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Diversified Industrials Conference 2016 key highlights

  • United Kingdom
  • Diversified industrials


Keynote speech - Angus Armstrong

Dr Angus Armstrong from the National Institute of Economic and Social Research considered Brexit and the continuing impact of anti-establishment politics on the UK and the wider global economy. Angus observed the issue that the UK has experienced with the Brexit vote was brought about by the ‘Political trilemma of the EU’ – in that as a nation we want access to the single market, national sovereignty and democratic politics, but we cannot have all three. This is not unique to the UK though, as we have seen in Scotland, the USA and now Italy following Sunday’s referendum.

Nearly half of the UK’s trade is with the EU (£227.7 billion), so we know how important the trade negotiations will be. This is not just because of the UK’s current EU membership, as Angus pointed out, but distance matters. This demonstrates one of the many challenges faced by the Government in negotiating Brexit, no matter what the benefit of negotiating independent trade deals with Canada, India or China, the UK’s trade with such nations will always be challenged by distance. You are more likely to have a stronger trading relationship with a nation closer to you. This is further amplified when looking at trade and recognising what the UK’s value added trade is as opposed to gross trade, the figure often referred to by politicians and journalists: by way of example the total value of an exported car (A) is £20K of which the value of imported components (B) is £10k. The gross trade (A)+(B) is £30k but the domestic gross value added (A)–(B) is £10k.

Overall Angus left the conference with a few key takeaways: (1) the UK Government should delay triggering Article 50 until after the French election in May to avoid becoming a political chess piece; (2) one of the biggest issues for the UK is how to address the international dispute settlement system which is a major benefit of the EU system, which no-one is looking at; and (3) the best case – involving a shared regulatory framework and a solution to EU governance – and the worst case – defaulting to the WTO in the hope of negotiating a weaker TTIP.

Brexit panel session

Eversheds experts Ros Kellaway, James Lindop and Giles Salmond discussed the mechanics of leaving the EU and how it might impact trade and taxation. Ros highlighted the Government’s wish to obtain a bespoke free trade deal with the EU, whilst having publicly distanced itself from either the Norway model (EEA) or the Switzerland model (EFTA plus bilateral agreements). Before the Government can begin those negotiations, it must of course trigger Article 50 and the Supreme Court’s decision on the hearings taking place this week will dictate whether or not the Government’s preferred March 2017 date can be met.

James discussed some of the trade options the UK has, including the challenges of the WTO model and the interest from countries outside the EU in negotiating free trade agreements such as Canada, China, India and the US. However, it is important to remember that the UK cannot conclude any free trade agreements before Brexit as this would breach its membership of the EU. In relation to trading with the EU post-Brexit, this could be subject to tariffs, ranging from 2.8% to 10%, which would have a pronounced impact on products traded at low margins.

With regard to tax, Giles highlighted the potential impact of Brexit on VAT – the UK would lose the benefit of EU trade simplification measures e.g. the “Action Plan on VAT” which would reduce compliance costs, VAT will become a barrier to trading with the UK compared to the rest of the EU but the increased flexibility the UK would have on VAT rates would be a benefit, although this would be scrutinised if in breach of WTO rules on state aid.

Restructuring companies and the impact of Brexit and the apprenticeship levy

Caroline Robins, Senior Associate at Eversheds, looked at the potential impact of Brexit on UK operations, including TUPE and European Works Council issues, the commercial impact of market uncertainty on real estate, contractual issues around termination and dispute resolution and changes to the regulatory regime. With so many variables at play, businesses need to closely monitor the viability of their operations and take a strategic approach to where they are based post Brexit.

Caroline also considered the incoming apprenticeship levy and how that will not only impact your “pay bill” but also the greater protections it will afford apprentices, whilst touching on some HMRC driven changes to salary sacrifice schemes and termination payments.

Due diligence risk assessments

Lee O’Connell, Head of Corporate Risk and Compliance at Eversheds Consulting, looked at the implications of complying with the Modern Slavery Act. All companies providing goods or services, with a global turnover of at least £36m, which conduct business in the UK are required to report. Lee explained the reporting requirements, discussed the practicalities of interrogating your supply chain and outlined the impact and penalties of non-compliance.

Lee emphasised the need to drill down the supply chain thoroughly to the raw material level. The example of the mineral mica, used in automotive paint and cosmetics to give a glittery effect, is a case in point, where young children have been employed in the mines.

It is clear that the current annual reporting requirements are seen as only a first step in addressing this issue and government requirements will increase. The focus will move towards a detailed risk assessment of supply chains.

M&A panel session

Chaired by Eversheds’ Head of M&A, Robin Johnson, the panel comprised Andrew Huntley, Business Development Asia, David Lobley, Finance Manager at G4S, Julian Tunnicliffe from Lincoln International and Charles Elkington of Electra Partners.

The panel debated the impact of world events, such as Brexit and the election of Donald Trump as US President, on mergers and acquisitions in the industrial arena globally. Although both events had come as something of a surprise, the panel generally felt it was too early to judge on either event. US companies in particular are waiting to see the outcome of further European elections (the Italian referendum, the French and German elections) before taking any decisive action.

China has expressed a lot of concern about the political implications of the US election and may turn its outbound investment focus away from the US as a consequence. The panel remarked they had already seen a lot of interest in industrial companies in Europe, especially Germany.

Dispute risk management in international contracting

International arbitration partner Jonathan Leach began by setting out the possible use of investment treaties to protect foreign investments in emerging markets, where the risks of political volatility and civil unrest are high and the local legal system may not be reliable. There is a comprehensive network of bi-lateral investment treaties between States (or “BITs”) around the world, as well as multi-lateral treaties (“MITs”) in particular regions (eg. NAFTA) or industry sectors (eg. the Energy Charter Treaty). If a BIT or MIT is in place between an investor company’s home State and the State where the investment is to be made (the “host State”), the investor is likely to benefit from international law rights, for example, to fair and equitable treatment, and to be treated in the same way as domestic investors and other foreign investors. Such treaty rights are independent from any contractual rights and can often be enforced in international arbitration proceedings directly against the host State. Eversheds has extensive experience assisting clients to structure their deals to maximise investment treaty protection, and to assert and enforce their treaty rights when disputes arise.

Litigation partner Richard Little went on to look at what other options exist, to protect your investment, should things go wrong after all. It is vital to ensure that the contract is under appropriate jurisdiction/applicable law, includes appropriate dispute resolution clauses, eg arbitration, and has an exit strategy covering termination and force majeure. It is important to create a structure in the contract to control the potential foreseeable risks. Even with this, the contract could still be frustrated.

Energy storage strategies

Jean-Pascal Boutin, an energy expert at Eversheds, outlined the new forms of power agreements being entered into nowadays: flexible supply agreements (where the price can be fixed or unfixed on the wholesale market); electricity supplies direct from the generator via a private wire cable/on site generation; and corporate power purchase agreements (PPAs), where electricity is supplied direct from the generator but via the grid.

Jonathan Cohen, Principal Associate, then discussed the benefits of energy storage, and some of the investment challenges restricting its development. The huge potential for energy storage in the UK and abroad was initially limited by cost, but policy and regulation need to be prepared for new business models as they develop. The UK Government needs to set out its long term policy for storage, and revenue streams need to be more easily identified, procured, traded and priced by the market.

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