COMMERCIAL AWARENESS

Question 1

How do you keep commercially aware?

Answer 1

Each day I:

1) Read the FT and the Economist

• I typically read the FT First and the Economist’s World in Brief to get a broad overview of big headlines
• From this, I then select specific articles to read based on my interests

2) I tend to listen to podcasts

• I enjoy listening to FT’s Wake up to Money and their News Briefing, Economist’s World in Brief and BBC’s Wake up to Money
• I typically listen to them whilst getting ready for work, when cooking or even at the gym whilst doing low-intensity activities

3) Research unfamiliar concepts

• Whilst reading or listening, I generally come across unfamiliar concepts so I will go away and research this in detail
• For instance, the other day I came across Net Asset Value Financing or NAV Financing
• It is capital provided by a lender that is secured against the value of a fund’s underlying portfolio. It is repaid by cash flows generated by the underlying portfolio, such as the proceeds from the sale of the company
• Allows PE funds to unlock liquidity from typically illiquid assets without the need for a liquidity event such as an IPO or sale
• Allows lender to expand their pool of eligible borrowers and benefit from the diversification of underlying portfolios

Question 2

Has there been any commercial developments that have caught your attention recently?

Answer 2

Given my interest in corporate matters, the reforms to the UK capital markets regime have caught my attention and something that I have been following.

For some context, London has struggled to attract companies and witnessed several take private deals. Indeed, according to the FT, the City attracted only 5% of global IPOs from 2015-2020. In response, the FCA published its Primary Markets Effectiveness Review in May last year outlining multiple proposals to enhance London’s appeal to prospective issuers. These proposals came into force 29 July. However, they may overlook competitive and cultural issues and deter smaller companies from listing.

The main change to the Listing Rules is streamlining the existing bifurcated structure of premium and standard listing segments into one single listing category with a unified set of obligations.

The reforms also include the removal of certain financial eligibility requirements, such as the need to provide a clean working capital statement and the three-year historical financial requirement.

Accordingly, as these changes simplify the IPO process and make it easier for companies to list, London could become a more attractive venue for prospective issuers.

However, some requirements currently applicable to the premium segment will carry over to the single listing category, such as the sponsor and significant transaction regimes.

Accordingly, whilst the proposals will likely enhance London’s appeal, it may deter smaller issuers given the higher burdens they face to list now.

Moreover, the UK is less liquid and offers lower valuations than competitor jurisdictions, namely the US.

As such, a broader approach targeting cultural change is warranted alongside reforms to listing rules. These include rules directed to pension funds given that they have reduced their allocation to UK shares from 44% to 4% over the past 25 years, according to Peel Hunt.

Question 3

What is a clean working capital statement?

Answer 3

A statement that confirms the issuer has sufficient working capital for at least 12 months following the publication of its prospectus

Question 4

What is the three-year historical financial information requirement?

Answer 4

Historical financial information for the past three years must be published or filed

Getting rid of this makes it easier for companies to list at an earlier stage

Question 5

Is the significant transactions regime done away with?

Answer 5

No, it is still in effect but less onerous

FCA now require companies to make an announcement with prescribed content when a company is entering into a significant transaction

Question 6

What is the significant transaction regime?

Answer 6

Prior to the reforms, companies entering into a significant transaction were required to get an approved circular and shareholder approval before entering into this - this also had to be approved by the FCA

It was considered a major impediment to Premium Listed companies, given the time and cost involved in obtaining relevant approvals

Question 7

What is the sponsor regime?

Answer 7

Unique feature of London, requiring issuers to have an expert advisor guide them through the listing process and other related public transactions, such as in the application of the City Code

Question 8

What does a trainee solicitor do?

Answer 8

Ultimately a trainee solicitor is there to be trained.

