Here are 22 commercial awareness issues you should know about in 2018

All law firms want their trainee solicitors to be commercially aware and informed. LawCareers.Net’s Josh Richman rounds up a range of the important stories in 2018.

Commercial awareness is a vital skill that all law firms want to see in their training contract candidates. For those planning to apply for a vacation scheme or trainee vacancy, becoming commercially aware involves learning about how firms and their clients work as businesses, as well as how they are impacted by what is happening in the wider world.

Keeping up with current affairs and thinking carefully about what you read is an important habit to acquire. A solicitor needs to know what is going on in the world and to consider how it might affect their firm and clients. As an applicant, you won’t be expected to be an expert but must be prepared to hold your own in a conversation with a panel of partners in an interview.

With the fourth quarter of 2018 well underway, let’s look at some stories that have made headlines in various practice areas over the year so far and consider how and where they fit together.

Brexit

What impact will Brexit have on law firms?

Britain voted to leave the European Union by a narrow 2% majority in 2017, but with the final withdrawal date of 29 March 2019 only months away, there is still bitter division in the government and among the other political parties over what the terms of Brexit should be, what kind of future the United Kingdom should pursue after it has left, and even whether the decision should be reversed.

The majority of lawyers apparently voted Remain in the 2016 referendum – and commercial law firms’ businesses arguably benefited from EU membership. The City is an attractive hub to overseas companies for both transactions and litigation, for reasons including the wide international use and perceived rigour of English common law, the quality of UK legal services, and a shared legal and regulatory framework with the European Union.

If Britain ceases to be an EU member without agreeing a deal with the remaining 27 EU member states, the subsequent loss of this shared framework and the necessity of a new, more complex regulatory environment could lead to a long-term decline in work for City law firms. In August, the Law Society predicted that a no-deal Brexit would result in a £3 billion loss of growth from the legal sector.  

However, those gloomy predictions have not yet become reality and despite uncertainty over Brexit, City firms are currently flourishing. Demand for legal services has increased as companies seek advice on bringing themselves into line with increasingly complex legislation. Whether the boom will continue in the long term, after regulations become more settled, remains to be seen.

To help cement the country’s reputation as the jurisdiction of choice for international legal services and dispute resolution, the Law Society has released plans for a new, state of the art commercial court in London. Law Society President Joe Egan said that the “increase in the country’s capacity to tackle cybercrime and fraud will undoubtedly reassure business and help maintain England and Wales as the global centre for legal services post-Brexit”.

What does Brexit mean for the economy?

Although the London Stock Exchange is thriving, many companies are busy preparing for the possibility of the United Kingdom walking away from the European Union without a trade deal, which would certainly bring widespread disruption to their production and supply lines. Businesses from pharmaceutical companies to confectionary giants such as Mondelez, owner of Cadbury’s, are stockpiling resources against the eventuality of a cliff-edge Brexit.

In August, Japanese tech giant Panasonic moved its European headquarters from Bracknell to Amsterdam to avoid any tax issues that might result from Brexit. Chief executive Laurent Abadie explained that if the UK cuts its corporate tax rates to attract business post-Brexit, it could be viewed as a tax haven under Japanese law. Other Japanese companies, including finance firms Nomura, Sumitomo Mitsui and Daiwa have also said they will move their European headquarters outside of the United Kingdom.

Meanwhile, several multinational companies have announced plans to cut UK jobs and move them elsewhere in the European Union, including Jaguar Land Rover (JLR), which is owned by Indian conglomerate, Tata. Some 1,000 UK jobs at JLR’s plant in Solihull were cut in April, with the losses blamed on uncertainty over Brexit as well as confusion over the future of diesel vehicles due to their impact on the environment.

In September, the car maker’s chief executive, Ralf Speth, warned the prime minister that tens of thousands of jobs are at risk and that he cannot be sure that his company’s UK manufacturing plants will continue to operate after Brexit. Speth said that a disorderly Brexit would disrupt the company’s production lines, which rely on the ‘just-in-time’ arrival of car parts made in various EU countries, and hamper access to the single market. Soon afterwards, JLR moved 2,000 staff at its Castle Bromwich plant in the West Midlands to a three-day week.

On the other side of the argument, leading Brexiters argue that there is “nothing to fear” from the country exiting the European Union without a deal. The European Research Group (ERG), which is made up of MPs on the right of the Conservative Party and chaired by the publicity-hungry backbencher, Jacob Rees-Mogg, has produced papers on the economy as well the crucial Irish border issue arguing that a no-deal Brexit would not damage the country. In fact, said the ERG, within 15 years of Brexit, the United Kingdom would be a trillion pounds richer than if it stayed an EU member.

