December Commercial Updates - Tarun Rao and Shastikk Kumaran

Technological tensions rise between the United States and China

Banking, Securities, and Finance Technology, Media and Intellectual Property


Artificial intelligence start-up Sensetime has become the latest Chinese firm to be the target of US sanctions amidst rising geopolitical tensions between the United States and China. The start-up had been seeking an Initial Public Offering on the Hong Kong stock Exchange at the time of the announcement, being forced to postpone the IPO as a result of the new sanctions. Sensetime has been subject to restrictions by US officials in the past, being added to the US Department of Commerce's blacklist in 2019 due to the alleged usage of its products in committing mass surveillance and human rights violations in the Chinese province of Xinjiang.


The measure occurs alongside worsening relations between the US and China which have seen efforts by both country’s national governments to decouple and reduce their reliance on each other’s economic and industrial capabilities in certain industries. Chinese ride sharing platform Didi was recently forced, by the hand of Chinese regulators, to shift trading of its stock from the New York Stock Exchange to the Hong Kong Exchange. Amidst investigations by regulators into the company’s practises, with prohibitions being imposed on the company accepting new users on its platform, The company’s decision to relist can largely be seen as an effort to placate Chinese regulators who view the listing of Chinese companies on overseas exchanges as a national security risk.


Regulators look into the risk management of financial institution

Banking, Securities, and Finance Taxation, Antitrust and Regulation


Since the 2008 Financial Crisis, the susceptibility of large, “too big to fail” financial institutions to sudden shocks in financial markets has been a key concern of regulators seeking to prevent overleveraged banks and questionable lending practises from jeopardising global financial markets. It is in this context, that the Bank of England recently concluded its first stress test, since the coronavirus pandemic, of the largest eight banks in the United Kingdom, assessing their ability to remain solvent even in the event of a major economic downturn. The test occurs amidst the reintroduction of certain reserve requirements by the Bank of England for banks which had been suspended due to the COVID-19 pandemic in 2020. All eight banks passed the stress test, possessing enough reserves to continue even in the event of major losses on their balance sheets due to loan defaults.


The stress test is an accepted element of the regulation of large financial institutions following the 2008 Financial Crisis and increased capital requirements placed to prevent a repeat of uncertainties in the banking sector. The measure occurs alongside increased scrutiny by regulators on certain departments of large global banks.


Separately, the Bank of England has recently joined other international regulators in ordering a review of the practises by the prime brokerage divisions of large global banks. whose services mainly involve facilitating borrowing and other financial activities by hedge funds. The role of these prime brokerage divisions was brought into the spotlight following the collapse of Archegos Capital Management, a secretive hedge fund in March 2021. The collapse of the fund was largely due to trades by fund manager Bill Hwang which backfired, causing Mr Hwang to suffer one of the largest losses of personal wealth in history. Beyond poor risk management at Archegos Capital, the collapse drew attention to questionable practises at major banks such as Credit Suisse, Nomura, and Morgan Stanley among others, whose prime brokerage divisions booked considerable losses of almost US$ 10 billion with the collapse of Archegos. Regulators in the United Kingdom and United States have sought to ensure that excessive lending based on questionable information, such as that which occurred in the Archegos crisis, does not repeat itself.


Law Commission confirms existing legal system sufficient for “Smart Contracts”

Technology, Media and Intellectual Property Dispute Resolution and Corporate Governance


Smart contracts, a technology associated with blockchain technology and certain cryptocurrencies, have come into prominence in the field of technology law in recent years. There exist diverse use cases for the technology, ranging from processing insurance claims to protecting sensitive data. The technology and other innovations associated with blockchain technology, such as Non-Fungible Tokens (NFTs), will likely shape future commercial deals and agreements.


The Law Commission, which makes recommendations to make the legal system of England and Wales equitable and efficient, has published its review as to whether the existing law is sufficient for the usage of smart contracts in the current legal system. The review follows a report from 2019 by the UK Jurisdiction Taskforce which concluded that smart contracts were enforceable under current English law. The review by the Law Commission concluded that legal principles used in the application of traditional contracts could also apply to smart contracts, although this might occur in the context of previously unforeseen situations. At the same time, there exist other issues with Smart Contracts which might pose unique challenges, particularly their highly technical nature, comprising lines of code only a programmer can understand and the unchangeable nature of smart contracts once they are deployed to a blockchain network such as the Ethereum network.



