Competition for Sustainable Innovation: The Ericsson-Huawei case

December 7, 2020

A surprising news item hit the headlines of the telecom industry mid-November of 2020. That is, following the earlier actions of the US and the UK, Sweden barred telecom operators from using Huawei products in their 5G installations, but surprisingly, it was Huawei’s major rival Ericsson that spoke up against the ban. The CEO of Ericsson, Borje Ekholm, criticized the decision of the Swedish government as he felt that the ban violated the EU guideline that the need for national security has to be balanced with free competition. As he saw the ban as restricting free competition, he feared that innovation efforts will be slowed down eventually resulting in a delay of 5G delivery.

Ericsson as a competitor

This news hit the headlines because it is remarkable in a few ways. It was in 2012 that Huawei became the world leader in the telecommunication industry and they did so by overtaking the then leading company (in terms of sales revenue and net profit), which was Ericsson. Since then, Huawei continued its international development and today they employ more than 194 000 employees, operate in more than 170 countries and regions, and serve more than three billion people (excluding the US market). In the fiscal year of 2019 Huawei’s revenue reached CNY858.833 billion (US$122.972 billion) and CNY62.656 billion (US$8.971 billion) in net profit (in 2018 revenue reached CNY721.202 billion and CNY59.435 billion in net profit). They are currently leading the telecommunication industry, are second in smartphone sales globally and rank number 61 in the Forbes 500 list.

The major event that escalated the decision-making whether Huawei should be banned or not was without a doubt the arrest of the daughter of the founder Ren Zhengfei, who was the company’s CFO, in Vancouver, Canada. An international warrant, issued by the US government, argued that she violated US sanctions rules against Iran by letting Huawei do business with Skycom Tech – a company known to work closely with Iranian telecom firms (De Cremer, 2019). Since then the fact that Huawei’s founder, Ren Zhengfei, has a military background combined with international suspicions about Huawei’s supposed espionage activities led countries like the US, Australia, New Zealand and the UK to block local firms from using Huawei to provide technology for the installation of 5G mobile networks.

What Ericsson and Huawei share

Given the current international pressure on banning Huawei’s involvement in any 5G projects, it is remarkable that their major competitor speaks up on their behalf. Why is this the case and does this signal that both companies may have something in common when it comes down to understanding how innovation has to be promoted? In light of this question, the following quote of Ericsson’s CEO, Borje Ekholm, is an interesting one. He said: “I belong in that category that believes competition makes us on the longer term a better company. It may be painful shorter term but longer term it drives us to be more innovative and make better products for our customers” (Milne, 2020). The company Ericsson is thus clearly a big believer of the idea that competition in an industry is needed if one wants to make progress and innovate. It is competition that makes that each party will put in its best efforts. Huawei shares this philosophy as in its first two decades of existence, the company adopted primarily a competitive mindset to ensure they could survive among the international companies and state-owned (funded) enterprises present in China (De Cremer & Tao, 2015). Ren Zhengfei believes that it was the necessity to compete that Huawei gradually became a better service provider and thus drove directly the growth of his company.

But, what is very interesting is that both companies do not only believe in competition, but also in collaboration. In fact, when we listen to both the CEO of Ericsson and the founder of Huawei, we see that these are two companies that seemingly seem able to combine both competitive and cooperative urges with the goal to perform in better and more innovative ways. For example, Ekholm also noted that while Ericsson competed “heavily” with Huawei, they also collaborated on network standards. (Milne, 2020). And it’s not the first time that Ericsson and Huawei have found each other in light of a cooperative belief. In fact, the success that Huawei has enjoyed in Europe can be partly attributed to the way they developed cooperative relationships with their competitors, the most important one being Ericsson. When Huawei wanted to enter the EU market, EU officials initially wanted to investigate the anti-dumping act in relationship to Huawei’s products, but it were companies like Ericsson that ultimately stated that in their view Huawei was not dumping its products. It was this move that helped motivate the EU to allow Huawei access to the European market (Tao, De Cremer, & Chunbo, 2017).

Why cooperation and competition need each other

The tendency to combine two opposites (competition and cooperation) is clearly shared by both companies as the belief exists that without any competitors they themselves would also not exist because they would simply not grow and innovate anymore. As Ren Zhengfei once noted: “Huawei only exists because it has competitors”. Another reason that Ren Zhengfei often provides when it comes down to his perspective that cooperating with one’s competitor should be possible is the historical reference to the heroic tales of the Glorious Revolution that took place in England in 1688. Ren Zhengfei has a strong interest and passion for learning about historic events and one story that stayed with him was the overthrow of King James II of England by a union led by William of Orange in 1688. This event is referred to as the bloodless revolution because the victory of William of Orange was achieved without bloodshed. He is often quoted that it was this historical story that inspired him to embrace the idea that one can win and still be cooperative (De Cremer & Tao, 2015).

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About the Author

David De Cremer is Provost ‘s chair and professor in management and organizations at NUS Business School, National University of Singapore. He is the founder and director of the Center on AI Technology for Humankind at NUS Business school; which is a platform developing research and education promoting a human-centered approach to AI development. Before moving to NUS, he was the KPMG endowed chaired professor in management studies at Judge Business School, University of Cambridge. He is named one of the World’s top 30 management gurus and speakers in 2020 by the organization GlobalGurus and has published over more than 300 articles and book chapters. He is also a best-selling author with his book Huawei: Leadership, culture and connectivity” having sold more than one million copies. His newest book “Leadership by algorithm: Who leads and who follows in the AI era?” came out in print in May 2020.

References

De Cremer, D. (2019). Hard-Wired to survive in the UC-China trade war. The European Financial Review, August-September, 7-11.
De Cremer, D., & Tao, T. (2015). Leading Huawei: Seven leadership lessons of Ren Zhengfei. The European Business Review, September/October, 30-35.
Milne, R. (2020). Ericsson chief hits out at Swedish 5G ban on Huawei. The Financial Times, November 18. Retrieved from: https://www.ft.com/content/d0399dd4-8a65-4102-ba07-cd71a2d0d505
Tao, T., De Cremer, D., & Chunbo, W. (2017). Huawei: Leadership, culture and connectivity. Sage Publishing.

“Ordinary and lawful recruitment” or Unlawful team move- issues to consider

December 7, 2020

By Wonu Sanda and Merrill April

In recent months two global investment banks found themselves embroiled in a public English High Court legal battle, with almost £6million at stake, over the alleged team move of six employees from Stifel Nicolaus to its competitor, Jefferies International. Such tussles are not unusual in the financial service industry, where substantial investment in a skilled cohesive workforce and nurtured client relationships are the driving engine of the business.

It is no wonder then that when employees defect or are recruited en masse to a rival competitor, the business will be keen to ensure damage limitation. This may include mitigating against the potential risk of client business following closely after the employees. In this article we discuss the range of legal and practical responses at the disposal of an employer faced with a team move and what they can do to protect against a team move in the first place.

What is a team move?

A team move is when two or more people coordinate to leave a business to join a competitor or set up in competition with their former employer. The team can comprise of senior managers, junior colleagues and sometimes support staff, usually led by one or more main orchestrator(s).

