Corporate governance is slowly but surely being implemented in Indonesia. The typical form of corporate/business organisation in Indonesia is a limited liability company, but other forms are available, including co-operatives, representative offices and partnerships.
But since the limited liability company is by far the most common form of corporate organisation, in principle, corporate governance is governed by Law No 40 of 2007 regarding limited liability companies (the Company Law). Article 4 of the Company Law states that the applicability of the Company Law does not detract from the obligation of companies to comply with the principles of corporate governance. It should also be noted that the principles of corporate governance only apply to limited liability companies, and these principles differ depending on whether the company is a public or private entity.
Corporate governance for certain types of companies and businesses is further regulated by the Financial Services Authority (Otoritas Jasa Keuangan or OJK). The OJK regulates corporate governance requirements for the insurance and capital markets sectors, issuers and public companies.
National Committee on Governance
Interestingly, the Co-ordinating Ministry for Economic Affairs established the National Committee on Governance (NGC) in 2004 through Co-ordinating Ministry for Economic Affairs Decree No KEP-49/M.EKON/11/TAHUN 2004. This decree was amended by Co-ordinating Ministry for Economic Affairs Decree No KEP-14/M.EKON/03/Year 2008. The stated aim of the NGC is to formulate, promote and facilitate the implementation and enforcement of the Indonesian Code of Good Corporate Governance (the GCG Code).
The GCG Code was first published in 2006. It must be noted that the GCG Code is not a legal instrument and as such does not have binding force on corporations in Indonesia. The GCG Code serves as a model that provides recommendations on the implementation of corporate governance in companies.
Aside from government regulations, internal corporate documents such as the company’s articles of association, company regulation and company code of ethics are also used as tools of corporate governance.
Handling corporate documents
One of the main regulations relevant to corporate governance in Indonesia, apart from the Company Law, is Law No 8 of 1997 regarding corporate documents dated 24 March 1997 (the Corporate Documents Law). The Corporate Documents Law is further implemented by Government Regulation No 87 of 1999 regarding procedures for the delivery and destruction of corporate documents dated 13 October 1999 (GR 87 of 1999) and Government Regulation No 88 of 1999 regarding procedures for transferring corporate documents to microfilm or other media and legalisation dated 13 October 1999 (GR 88 of 1999).
The Corporate Documents Law defines corporates as any form of business that continually engages in its business to achieve profit, carried out by individuals, legal entities or non-legal entities, established and domiciled in Indonesia. The same law defines corporate documents as data, records and/or statements made and/or received by the corporate in conducting its activities, either written on paper or another form of media that can be seen, read or heard.
Corporate documents consist of financial documents and other documents. The law further regulates that financial documents are notes, bookkeeping and supporting data related to financial administration evidencing the rights, liabilities and business activities of a corporate. Other documents are data or other written documents containing statements valuable to the corporate though not directly related to financial documents.
A corporate is mandated to maintain records consisting of an annual balance sheet, annual profit and lost statement, accounts, daily journal, and other records consisting of a statement concerning the rights, liabilities and other matters related to its business activities. The records shall be made using the Latin alphabet, Arabic numerals, Indonesian rupiah currency, and the Indonesian language, unless the corporate obtains Minister of Finance approval to prepare the records in another language.
These documents shall be signed by the authorised representatives of the corporate concerned. Unless stipulated otherwise, these documents must be made at the latest six months after the end of the financial year of the concerned business.
It is interesting that even though the Corporate Documents Law was introduced in 1997, it introduced the means for using media other than paper for corporate documents. Hence, the implementing regulation that provides procedures for keeping records using media other than paper. The law cautions the management of companies to consider the use of original documents that must be kept due to their benefit to the company or national benefit. Another consideration is that if the management converts documents into microfilm or other media, the issue of evidentiary value requires the management to keep the original documents in hard copy, not only in electronic form.
The Corporate Documents Law and GR 87 of 1999 provide that the transfer of corporate documents to other media must follow the procedures provided in these regulations, including the requirement of legalisation. Note, however, that even though the process is called legalisation, it does not require the services of a notary public. The legalisation process under the regulations provides that authorised representative of the company shall make the minutes of conversion of the corporate documents into other media. The minutes shall contain the place, date, month and year of legalisation, a statement that the corporate documents converted into microfilm or other media are true and correct copies, and the names and signatures of the authorised representatives.
It should be noted that the records, financial reports and other financial administrative documents must be retained for ten years as of the end of the financial year of the concerned company.
Another interesting fact from these regulations is that if corporate documents are deemed to have ‘historical value’, the company is required to deliver such corporate documents to the National Archives.
GR 87 of 1999 further regulates that if it is necessary to destroy corporate documents, such destruction must use the procedures provided in the implementing regulation.
The Corporate Documents Law and its implementing regulations add to the functionality of corporate governance practices in Indonesia.
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After 40 years of economic reforms and intense development in China, the economic landscape has matured. Foreign investment legislation in China sits on the cusp of a new era, in which reforms will pave the way for significant improvement, including corporate governance in foreign entities. Although, today foreign companies in China still face challenges in implementing the correct corporate governance to maintain control of a foreign entity and generate a profitable business.
The challenges
Semantic differences
Firstly, the definition of corporate governance in China differs from the concept formed in Anglo-Saxon jurisdictions. The definition of corporate governance, according to Black’s Dictionary, is applying policies, proper implementation and continuous monitoring. Typically done through or by the organisation’s governing body (a group of officers or persons having ultimate control). In Chinese, corporate governance is composed of the characters 治 zhì 理 lì . The character 治 zhì means utilisation and is constructed by the characters of water (left), and opening (right), which denotes to the original meaning 治 zhì 水 shuì, the utilisation of water. The second character 理 lì means reason. Corporate governance in Chinese could be defined as utilisation of the people through the application of reason. Such semantic differences between the definition indicates potential issues in how corporate governance is applied and perceived in Chinese culture. As result, control of the foreign entity can be easily lost – if a foreign shareholder does not fully comprehend how to implement correct corporate governance.
Legislation
Secondly, there are potential issues in the legislation of corporate governance. Currently, there are conflicts between the main legislation body, the Company Law of the People’s Republic of China (Company Law), and the three foreign investment enterprise laws (FIE Laws).
Although, the Company Law states ‘where foreign investment laws have conflicting provisions, such provisions shall prevail’. This, in theory, requires foreign entities to primarily adhere to relevant foreign investment enterprise laws. However, in practice such provisions can result in conflicts. For example, under the Company Law, there is a two-tiered governing body consisting of the board of shareholders as the highest governing authority, who make the major decisions and the board of directors managing the daily operations upon the resolutions of board of shareholders. Meanwhile in an equity joint venture (EJV) under the Sino-foreign Equity Joint Venture Law the highest governing authority is the board of directors. As directors in EJVs hold significant influence in the company and foreign shareholders may reside abroad, may entrust an individual as a director, how can corporate governance be established and maintained in the interest of the foreign shareholder?
Moving forward, such conflicts are theoretically resolved with the implementation of the Foreign Investment Law of the People’s Republic of China (FIL) effective from 1 January 2020. With the implementation of the new FIL, old FIL laws are abolished and all foreign entities are unified under the Company Law and Partnership Enterprise Law, thus all entities shall adhere to same provisions. However, under the current Company Law, corporate governance provisions centre on statutory procedures and the duties and liabilities of the governing body. With no clear provisions to ensure the foreign entity is governed in the interest of the foreign shareholder(s), the issue remains the same as before.
The practical solutions
Establishing correct corporate governance in China centres on activating several unwritten and unseen instruments. These are practical solutions which safeguard against losing control. Corporate governance can be implemented and maintained in the interest of foreign shareholders in both within overall governing body and within the management of employees – it is a matter of activating unseen instruments.
