On Your Radar Quarterly Aerospace, Defense and Security Sector Briefing Q1 2020 on Your Radar
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On your radar Quarterly aerospace, defense and security sector briefing Q1 2020 On your radar A turbulent start to 2020 caused by coronavirus, corruption and challenging global landscape 2020 started with great confidence as the sector aimed to return to growth, fueled by easing trade tensions between the US and China, progress toward resolving Boeing’s 737 MAX crisis, increased defense spending, a budding commercial space sector. However the last quarter has been an unpredictable challenge for companies in the sector which continues to stress test business continuity plans and impact long-term growth opportunities within the sector. Some of the key drivers and risk areas identified during Q1 2020, that continue to present challenges and opportunities within the sector are as follows: 1. Coronavirus global outbreak creates industry disruption and stress-tests 2. Industry gradually shifting to resist corruption and futureproofing your business globally 3. Continued close scrutiny of transactions across Europe and in the US, expansion of the CFIUS regime 4. UK aerospace industry at risk from leaving European agency and 2020 Budget For more information, please contact: Dr Christian Jeff Bialos Mense Alistair Cree Head of Aerospace, Co-Head, Aerospace, Co-Head, Aerospace, Defense and Defense and Security Defense and Security Security Sector (US) Sector (International) Sector (International) T: +1 202 383 0363 T: +49 895 456 5131 T: +44 161 8318129 M: +1 202 445 1112 M: +49 162 243 0095 M: +44 796 701 0535 jeffbialos@ christianmense@ alistaircree@ eversheds- eversheds- eversheds- sutherland.us sutherland.com sutherland.com Quarterly aerospace, defense and security sector briefing On your radar - Q1 2020 1 Coronavirus global outbreak creates industry disruption and stress-tests contingency planning The global aerospace and defense sector is feeling the impact of the coronavirus, with companies limiting travel, contractual and supply chain disruption and contingency planning underway. Supply Chain and Contractual Risk Supply chains across the sector are global, inter-related, and incredibly complex. In the last week we have experienced a number of global factory closures in China, Italy and most recently the closing of an F-35 factory in Japan. Workforce Issues It’s important that companies have good situational awareness and know their contractual position. Aerospace manufacturers’ main concern is the impact Companies suffering from or concerned about potential that the coronavirus is having on their workforce. These business disruption should start reviewing their existing issues include assessing the risks faced by their staff contractual arrangements to determine what the legal while at work, and developing measures to control those implications of the outbreak and measures to contain it risks; complying with local laws and guidance; identifying will be. The precise meaning and effect of a force majeure how much flexibility they have to adapt their working clause will depend on the specific wording of the clause arrangements to ensure business continuity; and special and its interpretation under the relevant governing law of measures to protect vulnerable employees. the contract. Lockheed, Raytheon and Honeywell were among dozens With what is becoming a long term situation, triggering of companies that pulled out of last month’s Singapore Air force majeure may simply result in triggering termination Show, which is typically the largest defense trade show in of the contractual relationship. The coronavirus crisis is Asia. Also, the sector has seen a majority of major yet one more illustration of the vulnerability of this defense contractors limit its employees to “business- assumption, following on the heels of Brexit and talk of essential” travel, and rescheduling some events, reducing trade wars. face-to-face meetings in favor of virtual meetings, and enabling telecommuting when possible. Civil Aviation disruption and Casualties While COVID-19’s long term impacts on the defense A growing number of airlines across the planet have aerospace industry may take time to manifest, they could initiated drastic fleet, network, and staffing cuts to be complicated by the uncertainty of the financial market combat the economic impact of the Coronavirus/COVID- and ongoing trade wars with China. As the global 19 pandemic. A cloud of uncertainty hangs over Chinese coronavirus spread continues, various stakeholders with airlines, and UK airline Flybe went into administration this vested interests in affected countries are expected to month and we wait to see if there are any other major experience large-scale disruption to their businesses. casualties within the sector. For support and to monitor developments visit our Most airlines in the world will be bankrupt by the end of Coronavirus Legal Hub [Link] May and only coordinated action by governments and industry right now can avoid the catastrophe, said global Our sector team recently covered the Defense Production aviation consultancy firm CAPA (read here). CAPA said the Act and other relevant advice for defense clients in external failure to coordinate the future will result in protectionism publications – [Link] and [Link] and much less competition. It will mostly consist of airlines that are the biggest and the best-supported by their governments. We have already seen reports that Boeing is seeking a $60 billion bailout from the US Government. Quarterly aerospace, defense and security sector briefing 1 On your radar - Q1 2020 2 Industry gradually shifting to resist corruption and futureproofing your business globally Airbus bribery probe There is an increasing global resistance to corrupt practices across the sector following the recent Airbus settlement of €3.6bn in an international bribery probe, a record amount to previous corruption related settlements. In the past, it was largely the US Department of Justice (DOJ) and latterly the UK Serious Fraud Office (SFO) that have investigated and prosecuted international corruption cases. What is new in this case is that the French regulator was not only involved, but took the lead in the Airbus investigation. Acquisition Due-diligence This follows on from last year where we see a rise in a Due diligence is a critical part of any acquisition, in number of Foreign Corrupt Practices Act (FCPA) February 2020 securities filing, United Technologies investigations of companies across the sector. Corporation (UTC) disclosed that DOJ and SEC had notified the company that they had closed their Over the past decade, European industry has been investigations into meal, entertainment, and gift catching up. Since the Organization for Economic Co- expenditures, as well as a potential conflict of interest operation and Development (OECD) Guidelines on Anti- involving a third party sales agent in China. According to Corruption were issued, European states have been the filing, the investigation focused on the activities of a cleaning up their own local laws and putting in place predecessor aerospace company discovered during a legislation to deal with foreign corruption by their post-acquisition review by a company that UTC acquired nationals. Not only has legislation such as the Bribery Act in November 2018. Regulatory due diligence should look in the UK, Spain and France been put in place, they are at the basis of the firm’s authorization and all its relevant widely viewed as more rigorous than the FCPA. procedures. SFO Handbook Update Revisiting your approach It is also timely that the SFO has just reissued the section Today there is no room for companies to be cavalier. To of its Operational Handbook on "Evaluating a Compliance ensure your company responds to these challenges, Programme". Read our briefing on this here. The revisit your anti-bribery and corruption policies and Handbook is an internal tool for SFO prosecutors, procedures. Ensure that your practices incorporate the investigators, auditors, lawyers and compliance latest regulatory standards issued by FCPA, SFO, DOJ and professionals that sets out standard processes, other regulators to build a culture of good practices. instructions and guidance on the conduct of SFO casework. It is intended as a practical reference guide for See our Global Bribery Guide which provides an overview staff and reflects, rather than dictates, best practice. on how jurisdictions around the world combat bribery, and the anti-corruption legislation they have in place – The Handbook reiterates that a key feature of any access here. compliance program is that it needs to be effective and work for each specific organization in the field in which it The Airbus landmark case indicates that the industry will operates. It is critical that the compliance program is come under enhanced scrutiny from regulators in the proportionate, risk-based and regularly reviewed. future. Use this opportunity to ensure that you have robust and adequate procedures in place. It will make you more resilient and give you a competitive edge globally. Quarterly aerospace, defense and security sector briefing 2 On your radar 3 Continued close scrutiny of transactions across Europe and in the US, expansion of the CFIUS regime The US released final regulations implementing the Foreign Investment Risk Review Modernization Act, or FIRRMA, which took effect in February 2020. FIRRMA significantly expands the authority of CFIUS to review certain minority investments in companies engaged with critical technology, critical infrastructure or sensitive