The commercial year 2014-15
updated on 27 October 2015
Having an amazing ability to analyse pure theoretical law is all well and good, but you also need to appreciate the commercial context within which your clients are operating. Courtesy of just published Best in Law, this feature looks at some of the key themes in the commercial world in 2014-15 and gives you some pointers on how they are relevant to lawyers.
The law is a many-splendoured thing; but in our interconnected, business-driven world, legal expertise is not always enough to convince prospective employers that you're a good bet. Firms these days want candidates who are not only well versed in the law, but also able to lift their eyes above their textbooks and apply this knowledge to the wider world around them.
Here we shine a light on some of the biggest stories of the last 12 months to show you some of the commercial workings underpinning them and that nothing ever happens in isolation.
Business speaks up
Was it hard-headed pragmatism that won the day for the Unionists in last autumn's Scottish referendum or fear of the unknown? Either way, a No campaign that had largely been ignored - when not egregiously mishandled - south of the border narrowly won the day after big business waded in at the eleventh hour to warn voters that Scotland leaving the Union would be a Very Bad Thing.
International investors were warned to pull their money out of the United Kingdom to insulate themselves from the cataclysmic effect of independence. Meanwhile, Lloyds and Royal Bank of Scotland announced that they would relocate their head offices to England in the event of a Yes vote. There is little doubt that such tactics proved had an effect, although whether it was decisive in denying victory to those pushing for independence is impossible to say.
Commercial interests again made headlines before the UK general election on May 7, with an open letter to The Telegraph in favour of a Tory government signed by over 100 (self-proclaimed) business leaders. The letter praised David Cameron and George Osborne's decision to cut corporation tax and claimed that a Labour victory could endanger the UK economic recovery.
In the event, the markets planned for every variation of coalition or minority government, only for us to end up with a Tory majority. However, just to stop everyone resting too easy, this clear-cut result has been succeeded by frenzied horse trading over the much-vaunted EU referendum, which could see the United Kingdom leaving the European Union. Not only would this be a seismic change for European businesses and the people who work for them, but there is also talk that a so-called 'Brexit' could trigger a fresh Scottish referendum, with Scotland leaving the United Kingdom and then petitioning to join the European Union as an independent country.
Whatever happens, it's a safe bet that businesses and commercial interests will be making sure that voters know how they feel on the matter. On the one hand - why shouldn't they? If a bank has concrete plans to change location and thus risk jobs in a particular place, that issue is of legitimate concern to voters. On the other hand, such tactics can at times feel heavy-handed, especially when they seem to carry more than a hint of a veiled threat. Certainly in the case of the two Scottish banks, there were questions over the manner and timing of the announcement, if not the subject matter. It highlights that the commercial fall-out of elections and referendums is high up on voters' priorities.
Phones for who?
Last September saw high-street stalwart Phones 4U - remember those annoying ads? - unexpectedly plunged into administration. Since the financial crash of 2008, household names hitting the wall is no longer news. However, what makes this one worth a closer look is the reasons why the mobile phone outfit went out of business so suddenly and with so little warning.
The retailer blamed the closure of nearly 700 shops on the decision by phone network EE not to renew its contract, which followed hard on the heels of a similar move by Vodafone. Phones 4U claimed that up until this point it had been a profitable company with a healthy turnover. However, without these contracts it simply had no business. Private equity firm BC Partners, which owned Phones 4U, warned that "the ultimate result will be less competition, less choice and higher prices for mobile customers in the UK".
Since the appointment of PwC as administrator, EE and Vodafone, as well as Dixon's Carphone, have all struck deals to acquire various Phones 4U assets. While this has helped to preserve over 2,000 jobs, the bankruptcy has still resulted in nearly 3,000 redundancies.
It's a timely reminder that no matter how cutting-edge the product, every business still relies on good old-fashioned supply chains - in this case the mobile networks decided to stop supplying Phones 4U and bankruptcy was the inevitable consequence. Did the networks behave unethically? That's a difficult one to answer and depends on whom you speak to. The fact is that when business models change - as they are wont to do - even well-established players can find themselves vulnerable. In this case the change was simply that customers had become more comfortable with the technology and thus more confident about choosing between myriad smartphones and mobile contracts. This created an opportunity for mobile networks to cut out the middleman and deal with customers directly - either through dedicated shops or online. It's a fast-moving world and things can change quickly - especially in the high-tech sector.
Night tubes for a 24-hour city - but who will drive the trains?
Last autumn London Mayor Boris Johnson announced that London Underground trains would start running all night long from September 2015. Johnson claimed that this was possible because of massive investment in London Underground and that running a 24-hour tube service would help to create 2,000 new jobs and create an economic fillip of £360 million. However, fast-forward a year and the launch date has been delayed indefinitely after a series of threatened tube strikes as well as two actual strikes, which paralysed the capital's public transport system. What went wrong?