Appointment of key individuals
In many cases, foreign shareholders reside abroad and the governance of the entity is left to ‘trusted’ key individuals acting as directors, supervisors, legal representative and senior officers, according to the Company Law. Therefore, it is essential for the shareholders to consider such appointments in the initial stage of the investment and established them in the articles of association. Without this first step, a resolution of the board of directors is required to remove and appoint a new individual. Therefore, where the board of directors does represent the interests of the foreign shareholders, this procedure could be problematic and result in a dead-lock.
Internal policies
While the labour contract governs the labour relationship between the employee and employer, an internal company policies establishes the fundamental provisions to manage the daily routine, responsibilities and obligations of the employee. Under labour law and contract law of the People’s Republic of China, an employee handbook provisioning the company policies is required for employees. Staff adhere to the employee handbook upon accepting the job. Therefore, the internal company policies serve as a legal basis for the senior officers and board of directors to correctly manage according to the resolutions of the shareholders, as well ensure employees adhere to management. Without such policies, the company may face difficulties in labour disputes, as what is deemed as reasonable conduct may become a subjective matter.
Furthermore, foreign shareholders often face challenges in related foreign laws, in the jurisdiction of their headquarters, which affect the Chinese subsidiary. Specifically, foreign laws may stipulate work safety requirements for any foreign employees dispatched to the Chinese subsidiary, otherwise, the headquarters shall be liable in their jurisdiction. Hence, the Chinese subsidiary may face conflicts in Chinese law when applying foreign law. A practical approach is to transform such legal requirements into internal company policies, avoiding arising conflicts or legal liabilities in Chinese law.
In China, incorporating a foreign entity is easy and with the upcoming reforms, it will be even easier. The challenge is to maintain control of the foreign entity through correct corporate governance. Recent legislation reforms signify a stronger legal framework for foreign investment. However, sustaining a profitable business in China means maintaining corporate governance through implementation of practical, but unseen apparatus in the company.
The opportunity to appoint two or more directors in a company, who exercise their authority jointly or severally, has been available in many foreign jurisdictions for a long time.
However, until 2014 Russian law stuck to the approach that only one person may hold the position of CEO and be indicated as CEO in the state register of legal entities (the register). This restrictive approach led to some difficulties for joint ventures with international investors and subsidiaries of foreign companies who were used to the ‘two-key’ principle in their home jurisdictions and tried to implement the same approach in Russia.
As part of corporate law reform, amendments to the Russian Civil Code set up legal grounds for the appointment of two or more people as CEOs with joint or separate powers. Unfortunately, the legislation on the registration of legal entities had not provided a technical procedure for recording the joint or separate powers of respective CEOs in the register. In 2015, The Supreme Court of the Russian Federation provided clarification, according to which, if the register contains information about two or more directors of a company, it is presumed that each director is entitled to act independently. This clarification had de facto nullified all the positive effects from the introduction of the two-key principle in the Russian Civil Code.
On 1 September 2020, new laws amending the procedure of registering legal entities will come into force. These amendments introduced the possibility to record information about the joint or separate powers of each director in the register. Anyone can easily obtain an extract from the register for any company. If the information in such an extract shows that the directors can act only jointly, third parties will no longer be able to refer to their lack of knowledge about the joint nature of the directors’ authority.
These amendments have completed the introduction of the two-key principle for Russian companies. This new opportunity will be used not only by foreign, but also by Russian, investors.
Liability of company management
Most Russian small and medium legal entities are managed by one director who, as a rule, acts as the sole executive body. Establishing a board of directors is mandatory only for public companies, ie joint-stock companies whose shares can be acquired by an unlimited number of persons. Given the extensive powers of a sole director, it is important to regulate their liability for possible damages caused to the company.
Russian law declares that company directors shall act reasonably and in good faith. A company and its shareholders, acting in the interests of the company, are entitled to claim damages (both direct loss and lost profit) caused to the company by the unreasonable or bad faith conduct of their directors.
Before 2014, there were only a few successful cases related to the recovery of damages from directors. After the Russian Supreme Court clarified some difficult issues concerning the application of management liability in 2013 and further legislative changes in 2014, the number of shareholder claims against company directors increased significantly. It is worth mentioning that even if a particular act causing damage to a company was duly approved by the shareholders’ meeting or the board of directors, a director is not automatically released from liability.
The imbalance between the value of company assets and the personal assets of directors, as well as the practicalities of enforcing damage claims against directors, are the biggest hindrances. Even if a court awards compensation to a company, most directors will not be able to pay that compensation due to a lack of personal assets. Considering the high risk of personal liability, in a tricky situation most directors prefer to refrain from making decisions for which they can be held liable in the future. This situation does not help companies whose business is based on daily high-risk decisions.
Shareholders of private companies (ie companies that are not public joint-stock companies) are entitled to limit director liability for unreasonable (but not for bad faith) behaviour. However, the practical application of such limitations is not widespread in Russian companies, mostly because of the absence of strict criteria for distinguishing unreasonable behaviour from bad faith behaviour. It also remains unclear in which corporate documents the limitation of director liability for unreasonable actions should be stipulated: in a charter or in the form of an agreement between the shareholders and the director. Limitation of director liability for bad faith behaviour is prohibited both in public and private companies.
Issues related to excessive director liability could be solved by directors’ and officers’ liability insurance (D&O). The Corporate Governance Code – approved by the Russian Central Bank in 2014 as a set of rules recommended to be applied to public joint-stock companies – contains the recommendation to insure the liability of members of the board of directors and company management.
Use of D&O insurance is still not common practice in Russian companies. As a rule, such insurance is used only by subsidiaries of foreign companies for which D&O insurance is mandatory at the global level. The low popularity of D&O insurance in Russia can be explained by the fact that the general provisions on insurance contained in the Russian Civil Code cannot directly be applied to the responsibility of directors, and special regulation for D&O insurance has not yet been adopted. Russian law prohibits the insurance of the risks of administrative or criminal liability of directors. Such insurance is considered as insurance of illegal interest, which is prohibited by law. On the other hand, insurance of the director’s liability for causing damage to their company is allowed under Russian law.
The clear regulation of D&O insurance is a necessary step for reasonable allocation of the risk between shareholders and directors of Russian legal entities. Otherwise, the interests of both directors and shareholders will be insufficiently protected.
In Mexico, corporate governance best practices have been part of the business environment for the last 20 years. Since 1999, following the OECD Principles (which in turn used the recommendations of the Cadbury Report to varying degrees), the first voluntary Mexican Best Corporate Practices Code (CMPC), issued by the Mexican Business Co-ordinator Council was published. However, the compliance of CMPC is only mandatory for listed companies pursuant to the General Provisions Applicable to Issuers of the Securities Market.
Corporate governance matters’ regulation and operational rules regarding companies in general (other than those listed on the Stock Exchange and depending on their specific nature), are governed by: (i) the General Law of Business Companies (LGSM) and (ii) the Securities Market Law (LMV).
In recent years, Mexican multinational companies, non-profit organisations and private family-owned entities have made significant efforts to introduce strong focus on governance and reaching stability, although there is still a long way to go compared to the leading countries in the world.
Mexico, as an emerging market, lacks strong corporate governance practices mainly due to: (i) centralised ownership; (ii) business cartelisation; (iii) insufficient regulation on accounting requirements; (iv) information transparency; and (v) a relatively limited number of securities market transactions.
By analysing the structure and corporate governance regime of several Mexican multinational companies through the six main corporate governance aspects (ie, average number of directors, independent membership, average age, educational background, corporate structure and investor voting rights), it is possible to get a better understanding on the matter as of this date.