Meanwhile, this autumn the right-leaning thinktank the Institute for Economic Affairs produced a Brexit plan arguing that the path to economic prosperity should involve setting the UK up as a direct offshore competitor to the EU through tax cuts and radical deregulation across all sectors, from farming and fishing to pharmaceuticals and finance. To undercut the European Union on free trade, Britain would aggressively lower workers’ pay and job security, as well as taxes and public spending. However, the benefits of slashing food standards, workplace rights, environmental protections and data privacy laws seem questionable for all but the wealthiest Leave voters.

The law firm as a business

Commercial awareness is as much about being switched on to the issues that affect law firms’ businesses as it is about understanding those firms’ clients. Let’s take a look at some of the most relevant topics of the year.

Deregulation of the solicitors’ profession

Alongside the issues of new technology changing how lawyers work and the urgent business need to increase diversity in the legal sector, the major trend that a commercially aware candidate should know about is the wave of deregulation sweeping the solicitors’ profession.

In 2018 the Solicitors Regulation Authority (SRA) has continued to pursue a deregulatory agenda which began in 2014 with the abolishing of the minimum salary for trainee solicitors. This year’s proposed reforms would replace the current SRA Handbook with a much-shortened set of rules, which would controversially enable solicitors to practise from unregulated firms and freelance solicitors to provide services that were previously reserved for lawyers at law firms.

The Law Society, a constant opponent of the SRA (the antipathy is mutual), has criticised the plans in the belief that multiple solicitor brands will make consumers feel misled and lose confidence in the system.

It is joined by a sizeable chunk of the country’s small and medium-sized firms in lobbying the Legal Services Board (the super-regulator that oversees the activities of the SRA and Bar Standards Board), to reject the proposals on the grounds that they will make it more difficult for smaller, regulated firms to compete with unregulated solicitors. These same firms are already facing a squeeze on their profits.

There are also fears that if implemented, the reforms could lead to a long-term lowering of legal standards. Nonetheless, it looks likely that these newest regulatory changes will be approved in the coming months.   

Making partner: not as important as it used to be?

Not long ago, most law firms were structured as partnerships, with their solicitors generally aiming to progress from salaried associates to equity partners (the level at which a salary is replaced by a stake in the firm and a share of its profits). But this year, new research revealed that the legal landscape is changing.

Some 44% of all law firms are now operating as incorporated companies, while only a small minority now use the traditional partnership structure (17%). Also in decline are limited liability partnerships (LLPs – where not all partners own a stake in the business and are not responsible for the misconduct of other partners), which are now only used by 15% of firms according IRN Research’s annual report for 2018. 

The cause for the shift has been attributed to the introduction of Alternative Business Structures into the legal profession in 2011, which increased competition by enabling non-legal businesses (eg, the Co-Op) to provide legal services and own law firms.

A strong candidate will be able to see the change in the dominant structure used by law firms as part of a wider pattern of liberalisation of the legal services market that includes deregulatory reform, as well as recent changes that make qualifying as a solicitor more flexible, such as the apprenticeship and paralegal/equivalent means routes. The Solicitors Qualifying Exam – the new assessment that all qualifying solicitors will have to pass – is also part of that trend.

M&A

If you are set on joining a City or national firm, the chances are high that M&A will be one of its important work areas. The last year has seen a lot of M&A activity – let’s look at some of the stand-out deals.

House of Fraser bought by Sports Direct

The venerable but ailing giant of British retailing, House of Fraser, finally went bust in August with debts of close to £900 million. But the British retail tycoon, Mike Ashley, owner of Sports Direct and Newcastle United, swooped in and bought the company for £90 million, promising to turn around its fortunes and make House of Fraser “the Harrods of the high street”.

However, although the business was saved, creditors were left with significant losses and customers were also left out of pocket when thousands of gift cards were not honoured by the new owner.

Virgin Money acquisition helps scale CYBG

One of the year’s big M&A deals involved Richard Branson’s Virgin Group, which sold its majority share in Virgin Money to CYBG, the owner of Clydesdale Bank and Yorkshire Bank, for £1.7 billion in June. The subsequent merger has created the UK’s sixth-largest bank, servicing six million customers, and gives CYBG the necessary scale to compete with other large banks.  

Sony buys EMI

In the entertainment industry, Japanese corporate giant Sony splurged $2.3 billion to take control of EMI Music Publishing in May. The acquisition adds EMI’s rights to 2.1 million songs to Sony’s 2.3 million, making Sony the world’s largest music publisher with a catalogue of over four million songs recorded from the 1950s to the present.