Linklaters and Cravath latest law firms to shift their compensation model

Business development, M&A, and restructuring


Linklaters has joined a growing list of law firms shifting their compensation model for law firm partners away from the traditional “lockstep” model, in which law firm partners are paid based on seniority rather than performance. Under the new model, Linklaters hopes to


The move occurs alongside a shift across the industry towards a system which rewards performance rather than seniority; in the days before the announcement by Linklaters, white-shoe firm Cravath, one of the oldest and most prestigious law firms in the United States, announced that it would consider performance in addition to seniority in a major shift for the US legal market.


The gradual shift across the law firms on both sides of the Atlantic comes amidst fierce competition by City law firms to obtain and retain talent, both at the associate level and in the ‘poaching’ of partners from competitors. Rapid increases in transaction activity across commercial law practice areas, including a record year for mergers and acquisitions deals and initial public offerings, has also resulted in a significant workload for firms operating in these areas of commercial law.


Private Equity and Private Credit shift the market

Banking, Securities, and Finance Business development, M&A, and restructuring


The private equity landscape has seen significant disruptions in the past week with new forms of deals in private equity and private credit being pioneered. New York based investment firm SSW Partners and semiconductor company Qualcomm have concluded a deal in which the former is expected to complete a US$ 4.5 billion takeover Veoneer, a Swedish automobile parts manufacturer, and then sell Veoneer’s vehicle software business to Qualcomm, which only seeks to acquire the firm’s division specifically focused on autonomous vehicles. The unique deal structure might portend a model for other companies seeking to acquire specific divisions of companies without needing to provide the extensive financial disclosures usually associated with M&A deals.


Separately, Los Angeles based investment manager Ares Management Corp has managed to raise US$8 billion for the purpose of making loans to smaller US corporations. With low interest rates on both government and large corporate bonds, investors have in recent months turned to newly emerged private debt funds which, similar to their private equity counterparts, claim to outperform the public markets for debt. While low interest rates have prompted greater interest in private debt as an alternative to public markets, it remains to be seen if like private equity, it can outperform its public counterparts.


 

https://www.channelnewsasia.com/business/chinas-sensetime-postpones-us767-million-hong-kong-ipo-after-us-ban-2375691


https://www.france24.com/en/live-news/20211213-china-s-sensetime-postpones-hong-kong-ipo-after-us-blacklisting


https://www.straitstimes.com/asia/east-asia/didis-rocky-road-for-moving-its-stock-to-hong-kong


https://www.cnbc.com/2021/12/03/didi-on-delisting-from-us-and-list-in-hong-kong.html


https://www.ft.com/content/1dd8f76a-3bb1-4a2e-9ea1-d49c837bfd4b


https://www.ft.com/content/b351691a-2ffd-45a6-8753-7a9a547853ef


https://fortune.com/2021/04/27/heres-how-much-big-banks-have-lost-so-far-from-the-archegos-collapse/


https://www.marketwatch.com/story/this-has-to-be-one-of-the-single-greatest-losses-of-personal-wealth-in-history-says-stock-market-pro-of-archegos-margin-call-11617123343


https://www.bloomberg.com/news/articles/2021-12-10/fed-says-banks-must-assess-risks-of-all-clients-post-archegos


https://www.kaleido.io/blockchain-blog/5-examples-of-blockchain-smart-contracts


https://www.lawcom.gov.uk/the-law-of-england-and-wales-can-accommodate-smart-legal-contracts-concludes-law-commission/


Legal statement on crypto-assets and smart contracts, https://35z8e83m1ih83drye280o9d1-wpengine.netdna-ssl.com/wp-content/uploads/2019/11/6.6056_JO_Cryptocurrencies_Statement_FINAL_WEB_111119-1.pdf


https://hsfnotes.com/tmt/2021/11/30/what-would-a-reasonable-coder-think-law-commission-says-no-need-for-new-legislation-to-handle-smart-legal-contracts/


https://www.ft.com/content/5d13a9ba-6e91-4063-9e85-b1b8184f9f4a


https://www.ft.com/content/29b3d982-041d-4452-83f3-bdcb47e3ed99


https://www.ft.com/content/254d8ce3-de74-43f5-8cb9-3bbaa23d8c84


https://www.wsj.com/articles/ares-raises-8-billion-fund-in-private-credit-arms-race-11639391408


https://www.ft.com/content/0d2d81cb-614b-4f9a-b415-710749f76ee4


https://www.institutionalinvestor.com/article/b1sk0t9kg78dlv/Private-Equity-Still-Outperforms-Listed-Stocks-But-It-s-Losing-Its-Edge

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