It is theoretically possible for a group of employees to move to a new company legitimately and lawfully, if handled carefully. However, often a team move will involve a degree of covert coordination with other team members, the new employer and sometimes recruitment agents acting as intermediaries to facilitate the move. It may also involve employees seeking to unlawfully remove, retain and misuse the employer’s confidential information for the benefit of their prospective new employment. As a result, team moves often risk the departing employees breaching various obligations owed by them to their former employer, such that they, the new employer and potentially the recruiting agents could find themselves at the wrong end of court proceedings.

Responding to Team Moves – legal options

An employer who suspects a team move is in progress, may wish to consider whether they can bring claims against the offending employees or potential new employer to thwart the unlawful conduct in its tracks or at the very least mitigate the harm to the business. This may involve swift legal action, including:

seeking an injunction to force the employees to comply with their contractual restrictions and potentially prevent the team move from taking place until the relevant restrictions expire;
seeking a court order to stop employees who have already breached their obligations from soliciting or dealing with clients, recruiting further team members, or even from joining the new employer at all for a period of time (this is known as a springboard injunction and is aimed at preventing the team gaining an unfair advantage from their wrongdoing);
compelling the return of confidential information (delivery up);
claiming damages as recompense for loss suffered by the business; or seeking an account of profits (where fiduciary duties, as discussed below, have allegedly been breached).

However, in order to establish the basis for such claims the former employer will have to show that the team members have or may have engaged in relevant unlawful conduct. For employees this is likely to be based on actual or threatened breaches of their express contractual duties, often found in employment contracts. For example confidentiality clauses, which usually prevent employees from disclosing or misusing confidential information. This could potentially include the employer’s database of client information or requirements, technical knowhow, or a business plan which could be damaging in the hands of a competitor. An employee’s contract may also restrict them from working for or having any interest in any other business during the course of their employment, without the permission of the employer (albeit there is usually a small exemption for holding a minor passive investment).

Additionally, directors and senior employees often have express duties of good faith to act in the best interests of their employer in preference to their own interests. This may require them to disclose their knowledge of a threatened team move, a colleague’s attempt to divert business and possibly ‘self-incriminate’ by disclosing their own wrongdoing to their employer. Equally, employee contracts may include garden leave clauses, which can be relied upon by an employer to, amongst other things, keep impugned employees away from the office (or virtual office) during their notice periods; isolate them from any remaining flight -risk employees; and prevent them from accessing the company’s email and internal systems. Further post-termination restrictive covenants (discussed below) may form the basis of potential claims.

Even if an employee’s contract does not contain any relevant express terms, an employer may nevertheless be able to rely on implied terms as the basis of a potential claim. All employees are likely to have an implied duty of fidelity and a duty not to misuse their employer’s trade secrets either during or after their employment (potentially an employer’s proprietary algorithmic trading models or financial information, for example). For directors and senior employees an added layer of obligation may be implied in the form of fiduciary duties, which are typically reflected in the express good faith duties mentioned above and which requires undivided loyalty (such that any threatened competitive activity would need to be disclosed to their employer).

Importantly, as Jefferies International discovered, it is not just the employees at risk of being sued. The new employer (and possibly recruitment agents) may also face being joined as defendants to potential legal action if they are unlawfully involved in the team move. This may include claims including but not limited to, inducement of breach of the employees’ contracts, conspiracy and claims related to the misuse of confidential information. Prospective employers should therefore take advice on their positions and ensure they are aware of and do not turn a blind eye to any obligations and any enforceable restrictions owed by their newly recruited employees to their former employer.

Responding to Team moves – practical action

As well as legal action there may be a range of time-critical practical measures that an employer may wish to take to try to stop or quell the potential adverse consequences of a team move. A typical response will involve obtaining specialist IT forensic assistance to conduct a forensic analysis of an employee’s emails or electronic devices and potentially uncover relevant evidence of a team move, for example revealing emails or mass downloads of company information. The employer will need to carefully check their policies and procedures to ensure they do not breach any obligations owed to the employees in the process. If an employee is put on garden leave, as mentioned earlier, or on restricted duties (if permissible under their contract) that time may give the employer the opportunity to gather such evidence with a view to putting roadblocks in the way of a potential team move.

Many employers may also consider trying to ‘turn’ the decamping team (or certain key individuals) to persuade them to stay with the company, by offering increased compensation and benefit packages, offering promotions or promising to address other concerns. Of course, many employers will also wish to prioritise safeguarding clients too, which may involve a ‘love-bombing’ campaign to bed down key relationships and deter clients from leaving for a competitor. Further, giving prompt written notice to employees and their potential new employer, of their obligations, restrictions and the consequences of breach may deter them from attempting any potential wrongdoing.

Prevention is better than cure

It is preferable for employers to consider and include well drafted restrictive covenant terms in their employees’ contracts of employment, as a protective measure against any potential team move, well in advance of needing to rely on them.

Relevant restrictive covenants can include terms to prevent employees for a period (typically up to 12 months) from joining a competitor, soliciting or dealing with colleagues and clients, and moving to a company that an ex-colleague has recently joined (an ‘anti-team move’ provision). Importantly however, employers should ensure they take advice and tailor the restrictions to their business and the employee, as only restrictions which protect a legitimate business interest (such as trade secrets, business connections and workforce stability) and which go no further than is reasonably necessary to protect those interests will be valid and enforceable. Employees and employers in some areas of the financial industry will no doubt be familiar with such restrictions, as their entitlements to equity benefits and incentives can often be conditional upon compliance with them. If an employee breaches their restrictions on departure they could therefore be at risk of the employer forfeiting their valuable benefits. If the recruiting employer offers to replace these lost benefits and incentives, additional issues arise as mentioned above.

Conclusion

For many businesses a team move, whether spearheaded by a predator competitor or resulting from an in-house uprising, can feel like the house has been gutted, leaving behind an empty shell. It may result in loss of talent, a new competitive threat and may ultimately be damaging for the business’s bottom line. When such circumstances occur an employer may have a range of legal and practical measures open to them to stop the team move train running away, apply the brakes and protect the business. But they will need to act quickly, and prudently and would be well advised to take specialist legal advice.

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About the Authors

Wonu Sanda is an Associate specialising in partnership and employment law. She has advocacy experience in employment tribunal proceedings and regularly works with Partners to advise on a range of issues in employment and partnership disputes and exits, including enforceability of restrictive covenants in traditional partnerships and LLPs, discrimination, whistleblowing and jurisdictional issues.

Merrill April is a Partner specialising in employment and partnership law. She have developed an international employment law practice which covers both contentious and non-contentious matters and advise both senior executives and employers across a diverse range of sectors such as financial services and technology, and consisting of both listed and private companies. She advise UK PLCs on hires and departures at board level, and on contractual and other issues that arise throughout the employment relationship, including in relation to whistleblowing and data protection. She is an instrumental in setting up employment and HR structures to support businesses, and She work closely with HR consultants and in-house HR teams, finance directors and in-house lawyers to achieve this objective.