Average number of directors
Board conformation is a wide interest area for investors, due to its strong relationship to shareholder representation and the strategic role they play in the company. To become an agile and efficient board, shareholders have to consider the company’s size and maturity to define the right number of directors. On average, there are 12 directors on Mexican boards, compared to an average of 14 in Germany. However, some of Germany´s biggest companies only have seven directors on their boards, which shows that board composition can vary depending on the relevant company’s specific needs and principal-agent relationships.
Independent membership
Independent board members are known for assisting companies to avoid conflicts of interest and incentivise a better decision-making policy by contributing an external and a unbiased opinion. Even though the LMV requires a minimum of 25% independent directors in public companies, these corporations have almost 50% of independent directors in their boards. However, in countries such as Finland, Denmark and Germany, the percentage is approximately 80%.
Directors’ average age
In Mexico, a directors’ average age is 59, while the average age of the chairman is 58. CEOs’ average age is around 50 years old.
Comparing these numbers with some of the most advanced European countries, directors’ average age in Mexico is close to that in countries such as Germany (58) or Finland (59).
Educational background
One quarter of companies’ directors in Mexico are engineers, followed by 20% that are business administrators, of which 45% studied industry-specific programmes. Other common graduate and postgraduate degrees include accounting, economy, law and finance majors.
Board committees – structure and composition
Mexico’s best corporate governance practices simply recommend companies consolidate their corporate governance with an audit committee, whereas in other countries regulations make these committees mandatory (including some others, such as the compensation committee or the nominating and governance committee).
According to Deloitte’s Best Corporate Governance Practices Study, involving a wide range of Mexican SMEs, 66% have an audit committee, 56% a finance committee and 44% a risk committee.
Investor voting rights
As mentioned above, Mexico has enacted (mainly for listed companies) operational rules that define important interventions and influences of the shareholders in a company’s decision-making through corporate governance, such as director elections, auditor selection, shareholders rights, and board structures. However, these important issues are not widely practised in non-regulated companies. In Mexico, shareholders vote on a fewer number of corporate issues compared with some other countries.
Conclusion
Mexico has worked through the years to become one of the strongest countries in America in corporate governance matters, starting with the first CMPC to the latest legal amendments in 2018. From a legal point of view, Mexico has developed a mandatory framework for publicly listed companies with requirements that contribute to a safer and more attractive market, with policies particularly focused on establishing and implementing several mechanisms to avoid liabilities from a civil, commercial, tax or criminal standpoint. Furthermore, the CMPC addresses with more detail the complementary elements of corporate governance, encourages investment and develops a more stable and trustworthy economy.
When analysing Mexico’s current position, we need to think creatively about incentives that may foster the inclusion of non-regulated companies into corporate governance, by showing that such controls and mechanisms will generate value to investors and shareholders in the long term. Mexico has a long way to go. However, there are some political changes that can shape the business and compliance environment in the country (mainly from a tax and regulatory perspective).
With a large number of family-owned businesses, Mexico can become a governance world leader in matters such as institutionalisation guidelines, better decision-making procedures, and an adequate wealth management and succession planning.
Finally, trendy topics such as gender equality, workers’ union representation, remediation of conflicts of interest, anti-discrimination, anti-money laundering, transparency, and governmental-independence rules, are becoming highly relevant for shaping the corporate governance structures in Mexico in the near future.
It’s not often a FTSE 100 GC and a law firm offer themselves up to the media to discuss a deal. Even panel review stories rarely elicit comment beyond a few contrived lines about ‘innovation’, ‘alignment’ and ‘deeper relationships’. So when BT legal chief Sabine Chalmers and DWF arranged conference calls in the summer to announce a five-year managed services contract, it was difficult to not get caught up in the (relative) excitement. True, BT had spent more than a year assessing dozens of potential providers and DWF was talking up its first major post-IPO client win, but the mood music was quite catchy: ‘Law firms are going through a period of tremendous transformation’ proclaimed Chalmers, ‘It’s an incredible opportunity,’ gushed DWF’s managed services head Mark St John Qualter.
But are they? Is it?
Managed services deals involving transferring staff are far from new, but this was a substantial, multimillion-pound arrangement for insurance and real estate work that saw 40 of BT’s in-house legal team switch to DWF. It is a model GCs often espouse but rarely follow.
Yet it is the direction an increasing number of law firms are expecting and banking on. When Eversheds Sutherland chief executive Lee Ranson recently opened a client function launching his firm’s New Law arm, Konexo, he invoked Hemingway to describe the threat new delivery models pose to law firms: ‘How did you go bankrupt? Two ways. Gradually, and then suddenly.’
The past decade has also seen a boom in new legal service providers and investment, as well as the much-hyped re-emergence of the Big Four accounting firms in law. It is not that long ago that the New Law market was basically a coin flip between Axiom and Lawyers On Demand (admittedly with a bunch of legal process outsourcers toiling in the background generally failing to live up to their early-2010s sales pitch).
But it has gone quiet again over the past six months. The only industry figures who bring up the BT/DWF deal are law firm leaders, with few GCs having even noticed it. And yet there are still predictions of legal departments rapidly shrinking courtesy of a fresh wave of outsourcing, as experienced by other corporate departments such as finance and HR.
As Chalmers notes in the first of IHL’s new series of set-piece interviews with leading GCs, however, law firms will struggle to get the business model to work unless they land long-term commitments from a handful of clients at once. DWF’s competitors on the BT deal, for instance, still argue the firm offered a cut price nobody else could match.
GCs, meanwhile, complain that firms oversell their ambitions and that New Law providers are still too risky for much more than contract lawyer resource. One EMEA law head of a global financial services giant also contends regulators would be ‘crawling all over us’ if they outsourced in-house lawyers.
Outsourcing of staff is therefore consistently hamstrung by law firms requiring immediate scale to build the necessary platform and a lack of partnership buy-in on the one hand, and GCs having little appetite to ship off swathes of their own empires after decades of sustained in-house growth on the other.
For all the ambition of advisers, managed services deals – at least those based on wholesale staff transfers – are destined to be nothing more than the flavour of the month they were once again over the summer of 2019. ‘Innovation’ and ‘alignment’ do so often end up as mutually exclusive.
BDB Pitmans, Irwin Mitchell and Norton Rose Fulbright have been dropped from National Grid’s panel, understood to be worth about £12m a year in the UK. Womble Bond Dickinson is the sole new appointee on a roster that reduced the number of advisers from 12 to ten. Addleshaw Goddard, Bryan Cave Leighton Paisner, CMS Cameron McKenna Nabarro Olswang, Dentons, DLA Piper, Eversheds Sutherland, Herbert Smith Freehills, Linklaters and Shakespeare Martineau have retained their spots. Continue reading “Significant matters – Winter 2020”
‘One reason I’m doing this interview is so I can send it to my parents. They’re really important to me. Ah, suddenly, the hard-woman persona crumbles,’ jokes Heather Mitchell, global general counsel (GC) for investments and head of EMEA at The Carlyle Group. Continue reading “Heather Mitchell – The Carlyle Group”
The In-House Lawyer (IHL): Eighteen months in the group general counsel role, what have been some of the key projects you’ve been doing since you landed? The wider business has been through a lot of transformation, how is legal keeping up?
Sabine Chalmers (SC), group GC, BT: When I joined Gavin Patterson was my boss. He’s since left the business and we’ve transitioned to Philip Jansen from Worldpay. During that time the focus has been on learning the company and industry, getting to know and work with a new CEO, new board, my team, and as a result of all that identifying as quickly as possible what the strategic priorities for the function are and how to best support the business. Early on I reorganised my leadership team to mirror the evolving structure of the business, to ensure we had GCs reporting to me that were lined up with each of the business and corporate units: we announced that in June last year.
