While one of our lawyers recommends conducting a cyber-attack exercise to be better prepared for the real thing, another anticipates challenges ahead for private equity, but also a major upswing in impact investing. Others expect an increase in anti-corruption cases, including greater coordination across jurisdictions, and highlight how breakthrough technologies and accelerating competition will impact our clients. As we head into what promises to be an anything-but-predictable year, our lawyers share their perspectives on the actions to take and the trends to watch in 2020.
During 2020, scrutiny around companies’ use and storage of personal data will undoubtedly continue. EU GDPR-style regulatory principles are gaining global influence. In the U.S., for example, other states are looking closely at California’s California Consumer Privacy Act, with potential federal law also in the offing. As this movement internationalizes, expanding regulation will be echoed in increased enforcement and data-related litigation.
Bad actors are increasingly sophisticated as we are seeing in proliferating cyberattacks and other security incidents with resulting data breaches. 2020 is likely to intensify regulators’ focus on corporate compliance—probing compliance processes deployed to prevent such incidents and ensuring potential weaknesses are safeguarded against. The chaos that follows major incidents brings substantial reputational risks. Companies need to review, refresh and remediate compliance programs sooner rather than later in order to avert or address crises at the outset.
Advances in cutting-edge technology—artificial intelligence, data analytics, facial recognition and the like—mean this compliance task needs constant fine-tuning. Regulators are keen to work with companies to engender proactivity and ensure effective management of these challenges. My advice is to work with regulators and be an active part of the compliance dialogue.
Companies need to conduct a cyber-attack exercise as part of their 2020 to-do list. No amount of paper policies is a substitute for bringing the team together for a simulation of the corporate response to a severe cybersecurity event. It’s important to have an independent facilitator so that there are no blind spots or assumptions baked in. Every time I lead an exercise I’m amazed at the number of practical lessons learned that come out. It’s also gratifying to see how it brings to life for client teams the issues they need to be thinking about.
Many GCs know they should plan an exercise, but are waiting for the right moment or for more progress to be made before testing their people. Candidly, the reasons for delay probably wouldn’t stand up under scrutiny in the aftermath of a serious incident for which people were unprepared. A great way to start is a simulation lasting a half-day. Everyone can then leave for lunch knowing they’re more prepared than they were before.
Private equity faces several challenges: an uncertain macroeconomic and geopolitical climate, increased regulatory scrutiny, greater international protectionism, a strengthening emphasis on ESG and, crucially, heavy competition for assets. GPs must develop new deployment strategies to deliver market-beating returns for their investors.
The substantial dry powder available in both private equity and private debt markets, along with the scarcity of attractive assets, has led to extremely aggressive auctions and pricing. Bidders need more than an attractive price—they must make a compelling offer. This means identifying and cultivating target management and demonstrating the value they can deliver to secure the holy grail of deal making: an exclusive bilateral process. We expect an increase in courtship and pre-emptive bids to win auctions.
Increasingly protectionist governments are tightening regulatory barriers to investment. Investors, particularly those active in sensitive industries, must be acutely alert to changes in the political and regulatory landscape to identify existential threats early on and minimize execution risk. Data privacy due diligence will also be critical when acquiring data-rich companies; robust technology policies and procedures will need to be maintained post-acquisition to reduce the risk of value destruction within the portfolio. Finally, we see a major upswing in impact investing, which is anticipated to grow to US$1 trillion this year.
We expect Europe to continue to be an extremely desirable marketplace for acquisitions, with relatively low valuations for high-quality assets. Deal activity will continue to be driven by the U.S.-Western Europe corridor, but we anticipate that we will see the return of, and increase in, deal flow between Asia and Europe throughout the coming year. M&A will continue to be one of the primary mechanisms companies use to respond to the changing technological and competitive scene; it is the quickest route to accelerate a company’s growth and or technology strategy, whether voluntarily or due to shareholder activism.
In light of this, dealmakers should be conscious of the increasing political, social and regulatory scrutiny deals are under. Deals that seek to shake up an industry and challenge market incumbents face an increasing number of antitrust and regulatory issues, in part due to the rise of protectionism and further potential “trade wars.” The strategic bolt-on acquisitions that will constitute the majority of the anticipated M&A activity will require focused diligence on the people, data, IP and technology that are expected to be the key attributes of the targeted businesses desired by acquirers.
Therefore, buyers would be best advised to ensure they clear their regulatory and antitrust analysis as soon as possible and prepare for focused and targeted diligence, especially if the trend of contested auctions continues.
Notwithstanding the robust economy, restructuring transactions continue to be active. Multiple industries, including retail, energy, automotive and health care, continue to struggle. As a result we find ourselves in the most active restructuring market since the Great Recession. One common factor in these restructuring transactions, with the exception of retail debtors which typically end up in liquidation proceedings, is the use of pre-packaged bankruptcies.
