any agreement that in any way prevented and “denied employees access to better job to come, particularly in light of a finding any person from soliciting, cold-calling, opportunities, restricted their mobility, and that “fully 58 percent of the 156 largest recruiting or otherwise competing for deprived them of competitively significant franchisors operating around 340,000 employees. The companies also were information that they could have used to franchise units used some form of... ‘no- required to implement compliance negotiate for better terms of employment”. poach’ agreements”, according Barbara measures to guard against these practices The DOJ alleged the agreements constituted T. Sicalides & Benjamin J. Eichel. In May in the future. Based on the DOJ’s recent violations of Section 1 of the Sherman Act, 2018, however, the Supreme Court may

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have delivered a severe blow to no-poach violations. As recent enforcement actions exchange of sensitive information should class actions by ruling in Epic Systems demonstrate, a company that is the first to be limited to the purpose of the proposed Corp. v. Lewis that companies may enforce report an antitrust conspiracy and meets transaction. In general, an information arbitration clauses in employment contracts other conditions of the division’s leniency exchange may be lawful if: (i) the to prevent employees from bringing class programme can qualify for full immunity exchange is managed by a neutral third action suits relating to employment issues. from fines and prosecution, as well as the party; (ii) the exchange involves relatively Criminal liability still poses a threat, potential mitigation of civil damages. old information; (iii) the information is although it is unclear how franchise no- In drafting and administering compliance aggregated to protect the identity of the poach agreements will fare under the DOJ’s programmes and employment-related underlying sources; and (iv) enough sources new policy. The guidance indicates that agreements, companies should keep the are aggregated to prevent competitors from ancillary restraints in the labour market, below points in mind to reduce the risk of linking particular data to an individual which are “[related to and] reasonably liability. source. necessary to a larger legitimate business Ancillary restraints are not criminal. The Exercise caution in sharing sensitive collaboration between the employers”, DOJ will not criminally prosecute ancillary information with a common third party. are entitled to rule of reason analysis. restraints made in pursuit of legitimate Companies should also be wary of sharing Franchisee no-hire arrangements arguably commercial interests and tailored in terms information about the terms and conditions fit within this category, given franchisees’ of geography, job function, product group of employment with a common third party, joint interest in promoting the brand and and duration. For example, the DOJ like a recruiter or trade association, which providing a uniform customer experience. would not criminally prosecute no-poach can facilitate or create the appearance of Likewise, no-poach enforcement brings agreements necessary to the settlement of collusion. joint ventures into the realm of legal theft of trade secrets disputes. By contrast, Consider entering into agreements directly uncertainty. The DOJ maintains that a shared desire among competitors to with employees instead. Although state “legitimate joint ventures (including, hold down costs or safeguard the benefits law on this subject varies, under federal for example, appropriate shared use of their employee training would not be antitrust law, individual employees may of facilities) are not considered per se legitimate reasons for no-poach agreements. still consensually enter into ‘non-compete illegal under the antitrust laws”. The Limit information exchange about wages. agreements’ not to work for a competitor, guidance does not elaborate. The DOJ Even in the context of a joint venture or as long as the agreements are reasonable in will likely scrutinise relevant no-poach potential acquisition or merger, companies terms of scope and duration and narrowly agreements in terms of factors bearing must limit what information they share. tailored to address legitimate employer on the reasonableness of the agreements’ Although not subject to criminal liability, an concerns, such as loss of trade secrets. The duration and scope, including geography, exchange of sensitive information between employees must also receive consideration job function, and product group, but the employers falling short of an agreement for their agreement not to compete. This acceptable parameters of what will be could place a company at risk of civil is also an area of increased enforcement, deemed a “reasonably necessary” restriction antitrust liability. “[E]vidence of periodic however, and legal counsel should be on poaching between firms participating in exchange of current wage information in an consulted when drafting these agreements. a research, marketing or other collaboration industry with few employers could establish remains unclear. an antitrust violation” when the exchange Conclusion of information decreases, or is likely to While the guidance sounds a warning shot, Avoiding liability: employment practices decrease compensation. For example, it may not be heard by many employers, relating to hiring and retention the DOJ filed a civil suit against the Utah even those which have undertaken An effective compliance programme and Society for Healthcare Human Resources significant antitrust compliance efforts careful drafting of agreements relating Administration for conspiring to exchange already. Assistant attorney general Delrahim to employment competition are critical non-public prospective and current wage recently warned that if a no-poach means for a company to avoid, deter and information about registered nurses. The agreement continued after the October detect potential violations. To the extent complaint charged that hospitals matched 2016 guidance was issued “we’ll treat that that a potentially unlawful agreement each other’s wages, keeping nurses’ pay as criminal”. As the DOJ’s policy to pursue is uncovered, companies may have the artificially low. civilly only agreements terminated prior to opportunity to self-report the existence of Limit information exchange about other its 2016 guidance approaches expiry, many the agreement in return for immunity from conditions of employment. Information employers may face criminal liability, and prosecution. The antitrust division of the exchanges about conditions of employment we should expect to see cases testing the DOJ offers a leniency programme, which made within the framework of a merger reach of criminal liability for no-poach and allows companies and individuals to report or acquisition, joint venture or other wage-fixing agreements in the near future. their own violations and cooperate with collaborative agreement may also pose In the wake of these developments, the division’s investigation of the reported antitrust risks. To avoid those risks, the employers should review and, if necessary,

