The commercial year 2015-16

Like the laws of physics, there is often a temptation to seek certainty in the cold, hard numbers of business and economics; but such certainty is generally illusory, as the reality inevitably proves more complex and what is one person’s triumph can be another’s misfortune.

Like the laws of physics, there is often a temptation to seek certainty in the cold, hard numbers of business and economics; but such certainty is generally illusory, as the reality inevitably proves more complex and – for everything from banking to fracking – what is one person’s triumph can be another’s misfortune. It is thus crucial for would-be lawyers to appreciate the interlocking interests and influences at play in the commercial world, and how business overlaps with political and social concerns. Commercial awareness involves applying your legal expertise within this context to find practical solutions to clients’ problems and help them to achieve their goals.

Below we use some of the biggest stories of the past year to illustrate the multi-faceted nature of these issues and to help you start thinking like a lawyer. Don’t take headlines and statements at face value; think about where they come from and whose interests they are intended to serve, and form your own opinions by considering the facts and listening to all sides of the argument. When money and power are involved, the loudest voices are not always the most reliable.


Nowhere were conflicting interests and irreconcilable differences of opinion more apparent this year than in the narrow vote to leave the European Union – easily the most seismic commercial and socio-political issue of 2016 from the British perspective. The referendum campaign that preceded the vote was fraught with rancour and growing alienation, with both sides peddling half-truths, misinformation and outright lies in the pursuit of their interests. The outcome of the vote revealed a deep schism between those with a continued affinity for the European project and those who feel that they have been left behind by globalisation and ignored by the increasingly distant figures calling the shots.

Immigration versus austerity

Immigration was perhaps the defining issue of the referendum, from both a commercial and social standpoint. A considerable proportion of the public believe that the free movement of people between member states – a cornerstone of the European Union – has put untenable pressure on vital resources such as school places, hospital beds and jobs. This belief was stoked by key members of the Leave campaign, who also claimed that Britain’s EU spending was starving the NHS of funds which would be better redirected there. However, this suggestion was immediately rowed back on following the referendum, while various studies show little to no correlation between immigration and wage depression, or pressure on public services. Immigration actually contributes a net financial benefit to the UK economy and the country’s ageing population, and this access to skills is why UK and international businesses were so overwhelmingly in the Remain camp. Meanwhile, critics ranging from trade unions to the IMF have instead blamed the squeeze on the government’s swingeing austerity policies, which have resulted in years of underinvestment in infrastructure and public services.

The principle of free movement and the rights of EU nationals to remain in the country have been thrown into doubt as new Prime Minister Theresa May prepares to enter negotiations with a European Union anxious to discourage other countries from pursuing their own exits. The ultimate outcome may remain shrouded in uncertainty for some considerable time; but whatever happens, it is highly likely that a lot of people will be unhappy.

Winners and losers

Brexit, and the attendant plunge in the value of the pound, has already created many winners and losers in the business world. Law firms will have plenty to do for the foreseeable future across all practice areas – from competition to environment and immigration – as players in both the private and public sectors rethink their strategies and roll out new arrangements. Elsewhere, Associated British Foods, the owner of Primark, anticipates that increased profits from its sugar business will more than offset a fall in UK revenue; while companies from IT outfit Aveva to Ocado could benefit from the drop in sterling as they work to secure deals abroad.

Meanwhile, the construction and real estate sectors are suffering as Brexit has depressed property sales; while banks have also been hit hard by fears for the economy and further cuts to already-rock bottom interest rates, which have made lending less profitable.

Banking: a subject of interest

The banking sector has been under intense scrutiny since the global financial crisis of 2008 and subsequent recession – events which the banks themselves had a major hand in causing through what the US Senate’s Levin-Coburn Report described as “high risk, complex financial products [and] undisclosed conflicts of interest”. Thanks to the weakened pound, Lloyd’s Bank has emerged as one of the biggest losers from the Brexit vote, while Royal Bank of Scotland – which, like Lloyds, was bailed out by taxpayers during the financial crisis – has said that the government will have to wait at least two years to sell off a further piece of the public’s stake, as its shares slowly recover.

The interest rate cut so keenly felt by the financial sector is also affecting savers and may even have a wider impact on everyday banking. NatWest has changed the terms and conditions for its 850,000 business customers, warning them that in the event of negative interest rates, it may have to start charging in order to accept deposits – meaning that money held in a bank account would slowly decrease in value over time.