The primary driver behind these prepackaged filings continues to be the certainty existing around the outcome in a “pre-pack,” with less interruption to a company’s day-to-day operation and the cost savings from spending as little time as possible under court supervision. With this greater pressure to remain in Chapter 11 for as little time as possible, many companies file with a very short runway in which to accomplish a restructuring. Expect to see debtors, creditors, investors and the bankruptcy courts continuing to compress bankruptcy cases that historically took years to complete into bankruptcy cases that are as short as a few months.
This year will build on now-established trends in the investigation and prosecution of bribery and corruption. 2020 will see more coordinated settlements, joint investigations, and multiple jurisdiction actions as anti-corruption rises up countries’ domestic policy priorities.
This no longer reflects a U.S.-driven agenda; there are prominent cases in each region. Companies should therefore think globally when looking at their internal controls and compliance framework, to ensure these satisfy international regulators and law enforcement authorities. Similarly, the work of gatekeepers—including lawyers, accountants, auditors and other financial intermediaries—will also be thoroughly scrutinized.
Companies—regardless of jurisdiction—will need to keep a watching brief on the impact of the EU Regulation on Data Protection and Whistleblowing Directives, as well as potential legislative actions in key countries (for example, Germany’s possible introduction of corporate criminal liability).
At the international level, companies and attorneys should monitor the review of the 2009 OECD Anti Bribery Recommendation, which may expand the remit of the OECD Working Group on Bribery. The G20 Anti-Corruption Working Group and wider international community understand the links between corruption and other economic crimes. It is imperative companies establish integrated, holistic internal control and compliance systems, and link these to corporate social responsibility.
Companies need to make sure they are on a track to compliance with the anti-corruption regulations of the U.S., EU and OECD, as well as U.S. sanctions regimes—as even inadvertent business dealings with entities located in countries subject to sanctions could invite significant potential risks, fines and penalties against Korean companies.
In 2020, GCs can expect to see continued coordination between the U.S. Department of Justice (DOJ) and its foreign counterparts in fraud, bribery and corruption cases, as well as an increase in foreign governments focused on such enforcement. They should also expect continued coordination among the DOJ and other U.S. government agencies in such areas as trade controls, sanctions, financial and securities, antitrust, and more.
This can arise in the context of formerly unlikely situations. For instance, in 2019 the Commodities Futures Trading Commission issued an Enforcement Advisory announcing its intent to coordinate with the DOJ on enforcing the Foreign Corrupt Practices Act (FCPA) as part of its mandate in order to address the rising incidences of foreign fraud that can result in distorted prices and undermine the integrity of markets. In November 2019, the DOJ announced the creation of the Procurement Collusion Strike Force, an interagency group focused on targeting collusion in government procurement, which includes violations of the FCPA, False Claims Act, and other statutes. The good news for companies is that these agencies take into consideration whether a company has made good faith efforts to implement an effective compliance program in deciding how to handle misconduct.
General counsel need to be addressing interdisciplinary risk areas, thinking multilaterally and ensuring that the various compliance functions are not siloed and are communicating and coordinating, in order to minimize risk, maximize effectiveness and achieve long-term success.
Innovation-driven companies are accelerating R&D programs, acquisition of talented scientists and engineers, and acquisition of technology assets. In order to continue to fuel their innovation engines, corporations are continuously assessing their existing IP portfolios and looking to strategically hold core IP assets and leverage them in their product marketing, licensing IP assets with royalty revenue potential, or selling off non-core IP assets.
Non-performing IP assets—those not being used by the owner and/or not generating any royalties—are increasingly scrutinized for the value proposition, as ownership itself costs significant patent office maintenance fees and internal administrative expenses. I represent a number of clients eager to prioritize and monetize their IP assets. I see this trend expanding throughout the innovation-driven industry segments. Corporations with large IP portfolios from past R&D activities now have perhaps a limited time window to monetize those assets with a significant financial upside.
Another IP challenge in this environment is protection of trade secrets—and, on the flip side of the coin, protection against trade secret contamination through acquisition of talent from competitors. The Uber-Waymo dispute may still be fresh in the minds of many. Corporations investing in safeguards for this important issue will be better positioned to further their innovation-driven growth without major disruptions.
The practice at the U.S. Patent Trial and Appeal Board (PTAB) is very dynamic and fluid, given the interest shown by the Supreme Court and the Federal Circuit. Clients will need to continue to carefully evaluate an actual or potential challenge at the PTAB and analyze all of the different factors at play in a given proceeding.
For instance, if you are the petitioner, you will need to balance factors such as filing a petition early so that you do not get a discretionary denial with making sure all of the positions are well-developed, especially given the PTAB is now applying the Phillips claim construction standard.