Thanks to the rise of streaming and a return to a model where teams of writers work together to produce hits, rather than artists writing their own songs, the music business is more lucrative than ever for those who own the rights.

Sainsbury’s to merge with Asda

Over the spring, the retail sector was rocked by the proposed merger of Sainsbury’s with long-time rival Asda (previously majority-owned by US chain Walmart, which still retains a 42% stake in the business). The £3 billion deal aims to put Sainsbury’s in a stronger position to compete with the budget offerings of Lidl and Aldi that are taking up an ever-greater share of the market, with the added scale of the combined businesses allowing bosses to promise a 10% cut in the price of popular foods.

The planned merger of two of the UK’s biggest has prompted concerns about competition, though, and the Competition and Markets Authority is looking into whether the deal would negatively impact consumer choice and service before it goes through.

Pret A Manger changes hands as coffee wars continue

In May, coffee and sandwich chain Pret A Manger was sold to an investment fund owned by the Reimann family, the reclusive clan of German billionaires. The acquisition is a part of wider spree that has seen the Reimanns buy up Keurig Green Mountain and a host of other coffee businesses, large and small, in recent years in a bid to challenge Nestle’s dominance in the coffee sector.

Pret’s staff benefited from the merger, with every employee receiving a £1,000 bonus when the deal was completed.

However, the Reimann family’s new business has its work cut out to rehabilitate the Pret A Manger brand after the tragic death of a customer, who suffered an allergic reaction to a baguette that she was unaware contained sesame seeds because of the company’s lax approach to food labelling.

Costa to demerge from Whitbread

In other coffee-related news, in April plans were announced to spin off Costa, the UK’s biggest coffee chain, from its parent company Whitbread. The demerger plan aims for completion by 2020, but has been revealed earlier than executives would like as a result of pressure from activist investors.

Banking

Banks make up some of the most important clients of many leading commercial law firms. Be sure to catch up on these key stories from the last year in the banking sector.

HSBC boosts profits through cost cutting and investing in Asia

HSBC is on course for a successful 2018, recording a 28% increase in profits in the third quarter. This has been achieved through cutting the bank’s operational costs and ramping up investment in Asian businesses, which accounted for 75% of the bank’s overall profits.

Not even the death of journalist Jamal Khashoggi at a Saudi consulate in October – widely believed to be a murder committed by Saudi intelligence agents – looks set to disturb HSBC’s investment in the Middle East and Asia. The bank’s chief executive, John Flint, pulled out of attending an investment conference in Riyad – billed as “Davos in the desert” – after Khashoggi’s death, but played down any further action. “I understand the emotion around the story but it is very difficult to think about disengaging from Saudi Arabia, given its importance to global energy markets,” he said.

HSBC has followed the lead of the government as well as arms manufacturers such as Lockheed Martin – the importance of Saudi oil money vastly outweighs the regime’s brutality when it comes to realpolitik.

Barclays avoids trial over actions during the financial crisis

Barclays’ profits were hit by a $2 billion fine for mortgage misselling in the US, but the bank’s year could have been far worse. Both Southwark Crown Court and the High Court have refused ruled against an attempt by the Serious Fraud Office to put Barclays on trial over the £6 billion rescue package it secured from the state of Qatar in 2008, which saved it from having to be bailed by the government during the financial crisis.

Although Barclays itself is in the clear, four former executives are still facing charges. Former chief executive John Varley, as well as Roger Jenkins, who ran the investment banking arm, Thomas Kalaris, former head of Barclays’ wealth division, and former European head of financial institutions Richard Boath are expected to face trial in January.

RBS fine puts bank in the clear to go private again

Royal Bank of Scotland (RBS) was one of the banks that had to be bailed out by taxpayers during the 2008 crisis and has been majority-owned by the government ever since. However, an agreement with the US Department of Justice to pay a $4.9 billion fine to end an investigation into the bank’s selling of apparently dodgy financial products in the run-up to the crisis has been hailed as a “milestone moment” that leaves the government finally able to sell its 71% stake.

Lloyds loses sex discrimination pensions case

Three women’s sex discrimination case against Lloyds could see the bank facing a £150 million bill, after a landmark ruling in the High Court found that it is wrong for the pension incomes of Lloyds’ women employees to increase at a lower rate than men. The case snowballed into a 3,000-strong class action lawsuit, the outcome of which could now benefit millions of women working in the private sector.

Deutsche on track for first profitable year since 2014

Despite a plunge in profits during the third quarter of 2018, Deutsche Bank has exceeded the expectations of analysts and bosses are confident that the bank is on track to become profitable for the first time in four years. The bank is utilising new technology to cuts its workforce and costs.