Home working or office working? There’s another option

December 7, 2020

By Michael Cockburn

Right now, every month brings with it another multinational company affirming their commitment to permanent remote work, from Twitter telling their staff that they can work from home “forever” to Pinterest cancelling their almost half-a-million square-foot lease in San Francisco. At the time of writing, the most recent public revelation was from Standard Chartered, which announced that more than half of their 85,000 employees would be allowed a choice of workspaces, including an option to “work near home” in convenient flexspace, with plans to roll this out to almost all of their staff by 2023.

This decision was dramatic for a couple of reasons. Firstly, unlike many other companies, Standard Chartered isn’t just giving staff the opportunity to work from home: they are the first to announce a massive use of flexspace. Secondly, unlike the many Silicon Valley companies announcing shake-ups to their real estate portfolio, banking has traditionally been far more cautious about remote work.

Over the last nine months, many column inches have been devoted to the benefits of remote work. But perhaps less attention has been paid to how this has specifically impacted the financial services industry. Yet the changes within this industry have been among the most significant. Prior to COVID, only 17% of finance and accounting professionals in the UK worked remotely once or more a week – half the national average.

Standard Chartered isn’t just giving staff the opportunity to work from home: they are the first to announce a massive use of flexspace.

Despite this previous reluctance, it has been adopted wholeheartedly by many in the industry – and it looks set to permanently change the way they work: in a recent PWC survey, 7 out of 10 financial services employers in the US said that they anticipated that 60% of their workforce would work remotely for at least once a week.

It’s also something that employees want: 86% want to continue to work from home for at least part of their working week post-COVID.

There are a number of reasons why remote work has been so enthusiastically adopted by the industry. For employers, they have discovered the financial benefits of having staff work from home. The majority of bosses (69%) say their teams are as productive or more productive than they were working in an office – leading many to question exactly whether expensive offices are really worth the money.

But this isn’t just about a better bottom line. At a time of great employment uncertainty, for some companies it can be a case of choosing between people’s jobs and pricey real estate: according to the Financial Times, Virgin Money is considering whether its back office staff should work from home most of the time, which might help save jobs when they shut offices in Leeds and Norwich.

Then there are the environmental benefits to consider. Most businesses are now being judged on their environmental commitments as well as their financial success. While financial services is not a polluter on the scale of some industries, being an employer to many people – many of whom have to make long commutes to a centrally located office – means that the sector indirectly contributes to a lot of pollution and carbon emissions. Encouraging staff to work from home dramatically reduces a company’s carbon footprint.

For employees, the commute is one of the main reasons they want to avoid returning to the office – and with good reason: the average British commuter spends 492 days and £135,871 on commuting over the course of their working life. There are several other financial benefits to remote work, as employees save money on everything from overpriced sandwiches to new work suits.

Tellingly, the second reason that financial services staff want to keep working remotely is so that they can work more flexibly, according to a Deloitte survey. More than 40% of those who have enjoyed working from home said they had valued the increased flexibility. Overall, working from home can greatly boost employees’ wellness, leaving them more time for friends, family and hobbies, as well time for eating, sleeping and exercising, which has a knock-on positive impact on their physical and mental health.

However, as anyone who has worked from home over the past year can attest to, it isn’t all home cooked family lunches and long walks with the dog. As work has become a physical part of the domestic sphere, employees have struggled to clock off at the end of the day and to keep their work and personal lives separate. For all its issues, the commute did signal a physical and mental transition to and from work.

Employees have struggled to clock off at the end of the day and to keep their work and personal lives separate.

This feeling is backed up by the evidence: the National Bureau of Economic Research has found that the average working day has increased by 48.5 minutes during lockdown – equivalent to two whole extra working days a month. When people can’t show they are working through their physical presence in the office, they are instead judged on the work they have produced, perhaps leading them to put in additional hours.

In addition, many financial services staff say that the division between work and life has grown blurrier, with 1 in 4 saying that if they continue working from home, they will need clearer rules on when people are supposed to be working.

All of this has implications for staff burning out and for employees struggling with mental health issues.

This situation can be compounded by the fact that staff may be struggling without the structure of the working day or the social interactions with colleagues. Psychologists have found that the number of interactions we have a day predict how strongly we feel a part of a community. Without this, it’s easy to struggle with loneliness and isolation.

Added to this is the fact that work from home disproportionately affects certain groups, most strikingly those early in their careers and parents. Younger workers are more likely to live in flat-shares where they might not even have space at the kitchen table to work, let alone a dedicated home office. They may be competing with others for internet access or private space to make calls. This impacts on the quality of their work as well as their individual happiness. And this is no small problem: in 2017 almost one third of American adults lived in shared households, defined as a household with two or more adults who are not in a relationship.

In addition, those early on in their career are most likely to need the office for the informal relationships that are developed there. Working alongside colleagues is how they learn about the company culture and how to do their job; it’s a lot easier to ask questions to the person sitting beside them than by sending off an email. Above all, in-person interactions are the best way to develop a network of contacts that will help them as they progress through their career.

Meanwhile for parents working from home can mean juggling parental responsibilities and a full-time job. This is particularly pronounced for those with young children. Although cute Zoom interruptions by kids too young to know better became something of a hallmark of lockdown, this is not a sustainable situation for working parents. The burden fell disproportionately on working mothers, with the Office of National Statistics reporting that they were only able to get one hour of uninterrupted work done for every three uninterrupted hours their partner worked. This is a particular problem for the financial industry where gender equality is still a long way off: women make up only 17% of Financial Conduct Authority approved individuals, a figure that has shifted little in the last 15 years. By leaning into home working for all, companies are a risk of only further exacerbating the gender imbalance.

Finally, remote working makes it difficult for everyone to collaborate. No matter how productive you might be working by yourself at home, everyone can agree that meetings of any degree of complexity are much harder through the medium of video call. If only for this reason, offices need to be a part of the world of work going forwards as a space where people can meet and collaborate.

The obvious solution to this problem is hybrid working, whereby employees work from home one or two days a week and in the office the rest of the time. This allows colleagues to come together to collaborate, as well as have an opportunity for social contact. Physical workplaces help people to restore a sense of work-life separation and unplug as they leave the office.

Yet this solution does not solve the problem of those who struggle to work from home at all, such as working parents, early stage career employees or those who need a physical office for their mental health.

Physical workplaces help people to restore a sense of work-life separation and unplug as they leave the office.

All of which brings us back to Standard Chartered. Rather than just rely on the hybrid model of work from home and a central office, they are also giving employees the option to use “near-home offices” by working with flexspace providers. Flexible workspace means that the company does not have to maintain or run the space, but can instead rent as much or as little space as they need, even down to a single office work desk for one employee.

Like moving to a working from home model, this will enable Standard Chartered to end some of their longer-term real estate leases as they will require less central office space. This reduction in costs is likely to save money, even with the costs of flexspace memberships for staff.

However, it will also solve many of the issues with working from home, while retaining the advantages.

Using flexible workspace enables teammates to meet up in a convenient workspace, rather than all having to travel to the main office if they want to work together.

It also provides an alternative to employees who don’t like or can’t work from home, while at the same time eliminating the hated commute, saving employees time and money and reducing carbon emissions.