IHL: How many in the leadership team?
SC: I have nine reports. GC of corporate, Bruce Breckenridge; GC of technology, Chris Fowler; the GCs of each of our business units: consumer, Russell Johnstone; enterprise, Jeff Langlands; global, Liz Walker; and then Openreach, which is a 100%-owned subsidiary, Nigel Cheek, who reports directly to Clive Selley, the CEO, but we have a dotted-line relationship. Initially, Chris was GC of technology and also my head of ops, but given the scale of the technology and transformation agendas at BT, we quickly concluded that Chris should be dedicated to technology and Dave Hart was promoted to director of transformation. In that role, Dave focuses on the evolving opportunities for the function being brought by technology and alternative service providers, talent retention and management, managing our budget, etc. In addition, when our former company secretary Dan Fitz moved to the Crick Institute as their GC, we promoted Rachel Canham from within the legal team, also reporting to me. Lastly, given the strategic importance of data to our business, a new data privacy officer role will be joining the leadership team and we plan to make an announcement in that regard within the next few months.
IHL: So you had the first crack at changing the structure, then tweaked and refined it, how’s it been bedding in?
SC: Well. Phase two of that was working with the leadership team and their direct reports to further align around the strategic priorities for the function and the business and how we want to deliver them. There were a number of areas core to business in which we definitely require deep internal expertise and business partnership – examples of that would be anything to do with telecoms regulation, competition law, data, security, big commercial agreements. We need to build the deep expertise internally and partner with the right advisers externally. And then there are other areas that are less bespoke – for example, certain aspects of litigation, commercial property – where a better way to deliver services and build careers for the talent involved and take advantage of technology and best practices across different industries was to partner with someone like a DWF.
IHL: Did you look at the strategic objectives per business line at first or overall?
SC: We did the two in tandem. It takes time to arrive at the right and thoughtful answers. But what’s challenging is that people in the teams also want speed and certainty. Getting that balance is hard.
IHL: DWF took what, a year?
SC: Yes, mainly because it was a robust [request for proposal] process with lots of different potential providers and ways of doing things. We went through various stages to whittle it down to a shortlist of four or five. We found the right firm to partner with and a home where a number of our people were going to be happy and add value.
IHL: Can you explain what that deal involves?
SC: It’s a five-year managed legal services mandate covering our insurance and part of our real estate work, which has seen 40 of our people transfer to DWF.
IHL: There were some suggestions another chunk of the team was heading over as well?
SC: There were headlines that BT Law – which is limited to our ABS-licensed claims business only – was later acquired by DWF and I think the name caused some confusion, which led people to think that the entire legal function was somehow impacted, but that’s completely wrong. It was always part of the agreement that BT Law would go across to DWF in the deal we announced over the summer. The changes on Companies House that were picked up were simply the final formalisation of the managed services arrangement.
IHL: Lots of change, any particular highlights immediately coming out of that or still ‘wait and see’?
SC: What’s always fun is having the opportunity to engage the wider team. Coming from consumer goods into telecoms, there’s no way I could do this role without really talented people. It’s been fun creating the solutions with them but also having an eye to moving people around to create new career challenges and opportunities. Rachel moving to the co sec role, Dave moving from litigation into the transformation role, Chris building out a technology team – that’s the fun part of this job.
IHL: How have you found learning about a new industry and new company?
SC: The big difference for me from where I came from is that in consumer goods it’s often the case that you land on what the business wants to do first and then legal and regulatory is more about execution. In telecommunications, it’s the other way around, not completely, but you almost always have to take into account the legal, regulatory and policy framework within which you are operating to define the business options and it’s much harder. But it’s also, especially for people in legal, really interesting. That’s how as a team you can add real value to the business by being knowledgeable and creative.
IHL: How does the function need to evolve? What’s next?
SC: I believe that with the way we’ve set up our structure, we’ve got the right mix of deep specialism and people that are physically co-located and partnering with the business. But as the business evolves, we are going to have to continue to change and evolve to keep lockstep with them. If the business priorities change, or we enter into new areas of business or experience challenges in particular areas, we’re going to have to evolve, both in terms of structure and skills, to adapt. We will likely also look at the way we partner with external law firms.
IHL: How much is the DWF deal a sign of things to come in that field?
SC: I genuinely don’t know. One of the big realisations I’ve had, particularly living outside the UK for the last 25 years, is that the market has changed enormously both in the fragmentation of providers and the many different offerings we now have. Therefore, the ‘Let’s have a re-look at the landscape’ is as much about the fact that’s changed, not just because BT’s changed. To ask, ‘What’s out there? What’s on offer? Where are the good people? Where’s the good technology? What are the different ways of doing things?’ It’s not a cost-cutting exercise, it’s about identifying the best ways to deliver, making best use of technology, creating the best career paths for our talent.
IHL: How hard is it to get around all those different providers? You spoke to 26 for the DWF one.
SC: Chris set up a fantastic foundation for that by building his transformation team and they are focused on that agenda. That’s the only way you can do it. Full-time, bringing in new thinking that challenges the status quo.
IHL: How big is that transformation team?
SC: There’s seven.
IHL: When we spoke at the time of the DWF deal you said this was the direction of travel and you’d expect other companies to do this sort of thing. How high are your expectations for those providers over the next 18 months?
SC: It’s going to be interesting. It used to be the case that the big law firms kept doing what they were doing and then you had a handful of alternative providers who were offering managed services or different bespoke services, often with a lot of offshoring. What’s interesting now is virtually every good law firm is at least looking at this for, if nothing else, to identify pockets of new growth. The only way the business model can work for some of the larger law firms is if they get scale and the commitment of a sufficient number of clients that are going to provide volume. A really interesting evolution would be if the top firms can bring together a consortium of, say, four or five GCs that say, ‘We’ll give you the work’, so they can build the platform and make the maths work, and then also provide the quality that only a big law firm can bring.
IHL: They’re very different business models. Eversheds Sutherland recently spun out their alternative services arm, do you give much to the idea of it needing to be a separate entity that can have its own strategy and investment or can it operate in the law firm environment?
SC: It can operate in the law firm environment. It’s a bit like the successful consumer goods companies, right? They have their luxury, premium end of the business that works in a particular way, but they also have the high-volume core business. At the end of the day the totality provides the customer with a broad range of products. The law firms that crack that nut and can come to a GC and say, ‘I can partner with you to solve multiple problems for you’, will do well.
IHL: Do you see much of that thinking from law firms at the moment?
SC: Not yet, but I’m sure they’ll get there. If you look at the way the world and the legal market has evolved, there are loads of talented lawyers who at some point in their career just need a different sort of flexibility: where they live, when they work… They lend themselves to different models of legal service delivery.
IHL: But you could see a consortium of maybe four or five GCs coming together…
SC: Consortium’s the wrong word. Maybe a law firm aligning four or five anchor GCs, who say ‘we’ll try this for five years’ and building over time the confidence that the model would work.
IHL: It does feel like it needs that tipping point or more momentum before this happens. Have you spoken to other GCs about this?
SC: No, this is an idea I had in the bath. I do get asked by law firms for my thoughts on this kind of thing and it came to me that to make the maths work they need the volume, right? But they are probably approaching it the wrong way around, by starting small to building from there. It would be interesting if you did it the other way around and went to four or five GCs and said: ‘Look, we’re thinking of building this, will you come?’
IHL: You mentioned talent retention at the start, is it something you’ve been looking at?