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strengthen their existing antitrust comply with the antitrust laws. Given Elizabeth Prewitt is a partner and Dina compliance programmes and their the extraterritorial reach of US antitrust Hoffer is an associate at Hughes Hubbard existing and future non-compete and non- law, this policy shift presents a risk to & Reed. Ms Prewitt can be contacted on solicitation agreements. It is particularly companies and individuals located outside +1 (212) 837 6551 or by email: elizabeth. important that HR professionals are of the US as well. [email protected]. Ms Hoffer educated on these issues and ensure can be contacted on +1 (212) 837 6426 or that their companies’ hiring practices by email: [email protected].

FRAUD & CORRUPTION The political importance of asset recovery

BY DAN WISE

sset recovery is a term generally The self-regulation, which, in part, derived have underpinned them in countries like used to describe efforts made from competition with sophisticated the US and the UK stem, in part, from by a victim of a crime, usually commercial rivals, has been replaced, the perception that the general rules do a fraud, to get his or her stolen notionally, by a reliance on oversight by not apply to the global elites and that the Avalue back. It is a burgeoning area of regulators. Given that regulators generally contract under which a citizen contributes practice, in major part because the quantum operate on a national basis, and we are constructively to society, in part by carefully of value stolen and the overall risk has talking about global institutions, the scope thinking before casting a vote, in return for increased so much over the last 25 years. for ineffective cooperation and liaison is the provision of a fair society and an equal Even allowing for inflation, the value of enormous. This is without the issue of application for the rule of law, is in danger frauds back then is dwarfed by some of the the revolving door from public regulators of breaking down. It seems to be getting frauds perpetrated on banks, particularly to private enterprise. At the same time, harder to substantiate the maxim that all in India, and other businesses in China and again in part by reason of the global are equal before the law. and South America, in recent times. financial crisis, which has, in many In situations where you have very Furthermore, corporations are not the only countries, reduced the sums available for significant frauds and the perpetrators victims of large-scale frauds; the general public expenditure, criminal investigation of those frauds who are businessmen public are also at risk from rigged or bogus and fraud prosecution capabilities of public rather than organised criminals escape, it financial markets and the consequential authorities has been greatly diminished. is easy to see how the moral justification public bailouts of financial institutions as a This trend has been exacerbated by the of a society breaks down. There are price of keeping the world financial system focus of many law enforcement authorities serial offending banks which have been going. Part of the reason for this enormous upon the terrorist threat. participants in major money laundering increase in the sums stolen derives from One of the great drivers underlying the of drug and terrorist money and suffer the concentration of value and financial populist trend which has been seen in the no more serious consequence than fairly influence into a small number of global US, and arguably the UK and Italy, among small fines (proportionately to profits and ‘uber’-players. The reduced amount of other countries, has been the frustration turnover) while low level drug dealers and competition makes it far easier for a cartel of those who have been left behind by users fill the prisons in many countries. to operate, which is so interdependent that capitalism. The frustration with democratic These facts provide a separate reason it is much less prone to blow the whistle. governments and the institutions which why institutions and societies which have