As many companies rush to downsize their office space and focus on work from home, they prioritise short-term savings while failing to think about the longer-term impact of this way of working. Companies that don’t address these problems now risk storing up issues for themselves in the long run.

Standard Chartered’s use of flexspaces is not just a compromise between using corporate headquarters and work from home. This represents a genuine alternative to both of these ways of working, taking the best of both options, while eliminating the negatives. Above all, it puts staff at the centre of the decision-making process: they are able to choose the workspace that works best for them.

The financial services industry is made up of many different roles, sectors and types of people, at different stages in their career. If working from home for the last nine months has taught us anything, it is that people live in very different circumstances and will react very differently to working from home. We should now apply this learning and rather than trying to enforce a one-size fits all approach, give employees options to suit their many and varied needs. Standard Chartered’s new way of working shows one way of providing this choice to its employees while still benefiting from the cost savings of remote work. It’s not the only solution and there are a raft of options, from turning corporate headquarters into hubs for meetings, to using on-demand desk booking tools.

As remote work continues to be a part of the financial services landscape, it’s likely we’ll see many other companies following in Standard Chartered’s footsteps and choosing a third way.

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About the Author

Michael Cockburn is the co-founder and CEO of property technology company Desana. Desana is partnered with some of the world’s largest flexible office space providers, commercial property agents, and workplace consultants to respond to the evolving needs of enterprise companies’ real estate strategies.

The Return of HMRC Preference

December 7, 2020

By Tim Carter and Helen Martin

After a year in which numerous businesses have relied on various forms of government support to stay afloat, many will be hoping that 2021 offers the chance to emerge from this period and resume some degree of normal trading. Certainly, the coming year will be make-or-break time for those businesses that have been most impacted by the pandemic – and as government assistance is wound back, the demand for working capital funding is likely to be high.

It is against this background that the re-introduction of ‘Crown preference’ comes into force. Effective as of 1 December, this brings in preferential treatment for HMRC in respect of certain tax debts when a company enters administration or liquidation, and is a major change to the order of priority in which creditors are paid out in a company’s insolvency. The key change is that HMRC will now be paid out ahead of lenders with floating charge security and all unsecured creditors.

The direct consequence of this will be a significant reduction in the amounts available to distribute in a company’s insolvency to creditors – both to secured floating charge lenders, and to unsecured creditors such as trade creditors and customers. It raises fears that the indirect outcome of the changes could be to reduce the availability of floating charge lending to businesses that may be struggling to obtain funds elsewhere, while also negatively affecting the likelihood of business rescue.

What has changed?

In a company’s insolvency, the order in which creditors are paid out of the company’s assets is set by legislation, and a lender advancing finance will seek to minimise its insolvency risk by ensuring that it comes as high up the ladder as possible. Typically (in England and Wales), a lender will take a fixed charge in relation to any assets over which the borrower does not need to have day to day control – such as plant or equipment. If the company were to go into an insolvency procedure, the lender would be entitled to the proceeds of sale of any fixed charge assets before any other creditors were paid out.

However, a fixed charge by itself may not be sufficient to secure all of the funding needs of a business, and in particular small-medium enterprises often have limited fixed charge assets. The lender will therefore also typically take a ‘floating’ charge over the remaining pool of the company’s assets, including items such as stock in trade and book debts.

Prior to the changes brought in on 1 December, only the expenses of the insolvency, limited preferential debts, and a ring-fenced amount for unsecured creditors (the “prescribed part”) would be paid out in priority to the floating chargeholder [see table below].

However, the Finance Act 2020 has made a substantial change to the pre-existing order of priority. HMRC now ranks as a ‘secondary’ preferential creditor in relation to certain debts including VAT, PAYE, Employee NICs and construction industry scheme deductions. In respect of any arrears relating to these taxes, HMRC will be paid in full before the floating chargeholder receives any return from the realisation of floating charge assets [see table below].

It is worth noting that not all debts owed to HMRC will receive preferential status – HMRC remains an unsecured creditor for taxes directly related to the business, such as corporation tax and employer NICs, and amounts due in relation to penalties and interest. Notwithstanding this, the effect of the new class of secondary preferential debts is to reduce the value of a floating charge dramatically. In cases where an insolvent company has built up substantial tax arrears, little or nothing may remain for distribution after the debt to HMRC has been paid – and the floating chargeholder and unsecured creditors will be left out of pocket.

The repercussions of this re-introduction of Crown preference on business finance are exacerbated by its retrospective effect. The new class of preferential debts takes precedence not just over floating charges created after 1 December 2020, but over floating charges whenever created. It therefore significantly elevates the risk level in relation to floating charge security which may have been taken some time ago, and well before the changes made in the Finance Act 2020 were on the policy radar.

Furthermore, it does not apply only to tax arrears built up over a specified period (for instance in the year prior to insolvency) but to all historic tax debts in the specified classes. The net result is that not only new lending, but also existing business funding is affected by what could be potentially a large reduction in floating charge realisations.

What challenges does this present for businesses?

The Government rationale behind this policy is that taxes which employees and customers have paid to businesses in good faith should be used to fund public services, rather than be distributed to creditors. The intention is to capture taxes which have been collected by a company on behalf of HMRC, on the grounds that the funds were never truly the property of the company to use in meeting payments to creditors. In its 2018 Budget briefing, the Government suggested that the increased tax revenue attributable to Crown preference could raise up to £185 million annually for public services. The Government has stated that this represents a small fraction of the SME lending market in the UK and therefore should not have significant impact on access to finance.

There can be no doubt about the urgent need for public funds at the present time. However, there are widespread concerns over the challenges posed for businesses and lenders by the elevation of HMRC’s status on an insolvency. The unfortunate outcome of the government’s decision is that the floating charge finance, relied on by many companies, may become harder to obtain or be subject to more onerous terms. Existing floating charge facilities could also be reduced in response, pushing some borrowers into default.

The businesses likely to suffer most are also those who are most in need of assistance, notably small to medium enterprises – particularly in struggling sectors such as retail, which rely heavily on floating charge lending to purchase stock. Such businesses may have benefitted from VAT deferral and possibly defrayed other tax debts (with HMRC’s agreement) to see themselves through periods of lockdown. Unfortunately, they could now find that this build-up of tax liabilities means that they struggle to access lending on reasonable terms, just as they seek to restart their business and adapt to new trading realities.

Lenders will have to assess both new and existing finance and security structures, on the basis of an evaluation of the borrower’s tax position potentially going back several years. This will impose an increased cost and administrative burden for lenders as they seek to gain a clear picture of a borrower’s liabilities in relation to the new class of preferential debts. No doubt the cost of such due diligence will ultimately be added to the lender’s fee, whilst the time involved in doing so could also delay the agreement of loan facilities. Meanwhile, pricing of lending secured by a floating charge is also likely to increase, to take into account the risk of floating charge realisations being reduced – or even wiped out altogether – by HMRC’s preference claim.

Will this cause more insolvencies?

Insolvency figures for the past few months have been artificially suppressed due to government support measures and restrictions on the ability to issue statutory demands and winding up petitions. Although further extensions of at least some of these measures into next Spring are possible, indeed likely, it is inevitable that we will see an uptick in insolvencies as and when they are eventually lifted.

