Commercial Awareness Update – W/C 23rd January 2023

TAKING deSPAC COMPANIES PRIVATE: 2023 AND ONWARDS

SOC Telemed, a clinical service provider that has gone public via merging with a special purpose acquisition company (SPAC), which is a shell company set up for the acquisition or merging with private companies, was taken private by Patient Square Capital for US$3 per share in April 2022.

After the merger, which valued the company at $10 per share in early 2020, SOC Telemed had lost most of its value and closed at just US$0.62 before the deal was announced.

According to an article by Hughes Hubbard & Reed, SOC Telemed might be one of the first deals of such kind: a “deSPAC” company going private in 2023 and onwards.

The rise and fall of deSPAC companies

In addition to a traditional Initial Public Offering (IPO), a company could go public by merging with a SPAC. Compared with IPOs, deSPAC mergers offer several advantages: faster execution, more certainty about the amount of funds raised, access to an experienced management team, and less regulatory scrutiny.

For these reasons, deSPAC mergers have found unprecedented popularity in 2021 and 2022 among venture-backed start-ups and high-growth visionaries taking advantage of the bullish market driven by low-interest rates and quantitative easing. In 2021, there were 302 deSPAC deals with over US$600 billion invested, the most famous of which were SoFi (online personal finance management), BarkBox (dog toy subscription), and Clover Health (health insurance for seniors).

However, the momentum of deSPAC mania, along with that of M&A activities and the capital market, has dissipated. With deSPAC stocks trading at a more significant discount than the broader capital market, deSPAC indices reflect a fall of more than 80% since 2022 compared to around 30% for major market indices. Therefore, private deals are at a record high.

Why might deSPAC companies go private?

Generally, established public companies go private, for instance, to innovate and drive long-term results without wall street pressure for short-term returns or to dispense with expensive, compliance-related distractions such as financial reporting and corporate governance disclosure.

The case is different for deSPAC companies: unlike traditional IPOs and M&As, deSPAC deals had taken advantage of a transient craze.

On the verge of bankruptcy, a deSPAC company may be acquired on the cheap, as was Romeo Power, an EV battery maker. Or, since deSPAC companies are trading at a discount, they are vulnerable to aggressive privatisation, as shareholders would likely prefer dividends at premium rates.

More interestingly, however, going private may present deSPAC management an opportunity to adjust to new market conditions and re-evaluate their strategies.

Recent deSPAC companies are typically start-ups that, whilst they preferred to remain private to prioritise innovation, growth, and reinvestment over short-term profitability, also took advantage of the favourable market conditions of 2020 and 2021. The cooling of the market and the tell-tale signs of an imminent recession could be heeded by deSPAC companies as a call to readjust their strategic focus.

Opportunities for and impact on law firms

As deal activities dwindle in 2023, the potential surge in deSPAC companies submitting to private deals means coveted business for law firms, especially those with robust private equity practices.

To date, the market capitalisation of all 300 deSPAC companies amounts to more than US$200 billion. Even though the taking-private deals are decidedly middle-market and will likely generate legal fees less than the average US$353k per private equity deal, law firms stand to benefit from the volume of such agreements.

According to the Hughes Hubbard & Reed article, law firms may advise deSPAC clients and private equities looking to acquire deSPAC companies on the following:

• Fiduciary duties: If management is taking the deSPAC company private, it is the responsibility of the management to demonstrate to its shareholders that the transaction is fair both in terms of the transaction itself and the price. For instance, it may be deemed unfair that the deSPAC company is taken private at a price lower than the moment of the SPAC merger, potentially resulting in lawsuits from investors who have paid the original price. Law firms can advise on the standards of fairness.
• The complexity of the shareholder base: Retail investors, SPAC “sponsors” who purchased shares of the shell company before the merger, and “PIPE” investors who purchased shares at the merger may have different or conflicting interests.
• Heightened Disclosure Obligations: If the management of the deSPAC company has decided to take it private, the Securities Exchange Act of 1934 requires heightened disclosure to protect shareholders. With additional scrutiny around deSPAC companies, further legal advice is recommended.

Article written by David Zheng

A TURBULENT YEAR FOR GOLDMAN SACHS

Wall Street giant Goldman Sachs has faced a series of tumultuous months. As reports of a recession continue into 2023, many investment banks across the globe are facing job cuts.

The primary issues

Goldman Sachs has recently announced that its Technology and Consumer Division has declined over the previous three years, contributing to substantial profit losses.

The division is responsible for transaction banking, credit cards and financial technology, including partnerships with companies like Apple and GreenSky. It has lost $3 billion in less than three years, with $1.2 billion being lost in the first nine months of 2022.

This loss has alarm bells ringing, with the chairman and chief executive Larry Fink pointing to market pressures. Fink suggested these pressures ‘had a substantial impact’ on investments and highlighted that this was the first time in decades that both stock and bond markets were down simultaneously.

In December 2022, chief executive David Solomon said Wall Street clients were ‘fatigued’ and extremely cautious after a volatile year in global politics. With its 49,000 employees across the globe facing job losses due to a slump in deals and capital raising by its clients, Solomon has warned of as many as 4,000 job losses, and it is now evident that the job cuts are due to dwindling profits.

Earlier this week, it was announced that Goldman Sachs’s profits fell by 66% in the last quarter of 2022 from $3.94 to $1.33 billion. Unlike other large American banks, Goldman Sachs relies on services like investment banking and trading more than others. As reports of an oncoming global recession continue, it is easy to see why Goldman Sachs is struggling.