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been the subject of systemic fraud, often Similarly, today, the offshore world running into the hundreds of millions of provides far less of an effective escape route dollars, must be seen to pursue effective for major fraudsters than it may have done remedies against the perpetrators. In previously. Anti-money laundering (AML) most liberal democracies, the burden of and Know Your Client (KYC) rules are proof rests on the prosecution. There generally, and rigorously, enforced. This are very good reasons for this, and there means that, with some application, it is is an enhanced burden for a criminal possible to tie-in offshore entities which conviction and given the policy choices may have been used to layer or conceal which western liberal democracies have these stolen monies to the fraudster, or made over the past several hundred years, to his or her agent. The moral benefit this is hardly surprising. However, when of pursuing these recovery actions is institutions, particularly when they are significant. One of the great frustrations licensed and sometimes owned by the of the general public, which has led to a state, fail to pursue civil remedies for wiliness to contemplate the pretty illiberal recovery effectively, this can be an issue. solutions we are now seeing, whether Often, the unarticulated reason for this is from the political left or right, has been because politicians, senior civil servants the anger at the way in which dishonest and regulators, as well as managers at players within the global elite can be seen these financial institutions, are reluctant to steal money which then has to be made to risk the scrutiny which a proper asset up, directly or indirectly, by the general recovery exercise would bring. Sometimes public. This perception contributes to the there has been clear criminal collusion challenge both to liberal democracy and to but more often there has been a failure the concept of western capitalism. While of competence. While employees may no one would claim that western capitalism be criticised for being incompetent, is perfect, historically it has seemed to be that incompetence does not excuse the the ‘least worst’ option available for the deliberate theft of value by a fraudster. It generation of wealth from which public is often the senior managers of the entity services may then be funded. who are kicked by the regulators into ensuring that a competent team, usually Dan Wise is a consultant and head from the private sector, is deployed to seek of litigation at Martin Kenney & Co., to effect a recovery. This is particularly Solicitors. He can be contacted on +1 (284) the case where there are now numerous 494 2444 or by email: dwise@mksolicitors. alternative funding arrangements available com. which allow the management of the risk of ‘throwing good money after bad’. When you are talking about really big frauds, it is not that easy to disappear, or to throw the money into a black hole from which it can never be recovered. With banks you always have a starting point, for example value was transferred from a bank to a borrower or a customer. Even if there is some problem with the contractual documentation in most systems of law there is something analogous to unjust enrichment and it will be possible to reconstruct approximate terms against which transfers were made. At the end of the day, it is inherently unlikely that a bank or other business will make an ex gratia transfer to a customer and this basic fact increases the scope for making out a case of wilful default.

98 AUGUST 2018 FINANCIER WORLDWIDE www.financierworldwide.com © 2018 Financier Worldwide. All rights reserved. www.financierworldwide.com SIGN-UP FREE stay informed. analysis. It’s quick,easyandfree,sosign-upnow password-protected pagesforthelatestnewsand you essentialnotifications,alongwithaccessto your deviceswithaclickortap.We’ll send availableonall Financierworldwide.com, Sign-up toreceivethelatestcontentfrom information youneed,whenneedit. To makesureyoumovewiththetimes,get come andgo.Preconceptionsareoverturned. an instant.Newrisksemerge.Opportunities industry, youknowtheoutlookcanchangein Wherever youdobusiness,whateveryour Stay informed. ISSN: 2515-4885 www.financierworldwide.com Issue 188 August 2018