The return of Crown preference will not itself be the cause of these company failures. However, pressure on directors will undoubtedly be increased if they face a funding shortfall, at a time when their company may already be struggling and facing an uncertain outlook. If lenders are unwilling to lend with the reduced benefit of the floating charge, then, in the absence of an alternative, this could lead to more insolvencies.

Meanwhile, the ability to rescue businesses, through procedures such as administration and company voluntary arrangements (CVAs), could be impacted. Increased insolvencies may rebound on other small businesses such as suppliers, particularly as the likelihood of there being any dividend for unsecured creditors is severely reduced.

Floating charge funding is often a key source of rescue finance, and lenders might now be less willing to lend in distressed situations, making it harder to rescue struggling companies. Meanwhile, CVAs, which are often used to restructure a company’s debts, will become difficult to achieve with HMRC as a preferential creditor, as it will not be possible to compromise their claim without their consent (which is unlikely to be given). Meanwhile unsecured creditors, who will be set not to receive any return due to HMRC’s prior claim, may simply not engage with the process as they will see little return. The consequence may be more companies falling into liquidation, as it is not possible to rescue them through other procedures.

What are the options available to companies?

UK Finance has estimated that the amount of floating charge financing available to companies will be impacted to the tune of £1 billion, which in real terms could represent a large number of businesses seeking alternative methods of obtaining funding. However, it may be that predictions of a large-scale funding crisis are overstated. Lenders have a number of other methods of protecting themselves from a borrower’s insolvency, which will no doubt be relied upon now that the value of their floating charge is compromised.

One consequence of this is that, as well as seeking to secure assets by way of fixed charge, assignment or trust so far as possible, lenders are likely to look increasingly to corporate and personal guarantees. Directors should be aware of the risk to their personal assets, given the heightened likelihood of any personal guarantee now being called upon in an insolvency.

Alternative forms of working capital financing exist which may ameliorate the funding gap – for instance the use of invoice discounting lines and invoice factoring. More complex structures may also be explored in relation to larger loan facilities, for instance separating liabilities or assets into ring-fenced special purpose vehicles (SPVs) within the group. However, the cost and complexity of such structures mean they are unlikely to be employed in relation to standard small to medium business loans.

A price worth paying?

It may be that, through alternative methods of securing corporate borrowing, the impact of Crown preference on company funding can be ameliorated. However, for companies already on the brink of insolvency, it is likely that it will severely impact the business rescue culture that has developed in the UK since the Enterprise Act of 2002 (which removed the old Crown preference).

With challenging times ahead for all, the unintended results of the introduction of HMRC preference may well prove to outweigh the relatively small boost to the public purse. It is hoped that flexibility and innovation in the lending industry will reduce the effects, but at present, it seems that the costs to business could be high.

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About the Authors

Tim Carter advises on all aspects of restructuring and corporate and personal insolvency, including distressed business sales. His clients range from insolvency practitioners, corporates, stakeholders and other investors to directors and individuals. He has particular expertise in matters involving insolvency litigation.He joined Stevens & Bolton in 1995 as a trainee and initially qualified into the dispute resolution team, specialising in insolvency litigation. He led the firm’s cross-practice insolvency team in 2007 and became a partner in 2010. He currently (together with David Steinberg) co-heads the restructuring and insolvency practice.

Helen Martin is an Associate in the Restructuring and Insolvency team at Stevens & Bolton LLP. Having qualified and spent her early career in the restructuring and insolvency team at Clifford Chance. She later joined Sidley Austin as part of the insurance restructuring team. As well as general insolvency and restructuring experience, she has broad restructuring, corporate/commercial and regulatory experience in the insurance industry, particularly dealing with discontinued and legacy business.

Getting Your Business Ready To Withstand The [NEXT] Recession.

December 5, 2020

By Kanayo Okwuraiwe

It is a fact of life that recessions will occur every now and then, either on a national or global level. Thankfully, modern-day economists have come up with fairly reliable methods of determining the probability of a recession occurring or not in an economy. Perhaps the only uncertainty about them is the intensity with which they will occur and how long they will last.

Some American economic trends and authors have opined that there is likely going to be a recession by the end of 2021. While the US economy appears to be on a rebound from the economic lockdown that many states went into at the start of the COVID-19 pandemic, a popular saying tells us that things aren’t always as they appear.

The fact of the matter is that stock markets are very volatile, and they can sometimes signal an impending recession. There is currently also a trade war between the two largest economies in the world, while there is a threat that the EU might soon join that fray.

There are also the uncertainties that hang in the air regarding the results of the US general election, and perhaps worst of all, is the fact that the pandemic is still very much with us and there are no guarantees that subsequent lockdowns will not be imposed. Any of these situations, individually or collectively, including other unforeseen negative events that are yet to happen, can easily become a recipe that triggers a recession.

The Great Recession of the late 2,000s greatly affected businesses and it safe to assume that the next one will do the same. In preparing for the next recession which is sure to come, small businesses, in particular, should start now to look into potentially trying to reduce its effects as much as possible, by strategizing and planning for that eventuality. To better understand what the looming recession means for business owners big and small, let’s take an in-depth look at what effects a recession has on businesses.

Effects Of a Recession On Businesses.

Small businesses usually experience setbacks that take them a long time to recover from during and after an economic recession. Perhaps because, unlike larger corporations, they usually don’t have the financial muscle and other resources to help them weather the storm.

However, over and above the immediate and direct negative impacts of a recession on a small business, there are often the longer-term and secondary effects that affect not just businesses, but the communities and families that house and own these businesses. These might include a deferment of educational achievements, an increase in poverty and personal debt, an increase in crime, personal bankruptcies, among others.

Some of the more impactful effects of a recession on small business include:

Reduction in sales revenue
Reduction in demand
Freeze in hiring and/or potential reduction in staff
Marketing constraints

During a non-recessionary period, some of the challenges that a small business might face include things like delayed invoice settlements, money that gets tied up in inventory, operational expenses, and more. During a recession with a slowdown in business activities, all these challenges and their effects obviously get exacerbated, which, if sustained, can make it difficult for the business to stay open.

The good news is that while there is nothing that a business can do to prevent a recession in the economy, there are things that they can do to potentially reduce the negative impact that such a recession can have on their business. If you cannot pay back a business loan interuption loan scheme, there are services to help you make ends meet.

Helping Your Business Prepare For The Next Recession.

1. Maintain and Nurture Business Relationships: The business relationship that you have with suppliers, creditors, and customers can be crucial in seeing you through the downturn of an economic recession. From relying on your loyal customers to keep patronizing your business through thick and thin, to earning the trust of your suppliers and creditors to the point where they would be willing supply you with the needed stock, raw materials, or finance when you most need it are just some of the things that can lessen the pain of a recessionary period.

Honesty and transparency, good communication and personal relationships, great products, and customer service, are just some of the necessary tools that can be used to make this happen.

