New technologies, accelerating competition, regulatory changes, and shifts in market sentiment continue to create complex challenges—as well as some significant opportunities. As we head into 2018, our partners share their perspectives on the important actions for our clients to take in the year ahead.
If 2017 was the year of the cyber attack, 2018 will be the year of the cyber regulation. Companies need to begin the new year making sure their compliance house is in order as new regulations go into effect worldwide. The EU’s General Data Protection Regulation takes effect in May; most companies will need to sprint to be ready for that. New portions of China’s game-changing Cybersecurity Law will also come online this year, as will additional provisions of the cybersecurity rule published last year by New York State’s Department of Financial Services. Now is the time to engage a comprehensive compliance approach. The regulations are flying almost as fast as the hacking attempts.
Companies need to make sure they are on a track to compliance with cybersecurity and privacy regulations that are proliferating globally, including in the U.S., the EU, and China. Korean companies are export-focused and technology-intensive, so these developments will be particularly relevant to them. More broadly, Korean and all other companies need to sharpen their cybersecurity governance and incident response planning to get ahead of the increasingly dangerous digital threat landscape.
Heading into 2018, global companies should take action early to position themselves for both internal assessment and regulatory compliance review of their cybersecurity and data protection risks, as major new regulatory regimes come into force. In China, the new Cybersecurity Law (effective June 2017) requires companies to maintain cybersecurity safeguards and defined cyber programs, localize personal and other important data, and comply with cross-border data protection restrictions. In the EU, the General Data Protection Regulation (effective May 2018) will impact "all personal data stored in the EU or controlled or processed anywhere by an entity in the EU (or any of their contractors and subcontractors anywhere in the world)."
In addition, amendments to China’s Anti-Unfair Competition Law will take effect in January 2018. The amendments clarify the recipient scope for off-the-book rebates to include “staff members of transaction counterparties,” expand the scope of bribery purpose from “to sell or purchase goods” to “seeking business opportunities or competitive advantages,” impose employer liability for acts of bribery by employees unless proven to be irrelevant, and raise the monetary bar for finding commercial bribery significantly. Companies should continue to monitor compliance and investigate promptly as needed, with a particular focus on evidence showing individual behavior versus acting under instructions.
We have spoken extensively with our clients about these issues over the past year—and they will continue to be top stay-awake issues in the year ahead.
2018 will see more countries cooperating with U.S. law enforcement on complex criminal cases—whether corruption, money laundering, economic sanctions or criminal fraud matters. Global companies must be prepared for handling investigations from multiple jurisdictions and be prepared to work efficiently to investigate and resolve matters where a company’s financial exposure is significant in more than one country. In addition, the legal framework in the United States, and increasingly in other countries, recognizes the importance of enhancing a company’s compliance program and permits prosecutors to reduce financial penalties based on a company’s pre-existing compliance program or significant remedial improvements arising from the investigation. In 2018, companies should conduct risk assessments of their potential areas of criminal exposure and invest in their compliance programs to best position themselves to both prevent misconduct and minimize the financial impact of any violations that do occur.
The UK Criminal Finances Act came into force on September 30, 2017. It will remain one of the most significant pieces of legislation affecting companies during 2018—first, because it introduces a controversial new law allowing companies to be prosecuted for failing to prevent another person’s criminal conduct, and second, because most companies are unaware that the law even exists. The legislation has extra-territorial effect and applies to any company, wherever incorporated, that conducts business in the UK. A company commits a crime where it fails to prevent an associated person from facilitating tax evasion by a third party. "Associated person" is very broadly defined as any person or entity that provides services for or on behalf of the company (such as employees, agents, advisers, subsidiaries, or sub-contractors). It should be noted that the Act applies to the evasion of both UK and foreign taxes. The only defense is for the company to show that it had in place "reasonable procedures" that had been designed to prevent the facilitation of tax evasion—in other words, a tailored compliance program. The UK government has signaled that companies should ensure that there is "rapid implementation" of such a program. Companies should therefore seek advice without delay.
During the Obama administration, pharmaceutical companies faced intense government enforcement across all facets of their U.S. operations, with fines and penalties running into the billions of dollars, even in individual cases. Global operations had to navigate a similarly strict regulatory landscape, with many companies facing prosecution under the U.S. Foreign Corrupt Practices Act and other anti-corruption laws. While the new administration has called for—and in certain areas enacted—a dramatic shift toward a lighter regulatory touch, the effects of any change in the anti-corruption arena will be more gradually felt. In the meantime, the outlook for the pharmaceutical industry heading into 2018 suggests more of the same: intense enforcement. This makes compliance a top priority. Pharma companies will continue their shift from defense to offense, making significant investments in robust compliance programs to identify, evaluate, and minimize their potential risk.
European credit markets look well supplied in early 2018 which should offer opportunities for corporates to re-price or refinance and for private equity funds to continue to get leverage on friendly terms. The product convergence in the European leveraged loan market is already well storied but now manifest in credit agreements offering flexibility that goes beyond what the standardized high-yield and traditional leveraged loan products could have offered, whether under U.S. or English law. The European leveraged lending guidance from the ECB is now in effect but its full impact remains to be seen in 2018. The challenge for 2018 may be in retaining discipline in a benign market and positioning for future shocks. At least for the time being, the political headwinds around Brexit and a new German coalition are not really being felt on the ground where growth and steadily rising rates appear set to continue.
