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Commercial Awareness: The Fortnightly Round-Up (w/b 28th August)

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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.

UK Positions Itself for Next Round of Brexit Negotiations

David Davis, the UK's Brexit Secretary, travelled to Brussels this fortnight to begin the next round of EU exit talks. After the government faced criticism for showing a lack of direction in their negotiating position, this time Mr. Davis was armed with seven policy papers outlining objectives on key Brexit issues.

Three of these papers relate to the current divorce phase of the negotiations – focusing on issues such as Northern Ireland, the confidentiality of EU documents and the sale of goods. The remaining four papers focus on the future relationship between the EU and the UK. These relate to a future customs arrangement – as discussed in a previous edition of the Keep Calm Talk Law Fortnightly Round-Up – data protection, dispute resolution and civil judicial co-operation.

The papers’ position on data protection and the future relationship between the European Court of Justice and the UK legal system will be explored below.

Data Protection

In the digital age, the right to privacy extends to personal information which is collected, processed and stored digitally. Entering personal information is inevitable when using certain services, like registering with a doctor, buying products online or paying bills. In order to protect personal and potentially sensitive information from being abused or shared too freely, data protection regulation was introduced. It aims to strike a balance between the rights of individuals to privacy and the ability of organisations to use data for the purposes of their business.

In 1995, the European Commission adopted the Data Protection Directive in order to harmonise data protection legislation throughout the European Union. This directive was implemented into UK law through the Data Protection Act 1998. In order to refresh data protection rules to reflect 12 years of technological developments since 1995, the EU introduced the General Data Protection Regulation (GDPR) which will come into force on 25th May 2018.

The UK has an estimated £240bn data economy with three-quarters of its cross-border data flows involving EU countries. Reaching an agreement for data transfers between the UK and the EU after Brexit will prevent UK businesses being faced with burdensome arrangements for international data transfers and will provide certainty in how they can use their data. 

The policy papers note that the UK will seek a “bespoke” deal with the EU for continued free exchange of personal data after Brexit based on a mutual recognition of both sides’ data protection regimes. As the UK promises to be fully compliant with EU data protection laws at the point of its departure in March 2019, this will inevitably mean implementing the GDPR into domestic law. The papers also envisage the Information Commissioner’s Office, the UK’s data protection watchdog, having a continued role working with European regulators. This gives the UK a seat at the table when deciding the future direction of data protection regulation in the EU.

Currently, if the EU considers a non-EU country to have an “adequate” data protection regime it will allow the transfer of personal data without additional security measures. Through the close alignment of its regime with that of the EU, the UK is effectively seeking its own adequacy decision to allow for the free flow of information. Through this model, the EU could unilaterally withdraw its approval in the future if the UK decides to change its data protection regime or enter into data-sharing agreements with third countries that Brussels believes do not comply with its regime. However, this is an inevitable side-effect of Brexit. As the government admits, there is no upside to Brexit in relation to data protection – only risks to be mitigated. Reaching a deal with the EU on data protection which allows for the exchange of data, absent of expensive and time-consuming security checks, is important for ensuring that the UK’s data economy is not left in isolation.

Law firms with a particular strength in Data Protection include Bristows, Baker McKenzie, Covington & Burling, Hogan Lovells, and Bird & Bird.  

Enforcement and Dispute Resolution

When Theresa May addressed the Conservative Party Conference in 2016, she drew a red line under ending the role of the European Court of Justice (ECJ) in the law of the UK, saying "we are not leaving only to return to the jurisdiction of the European Court of Justice”. While such rhetoric may wash with her own party, it is ultimately unrealistic and naïve. If the UK wants access to the Single Market, which presumably it does, it will need to adhere to the rules of that market, the final arbiter of which is the ECJ.

With the tone of the most recent policy papers reflecting a more constructive approach, it appears that the road to Brexit has been re-tarmacked and the red line under the role of the ECJ repositioned. The papers called for an end to “direct jurisdiction” – where EU law has a direct effect on citizens living in the UK. Linguistically, the change is small however in practice it is significant as it still holds out the possibility of the ECJ playing a role in Britain’s legal order post-Brexit.

The paper expressed a wish to establish a new dispute resolution mechanism to address any disagreements on the interpretation or application of agreements that govern the future relationship between the EU and the UK. Such a mechanism might be used, for example, if EU and British courts and regulators interpret treaties or trade agreements in different ways or if either party breaches any agreement. Some commentators have criticised the paper for giving a list of potential options for what a dispute resolution mechanism may look like, but not committing firmly to any. However, it is very difficult to create such a mechanism until the future commercial relationship with Europe is defined; the deeper the UK’s access to the single market, the more sophisticated any disputes resolution mechanism will have to be and the more safeguards the EU will want to put in place to ensure it has dominant influence. Further, it would not be practical if the policy papers were so clear and precise that it caused rigidity in the UK’s negotiating position and risked further stalemates.