• I have to act like a sponge and take in everything and anything that I come across to grow into a competent practitioner
• Furthermore, I appreciate Slaughter and May provide trainees with a legal and skills training programme and a Continuity Partner as a point of mentoring contact - these will provide me the opportunity alongside my work in seats to take in as much as I can

Secondly, trainees are required to do whatever is asked of them from an associate or partner

• This is regardless of the complexity or how stimulating a task is because 1) nothing is beneath me, and 2) I recognise that the partner or associate has delegated a task for the wider benefit of a client or the matter being worked on

The types of task that could be given to a trainee vary, but may include:

• Legal research on a client query or a technical point that has arisen
• Sitting in on client meetings and taking notes to then circulate to wider team
• Project management - arranging singing and closing
• Learning how to deal with clients
• Trial bundling
• Preparing first draft of a court submission
• Drafting board or shareholder minutes or even written resolutions

Lastly, trainees will be trained on administrative matters, for example:

• KYC, opening and closing files and how to record time

Question 9

What do clients look for in a law firm?

Answer 9

Different clients look for different things in law firms. However, the main things clients look for include:

1) Relevant experience and expertise

• A client will instruct a law firm that is market-leading in a particular area and has past and relevant experience on a matter they require guidance with
• Accordingly, a firm must be renown for their expertise in that area, speak the client’s language and understand their business

2) Competitive pricing

• Given the macroeconomic climate of high interest rates, clients are also seeking competitive pricing
• Accordingly, they may look to a fixed fee arrangement o more commonly, capped fees, and even consider whether a firm is meeting their budget requirements

3) International capabilities

• Clients will have international operations that require specific jurisdictional advice so will seek a law firm that boasts an international network to deal with those specific matters

4) Personal element

• Ultimately, law firms are a business and must therefore develop relationships to retain clients and bring in revenue
• Accordingly, a client will consider whether they get along with the partners, senior associates and associates they are instructing

Question 10

What challenges are facing the legal sector?

Answer 10

I believe there are three main challenges facing UK law firms:

1) Rise of alternative legal service providers

• The Big Four (EY, Deloitte, PwC and KPMG) are expanding their presence in the global legal services market, offering clients a one-stop shop for professional services, such as tax, auditing and legal
• Such an offering is increasingly appealing to clients who seek seamless advice for all their professional services
• This is likely to affect mid-market law firms in the short term but could impact upper-market work in the medium to long-term

2) Rise of US firms in the UK

• UK top law firms are facing increased competition from US heavyweights, including the likes of Davis Polk, Paul Weiss, Cravath and Latham & Watkins as they capitalise on the rise of London’s corporate scene, particularly in private equity matters
• Furthermore, these US firms are beginning to win panel appointments to FTSE 100 clients, such as Latham & Watkins who had won such appointments at Vodafone and Anglo American
• These firms have also been on an aggressive hiring spree, poaching UK partners and boating higher base salaries for junior lawyers

3) Adoption of legal technology

• According to the FT, the legal sectors is one of the fastest growing sectors to adopt technology
• Indeed, many firms have rolled out internal pilots of generative AI, including Addleshaw Goddard, Travers Smith and Macfarlanes
• Accordingly, a competitive environment has emerged with law firms vying to leverage emerging technology to improve efficiencies and bolster the client experience

Question 11

What makes law firms different?

Answer 11

There are many things that make law firms different, but I think the following four things are distinct:

1) Specialisms

• Law firms will have different practice area or sector strengths
• As such, this will also inform what clients they firm services or what markets they are operate in

2) International approach

• Firms operate different international models:
• Swiss Verein - includes the likes of Baker McKenzie, Dentons and DLA Piper
• This models allows law firms to share a brand but operate as separate legal and financial entities
• Global Partnership - includes majority of law firms, such as Clifford Chance, Linklaters and Freshfields
• This model is a unified model where firms share a brand and branding, profits and decision making
• Best Friends Network - includes the likes of Macfarlanes, Travers Smith and Slaughter and May
• This model is an independent firm which have formed a network to refer work to each other

3) Partnership model

Lockstep
- Where pay correlates with the seniority of equity partners

Eat-what-you-kill
- Lawyers compensation is dependent on the amount of revenue they bring in

Modified lockstep
- Incorporates eat-what-you-kill into traditional lockstep so that it is modified by performance factors

4) Culture

• Lastly, firms differ on culture
• For me, it is important that I join a firm where I can see myself being there for the long-term
• Slaughter and May appeals to me for this reason, given that they boast a legacy culture of talent with other 200 partners having trained at the firm, indicating that loyalty is sought after along with the fact that fee earners want to stay on

Question 12

What is securitisation?

Answer 12

Refers to the process where a business would like to remove not-easily tradeable assets off its balance sheet and pool them into a tradeable security.