The sticking point is who will drive the trains. The four trade unions involved claim that the changes are being forced on their members with little consultation and insufficient compensation given the impact that night shifts will have on work-life balance. They also cite safety concerns over running a transport system staffed by exhausted, burnt-out staff - various new medical studies have highlighted the ill effects of shift work. Transport for London (TFL) argues that tube drivers are already well compensated and the unions are behaving unfairly by striking. However, there have been allegations that TFL is itself against a night tube and is using unreasonable negotiating tactics in order to sabotage the talks and blame the unions.
Whatever the truth of the matter, the fact is that there have been two strikes already and it is still uncertain as to when night tubes will actually start running. Given the fundamental change that a 24-hour service would impose on workers' lives, it is not unreasonable for the unions to call for strikes. Let's face it, even lawyers have been known to strike in certain circumstances. The moral of the story? Don't make big commercial announcements until you've ironed out at least some of the finer details…
Energy - what does the future hold?
As 2014 drew to a close, the plummeting price of oil dominated headlines along with the impact that this fall would have on the North Sea energy industry, with one executive warning that Aberdeen's economy was "close to collapse".
The energy sector has been big news for several years. While this is partly due to instability in various Middle Eastern oil-producing countries, it also reflects the fact that climate change has evolved from a niche theory to a reality that is now treated with deadly seriousness by governments and commercial interests around the world. The two may well be linked. In March 2015 Scientific American suggested that a five-year drought, which is believed to have been exacerbated by climate change, was most likely a factor in the conflict. The Paris summit scheduled for this December is being described by the green lobby as the world's last chance to put in place binding targets to curb carbon emissions and avoid catastrophic climate change. Countries are being invited to submit their own plans for how they can achieve this - with mixed responses.
If the summit does result in properly binding targets, expect the energy industry to react with predictions that any curtailment of their activities will lead to economic disaster - as well as a strong lobbying effort. However, in the last few years some business voices have begun to speak out in favour of long-term clarity, even if this means governments being upfront about carbon taxes or other measures to limit emissions. In addition, a clearer policy on this will give a boost to nascent industries - including manufacturers of wind turbines and solar panels. If traditional energy companies suffer under a new regime, there will always be new businesses to take their place.
Will Paris result in a clear roadmap or more of the ineffective number-crunching that made the Copenhagen summit 2009 such a damp squib? We can but hope. However, for the first time there does seem to be more acceptance from at least some parts of the business community that action needs to be taken.
Tough times for the supermarket king
In April 2015 retail behemoth Tesco shocked the City with a pre-tax loss of nearly £6.4 billion for 2014. The scale of the loss - the biggest ever by a UK retailer - stunned experts, even after revelations of an accounting black hole last September, when Tesco was forced to admit that it had overstated its 2014 first-half profits to the tune of £250 million.
So what's to blame for this dramatic reversal of fortunes? An increasingly competitive supermarket sector, with discount chains such as Aldi and Lidl taking an increasingly large slice of the pie, is certainly a factor. As is classic over-reaching: Tesco finally called time on its attempt to expand into the United States in 2013, offloading its loss-making Fresh & Easy chain for £80 million. Some analysts estimate that Tesco lost £2 billion in total as a result of the debacle.
A large proportion of the losses announced in April can be put down to asset writedowns rather than poor trading - in fact, trading is (slowly) on the rise. Some analysts speculated that Dave Lewis - who joined the supermarket giant as chief executive last August after 27 years at Unilever - was 'kitchen sinking'; or getting all the bad news out all at once in a short, sharp shock, rather than letting it trickle out piece by piece and cause more damage. The market reaction suggests that his instincts were correct - share prices actually rose slightly after the announcement, suggesting that the City still has faith in him.
Like Phones 4U, Tesco found out the hard way that the market is a turbulent place. In the mobile phone retailer's case it was a changing business model that caused it to come a cropper - for Tesco, it seems to have been more about simple mismanagement. Some analysts pointed to lack of retail expertise among members of the Tesco board. It is certainly worth bearing in mind that business acumen is not necessarily transferable across sectors and retail is a particularly tricky horse to master. Above all, it's crucial to have good people with relevant experience in place if you are not to lose your place at the top of the tree.
Hound of Hounslow or rise of the robots?
This spring also saw the arrest of Navinder Singh Sarao. The financial trader and UK citizen was apprehended at the request of the US authorities, which are seeking to extradite him to stand trial on 22 charges, including wire fraud and market manipulation. The US Department of Justice alleges that Sarao 'spoofed' futures markets by entering orders that he had no intention of fulfilling. The orders affected the price of shares and - so alleges the department - contributed to the so-called 'flash crash' of 2010, when speculative trades wiped $500 billion off the US stock market.