SC: There’s a lot that’s being done by BT as an organisation around leadership and development and we’re therefore just ensuring that we are putting folks from the legal and co sec team forward to take advantage. Within the legal and co sec function, Jeff Langlands’ team always manages to knock the ball out of the park on our annual engagement survey. He’s very thoughtful about it.
IHL: He’s a nice guy.
SC: He is leading the charge for us on talent, being clear about the different building blocks you need to have in a career. In my experience, it’s not about just getting successive promotions, it’s about getting that variety of experience so you have a well-rounded career. So, it might be making sure that folks that are in one business unit, say consumer, also get some B2B or corporate unit experience at some point, or a different legal qualification or language.
IHL: What about introducing non-legal professionals in some way?
SC: We have the mix that you’d expect of paralegals, new graduates who may want to become lawyers, obviously, the transformation team has a good mix of analysts and tech experts. At BT, because we have such a broad range of skills across the business, often rather than building it within the team, we harness the rest of the organisation.
IHL: What are the differences you’ve noticed between the US and UK markets?
SC: When I left the UK in 1995 and moved to the US I was shocked and, frankly, pleased at the relevance and stature in-house counsel had in the US. Company GCs that did not report to the CEO or form part of the executive team were in the minority. A lot of that was driven by the litigation environment and regulation but also it’s just a country in which lawyers have forged careers in business, in politics, in many fields. The UK is not quite where the US is and maybe it never will be, because the litigation environment is so different, but the gap has definitely narrowed.
IHL: Is that just because it’s had to?
SC: The world’s become a much more global place. I’d like to think it’s not just, ‘Oh my gosh, there’s many more lawyers in senior positions just because we need them’, but it’s because the profession is showing we can add value in many different ways.
IHL: What are the downsides to that? How does it evolve further?
SC: It’s great when people get moved around and have different challenges. In terms of the teams that I’ve worked with and had the privilege to lead, some of the proudest moments are when members of the team move outside the function into M&A or finance or general management. That trend will continue. But a lot of lawyers like being lawyers.
IHL: How far has legal technology come in the last few years and how much impact do you expect it will make?
SC: The GC is sometimes the worst person to ask that question because they’re so far from what the technology’s actually doing. There is a dizzying array of potential solutions out there and you can fall into the trap of investing in technology for technology’s sake. It’s important to be thoughtful about what is going to make peoples’ lives easier, are they going to embrace it, and what training are you going to have around it? The great thing about the partnering with DWF and others is they’ve tried and tested heaps of technology.
IHL: And they have dedicated tech budgets as well?
SC: Exactly, which would never make sense. If there’s a choice between putting the pounds behind our network and serve customers or some new piece of tech for the legal team, I know where the money will go.
IHL: What are the goals for the next 18 months?
SC: First, making sure that the team is ready to support the four or five key business challenges/opportunities that our CEO and ex co want us to address. Second, continuing the work on talent development and nailing succession planning, while third is getting the model of external partnership right.
Hamish McNicol
At a glance Sabine Chalmers
Career
1987-93 Associate, Lovell White Durant, London 1993-95 General counsel, Guinness, London 1996-99 General counsel, Guinness/Diageo Latin America, Miami 2000-01 General counsel, Diageo International Markets, Miami 2002-04 General counsel, Diageo North America, Connecticut 2005-08 Chief legal officer and company secretary, InBev, Belgium 2008-17 Chief legal and corporate affairs officer and company secretary, Anheuser-Busch InBev, New York 2018-present Group general counsel, BT, London
BT – key facts
Size of team 340 External legal spend More than £40m annually Preferred advisers Allen & Overy, Bryan Cave Leighton Paisner, CMS Cameron McKenna Nabarro Olswang, DWF, Freshfields Bruckhaus Deringer
Matthew Scully, Clifford Chance: There are two things that I wanted to touch on: first, whether there is such a thing as a good culture – I would say there is no one good corporate culture for all businesses but there are perhaps some basic common features – and, second, the notion of ‘tone from the top’, which is very important but it is not enough because culture has to be embedded. Why are we discussing it around the table here as a bunch of lawyers? We can inject common sense and pragmatism into the debate and to help people understand that the difference between right and wrong is not just what is legal and not legal – sometimes there is something that is legal but is a really bad thing for the business to be doing.
Mark McAteer, The In-House Lawyer: Is there such a thing as a good corporate culture?
Stephen Lerner, Three: Corporate culture is not about what is right or wrong legally. It is a unifying view as to what your company stands for and what employees get behind. If they believe in what you stand for, that engenders trust and that trust will then lead to a positive environment where risks will be escalated and people will feel confident in reporting. If you do not have that trust culture, you have bigger problems than just legal compliance and having your company fall in line with your appetite for risk. Those are all things that are in the purview of general counsel generally but they do not drive corporate culture.
Mark McAteer: Are we talking about the role of the GC as a gatekeeper of corporate values?
David Eveleigh, Serco: You cannot just have the GC as being the go-to person for working out whether culture is good or bad or indifferent. It is definitely not a legal issue. You cannot impose culture by way of regulation or law. People have tried and not necessarily been successful. They are starting to get it a little bit now with things like s172 [of the Companies Act] but, if you look at what is coming out around the culture of a company through ESG [environmental, social and corporate governance], it is all from a very different driver than the law and regulation. Therefore, if it is placed at the GC’s door, you are going down the wrong route because, just handling it as a legal issue, you are not going to get to the culture of the business.
Roger Leese, Clifford Chance: It is interesting now that there is this move to try to increase the relevance of s172 through this new mechanism, which seems to be the way in which this government thinks you can bring in good practice, by forcing transparency through reporting. As the lawyer what I see as the legal risk, for instance, is the gap between what a company reports and what is happening or what happens in the future.
Chinwe Odimba-Chapman, Clifford Chance: Is there a risk that companies that have too strong a purpose and direction do not create the right culture for employees and stakeholders if people who do not necessarily agree with that purpose feel they cannot speak up?
Matt Wilson, Uber: We used to have 14 cultural values at one stage, which is a few too many. There are now seven and they are very different. Some of those older cultural values included ‘principled confrontation’ and ‘toe-stepping’. Toe-stepping was meant to be this cultural value where you could challenge anyone else but it was weaponised and used as an excuse to be a bit of an arse. People said, ‘I am just toe-stepping’. ‘No, you are not. You are clearly being an arse.’
I became really interested in our corporate culture as a GC, and like to think I have played some small part in helping to influence it positively over the last few years with the rest of the leadership. It absolutely means complying with all of those technical things, whether it is equal pay or tackling modern slavery, but having the right culture also means lowering the risk for the business generally so you will have fewer problems. It will lead to the business making the right decisions and being an inclusive workplace where people are able to challenge power or what they see as a hierarchy.
Stephen Lerner: I do not think it is a question of having too strong a culture; it is having the right culture because, essentially, you want to have high levels of employee engagement. That is how you have high-performing companies that are aligned around a unified purpose. If you do not have the right people at the top, it has such a disproportionate influence on everybody else in your organisation. General counsel broadly have a huge influence on the organisation. If we are not aligned to that way of thinking and we act as the policemen of the business, we are not going to have the influence we need.
Mark McAteer: Is culture also linked to the business cycle? You may have the best-intentioned CEO in the world but if you are not turning profit, the message from the top changes.
David Eveleigh: Is it sustainable to have a culture that adapts to where you are in the market? I would worry because I have been in a company that has been through quite a cycle. I came in at the bottom part of it and there were issues. Did that drive the right kind of behaviours? While certain things might be very important to one of the stakeholders – the shareholders – long term they may not be sustainable and it can lead to some poor behaviour. It needs strong governance if that is a driver but the governance is really just a ~defence mechanism for a culture and, if the culture is not right, that is challenging.