It does this by grouping these assets and gets an SPV to purchase them, and this SPV issues bonds

Question 13

What are derivatives?

Answer 13

A financial contract whose value derives from the underlying asset, such as a commodity or security

They are used to hedge risk on the directional movement of an asset

Question 14

What are the types of derivatives?

Answer 14

Forwards, Futures, Swaps and Option

Question 15

What is a SPAC?

Answer 15

A special purpose acquisition company - in other words a blank cheque or shell company that is publicly listed and primary purpose is to merge with a private company to make them public

Question 16

What is the difference between Reg S and Rule 114a offerings?

Answer 16

Both refer to the offering of securities to qualified institutional buyers without the need to register under the US Securities Act. It is an exemption because of the target investors.

In a Reg S offering, securities may be offered to overseas investors.

In a Rule 114a offering, securities may only be offered to US domestic QIBs

Question 17

What is the difference between an ordinary note offering and a programme?

Answer 17

An ordinary note offering is a stand-alone bond issuance. Whereas a programme or an MTN refers to a flexible form of financing that allows an issuer to issue multiple notes within a period.

Under a progamme, this provides the issuer with greater flexibility in accessing capital. Lawyers are also involved to a greater deal given that they would have to update documents when a material change in their business occurs.

Lawyers in a stand-alone bond issuance would just be involved in preparing the offering documents and perhaps providing ongoing advice post-issue

Question 18

What are the advantages and disadvantages of securitisation?

Answer 18

Advantages:
- Allows a business to turn illiquid assets into liquid ones
- Lowers their risk profile
- Removal of assets within a company’s balance sheet lowers the requirements of related capital, resulting in capital being available for other purposes

Disadvantages
- Tranches of securitisation may not reflect their true level of risk given that they are diversified leading to lower risk rating
- There is default risk on underlying loans
- Investor in the securitised asset assumes the creditor role, increasing their risk profile

Question 19

What is sweet equity?

Answer 19

Providing shares to management with an exercise price below that of the current market price to incentivise them to grow the target.

Question 20

What is a lock-in agreement?

Answer 20

Prohibits existing owners from selling shares for a specified period (typically 90 to 180 days) after the IPO.

Question 21

What practice areas are involved in legal due dilligence?

Answer 21

Corporate, Finance, Employment, Property, IP and Litigation

Question 22

What is the role of corporate in DD?

Answer 22

Corporate will investigate the constitutional documents of the target (certificates of incorporation, articles of association) to identify whether:

1) The target has the authority to sell;
2) If there are any restrictions on shareholders transferring shares;
3) If there are any restrictions on directors transferring assets

Question 23

What is the role of finance in DD?

Answer 23

1) Has the target borrowed money and if so are there assets subject to a charge? These need to be discharged

2) If SPA, there is likely a change of control clause, so will need to check loan documentation to ascertain the consequences of clause (i.e. will lender accelerate the loan)

3) How many lenders is the target subject to?

Question 24

What is the of employment in DD?

Answer 24

1) Who are the employees?

2) What is the pension situation

3) Has the target been complying with relevant employment legislation?

4) Are there any key managers we want to stay with the company?

Question 25

What is the role of property in DD?

Answer 25

1) Is the property in good state - does it need repairing? Might need to conduct site visits or have a survey conducted

2) Has the relevant legislation been complied with (i.e. EPA and planning permissions) because we can carve it out in the agreement

Question 26

What is the role of litigation in DD?

Answer 26

1) Is there any existing or threatened litigation?

2) Might also check correspondence that shows customers or employees unhappy to ascertain if future claims are a possibility

Question 27

After completing DD, you discover a litigation claim could be brought potentially against the target. What do you do?

Answer 27

1) See if buy can resolve before conducting agreement

2) Include CP that thorough DD is conducted and buyer is satisfied before concluding

3) Adjust consideration

4) Put money aside in escrow in the event that litigation does arise

5) Include warranties or indemnities (like an indemnity because you have found a potential litigation claim)

6) Walk away if serious

Question 28

Imagine that you are advising a client who wants to invest £1m, what advice would you give to this client?

Answer 28

Firstly, I would confirm the client’s source of funds to ensure I am adhering to my duties with regards to KYC and AML.