2. Protect Cash Flow: The lifeline of any business is its cash flow. Preparing and staying on top of your cash flow projections, being frugal with business expenses as much as is possible, ensuring that customers meet their debt obligations to your business, while also building up a healthy cash reserve are just some of the things that can be done to ensure a healthy balance sheet during the time of plenty. This, hopefully, will give you a fair amount of buffer to withstand the lean times of recession when it comes around.

3. Marketing: One mistake most businesses make during a recession is cutting down on their marketing. This is perhaps the opposite of what you should be doing. On the contrary, several schools of thought and well-informed thought leaders have opined that such periods calls for a stepping up, or at least maintaining your marketing efforts.

Consumers will usually be looking to make informed changes to their buying or spending habits during an economic downturn. Investing in marketing that puts your products and services in front of them as capable of meeting their needs at such a critical time makes the most sense.

Also, there is also the risk that stopping or reducing your marketing provides an opportunity for your competitors to step in and fill in the gap. This is an advantage that they will potentially enjoy long after the recession has ended.

4. Diversify Your Business: Diversification is one of the cornerstones of any successful business. Whether in times of economic boom or bust any business that is able to master this art has a higher chance of success than not. The diversification of the revenue stream of the business can be especially important during a recession and can sometimes be the difference between the business staying afloat or having to shut down.

5. Avoid Unnecessary Expenses/Keep Debt to a Minimum: It has often been said that debt can sometimes be a good thing and for the most part this is true if that debt is managed properly and used constructively.

Debt can be used to grow a business and during an economic boom and this can be beneficial to it. However, if and when an economic recession comes along and your business has a rather high and unsustainable debt profile, it can easily spell doom for your business when your creditors come calling and you are unable to service your debt.

In such situations, while your business may have an ‘escape’ route if you have gone through the process of forming an LLC or any other corporate entity and, therefore, might have the option to file for business bankruptcy, it should be noted that there are instances where a corporate veil will be pierced and you may personally be held liable for any debt the business owes, more so if they have been personally guaranteed by you.

Similarly, cutting out unnecessary business expenses means that these monies can instead be reinvested into the business to increase sales or can be used to build up its cash reserves, both of which can make a world of difference during a recession.

6. The Workforce: Many business owners who have experienced it will tell you that there are few things worse than having to layoff employees who depend on you for their (and their families’) livelihoods. And yet, this is exactly what you may have to do during a recession if your business has not done many of the things spoken about in this article and anything else you can do to help you stay afloat during such times.

Perhaps the first thing that needs to be done to reduce the chance of this happening is to ensure that your workforce is always kept at an absolute minimum. Just because times are good and business is booming is no excuse to go on a hiring spree.

Hire new staff only when absolutely needed, and in many cases, you might find that you will be better served by getting your existing employees to take on more roles, training them for these new roles, and paying them accordingly, rather than hiring new staff.

And if you must increase your workforce, perhaps first consider hiring freelancers or contractors instead of taking on full-time employees. Freelancer platforms like Upwork and Fiverr have made finding such people significantly easier.

Doing this will keep your staff levels at a more manageable level and, consequently, when leaner recession times come around, you will not have an unnecessarily bloated staff level that you might have to let go to help the business stay afloat.

Also, whether you hire freelancers or full-time staff, always ensure that any employment contracts that they sign, and in fact any contracts that are signed between your business and any external parties are looked over by a good and experienced business lawyer to ensure that you would not be inadvertently putting your business in trouble.

In Conclusion

While there are no guarantees that if taken, these steps will ensure that your business will not go under as a result of a recession. What they do is ensure that it has a higher chance of surviving the negative effects of the downturn.

Following these steps will help to strengthen your business upon the looming or any other future recession. The stronger your business, the fewer risks you will have to endure during the economic downturn. It’s not all doom and gloom, however, considering that the United States has been on the track of growth for the past six years. Since 2009, the unemployment rate in the US dropped from a high 10% to an impressive 5.9%. The United States stock market is on a continuous high, and interest rates are significantly lower. The wise option, when threatened by talks of a possible recession, is to prepare for the unprepared.

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About the Author

Kanayo Okwuraiwe is the founder of Telligent Marketing LLC, a digital marketing company that provides lawyer SEO services to help law firms grow their practices. Connect with him on Linkedln.

What is the Foreign Earned Income Exclusion for Americans abroad?

December 5, 2020

When you are an American citizen living abroad, there are many adjustments you have to make. Of course, you’ll need to get used to the language, traditions and culture of the country you are living in, but you’ll also need to align your finances with both your host country and the United States of America, including filing a US federal tax return.

The U.S. government has strict filing requirements relating to foreign investments, bank accounts and on global income. That’s because as an American citizen and taxpayer, you continue to have obligations to the U.S. after you moved abroad. Many of these requirements are not difficult to comply with, but you do have to be knowledgeable about them so you don’t find yourself in hot water down the road. Non-compliance can come with strict monetary, civil and even criminal consequences.

The majority of Americans living abroad, also known as expats, will be earning income during their stay. If this describes your situation, you should understand that according to the Internal Revenue Service (IRS), you will be taxed on their worldwide income.

However, that does not mean you will be double taxed – both by the country you are living in and by the U.S. The Foreign Earned Income Exclusion is an IRS provision that allows you to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation. For 2020, that figure comes in at $107,600. Excluding this portion of your income will reduce your tax liability to the U.S.

Remember, you only qualify for the Foreign Earned Income Exclusion if you live outside the United States and earn wages or self-employment income for services performed outside of U.S. borders. If you live in America, but do business outside the U.S., the Foreign Earned Income Exclusion does not apply to you.

Of course, there are other eligibility requirements to claim the Foreign Earned Income Exclusion as well. The U.S. government wants to ensure that you live outside the U.S. for the majority of the year, so it has developed two ways to determine if a U.S. citizen’s tax home is outside the country:

The first is the Bona Fide Residency Test, which involves establishing that you did indeed live in another country during the calendar year
The second is Physical Presence T If you travelled back and forth between America and one or more foreign countries, to claim the Foreign Earned Income Exclusion you must prove that you were physically outside the US for at least 330 full days during any consecutive 12-month period in order to maintain your residency status

If you have fulfilled foreign residency requirements, or qualify through time spent outside the US, make sure your record-keeping is accurate. That’s because if you generate income that relates to services rendered both while you were in the U.S. and a foreign country, you will need to properly apportion the income accordingly so it can be tax appropriately.

To claim the Foreign Earned Income Exclusion, you should use IRS Form 2555. For additional tax requirements and information specific to your circumstances, always consult a tax professional for guidance and advice.

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How technology is advancing the finance sector

December 4, 2020

Technology is touching all of our lives, whether we like it or not. It is infiltrating everything we do – making things easier, automated, more efficient, and even lower cost. But one of the industries it’s impacting the most is that of finance. In just a few short years, the financial sector has become almost unrecognizable due to the technology that is underpinning it. From forex to AI and everything in between, let’s find out more.

Blockchain

Blockchain – the technology that underpins cryptocurrencies such as bitcoin and litecoin – was once eyed with suspicion. Those that were not in the know, tarred it with the same brush of cynicism that they used for cryptocurrency, but now, they are realizing their mistake. Blockchain technology has been realized as a system that can have vast and far-reaching possibilities for an increasing number of sectors. Logistics, healthcare, education, manufacturing, government, and legal processes have all adopted blockchain into their operations.