Although the pace of outbound M&A from China has moderated, there has been a significant upswing in private equity investment which has more than made up for the cool-off in outbound deal activity earlier this year. Looking ahead, we expect transaction volumes involving private equity investors to continue to be very strong, particularly in the tech sector (including fintech, medtech and AI).
We also are seeing a rebound in China M&A deals as industry players look to complement their own organic growth with acquisitions designed to accelerate development and enhance value, and PRC regulators encourage M&A as a means of promoting expansion of China’s economy and addressing the needs of enterprises and individual consumers across the country’s evolving markets.
As we enter 2020, expectations are high in Latin America. In Brazil, economic reforms and interest rates at a record low are expected to drive growth. As part of the economic reforms package, the current government’s agenda to privatize state-owned companies from various sectors and worth a total of US$36 billion is expected to attract substantial foreign investment in the year ahead.
As clients increasingly become more willing to consider cross-border opportunities in Latin America, they must understand the specific industry and the regulatory hurdles and obtain satisfactory contractual protection. As such, it is advisable to look for judicial certainty through choice of law and other deal protections when negotiating the agreements to acquire assets in Latin America.
Looking ahead, M&A activity with Asian investors and companies increasingly will be driven by building technical capability. It is essential to understand that the mission-critical data of tomorrow’s business environment lies in every company’s data systems—not just those companies in the high tech sector. Additional areas that will increasingly drive M&A activity include renewable energy and utilities and related industries, such as energy brokers driven by distributed energy, all of which involve technology solutions.
The beginnings of a general slowdown in lending funds follow a buoyant 2019. First closes are smaller, and funds are taking longer to launch. Brexit slowed action on the deal side and increased investor caution. An insufficient supply of deals for all the funds launched last year may be the first sign that consolidation in the sector may be on the cards in 2020.
Managers have started looking at credit opportunity funds with an eye to an impending market correction. It will also be important for managers to institutionalize their investor relationships to build longer-term commitments to multiple strategies. The spate of multi-asset funds launched in 2019 will continue in 2020. There has also been a strong, successful focus on ESG and diversity, with 2018/2019 initiatives now coming to fruition in 2020. Almost all investors insist on diversity in their asset managers’ C-Suite, pressuring managers to enhance diversity at all levels from portfolio management through to senior levels.
However, leverage ratios and leveraged funds are increasing as they did pre-crisis. Watch out for heavily concentrated portfolios and lender enforcement risk, given many New York-based leverage providers are servicing EU funds. Managers must have solid conflicts of interest policies and transparent reporting systems to deal with these risks.
Unlike 2009, when the next recession comes—and it may not come that soon—there will be a softer landing for borrowers. Today, we have billions of dollars in distressed debt funds, private debt funds and rescue funds ready to come in. However, there will be a price for those private lenders to come in, in the form of higher interest rates and large pieces of equity in those companies.
Many private debt funds have the capability and appetite where if they have to “take the keys,” they will. They have the capacity, they can bring in the experts, they can turn around the business—and three to five years later they can sell it and possibly recoup not only their equity, but also a good portion of their debt.
Traditionally, life sciences companies have not had extensive experience in the tech space. Likewise, tech companies historically did not create inventions in the life sciences. However, we are seeing life sciences and tech businesses rapidly come together to innovate in diverse fields such as biotech, robotics, pharma, digital health, wearables, medical devices, and AI/big data, among others.
With this convergence, companies in these arenas will find themselves in a new world of intellectual property that is increasingly accelerating in growth—one in which the IP laws relating to life science and technology begin to amalgamate. As a result, life sciences and tech companies may find themselves outside their comfort zones, including in thinking about how are their innovations protected, what is the value and scope of their IP portfolio, and how will they enforce and defend their IP rights.
For all of the diversity between and across our life sciences clients and the industry as a whole, they all share one core mission: improving and saving the lives of patients. In 2020, patients will reign, front and center, not only as consumers but increasingly as advocates, participants, and industry influencers.
Social media, digital medicine and medical technology innovations have helped drive this paradigm shift—changing how, when, where, and at what price the world’s patients are accessing their information, services, and our clients’ products. At the same time, federal enforcement, joined by increasingly emboldened state regulators and qui tam relators, remains suspicious of the growing patient-centricity of industry activities and innovations that are changing traditional doctor-patient relationships, health care delivery models, information sharing practices and data privacy, and product distribution channels.
As we look ahead, life sciences companies should take stock of the full range of their patient-directed activities—from social media ads to in-person promotional programs to the engagement of patients as ambassadors or social media influencers for the company and its products—and develop strategies for mitigating risk in view of an enforcement landscape that evolved over time around a health care professional-centered model.