Matt Wilson: We have heard about cyclical businesses and I can recognise some of that but I know, from my experience, that if you do not fix things for the long term with some level of baseline or north star that people can come back to, it causes problems.
“When a business is not going so well a GC can push home the message that it is not business at any cost.” Kate Danson, Johnson Matthey
Hannah Hullah, John Lewis Partnership: The John Lewis Partnership has a very clear purpose, which revolves around being a better way of doing business and having a happy and motivated workforce that puts customers first. The challenge is how to provide clarity around how this is achieved. As a co-owned business that encourages empowerment of our partners by involving them in decision-making and how the business is run, this can have unintended consequences. There have to be boundaries and support so that partners can be genuinely empowered to deliver the partnership’s purpose. Tone from the top is key to setting these. As widely reported, we are restructuring the partnership and embarking on a significant period of change bringing our two brands closer together, which is a big cultural shift. However this will, ultimately, ensure that we can continue to deliver against our purpose.
Stephen Godsell, Guardian Media Group: At The Guardian, we have an endowment fund, designed to support the long-term future of The Guardian, created out of the proceeds of previous disposals of non-core assets. The fund is committed to socially-responsible investment and alignment with the values of our organisation.
There is an increasing focus in the market on ESG investing – how investments can be made to generate long-term returns while still being in line with high ethical standards.
Roger Leese: There may be a couple of different strands to this. One of them is really about what we mean by culture. Cultures certainly ought to change and mutate as you go in certain directions. If you are in a start-up, you need to be in the business of taking risks, whereas if you are an established business with thousands of employees, you are stable and you have a different culture. There is also the other part of culture, of course, that is about people doing the right thing and not breaking the rules and not creating risks for the business, which ought to be a core that stays the same throughout the cycles.
“You have value statements and codes to help shape corporate culture but culture is very much shaped externally as well.” Nick Havers, Marsh
Mark McAteer: Isn’t this about communicating the message that doing the right thing can also be profitable?
Kate Danson, Johnson Matthey: That goes back to the point that, when times are tough, your culture goes downhill. When I think about culture, I often think about it being something much more long term. But when the rubber hits the road, what happens when a business goes through tough times?
Matt Wilson: Do you think part of the role of the GC is to provide some balance to that trade-off between short term and long term?
Kate Danson: Absolutely. Let us be clear that it is not just the responsibility of the GC alone, but one of the things that a GC can try to do when a business is not going so well is to push home the message that it is not business at any cost and make sure this message is coming right from the top as well, because it is then that people are more likely to make rash decisions to push the envelope further because they want to meet their targets.
James Sullivan, Monzo: Absolutely, and it is a dynamic thing. It is not static. As an early-stage company we’re still on a path to profitability but we have a very strong focus on culture.
Nick Havers, Marsh: You have value statements and codes to help shape corporate culture but in my more recent experience, culture is very much shaped externally as well. Like many of the industries represented here, we are regulated. The regulator’s gaze does inform our culture. We might like to present that it is what it is, but the regulator’s lines of enquiry do permeate through and determine the way that we present ourselves on culture as well.
The other externality is M&A activity. We have just gone through a large transaction and there are perceived to be slightly different cultures in the two businesses, and that brings an opportunity through integration to change a little by taking the best of two different cultures and blending them together.
Rupert Hopley, Informa: We have been very busy in M&A over the last few years. One of the biggest integration challenges to create a successful acquisition is bringing together two cultures.
I would point out the differences in cultures not only relate to the businesses themselves but the different country and local cultures they operate in. Those differences come in many ways even at the top of a company, where the corporate governance culture in US companies is different to UK corporate governance. A basic example is how our governance requirements focus on the independence of the non-executive directors and ensuring they do not stay on a board for too long. Similarly the chair’s independence and separation from the CEO role is a strong part of our governance. Our chair’s ability to create a collegiate and engaging atmosphere has helped our executive team take advantage of the knowledge and expertise the NEDs bring to the table. In turn, the chair and NEDs make sure that the goals that have been set and agreed at board level are being delivered in the right way and in the right culture for the organisation, so as to facilitate growth.
Mark McAteer: Can you effectively measure that?
Nick Havers: There is a fine balance. You have those measures, particularly in areas like whistleblowing incidents and customer complaints, for example. If you have none or you just have green RAG ratings, it may be too good to be true; and if you have too many red flags, you appear to have a bad culture. I am not trying to game the measurement but there can be this perspective, for example there have not been any whistleblowing incidents in the last quarter. That may not be accurate or the right indicator. Is the whistleblowing line well publicised, for example?
Mark McAteer: Chinwe, is the right information filtering through when the in-house function does this due diligence on people issues?
Chinwe Odimba-Chapman: In most areas where GCs are asked to advise in relation to regulation, law, etc, the rules are fairly clear. You know what you have to do to keep on the right side of the line. The concern I have with this real focus by the financial regulators on culture is that they find it very difficult to define what culture is. Therefore, how are you, as GCs, meant to go into your boardrooms or to your CEOs and say ‘we are doing everything right’? David, you talked at the beginning about the tick-box approach of the regulator being, ‘Do your s172 statement. Do your gender pay gap reporting. Make sure you choose one of three options for workforce engagement under the Corporate Governance Code.’ You can do all of that and you can say to your board or CEO, ‘We are doing everything,’ and it does not matter. You can have your whistleblowing hotlines and employee surveys but you just need one thing to go wrong and the way that you deal with that wrong thing can make the regulator say, ‘You do not have the right culture.’
David Eveleigh: If you are presenting to the board and that is the only time the board meet you, that is not ideal. If the people on your board are not out in the business on a fairly regular basis, unchaperoned, it is very hard for them to get any sense of the business other than what you have told them.
Rupert Hopley: That said, there is a balance to be struck, as they aren’t employees and may not have the time to be in the minutiae of everything going on in the business. With some of the issues that came out in your sector, it may be great to talk to the person on the ground doing the day-to-day job but, from what I have read, the issues have arisen in the contracts and obligations that people have signed up to. You may well have a challenging sales culture where getting the deal signed is key but the individuals may not know, or understand the nuances of what is being committed to by the company, and the risks that are being taken on. So if that is where the risks arise, closely managing those parts of the business and the localised culture are as important as setting the tone from the top.
Your role in those circumstances is as much as a member of executive management as it as a lawyer. Sometimes being a lawyer and simply giving advice isn’t enough; you are sitting in that room and can influence the decision making, so have a voice at that table.
“Your role is as much as a member of executive management as it as a lawyer. Giving advice isn’t enough.” Rupert Hopley, Informa
Matthew Scully: If that is not done then, you end up with situations where you have rotten apples inside the organisation. A lot of the things we have seen giving rise to massive investigation and litigation risk have come from situations where there is a nice message at the top and it is not just implemented properly because people within the organisation are incentivised to do things other than what senior management is telling them they should be doing.
Mark McAteer: Thank you all very much for your contribution.
Participants
Kate Danson, general counsel, group, Johnson Matthey
David Eveleigh, group general counsel and company secretary, Serco
Stephen Godsell, general counsel and company secretary, Guardian Media Group
Nick Havers, chief counsel UK and Ireland, Marsh
Rupert Hopley, group general counsel and company secretary, Informa
Hanna Hullah, director – legal, John Lewis Partnership
Stephen Lerner, general counsel and director of regulatory affairs, Three
James Sullivan, VP legal, Monzo
Matt Wilson, EMEA general counsel, Uber
Roger Leese, partner, Clifford Chance
Chinwe Odimba-Chapman, partner, Clifford Chance
Matthew Scully, partner, Clifford Chance
Mark McAteer, managing editor, The In-House Lawyer
Alex Novarese, The In-House Lawyer: It has been a record period for Asian activity into Europe. How do you see the general trends?