Restructurings in 2018 will be driven by uncertainty. Companies exposed to big changes in their operating environments—such as trading disruption or market uncertainty caused by Brexit, the unwinding of quantitative easing, or disappearing markets due to the growth of disruptive technologies—will face increasingly strong challenges over the next year. Capital may continue to be available on generous terms. Easy credit on with few or no covenants will enable some companies to defer the final day of reckoning, but for others it will mean that when the crunch comes they will face a much more sudden and dramatic set of problems on many fronts simultaneously, creating huge volatility and requiring rapid response. Unless companies with high leverage and their shareholders are prepared in advance with defensive and coping strategies, they could easily lose control of their destinies. The biggest risk is complacency. The biggest need will be for liquidity. The biggest opportunity will be to acquire mispriced assets out of distress.
After years of stagnant interest rates, the U.S. Federal Reserve is expected to raise rates three to four times in 2018. Higher rates combined with continued headwinds on certain borrowers like brick-and-mortar retailers or companies with complicated histories will put private lenders in an even stronger position. Risks associated with these loans will continue to intensify and, without significant changes to the regulatory environment, alternative lenders will see continued opportunities to originate and restructure loans. In 2018, we could see sovereign wealth and pension funds carving out an even larger share of that lending pie.
The media, technology, and telecommunications industries are changing at a rapid pace. This dynamism will only accelerate in the year ahead, fueled by regulatory change and technological evolution. First, the easing of broadcast ownership restrictions by the U.S. Federal Communications Commission creates a golden opportunity for media outlets to rethink corporate growth strategies and evaluate innovative strategic opportunities related to broadcast assets. Second, the proliferation of high-quality online video is expanding the media landscape, prompting consolidation between traditionally separate industry segments. The vertical combination of valuable content and wide distribution (whether digital, wired, or wireless) is key to competing effectively in the new environment and providing superior consumer experiences. Nevertheless, industry players should keep a finger on the pulse of government regulatory and enforcement trends, as public policy priorities continue to shift along with the acceleration of consolidation and deal activity.
The U.S. Senate and House of Representatives reached an agreement on tax reform, which marks a major policy victory for the administration. The tax reform, including a reduction in corporate tax rates and a repatriation tax holiday, is part of a program designed to increase economic growth and create new jobs. Certain sectors—particularly pharmaceutical, biotechnology, tech and industrial—will clearly benefit from the tax break on repatriation, which will likely have a positive impact on share repurchases, dividends and the equity markets overall. The tax reform is also expected to set off a new round of M&A activity, with additional capital available for targets that companies have long had their eyes on. Our clients will surely be following these developments closely in the year ahead to identify opportunities for growth.
We are seeing technological innovation and disruption in almost every industry our clients are involved in. Our Korean clients and other Korean corporations, who are now industry leaders in numerous sectors—from semiconductors, IoT, and wireless communications to consumer electronics, automobile and infotainment systems, and healthcare—are at the forefront of this technological innovation. These companies will need to turn to M&A more and more, rather than relying predominantly on internal R&D, to maintain their market positions and continue to provide next-generation products and services. As a result, I believe we will see Korean companies break out of their comfort zone and increasingly look outward and globally for necessary technology and talent. If entering new markets and expanding in existing markets were the focus of Korean outbound M&A activity in previous years, that focus is now shifting to acquiring the technology and talent necessary for continued innovation and market leadership.
The Chinese government has criticized companies making irrational, risky outbound investments, so heading into the new year our clients will need to be aware of the potential implications that increased capital controls and heightened scrutiny may have on outbound investment opportunities. We help our clients stay current on the views and policies of regulatory bodies such as the Ministry of Commerce (MOFCOM), National Development and Reform Commission (NDRC) and China Insurance Regulatory Commission (CIRC), which typically set the specific controls. This is especially important for private companies, which are likely to face higher degrees of control than state-owned enterprises.
In the new year our clients will continue to see aggressive challenges to their patents protecting important pharmaceutical products that are the lifeblood of their continued ability to innovate. At the same time, we are witnessing certain unfortunate trends in the law that patentees should take into consideration when obtaining their patents and planning strategy in litigating them. The two most important action items in such an environment stem from this reality. First, innovators should be thinking about future challenges to their IP, protecting their products and engaging in careful pre-suit analyses so they are ready for an eventual challenge. Second, innovators should consider their patent portfolio in order to ensure an appropriate scope of protection and, relatedly, how each component of the portfolio and the record that is created in obtaining that component can impact the outcome of a future litigation involving those components. The most reliable evaluation is one that knows the details of the trees, but also sees the forest they compose.
Over the next year, companies will need to be ready to adapt to the evolving law and practice before the U.S. Patent Trial and Appeal Board (PTAB) and district courts. For instance, at the PTAB, institution and invalidity rates for post-grant proceedings, such as inter partes reviews, have been decreasing. In light of this trend, companies will need to weigh the benefits and risks associated with these post-grant proceedings as they develop their litigation and/or business strategy. On the district court side, it will be interesting to see how courts continue to shape the law on what is statutory subject matter and proper venue for patent cases.