Changes in consumer habits are also transforming retail banking: the number of customers visiting banks in person has declined, while the mobile banking explosion continues apace. The trend is resulting in branch closures and job losses on the high street, with Lloyd’s alone set to axe over 10,000 posts between 2014 and 2017, even while recording healthy profits.

But the most worrying forecast in banking is the suggestion that the reckless, profit-at-all-costs culture which led to the financial crisis still reigns supreme. Kweku Adoboli, the so-called “rogue trader” who lost UBS £1.4 billion and was found guilty of fraud (and has since apologised for his actions), has warned that investment banks have not learned the necessary lessons from the last crash. Adoboli told the BBC: “I think the young people I've spoken to, former colleagues I have spoken to, are still struggling with the same issues, the same conflicts, the same pressures to achieve no matter what. And this goes back to the structure of the industry. People are required to take risk to generate profit, because yields in the industry are consistently compressed. And if investment banks continue to chase the same level of profitability as they have in the past, the only way to generate those profits is to take more risk.”

And the regulators are arguably not helping the situation. Former Chancellor George Osborne forced out Andrew Wheatley, the chief executive of the Financial Conduct Authority (FCA), after the Conservatives won the May 2015 general election; the City had complained about Wheatley’s tough stance, while Osborne said it was time for a new deal and an end to blaming the banks for the financial crisis. Under new chief executive Andrew Bailey, the FCA has taken a markedly lighter-touch approach to regulation, with a sharp decline in the number of fines issued in the past year.

Amazing M&A

It has been quite a year in the world of corporate deal making. Among the biggest acquisitions was Microsoft’s purchase of LinkedIn for £18 billion, giving the software giant unfettered access to the world’s largest professional social network. Elsewhere, UK-based microchip designer ARM was snapped up by Japan’s Softbank, one of the world’s largest technology companies, for an eye-watering £24 billion.

In the cosmetics sector, Revlon announced the purchase of Elizabeth Arden in a £611 million deal that unites its own beauty and hair colour products with its rival’s anti-ageing creams and celebrity fragrances. And in big pharma, Pfizer moved on from the collapse of its merger with Allergan by acquiring Anacor, a smaller US pharmaceutical company which specialises in anti-fungal treatment, for £3.6 billion.

There were also major changes in the food and drinks industry, as iconic doughnut purveyor Krispy Kreme was bought by JAB Holdings, the owner of Kenco Coffee, Douwe Egberts and designer shoe firm Jimmy Choo, for £935 million. The Peroni and Grolsch lager brands changed hands too: both were sold to Japanese beer brand Asahi by AB InBev as part of the latter’s takeover of SABMiller.

That said, it wasn’t all plain sailing this year. One of the biggest scuppered deals was in the telecommunications sector, where the attempted £10.3 billion purchase of O2 by CK Hutchison, the owner of Three, was blocked by European Commission on competition grounds. The deal would have left just three major mobile phone network operators in the United Kingdom, resulting in reduced customer choice and higher prices. EU Competition Commissioner Margrethe Vestager said: “The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses. We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality.”

CK Hutchison is reportedly considering a legal challenge to the decision.

Airlines flying high?

The pressure in the aviation industry has intensified as customers are increasingly deterred from flying due to fears of terror attacks and political volatility around the world, while the drop in the value of sterling has increased fuel costs. The budget airline market has borne the brunt of the pain, with EasyJet predicting further turbulence and Ryanair responding aggressively, dropping ticket prices by 7% in May to lure rivals into a price war.

Suits, cigarettes and bunnies

No, not the dubious ‘glamour’ of Hugh Hefner’s 1970s Playboy heyday, but rather the big-ticket litigation that has come through the London courts in the last year. In May the tobacco lobby lost its High Court challenge against the new statute requiring cigarettes to be sold in plain, unbranded packaging. While tobacco firms have signalled their intention to appeal, the case has been held up as a landmark victory for public health over the interests of the tobacco industry. However, the plain packaging policy may have unintended consequences, with critics suggestion that the new rules will help criminals and have sweeping ramifications for intellectual property. Chris Snowdon, head of lifestyle economics at the Institute for Economic Affairs, said: “Plain packaging will inconvenience retailers and fuel Britain's already vast black market. Moreover, now that the government has abolished trademarks for one industry, single-issue fanatics will be lining up to do the same to alcohol, food and soft drinks. It is a folly on every level.”