But it’s inn finance where it really comes into its own. The fact that the blockchain is immutable, decentralized, and secure means that it’s of huge interest to the financial services industry. Most of the big banks, lenders, insurers, and investment banks have incorporated some form of blockchain, or are planning to, into their business model. It’s particularly useful in recording deposits and payments as once a transaction is recorded on the blockchain, it cannot be altered or edited in either way. It also has potential due to the fact transactions can be conducted cross-border in a matter of seconds, at a lower cost than with fiat currency.

Cryptocurrency

When Bitcoin launched over a decade ago, many were cynical of its use. As it became more popular, still many were skeptical that it could be a viable alternative to fiat currency. But in 2020, cryptocurrency in various forms; stablecoins, altcoins, virtual assets and digital currencies have flourished. You can pay for groceries, buy a house, get your salary paid, and even gamble in cryptocurrency.

Some service providers have their own coins, others integrate payment with other leading coins into their payment options. As we proceed into 2021, we can anticipate that more institutions and companies will start using and accepting cryptocurrencies. Big names such as Facebook, JPMorgan Chase, Walmart, AirAsia, Amazon and Tencent have either launched their own coin or are set to do so shortly. In particular, financial institutions have found value in launching their own coins to streamline transactions and transfers of cash and other assets.

Mobile trading

Online trading has grown exponentially during the last year – as much as 300% according to some sources. This huge influx of new customers are looking to buy, sell, and trade various currencies and to capitalize on volatile market conditions. The majority of these customers are first time traders and are using mobile devices. Thanks to advances in mobile technology, notably speed, screen quality and refresh times, the advancement of apps, and increased internet speeds, trading online has become as easy as it was previously on a mobile.

A popular way for many of these newbies to get started is to utilize platforms that provide forex demo trading accounts. These types of accounts allow traders to experiment with different strategies and methods to maximize their success. This is particularly beneficial and valuable to those who aren’t sure how the markets work and want to learn through trial and error. The ability to have access to these accounts via mobile, wherever they are and whenever they want to practice buying and selling currencies of their choice. We can expect to see a big increase in mobile trading in the future as people move away from laptops and PCs.

Artificial intelligence

It doesn’t seem so long ago that artificial intelligence was something only seen in Sci-fi and games. But here we are in 2020, and many of us are interacting with AI every day, without even knowing it. Our mobiles have inbuilt AI assistants as do our home assistants and PCs. We talk to AI chatbots on social media and company websites, sometimes even by email. What’s more is AI is often at work behind the scenes, learning, watching, and absorbing what we do and say.

In Finance, it’s being used on the front line to improve and streamline customer service, as well as to gather information on clients’ behavior and needs. AI is also being utilized to assess and predict loan risks, to process applications, onboarding, and account opening, and to analyze accounts, spending habits, and overall financial health. The technology of AI has the power to do this in seconds and automatically, eliminating any human error. Humans, unfortunately, are slower and are at risk of bias, mistakes, and emotional decisions. AI is not set to replace humans in the financial services workforce, but rather improve the way the system works.

The way we do many things now would have been unthinkable a decade ago, it will be interesting to see what the ’20s will bring!

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Easy Hacks To Make Money With Online Gaming

December 3, 2020

If you are an avid gamer, you will know the thrill and excitement that online gaming offers. Surprisingly, you can also make money with it, which doubles the joy of the experience. The key to making big money with online gaming lies in choosing the right games, platforms, and means. With some options, you only win tokens while others get you real cash, so everything boils down to the right choice. Malaysia is one of the countries that have witnessed a surge in the popularity of online gaming in recent years. Avid gamers here are discovering innovative ways to make money with the activity. If you are looking for some money-making hacks with your favorite games, here are some for you.

Participate in a tournament

While video games do not pay you directly, you can make big bucks online by participating in a professional tournament with prize money. There are several eSports competitions and tournaments that bring opportunities for players to win huge cash prizes. Since many of these events are hosted online, there aren’t any constraints of place and time. As long as you are confident about your skills, you can go ahead and win cash at these tournaments. eSports are growing in popularity, and professional players are winning big jackpots here. The industry is big around the world, and Malaysia hosts several leagues every year.

Online slot machines

Even if you are only a casual player rather than a skilled professional, there is no dearth of money-making opportunities. You can try your luck with an online slot machine that does not require you to be a tech genius. If you look around, you can easily find a Casino Online Malaysia and access it via your computer or mobile device. Just make sure that you pick a site that is reliable enough to play with money, as you will have to share your financial information with them. Once you start playing this game of luck, you will gain a good understanding of the concept of odds and have better chances of winning eventually.

Earning Through Gaming Expertise

Looking to capitalize on your gaming prowess? There are several straightforward methods to earn money through online gaming. For instance, you can offer coaching services to less experienced players, participate in online gaming forums where you can sell virtual items or accounts, or even become a game tester for developers looking for feedback.

Additionally, joining gaming communities such as 91cllub.in provides opportunities for networking and discovering new avenues for earning income through gaming-related activities. With creativity and perseverance, making money while gaming is more achievable than ever.

Video game testing

An indirect means to make money with gaming is by working as a professional game tester. When game producers launch a new product, they look for testers to try out the beta versions of the new game. The objective is to find all the possible flaws and address them as they want to roll out only a perfect product. You can collaborate with these companies and test the products by playing them and finding the glitches for the developers to resolve. In return, they will pay you for your skills and time.

Gaming is an incredible online activity as it not only keeps you entertained but also enables you to make big money, provided that you take the right approach. Each site pays differently, so checking the rules and terms before you start is a wise move. Look for the payment methods they use and make sure that these are legitimate. Also, pay attention to their privacy policy as you wouldn’t want to compromise with your confidential data.

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What does a “No-Deal Brexit” mean for the Legal Services Sector?

December 3, 2020

By Zulon Begum and Harriet Riddick

On 16 October, after many months of negotiations and a deadlock over key issues, Boris Johnson urged the UK to be prepared for a no deal break with the EU from January. Negotiations have since resumed, but, despite the stated deadline for an agreement to be reached to allow sufficient time for parliamentary ratification (31 October) now having passed, a deal is yet to materialise. At the time of writing, it is unclear whether an eleventh-hour agreement between the UK and the EU will be reached (and if so, what exactly it will look like) or whether the so-called “worst case scenario” – the transition period ending without a deal in place – will become a reality.

Amid such uncertainty, planning for the worst (whilst hoping for the best) is the prudent course of action for the many businesses which will be impacted by the eventual outcome of the post-Brexit transition trade deal negotiations.

For the UK legal services sector, which relies heavily on the EU as a significant destination for the export of its services, understanding and planning for the implications of a “no-deal” is crucial.