Abhijit Mukhopadhyay, Hinduja Group: China is an issue, because the main difference between the Asian companies, European companies and Chinese companies is that Chinese companies are directly or indirectly state-owned.
The second part of the story is their motives are under question. That is why you find in Germany the government putting up new rules. In Britain, it is looked at with suspicion and we are seeing what has happened with the London Stock Exchange [recently subject to a bid from Hong Kong Exchanges and Clearing].
Roger Barron, Paul Hastings: We talk about the trade wars. One of the ideas coming out is that the Trump administration is forcing people to not do business with certain entities. It feels there is a political side of things even before we get to regulatory hurdles.
Samantha Thompson, Anglo American: There are now more factors feeding into whether to do a deal. One of them is reputation and that includes the reputation of the counterparty. If you have to go to a shareholder vote, to what extent is reputation a factor? If we were to think of selling a big asset, a mine, for example, we would have to think long and hard about who the counterparty is because…
Roger Barron: … stewardship.
Samantha Thompson: Exactly, it’s not just about the money. It is about sustainability and governance – reputation. Even if you had a counterparty with very good sustainability and other credentials on paper, if it is complicated by the politics of whichever country, it just makes it a harder environment to get the deal done.
Alex Novarese: What would be the red flags for counterparty risk?
“It is a question of trust. So the client can accept not to understand every piece of a certain regulation but that you can manoeuvre him through it.” Regina Engelstaedter, Paul Hastings
Samantha Thompson: Reputation overall, environmental record, track record with communities and employees, not having a proper plan for running the asset… You have to do a lot more due diligence up front about how things are going to be run after you have exited, whoever you’re dealing with.
Paul Harvey, Arma Partners: How do you do due diligence on counterparties?
Samantha Thompson: You might use a law firm. You would use an environmental firm. There are other specialist firms if you have concerns.
Alex Novarese: Are there any other kinds of businesses or sectors where people are particularly concerned?
Parminder Nahl, Wyelands Capital: Industries where IP is a key asset. This certainly seems to be one of the key things that Donald Trump has sought to highlight in his statements about wanting a revised trade deal with China.
Roger Barron: There is a question as to at what point does concern for infrastructure and defence stray into paranoia? You find chips in all sorts of things from fridges to toys. The UK changed their rules and are looking at their ability to intervene in general areas of critical infrastructure. That is happening in Europe too.
That was a time when Europe generally was very open to business. We then had a period when the Cameron/Osborne government were very much encouraging of investment from Asia more broadly and China in particular. We now have strayed from concerns of national security arguably into potential paranoia. Discuss.
Regina Engelstaedter, Paul Hastings: It started with IP. This was the core interest of Asian investors and major concern of governments at the beginning. Today, only very few industries are excluded. Next to IP, it is tech and it is infrastructure. Data has now become a hot topic as well, including privacy of data and data technology.
Abhijit Mukhopadhyay: Over the last 30-35 years, you see a pattern going on. [Chinese companies] have acquired almost all the energy assets in many parts of the world, Africa as well as Latin America. There is a fight going on between India and China on how to acquire which assets, especially the energy assets. [Chinese firms] have acquired a lot of metal exchanges. Now, they are trying for the London Stock Exchange. Half of the major infrastructure here is owned either by the Qataris or the Chinese.
Natalie Salunke, Fleetcor: I find your comment about investment decisions being driven by the acquisition of knowledge rather than purely economical echoes my perceptions. We are seeing that countries are ‘empire building’ in a different way to the past.
Abhijit Mukhopadhyay: It is economic control.
“In the UK, the willingness of government to intervene in deals is often swayed by the general mood of the country.” Samantha Thompson, Anglo American
Natalie Salunke: Yes, the empire of knowledge. What I find interesting is the more passive roles of some investment versus your perception that it is a much more active relationship because it is not just a monetary value.
Neel Malviya, Moelis & Company: In late 2015/2016, we worked on six US public M&A deals involving Chinese buyers in a 12-month period. Every single target company had a technology/IP slant and the Chinese buyers were very purposeful about what they were trying to do. Once President Trump was elected, Chinese rules on outbound investment changed and our team suddenly had to reinvent what they did.
Roger Barron: Same here. When the Cameron government handed over to May, there was a definite change of approach. Sonya, what are you saying to your clients?
Sonya Rogerson, Bank of China: People have mentioned trade wars, but there is a very good opportunity here in Europe and people recognise that, despite uncertainty with Brexit. People are being very active in the market, at least in asking lots of questions and scoping for acquisition targets. Certainly, there is a bit of distrust, but it is just [an issue] of education and understanding that there are huge opportunities. People have to be smart about how they partner with the Chinese, understand the differences and try to make it successful.
Alex Novarese: What are the general mistakes that can creep into the process when you have large Asian companies bidding for European assets?
Neel Malviya: When we run sell-side M&A processes, the ease with which deals are done these days is very different to two or three years ago. Every deal is harder to do now. The perception with Chinese buyers seems to be that, while they may be prepared to pay a higher headline price, deal certainty is not there. Frankly, the right advice to the client on the sell side is to consider all bidders, not just the highest bidder. People are often much happier to take the slightly lower bid in exchange for deal certainty.
Roger Barron: We are advising parties on both sides so we find the same issues, whether you are on the buyer’s side or the seller side; basically you need to make sure you are facing up to these concerns early on.
Let us say you are buying in the UK. If you know you are going to have an issue, you go early to the local government authority. You explain it and present your solution to the seller’s side. You cannot just take it at face value. You have to show you have the solution.
Pricing is interesting. I have seen that going both ways. I do not necessarily think there is an execution premium people are willing to pay. What we are advising people is to very much cover that issue off early. Do not leave that to a negotiation on the sale and purchase agreement.
“Governance generally has improved massively across the developed world.” Roger Barron, Paul Hastings
Samantha Thompson: When I was advising Asian clients looking to invest, particularly into the UK, the Takeover Code could throw them completely. ‘What do you mean, “The spirit of the Code”?’
Roger Barron: ‘What happens if you break it?’ Yes.
Samantha Thompson: Exactly. Even when you have gone through that, the concept of what you say to the media, even if it is in your home country, impacting what you can do in the target country is really difficult to manage.
Alex Novarese: Is there any particular way to mitigate confusion around the Takeover Code?
Regina Engelstaedter: It is a question of trust. It is important to establish a really good professional relationship to the client so the client can accept not to understand every piece of a certain regulation but that you can manoeuvre him through it.
Samantha Thompson: The financial adviser can be key.
Roger Barron: You asked an interesting question at the start: ‘Are different types of buyers changing governance and regulation for the future?’ I am going to put it out there as a thesis that the standards of governance and transparency are such that it is no longer good enough to have this middle guy who will sort everything out for you.
Abhijit Mukhopadhyay: Completely true.
Roger Barron: I do not think there will be wholesale changes in powerful countries or players changing regulation. That is not to say they will not have input because the law and the regulatory practice changes all the time by consultation. But I do not think you will find a single player you can strong-arm into it.
Parminder Nahl: Does that point to the fact that, because there is a lack of certainty in who you are dealing with, that stops the potential [deal]?
Roger Barron: That is certainly what people think, but over time will surely increase the level of certainty and the degree of trust you can have in a process because it’s no longer contact based. It is more rules based.
Parminder Nahl: If you draw the analogy to Japan when it was going at a great pace in the 1980s and early 1990s, presumably there were the same concerns about that kind of M&A?
