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Commercial Awareness: The Fortnightly Round-Up (w/b 24th April)

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About The Author

Jack Turner (Commercial Awareness Guru)

Jack is a law graduate from the University of Manchester and is currently working for as an analyst for a 'Big 4' accountancy firm. He has an interest in current affairs, business and commercial law, while also being a talented and passionate musician.

This article is part of the 'Commercial Awareness Fortnightly Round-Up' series, edited by Jack Turner.

Every two weeks, Keep Calm Talk Law will bring you an overview of main commercial stories that have occurred. Detailing the main players involved, the interesting and salient facts, and the main points of discussion that arise from each story, this round-up is intended to be vital tool for developing that commercial knowledge and awareness demanded by the country’s top law firms.

Other articles from this series are listed at the end of this article.

Theresa May calls a Snap General Election

In the current political climate, where the unexpected is increasingly becoming reality, it does not take much to spook the markets. Indeed, on the morning of 18 April, the pound dropped sharply in anticipation of a mystery announcement to be made by Theresa May. In what was either a very well-kept secret or a very quickly made decision, the prime minister declared her intention to call a snap general election to be held on 8 June.

As Theresa May announced the vote, she noted that “division in Westminster will risk our ability to make a success of Brexit”. This indicates that she is looking for the election to give her a strong mandate to carry through the difficult negotiations as the UK leaves the European Union. The more likely reason for calling the election is to take advantage of her party’s leads in the opinion polls. Labour currently have around 80 seats where they won over 50% of the vote in the last general election. It is unlikely that they will lose these seats in June, but with Labour’s current position in the opinion polls, it is foreseeable that the Conservatives can pick up many seats in tighter constituencies. Similarly, with UKIP no longer appearing to have a place in UK politics, May will be looking to pick up votes from disenfranchised UKIP voters. Currently, the Conservatives are likely to make significant gains in the upcoming election.

Before 2011, the power to dissolve parliament was one of the prerogative powers that the prime minister could exercise on behalf of the crown without requiring any parliamentary vote. The Fixed Term Parliament Act 2011 (FTPA 2011) changed this; the legislation required five-year terms for each government. This meant that the next general election was scheduled for 2020. However, under the act, the prime minister could call an early election if the motion receives a two-thirds majority in the Commons. This was achieved on 19 April, with only 13 MPs voting against the motion.

The intention of the FTPA 2011 was to prevent the prime minister abusing their power to dissolve parliament to benefit them politically and to provide greater certainty as to the lifespan of a government. If we believe that the overriding purpose for calling this election is to increase a Conservative majority, then Theresa May is defeating the spirit of the legislation. Even so, this event calls into question the effectiveness of the legislation in providing checks on the prime minister’s ability to dissolve parliament for their own political gain. In reality opposition parties are unlikely to vote against an early election; doing so would be implying that they are not in a position to form government and would be a confession of weakness. As such, the requirement that an early election receives two-thirds approval in the Commons is a hindrance, but one that can be easily overcome. The ability of a prime minister to call an election with the purpose of making their majority bigger still stands.

Talking Points

Although the pound plummeted on the morning of Tuesday 18 in anticipation of the announcement, it ended the day at a five-month high. Behind this rise is the prospect that, by increasing her parliamentary majority, Theresa May can pursue a “soft-Brexit” by diluting some of the hard-line Eurosceptics in her party with more moderate MPs. With a slim parliamentary majority, these Eurosceptics currently have significant power to influence the outcome of Brexit negotiations.

However, such a belief may not ring true. The Liberal Democrats, who have a clear pro-EU stance, are well positioned to pick up votes from constituencies with a high proportion of remain voters. This could risk the Conservatives losing moderate MPs to the Lib Dems in the south. Similarly, they could end up winning seats from Labour in Eurosceptic constituencies in the north. The end result could be that the Conservatives end up being a more hard-line Brexit party after the election.

Also, a belief that a Conservative party made up of more moderate MPs will lead to a soft-Brexit is to misunderstand the nature of the negotiation. The size of Mrs May’s mandate in the UK will be of little importance to European politicians. The EU will continue to be in a strong negotiating position and will be looking to secure a deal that they believe to be in their best interests. If the EU takes the approach that the UK enjoy either all of the benefits of membership to the EU or none of them, then a soft-Brexit may be off the table for the UK - regardless of how many Conservative MPs want it.

The rise in the value of the pound following the general election also had an interesting effect on the stock markets. The FTSE 100, a share index composed of the 100 largest companies listed on the London Stock Exchange, dropped 2.5% on Tuesday 18, its worst daily decline since just after the Brexit referendum result. This is because the majority of the index’s constituents make their earnings outside of the UK. As the value of the pound rises, their earnings in foreign currencies decrease once converted back to sterling.

More Patents are Being Filed in Emerging Markets than in the West

According to figures from the World Intellectual Property Organisation (WIPO), the 12 leading emerging markets nations applied for 1.49m patents in 2015, exceeding the 1.48m applied for in developed market countries. This is the first time that the number of patent applications filed by emerging market countries has overtaken those filed by the developed world.