There is a whole mix of legal issues here. As stock markets around the world become largely automated, they have become vulnerable to spoofing and similar electronic manipulations. While such price variations might net traders only a fraction of a cent for each share, when trading in volume, this soon adds up. Such behaviour would not have been tolerated in the old trading pits, where business was conducted face to face - a trader who made orders in bad faith and then cancelled them would likely soon have been shown the door. However, automated markets open new possibilities. Spoofing involves misleading so-called 'high-frequency traders', who themselves have been criticised for using algorithms to try to predict the direction in which the market is heading and then get there first.
Even more problematic for the US authorities is that until recently, spoofing was not illegal - yet another instance where the legal regulations have failed to keep up with technological innovation. Although the practice was outlawed in the United States in 2010, there is some doubt as to whether it amounts to fraud in the United Kingdom and is thus an extraditable offence - hence the US Department of Justice cobbling together its 22-count charge sheet.
Sarao denies the accusations and claims he is being made a scapegoat for the crash. He is supported by many traders, who question how one person could have caused the 2010 market convulsions. However, if Sarao is not to blame, it suggests a more uncomfortable truth - nobody knows what caused the flash crash, whether it was high-frequency traders or the fact that, second by second, prices are being driven by computers, not people. The case also illustrates that there is an extremely fine line between canny trading and illegal behaviour.
Everything is awesome…
Brands are big business these days - some of the biggest. So-called 'intangible value' can add millions to a company's share price and savvy brands know that. It's fitting, therefore, that Lego - named this year as the most powerful brand in the world - should be under the spotlight here. Trademark law has to striking an increasingly tricky balance between protecting distinctive marks, logos and designs and yet not being so restrictive that it prevents trade and stifles innovation. When is it fair to compare your washing powder to that of a competitor? When is your distinctive orange logo too similar to that of a rival? Trademark law - as with so many branches of the law - is not an exact science, no matter what the textbooks might suggest. The clue here is in the first half of the word - trademarks are designed to promote trade by giving consumers clear knowledge of the origin of goods or services (ie, that the golden arches mean McDonalds food). They are not - despite the efforts of some over-zealous brand owners - designed to provide a monopoly.
The Lego judgment shows the court treading a fine line - and one on which Lego itself has not always found itself on the right side. Past case law has found that Lego bricks themselves fulfil a functional purpose and therefore cannot be protected as three-dimensional trademarks. Lego's opponent in the current case made a similar argument - the figures were part of a toy that involved "interlocking building blocks for play purposes" and thus could not qualify as a trademark. However, the court found that the essential elements of the Lego figure have nothing to do with their ability to lock onto Lego bricks. It also found that distinctive features such as holes in the feet and legs had no obvious technical functions.
So Lego wins the day - at least today. However, with a brand this big, it's unlikely that this is the last time that its crown-jewel marks will come under attack.
Is London's financial crown under threat?
Summer 2015 and banking giant HSBC announced that it was cutting 25,000 jobs - including up to 8,000 in the United Kingdom - as part of a reorganisation designed to help it refocus on Asian markets. This followed news in May that the bank was reviewing where it should locate its global headquarters - and the answer might not necessarily be London.
HSBC's shock announcement caused a firestorm in the financial pages - could this be the beginning of the end of the Square Mile's dominance over global financial institutions? Fingers started being pointed when HSBC boss Stuart Gulliver cited Osborne's bank levy - which cost HSBC £700 million last year - along with the requirement to separate its high-street business from its investment operations, as among his concerns over keeping the bank's HQ in London.
The tussle typifies the struggle that governments around the world face when it comes to regulating banks. Many of the rules governing the financial sector were stripped away in the 1980s and the good times did indeed roll - right until the financial crash of 2008. Critics say that more regulation is needed urgently if we are to avoid a repeat. However, the banks protest loudly and furiously at any attempt to clamp down and predict dire economic consequences. Governments around the world don't know which way to turn. Opponents insist that the bank levy is just a drop in the ocean, while Gulliver seems to be painting it as the straw which may break the camel's back.
It's a rich mix of money, economics and legal indecision. Given that Gulliver made his remarks about relocating two days before the May 7 general election, it would be naïve to believe that financial institutions are above trying to influence political results.
So there you have it - a taster of some of the headline-grabbing commercial stories from the past year. They should show that there's more than one side to every story and that the world in which we live is more connected than ever before. They also show that it's always worth digging a little deeper into the stories behind the headlines - looking to see who benefits may be more revealing than you realise.
For more commercial awareness skills-boosting, read our feature "Are you commercially aware?" and our Burning Question section. Also follow @CityLawLIVE and @NationalLawLIVE on Twitter for daily commercial news updates.