Secondly, I would ask the client what their objective is? Is it a short-term, mid-term or long-term strategy? That is, are they going to be investing for a year or so, 5-10 years or 20+ years.

Thirdly, I would ascertain their risk appetite. Is it low, medium or high?

Depending on these options, I would advise the client differently. However, my overarching aim would be to ensure their portfolio is diversified and well-balanced to meet their risk appetite and objectives.

For instance, if they wanted a 5 to 10 year investment with medium risk, I would provide them with a mixed portfolio of low, medium and high risk assets.

Low risk assets may include gold, deposit accounts or government or corporate bonds with AAA ratings.

Medium risk would include shares or commercial property.

High risk would include emerging market shares, derivatives, high yield bonds and cryptocurrency. Given my client wants medium risk, I would also expose them to this asset class minimally.

Question 29

Do you consider the business of private equity to be unethical?

Answer 29

There’s definitely two sides to the argument.

Firstly, some may say that PE’s business model is unethical.

• When PE firms take over the management of a company, they make it highly leveraged, adding to its risk of collapse and strip its assets and can include employees, leading to reams of job losses.
• Furthermore, PE firms have a short-term mindset, seeking a return within 7 years. Accordingly, they are not invested emotionally to the well-being of the business.

However…

• PE firms buy distressed companies on the brink of collapse and turn them around. As such, this would stop an extended number of job losses. One notable example is Hilton Hotel that was in the midst of the real estate bubble in 2007.
• They also put their capital at risk so should be compensated adequately for this and should not be demonized for seeking a return.
• Lastly, they offer businesses access to capital and expertise that would otherwise be difficult to obtain in their financial position, such as through a bank or public markets which require stringent capital requirements and reporting obligations.

Accordingly, I think the business of PE firms does far greater good than harm.

Question 30

What is a forward / future and what are the differences between the two?

Answer 30

Both are a derivative contract creating a legal obligation to buy an asset in the future at a specified price.

A forward is a customisable contract that is traded over-the-counter.

A future is a standardised contract that is traded on the public markets.

Question 31

What is an option?

Answer 31

It is a derivative contract that gives the right but not the obligation to buy an asset at a future date, providing the investor with a choice to exercise that option at a later date.

Question 32

What is the role of a corporate lawyer (generally)?

Answer 32

Corporate lawyers advise companies and financial institutions on a broad range of matters, including:

• Incorporation of companies;
• Going from private to public;
• Takeovers and M&A work;
• Restructuring companies;
• Advising on the life of a company

Question 33

What is the role of a finance lawyer (generally)?

Answer 33

Finance lawyers advise companies and financial institutions on a broad range of matters, including:

• Raising capital;
• Advising on financial regulations;
• Advise on alternative forms of financing (such as securitisation and derivatives);
• Advise on restructuring debts

Question 34

What is the role of a disputes lawyer (generally)?

Answer 34

Dispute resolution lawyers advise companies and financial institutions on a broad range of matters, including:

• Instructing counsel to get a matter to trial, and ultimately solving an entity’s dispute
• Advising clients on existing or threatened litigation, providing advice on whether to settle
• Advising clients on how to avoid litigation, by going through ADR

Question 35

What is the purpose of DD in an IPO?

Answer 35

Fundamentally, it is making sure that investors have all the necessary information to make a well-informed decision on whether to purchase the security.

Accordingly, legal due diligence would check the validity and accuracy of any disclosures in a prospectus to prevent legal risks from arising.

Question 36

What do lenders need to know before lending?

Answer 36

There are a number of things that a lender must confirm before lending, these include:

• Last three years of financial information to ascertain if they are in a position to satisfy the lend, so they will look at cash flows
• What the business is going to use the money for
• What assets the business has in the event they need to acquire
• Is the business subject to litigation or is there any threatened litigation
• Has the business defaulted in the past

Question 37

What is the difference between partners and senior associates?

Answer 37

Partners are either equity or salaried partners and make managerial decisions on a client matter, meaning they are ultimately responsible for that transaction or client matter.

Partners make managerial decisions on the strategic direction of the firm. Whilst senior associates are employees and do not have that managerial scope.

Partners are typically more experienced than senior associates.

Partners also bring in business for the firm.