Alex Novarese: Yes, even just looking at the popular culture of the day, there were fears of economic nationalism.
Roger Barron: Governance generally has improved massively across the developed world.
Alex Novarese: Are people expecting resistance in Europe to build up? Will there be more barriers thrown up to Asia bidders?
Parminder Nahl: We are probably getting a wave of protectionism. Certain deals will go through and no one will know about them, but the big-ticket stuff, deals that are going to be on the front page, may meet resistance.
Roger Barron: Do you sense a change [in Britain’s takeover policy]? With the Cobham deal, Advent are a respectable US house [the US private equity firm this year bid for defence group Cobham]. Do you think that would have been reviewed three years ago? I wonder.
Samantha Thompson: In the UK, the willingness of government to intervene in deals is often swayed by the general mood of the country. At the moment, there is more willingness to intervene in part because there is this growing protectionist sense in the UK, given what has been going on for the last three years. There is also counterbalance where industry needs investment. If the car industry needs investment, the government recognises: ‘We may need to look at other options.’ [But] it is not necessarily a rational or predictable distinction.
Alex Novarese: You have just described the dynamic in which we are likely going to have two forces in direct opposition in Britain for probably the next 50 years.
Abhijit Mukhopadhyay: There are more nationalist governments coming in different parts of the world. This kind of government and the leaders that govern, for example Trump, will always try to play the protectionist part to a great extent. It is happening in many countries. It is not only political. It is more of a so-called nationalist approach. It happens especially in Asia.
Parminder Nahl: Having done less inward M&A into China, how easy presently is it to get away?
Roger Barron: [China’s] antitrust authority is famously involved, very sophisticated and often the very last one in a process involving lots of antitrust authorities. I have done deals in a whole bunch of countries around the world. No one is, as a country, especially difficult. They all have their individual issues.
Alex Novarese: So where would you put doing deals in China on the spectrum in terms of just overall challenge?
Roger Barron: M&A is less tried and tested, because of history and the economy. Sometimes on transactions, you may have to spend a little longer on those earlier steps. A lot of everything that goes wrong in deals is a misunderstanding, whether with each other or with the underlying factors. Creating clarity on what needs to happen is the main thing.
“It is about investing in human relationships and acknowledging that Asian companies still place a lot of value in that.” Natalie Salunke, Fleetcor
Paul Harvey: [I have heard it said that] Chinese firms do not pay sell-side adviser fees. I am curious: do they pay legal fees?
Alex Novarese: It is often claimed that Chinese clients pay better rates to Chinese law firms and advisory houses than Western equivalents. How scientific that claim is, I cannot say.
Roger Barron: You have a pretty good view across the board in your position.
Alex Novarese: I have heard it from so many people, there must be something to it. In the European collapse of King & Wood Mallesons, late payment or write downs for the European side of the business [from Chinese clients] was one of many contributing factors.
Sonya Rogerson: Doing M&A in China, you need a different mindset. How you are going to do it is going to be different than in any other country. Successful M&A is thinking long term and building trust. Most successful British or Western companies that have done it have been investing in those relationships over ten or 15 years before they have then executed the M&A strategy, whether an acquisition, a joint venture or starting through alliances. There is a lot of sophistication in the Chinese market, particularly with advisers. Some of the fees the lawyers are getting paid are much higher than they are here in the UK so I do think the market is increasing in sophistication. Western boards need to understand that M&A is just done differently. What would be a Western risk to a Western company may or may not be the same risk. They are coming at it from a completely different perspective.
Roger Barron: A related point on that in terms of knowing: if you are a Western counterparty dealing with a Chinese counterparty, is there a question about knowing who your decision-makers are? I have heard that a few times with people saying, ‘I think I’ve been negotiating with the wrong person’.
Sonya Rogerson: It is quite unlikely you will know who the decision-maker is in all circumstances. It is about access, being patient and not necessarily making your returns as quickly as you might want.
Roger Barron: Just in terms of the payments world, is that something people run into: trying to second guess where the Asian buyers are coming from?
Natalie Salunke: For us it is more about simple economics. The targets in our pipeline just aren’t going to draw the returns we would expect so we are biding our time. It is more about investing in human relationships and acknowledging that this part of the world still places a lot of value in that. The American way may be a lot more process driven, but that doesn’t always work here. There is still this arrogance that, if you want to play with these guys, are you going to play their game or are you going to be the dominant party? If you are arrogant, you are not really playing the game so why would you come out winning?
Alex Novarese: It is interesting that the vastly differing timelines of certain state-owned Asian businesses and the short-term decision-making in public companies in many Western companies is one of many factors causing tensions.
Roger Barron: That is a really good point, whether it is family wealth, state-owned enterprises or government-backed business. Although there are many opportunities that being a listed company will bring you, they also do have advantages in what they can do too.
Alex Novarese: Perhaps we could spend a few minutes exploring opportunities of European and Asian investment back and forth.
Abhijit Mukhopadhyay: Brexit is creating a lot of uncertainty. In the Asian world, there is the India/Pakistan conflict. We are global investors. Geopolitics plays a very important role for us. If the geopolitical stability is not there, there is a big problem.
“We have to assess what price we are willing to pay to get access, because there surely is a price.” Parminder Nahl, Wyelands Capital
Parminder Nahl: There is opportunity because while some industries will still have the same issues about IP, there are other investment avenues that may not be impacted as much. This will largely be dependent on whether what evolves politically is genuine protectionism or paper tiger protectionism. We all know that there are huge opportunities. It is just getting a balance in a way that all parties are comfortable with the risks and rewards of doing business.
Some of the challenge arises because the Chinese do not presently need foreign investment as much as other countries. They have the cash whereas other jurisdictions want foreign investment and are more inclined to change their rules to match whatever they think is the common standard.
Alex Novarese: So the normal leverage is not there.
Parminder Nahl: Exactly. How do you then do that? It is just a longer process. As China’s role in the world changes they will need to reconsider how they interact with the wider world and it is conceivable that it may be in their interests to protect IP rights as they move up the value chain.
Until then, we have to assess ourselves what price we are willing to pay to get access, because there surely is a price. If you are going to do a deal in America, you have to accept that.
Roger Barron: The cause for optimism is the increasing understanding of how to execute those deals. The more people do those sorts of things, the uncertainty or room for misunderstanding dissipates. You will find that will happen too with the internationalisation of advisers.
Neel Malviya: The importance of joined-up thinking has never been more apparent. We do a lot of deals with Asian counterparties and having the wisdom in each continent, and being able to join up, is the difference between getting deals done and not getting them done.
Roger Barron: That is absolutely right. We have all been at negotiating tables where there has been a simultaneous translation going on across the table. That can be a barrier, but you get the people engaged, have some humour through the translator to the other side and, all of a sudden, the room starts melting.
Alex Novarese: Thank you all for your time.
The panellists
Paul Harvey, group business development director, Arma Partners
Neel Malviya, general counsel, EMEA and APAC, Moelis & Company
Abhijit Mukhopadhyay, president legal and general counsel Europe, Hinduja Group
Parminder Nahl, general counsel, Wyelands Capital
Sonya Rogerson, general counsel/head of legal and compliance, Bank of China (UK)
Natalie Salunke, European general counsel, Fleetcor
Samantha Thompson, M&A and corporate legal head, Anglo American
Roger Barron, partner, Paul Hastings
Regina Engelstaedter, partner, Paul Hastings
Matthew Poxon, partner, Paul Hastings
Hamish McNicol, corporate counsel editor, The In-House Lawyer
Alex Novarese, editor-in-chief, The In-House Lawyer
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IHL: How hard is it to get around all those different providers? You spoke to 26 for the DWF one. 