The current single market framework

At present, the legal services sector is able to operate relatively seamlessly across EU jurisdictions under the following two EU Directives:

the Lawyers’ Services Directive (Directive 98/5/EC), which allows specified lawyers to provide legal services on a temporary basis in a member state other than the one in which they are qualified (a practice known as fly-in, fly-out or “FIFO”); and
the Lawyers’ Establishment Directive (Directive 77/249/EEC), a reciprocal arrangement which allows specified lawyers in one member state to establish and practise permanently in another member state under their existing title and conditions.

In addition, the Mutual Recognition of Professional Qualifications Directive enables EEA nationals to have their professional qualifications recognised in an EEA State other than the one in which the qualification was obtained.

The current EU legislative framework enables England and Wales qualified lawyers and/or law firms (as applicable) to:

provide advice on the laws of England and Wales, EU law and international law as well as on host state law (subject to certain restrictions and meeting the host state’s competency requirements);
requalify in another member state without undertaking the usual qualification route after three years of practising in that member state;
appear in court in conjunction with a local lawyer in EU states;
represent their clients before the EU courts, and allow their clients to benefit from legal professional privilege; and
establish a branch office of a UK incorporated/established entity to provide legal services in another EU member.

The above arrangements are augmented by the EU laws on free movement, which enable EU citizens to live and work in any EU country, as well as the Court of Justice of the EU (“CJEU”), which can enforce EU single market rules.

No-deal Brexit

If the transition period ends without a deal in place, the current EU regulatory framework which allows the UK law firms and lawyers to provide services and/or establish and practise in other EU member states will fall away with effect from 1 January 2021.

Instead of being subject to a single EU-wide legal framework, UK lawyers and law firms will be subject to a myriad of rules and regulations in each of the EU/EFTA states – and ultimately will only be entitled to those rights granted by the national regulators of EU member states to third-country (non-EU) lawyers.

This will create an array of challenges for UK lawyers and law firms, including:

Restrictions on providing services in EU member states on a temporary basis using home state qualification (FIFO). Under German law, for example, the provision of temporary services in Germany by a lawyer from a non-EU member state under his/her home title is not permitted. UK solicitors who want to practise in Germany under their home title after the end of the transition period must apply for “foreign legal consultant” status.
Restrictions on use of UK LLP structure. UK firms will lose the automatic right to use their preferred business structures in EU member states and, in certain jurisdictions, the UK LLP corporate form may no longer be accepted. In Germany, for example, LLPs will only be able to operate after the end of the transition period if they do so as a branch of a firm with its centre of administration in the UK. LLPs with their centre of administration in Germany should therefore either be absorbed into the UK LLP or converted to a German partnership (with a different liability profile).
Loss of rights of audience before the EU courts from 1 January 2021, unless UK lawyers hold alternative EU/EEA (but not a Swiss) qualification.
Restrictions on practising with, or sharing profits or equity with, non-EU lawyers. For example, in France, non-EU lawyers are not permitted to form a partnership with French avocats. A continuing uncertainty therefore presented by a no-deal Brexit is how to maintain the governance, control and integrated global profit pools of international law firms that had established in France via a branch of UK LLP following the end of the transition period, when, unless any agreement is reached to the contrary, direct ownership by UK lawyers will be prohibited.
Loss of the protection of legal professional privilege (“LPP”) in front of EU courts and EU institutions with respect to communications between UK qualified lawyers and their clients. UK lawyers should consider involving their EU/EEA-qualified colleagues in ongoing cases to ensure that LPP continues to apply where applicable.

Steps to prepare

A detailed country-by-country analysis of local professional and corporate regulations would be well-advised for UK firms with offices in other EU jurisdictions, in order to ensure that their existing structures conform with national laws in each EU member state in which they are established, regarding corporate structure, ownership, control, profit sharing and professional rules for non-EU professionals in that country.

With a Brexit deal still hanging in the balance, and the end of the transition period fast-approaching, law firms should also ensure they are able to put their contingency plans into action in the coming weeks.

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About the Authors

Zulon Begum has extensive experience of advising professional and financial services firms and senior equity partners on a whole range of partnership and corporate matters. Zulon has particular expertise in mergers, acquisitions and internal restructurings involving partnerships and LLPs. Zulon regularly advises partnership businesses on their constitutional and governance arrangements, partner remuneration and succession issues, restrictive covenants and partner teams moves and exits.

Harriet Riddick advises clients across many sectors on all aspects of UK contentious and non-contentious employment and partnership law issues. She has experience advising professional services firms (including law firms) on a wide range of issues including reviewing and updating their LLP Agreements, partner investigations and disciplinary matters and partner disputes and exits.

Financial Focus on the Gambling Industry – Corona Effect

December 2, 2020

The Corona Pandemic has been the downfall of multiple business ventures worldwide since it last hit the streets. To curb the spread and alleviate its effects, governments worldwide had to put in place some restrictive measures such as unappealing lockdowns that forced the masses to stay at home. Consequently, most businesses had to close shop or find other means of operation. While other businesses are crying foul online gambling entities have been smiling all the way to their coffers as they reap big from the pandemic.

Here’s how the Corona Pandemic has positively impacted the online gambling industry.

Incredibly Better Returns

The Covid-19 pandemic has been considerably a blessing in disguise for betting entities, especially those that have fully embraced online sites. Since the pandemic broke out, the numbers have risen not only in terms of the players joining in but also the returns gained. By the time the year ends, online gambling is expected to have grown by an impressive 13.2%, and this could rise. In the course of the pandemic, online gambling has raised about US$66.7 billion.

In 2019, the global online gambling revenue stood at around $58.96 billion, but the numbers are bound to jump to around $92.86 billion by 2023, a steady 12% growth going by the current state of the world. The numbers might even increase to a whopping $133.12 billion by 2025. These numbers are associated with the governments’ stay at home lockdown measures that have left billions across the world lockup at home with little or nothing to do.

More Players

With physical on-site casinos closing shops, seasoned gambling enthusiasts had to find an alternative way to practice their craft, and online casino provided the perfect escape. Moreover, with little to do at home during the quarantine season, many people have turned to online gambling to keep themselves occupied. And it’s not gaming activity that increased during 2020. Looking at MGA, where many online casino is licensed by, we find large numbers of new operators. The highly acclaimed casino site Winny.com, is of them. is Turbonino is another. SlotV as well. The list goes on.

Statistics have shown a massive increase in the number of online gamblers. For instance, PokerStars recorded their highest ever number of entries in a recent online poker tournament.

Their popular “Sunday Millions” endeavour generated a historic $18.6 million prize pool, the largest in the history of the entity. The tournament attracted over 60 000 players with about 93,016 entries. Each entry came with a $215 price tag. Worldwide online poker is estimated to have gone up by an impressive 43% since April, and this is just one side of the coin; other markets have also recorded significant increases.

Financially, online gambling has done incredibly well in the Covid-19 pandemic. Online gambling entities have recorded a massive increase in players, which has resulted in high financial returns.

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CFO's new mandate. CFO explaining the presentation

The Performance and Transformation Orchestrator: The CFO’s New Mandate in the Age of AI

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By Terence Tse CFOs are evolving into AI-driven transformation orchestrators, balancing finance, technology, and strategy while upskilling teams, managing risks, and driving measurable business value. A key insight from this year’s AI for CFOs event, organized...