The gig economy

The so-called ‘gig economy’ has been at the forefront of political controversy and litigation this year. The model enables businesses such as Uber and Deliveroo to rely on a workforce of technically self-employed and temporary workers, but it remains controversial. Supporters celebrate the convenience it brings to consumers and the flexibility it provides to people who do not want to be tied down by full-time employment and a set number of hours, but critics point out that gig economy workers are often paid below the minimum wage and live in precarious conditions without the freedom of being truly self-employed, or a safety net should they become ill. In recent years, several court cases have exposed how businesses in the gig economy can effectively control workers without taking full responsibility for their wages and working conditions.

Delivery drivers vs Amazon

In June GMB, the union which represents professional drivers, announced that it is taking legal action on behalf of members working for three delivery firms used by Amazon, arguing that the companies wrongly classed them as self-employed. GMB said: “The drivers were required to attend scheduled shifts that were controlled by Amazon, meaning they did not have the flexibility that is integral to being self-employed. In this situation, the couriers were treated like employees in terms of their working hours and the GMB union contends they should be treated as employees in terms of their rights too.” The case has yet to go to trial.

The Pimlico Plumbers case: self-employed or worker?

The year’s most famous UK litigation concerning the gig economy was the case brought against Pimlico Plumbers by plumber Gary Smith. Pimlico treated Smith as a self-employed contractor despite requiring him to work a set number of hours, wear a uniform and rent a van displaying the company’s branding.

When Smith requested a reduction in his hours due to ill health, the company refused and ended his employment. Smith took his case to court to seek worker status, which would grant him the right to sick pay and holiday, and an employment tribunal, the Court of Appeal and eventually the Supreme Court sided with him against Pimlico.

The Supreme Court’s decision is a landmark ruling that has the potential to impact the rights of many workers currently classified as independent contractors across the UK, including the huge workforces relied on by Uber and Deliveroo. 

Media and competition

The biggest UK media story of the year has to be the news that Rupert Murdoch’s three-decade reign at Sky TV is to end following a long bidding war for full control over the broadcaster between his company, 21st Century Fox, and US media firm Comcast. The corporate struggle ended after a knock-out £30 billion bid by Comcast in a high-stakes auction.

The outcome eases concerns about media monopolisation by the Murdoch family who, in addition to their stake in Sky, own newspapers the Sun and The Times, as well several British radio channels.

Technology

The Cambridge Analytica scandal

If there is an award for the highest increase in brand awareness of a tech-based firm among the public in the space of a year, it should probably go to (now defunct) Cambridge Analytica. The political consultancy combined a traditional strategic communications service with data mining, brokerage and analysis to help its clients win elections.

The firm has been accused of breaking the law in a number of jurisdictions, due to the improper harvesting of some 87 million Facebook users’ data during its work on elections and other campaigns, including for the Leave side of the referendum on the UK’s EU membership. Chief executive Alexander Nix was also recorded by undercover journalists, boasting of his company’s ability to discredit opponents with smear campaigns.

Facebook was also found to have broken the law in the UK by failing to safeguard user data and not telling tens of millions of people how Cambridge Analytica harvested their data for use in political campaigns.

Google controversy

In July, Google was fined a record €4.3 billion over its use of its mobile operating system, Android, to illegally cement the dominance of its search engine. However, even such a large fine would do little to dent the company’s cash reserves.

Google would also appear to be less cuddly and benign than the image of itself that it likes to present to consumers. It is currently developing a censored version of its search engine for use in China, which the repressive Chinese government will allow because it blacklists search terms and websites about human rights, democracy, religion and peaceful protest. Reports also claim that the Chinese version of Google would link searches to users’ phone numbers, putting them at risk of persecution by the government. How this fits with Google’s motto of “don’t be evil” is worth some thought.

Intellectual property

Intellectual property (IP) lawyers are always busy – not a day goes by without some dispute over the ownership of ideas.

This year is notable for its IP losers. First Crocs, maker of the eponymous plastic clogs, lost its battle to trademark the design of its shoes – neither the EU’s IP office nor the European Court of Justice were moved by the company’s arguments.

The European Court of Justice gave similarly short shrift to Nestle’s attempts to protect the four-finger shape of its KitKat bar, ruling that the snack is not distinctive enough in appearance to trademark.

That concludes our recap of 2018’s big commercial news. To keep up with the business world and continue developing your commercial awareness, read LawCareers.Net’s weekly commercial news round-up and Commercial Questions.

Josh Richman is the senior editor of LawCareers.Net. 

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