China has led this growth, where 1.1m patent applications were made in 2015, a 745% increase from the 130,000 that were lodged in 2004. China also accounts for more active trademarks than any other country, around 10.3m according to WIPO data. Other emerging nations such as Turkey, Vietnam, and India have also seen significant increases in the number of patent applications filed.

Emerging market nations are starting to shake off their image as centres for low-cost manufacturing and are instead focussing on driving innovation and technology. However, some question the quality of these technological advancements; a high proportion of emerging market patents appear to be “process oriented” — concerning the manufacture of a product or the materials used in it — rather than actual product-based patents that are more common in the west. Of course, this is not the whole picture, emerging market countries are responsible for some genuinely market-leading innovations. For example, Discovery, a South African insurer, is using data analytics and behavioural nudges (such as rewards for keeping fit) to cut the cost of insurance.

Talking Points

Emerging markets have been a major focus for many international law firms in recent years as they look to explore the opportunities that come from countries with a rapidly expanding economy. Similarly, many multinationals and “western” businesses are increasingly looking to build more extensive operational networks and tap into the talent and potential in emerging markets. It is important for a law firm to be able to serve their clients wherever they do business. Therefore, building an international presence and increasing focus on emerging markets is a strategic priority for many law firms.

Emerging markets still remain a complicated place to do business. The legal and cultural idiosyncrasies in each country can provide a significant barrier for law firms without an established presence or experience in the region. The undeveloped nature of the markets also means that companies can find themselves in relatively unexplored territory. This leads to unique challenges for companies, that their legal advisors must help them overcome. As such, some law firms have favoured tie-ups with local law firms as opposed to opening new offices and building their base in the country from scratch. Dentons, the world’s largest law firm by lawyer headcount, followed this strategy by merging with Chinese firm Dacheng in 2015. Dentons operates under a decentralised approach where it has no global headquarters. Instead, it employs regional CEOs which allow the firm to tackle the local legal and cultural differences in each jurisdiction while still retaining an international network that can be utilised when delivering a client service.

Law firms with a presence in emerging markets and a strong intellectual property practice will be well positioned to benefit from the increase in patents being filed. Businesses looking to protect their products and innovations will seek the advice of commercial lawyers and seek their assistance in the patent filing process. Similarly, the development of technology and a focus on innovation will also attract the attention of venture capital. Venture capital funds are investment funds who typically invest in start-ups and small-to-medium-sized enterprises with strong growth potential in return for a stake in the company. These funds take particular interest in companies focused on disruptive technologies because of their capacity for explosive growth and ability to transform and dominate an industry. Greater investment by venture capital funds can provide opportunities for law firms to advise funds on making investments or assist companies throughout the fundraising process.

Law firms with particular strength in emerging markets include Allen & Overy, Baker McKenzie, Clifford Chance, Herbert Smith Freehills, Norton Rose Fulbright, Latham & Watkins, and White & Case.

UK Economic Growth Slows

Gross domestic product, the monetary value of all the finished goods and services produced by a country, rose just 0.3% in the first three months of the year compared to 0.7% during the last three months of 2016. This is less than the 0.4% and 0.6% growth that the markets and the Bank of England predicted respectively.

According to the Office for National Statistics, this slower growth is due mainly to the service industry which accounts for almost four-fifths of national income. The main drag on this industry came from the hotels, restaurants and the distributions sector, which fell by 0.5%, as increasing prices caused by rising inflation discouraged consumer spending. In a previous round-up, we noted that inflation was high in the UK on the back of rising oil prices and a weaker pound. We also discussed how this inflation could have the effect of weighing on economic growth in the UK by discouraging consumer spending. This data suggest that this prediction may have come true.

Talking Points

The risks for law firms in this story lie in the fact that a slowdown in growth may result in the UK becoming less attractive to outside investment. Law firms can play a significant role in accommodating foreign investment in the UK and can generate significant revenue from fees. Similarly, law firms who have clients in the service industry will be concerned with how the fall in consumer spending will cut into their clients’ balance sheets and leave them with less capital to make investments.

However, there may also be opportunities for law firms as clients look to restructure their business to counter any reduced consumer spending. For example, Debenhams announced last month that its pre-tax profits declined 6.4% to £88m. As a result it is revamping and restructuring its business. It plans to close up to 10 of its department stores and 11 warehouses. This will require employment lawyers to assist with any redundancies or changes in staffing arrangements as a result of these closures. It will also require commercial property lawyers as Debenhams seek to sell the property that it used to house these closed functions. Debenhams is also going to reconsider its current partnership with Sports Direct under which the sports retailer has seven concessions in Debenhams stores and a 5% non-voting interest in its shares. Some have questioned whether the Sports Direct brand fits with Debenhams’ and whether it adds any benefit to their business. Reviewing the partnership and advising Debenhams on actions they can take to terminate or change the agreement will require the work of corporate lawyers.

Commercial awareness requires the ability to spot both risks and opportunities in a commercial story. Considering both sides of a story will help impress at interview.  

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Tagged: Banking & Finance, Commercial Awareness, Commercial Law, Intellectual Property, Legal Careers, Parliamentary & Elections, Technology, Trade

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