As the papers note, the Repeal Bill will give pre-Brexit CJEU case law the same binding, or precedent, status in UK courts as decisions of the UK Supreme Court to ensure a smooth and orderly exit. Further, where the language of future agreements between the UK and the EU are identical in substance to EU law, ECJ decisions interpreting those concepts can be taken into account. This indicates that there is a role for both pre and post-Brexit EU case law in the future interpretation of UK law.

United Technologies closes in on $30bn deal for Rockwell Collins

With both sides deep in discussion over a merger, a deal between United Technologies (UTC) and Rockwell Collins is expected to be reached in the coming weeks. The precise terms of the deal have not yet been agreed, however, it is believed that UTC will pay $30bn (about $22.5bn in equity value and a little over $7bn in debt).

United Technologies Aerospace Systems, a division of UTC, is one of the world’s biggest aerospace suppliers, ranking in the top 20 for both Boeing and Airbus. Similarly, Rockwell Collins makes airline cabin seating and lighting, food and beverage preparation and storage equipment, water and waste systems and aircraft bathrooms and equipment. It also makes in-flight entertainment systems and equipment in the cockpit. The tie-up will make UTC an even more critical supplier of components to aircraft companies. The deal will increase UTC’s market share and give it a dominant presence in the aviation industry, an industry that the International Air Transport Association estimates will generate profits of $30bn globally in 2017 buoyed by a rising middle class in China and lower fuel costs. It will also give UTC greater bargaining power against large aircraft companies who are attempting to squeeze suppliers’ sale and operating margins by moving the production of certain aircraft technologies in-house.

As with most tie-ups, a key rationale of this deal is to produce savings by consolidating production and distribution channels. When UTC acquired aeronautics company Goodrich for $16.4bn in 2011 it ended up delivering $500 million of savings, 25% greater than the savings it promised. A similar level of efficiency gains at Rockwell Collins would produce $530 million of annual savings.

Talking Points

UTC owns Carrier Corporation, a manufacturer and distributor of heating, ventilating and air conditioning systems. In February 2016, Carrier announced that it would be closing its Indianapolis plant, cutting about 1,400 production jobs and moving production to Mexico to make expected savings of $65 million annually.

Given that Trump’s election campaign focused on protecting American manufacturing jobs and included strong anti-Mexican rhetoric, when he was elected president he was quick to turn the screw on Carrier to stop the proposed cuts. He brokered a deal in which Carrier were to employ at least 1,069 people in Indianapolis in return for a $7 million incentive package of tax breaks and grants over 10 years. However, nearly 340 workers were laid off from the Carrier's Indianapolis plant in July of this year, with another wave of 290 workers to be let go just before Christmas. UTC CEO Greg Hayes said that Carrier is still meeting the promise it made to Trump because at the heart of the deal was an agreement to keep the 800 manufacturing jobs in Indianapolis. The rest of the 1,069 jobs are engineering and technical jobs that were never scheduled to be cut and were not part of the discussions.

When doing deals companies need to assess business risks and legal risks, usually identified during the due diligence phase of a transaction. However, increasingly companies need to examine the political risks as well. As discussed in previous editions of the Keep Calm Talk Law Fortnightly Round-Up, strong political scrutiny contributed to bringing an end to Kraft-Heinz’s attempted takeover of Unilever and PPG’s attempted takeover of Akzo-Nobel. By circumventing its agreement to protect jobs in Carrier’s Indianapolis plant, UTC is sure to have irritated Trump. Any plans within the deal to further cut jobs will be met with fierce criticism from the volatile US president. Although Trump cannot block a merger purely on the grounds that it will lead to job cuts or that one party to an agreement has undermined its purpose, he can order a large scale antitrust investigation into the deal. This would complicate the deal, add uncertainty and crucially increase advisory costs on both sides.

In Brief: Other Developments this Fortnight

  • The UK's pension regulator is to prosecute former BHS owner Dominic Chappell for failing to hand over crucial documents regarding its purchase (Link).
  • The US imposes sanctions Chinese and Russian companies and individuals for aiding North Korean weapons programme (Link).
  • Barcelona is to sue Neymar for €8.5m for breach of contract following transfer to PSG (Link).
  • The successful closing of Amazon’s acquisition of Whole Foods, with the company now planning to cut food prices in an attempt to hits rivals’ share prices (Link).
  • Softbank invests $4.4bn into WeWork (Link).
  • Hurricane Harvey has serious impacts upon oil prices, Houston house prices and Donald Trumps' presidency (Link 1, Link 2, Link 3).

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Tagged: Banking & Finance, Brexit, Commercial Awareness, Commercial Law, European Union, Legal Business, Legal Careers, Trade

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