Elsewhere, a US judge ruled that a court battle between battery makers Duracell and Energizer over pink rabbit mascots can effectively run and run (sorry). Back in 1992 the two companies agreed to divide rabbit rights between Europe and the United States, with Energizer enjoying the exclusive right to use a pink bunny in its US advertising and Duracell doing the same in Europe. However, Energizer is now claiming that its rights have been violated because US stores importing Duracell batteries from Europe are allegedly displaying the offending mammal on packaging. In the ongoing suit, which Duracell failed to have dismissed, Energizer maintains that the Duracell rabbit is confusing customers and damaging its business; while for its part Duracell argues that it cannot help the presence of its European mascot on imported batteries. The bunny wars rage on…

The unacceptable face of capitalism

The retail sector has been rocked by scandal in the last year. Department store chain BHS collapsed following what MPs described as “systematic plunder” of the business and employees’ pension pots by former owners Sir Philip Green, Dominic Chappell and their respective “hangers-on”. After taking hundreds of millions of pounds from BHS to personally enrich himself and his family, severely weakening the business, Green sold it to Chappell, a serial bankrupt and “wide boy”, for just £1 in March 2015. Chappell also spent his tenure sucking millions from the company and just over a year later, BHS finally succumbed and went into administration with a £571 million deficit, jeopardising the pensions of some 20,000 staff members. It was alleged that Green had done most to cause the black hole by refusing to provide sufficient funding over the 15 years that he headed the business, despite pleas from the fund’s independent trustees.

Parliament’s Work and Pensions Committee released a damning report on the fiasco, condemning the actions of Green and Chapell as “the unacceptable face of capitalism”. Chairman Frank Field went further on Green: “[His] reputation as the king of retail lies in the ruins of BHS. His family took out of BHS and Arcadia a fortune beyond the dreams of avarice and he’s still to make good his boast of ‘fixing’ the pension fund. What kind of man is it who can count his fortune in billions but does not know what decent behaviour is?”

Green defended his position, arguing that in fact he had put hundreds of millions of pounds into BHS during his ownership; but MPs concluded that the collapse of the business was due to “bad decisions and personal greed”. The case has led to two new investigations into how corporate governance of private companies is regulated and whether there should be more proactive regulation of pension funds.

Meanwhile, an undercover investigation by the Guardian and subsequent action brought by trade union Unite revealed appalling employment practices at Sports Direct. MPs likened conditions – including underpayments, fines, refusal of “excessive” toilet breaks, childbirth on shift, harsh discipline and sexual harassment – as akin to those of a Victorian workhouse; although they might just as easily have compared them to the market practices and lax employment laws which permit Bangladeshi and Vietnamese sweatshops today. Mike Ashley, the billionaire owner of Sports Direct, admitted that the conditions which have persisted on his watch are unacceptable and pledged to make necessary changes, but the case has highlighted serious questions about our wider economic and employment models.

In the developing world, the proliferation of sweatshops relies on the abundant supply of cheap labour, as well as a coercive environment in which unions are forbidden and inspection agencies are underfunded. Alarmingly for human rights groups, some of these conditions are once again in evidence in the 21st century United Kingdom, with the rise of zero-hours contracts, job insecurity and continual attacks on trade unions by the government and businesses creating an environment that is ripe for employee exploitation. The goings-on at Sports Direct broke both employment law and human rights legislation, but nonetheless persisted until they were exposed by journalists. Is this an unfortunate but necessary price to pay to compete in today’s global economy, or is a shift in economic priorities and a strengthening of employment rights needed in the so-called ‘gig economy’?

What lies ahead?

Unprecedented challenges are on the horizon in the short, medium and longer term. Europe is struggling to deal with the biggest migrations since the Second World War, and the number of people forced to leave their homes will only increase if global temperatures continue to rise at their current rate. Much of the debate in the wake of Brexit is centring on how to create economic growth, as well as the nature of important new trade agreements with the European Union – complicated as that is by the conflict on freedom of movement – and other countries. However, questions about climate change and the need for a green energy revolution that can support the 21st century economy, providing better quality of life for all, remain unaddressed. Today’s trainee lawyers will play a crucial role in attempting to find the answers in the years ahead.

This article is from Best in Law 2016 magazine. Free copies of Best in Law 2016 will be available at university law departments and careers services from mid-October. Pick up your copy for more commercial and legal insight, plus profiles of award-winning firms.

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