To improve profits, Goldman Sachs announced its plans to spend millions of dollars buying or investing in crypto-related companies after the collapse of FTX. Goldman Sachs has invested in 11 digital asset companies that provide cryptocurrency data and blockchain management services.

Despite this move, in November 2022, Solomon told CBNC he was highly speculative of cryptocurrency but did see the potential. This has led analysts to predict whether 2023 could be Goldman Sachs’s year of Crypto investments or whether this investment could play out similarly to its Technology and Consumer Division. Cryptocurrency is a seemingly risky investment for the bank, considering its enormous decline in generating profits.

Wider and legal implications

The broader implications of Goldman Sachs’s turbulent few years are two-fold.

Arguably the large-scale job cuts indicate a looming recession. As fears arise regarding the global economy’s health, staff at large investment banks are starting to feel the pinch. Similarly, the Credit Suisse team faces 9,000 job cuts, and Morgan Stanley recently announced it would be cutting 2% of its global staff. The legal implications of job cuts include a rise in potential employment law matters.

Secondly, the urgent need for crypto regulation has never been more apparent. The regulations are specifically needed before big banks, and Wall Street giants begin to plunge million into unregulated online currency.

While the FCA and the Treasury grapple over the best approach, many people are losing significant amounts of money to cryptocurrencies like FTX. In turn, law firms face an even more onerous task when assisting clients in purchasing cryptocurrency and potentially recovering lost crypto assets.

Article written by Maddy Preedy

WILL ChatGPT REVOLUTIONISE THE LEGAL INDUSTRY?

ChatGPT is currently creating a buzz with its mind-blowing abilities. The application, amongst other functionalities, can write essays, compose poems, and source answers to application questions.

The intricacies

But what exactly is ChatGPT?

According to ChatGPT, it describes itself as:

“A large language model developed that uses deep learning techniques to generate human-like text, and can be fine-tuned for a wide range of natural language processing tasks such as language translation, question answering, and text summarization. It is trained on a massive amount of text data, allowing it to understand and generate a wide range of language styles, idioms and expressions.”

ChatGPT has the potential to transform various industries. Therefore, the question that has risen in the minds of many lawyers is: what is the exact impact this AI technology will have on the legal industry?

The positive impact ChatGPT will have on the legal industry

ChatGPT can aid law firms in various capacities.

For example, it can generate legal briefs and contracts with high speed. Furthermore, it can facilitate legal research by effectively analysing voluminous data and providing summaries of key information.

Some lawyers have even tested this technology and noted that it produced more accurate and eloquent information than what some actual legal practitioners have previously produced. AI technology can also help with document review by examining a substantial number of contracts and documents in a relatively short period.

ChatGPT can also assist in executing tasks specific to the practice areas of commercial law firms. Regarding mergers and acquisitions, ChatGPT can assist with due diligence and generate legal contracts such as NDAs and share purchase agreements.

It can also help litigation practices by researching case law to find relevant precedents and arguments that can be used in a case. It can generate legal documents such as pleadings, motions, and briefs, thereby saving the law firm a significant amount of time.

Furthermore, it can be used to analyse data and predict the outcome of a case, which can help the law firm to develop a more effective strategy. It can assist the tax department by identifying tax issues and potential client savings opportunities.

Therefore, through streamlining certain legal services, ChatGPT has the potential to reduce the expenditure of both time and resources for law firms.

The current limitations of ChatGPT and ethical concerns

Despite the numerous benefits, this AI technology has some flaws.

ChatGPT states on its website that it may occasionally generate incorrect information and has limited knowledge of the world and events after 2021. Unlike a solicitor who owes their client a duty of care, ChatGPT does not possess this obligation. Consequently, if the AI bot disseminates misinformation, legal recourse is unavailable.

There is also the issue of client confidentiality if a client’s data is inputted and retained within ChatGPT’s database. Even if the technology currently could create legal documents, lawyers will still have to check its outputs to ensure the accuracy of a document and that it truly serves a client’s best interest.

Another limitation is that it does not understand the nuances and complexities of the law when interpreting legal principles and precedents. Additionally, since AI is developed with human input, it may also have biases in its information, which may negatively impact clients.

So, can ChatGPT revolutionise the legal industry?

Due to its current limitations, it still has a long way to go before it can always give accurate, up-to-date information that law firms will rely on. However, the benefits stated above demonstrate that AI technology has the potential to do so.

It is hoped that the $10bn, which Microsoft is currently considering investing in ChatGPT, will enhance the system’s capabilities and provide more reliable information. If this happens, then it is possible for ChatGPT to truly revolutionise the legal industry.

Article written by Ifeoluwa Bayo-Oluyamo

INFLATION AND THE INCREASE OF INTEREST RATE

The assumption of the economy returning to pre-Covid levels is slowly dying out among the public due to the rise in inflation and the consequent increase in interest rates by the Bank of England.

Partly caused by the Russian-Ukraine war, the increase in the price of imports has led to the current recessive state of the UK. We have seen a rise in energy bills, fuel and petrol, food, and other essential commodities.

To stimulate the economy, the Bank of England has raised interest rates to 3.5%, the biggest increase in 30 years. The problem this creates is that in an economy where the cost of living has drastically increased, people struggling with everyday prices due to inflation would now also struggle with increased charges for mortgages, loans, and other types of credit that the banks offer.

Why has the Bank of England increased interest rates?

The reasoning behind increased interest rates is that people would borrow less and save more in the face of inflation. Also, since consumers will spend less, the demand for commodities will drop, subsequently reducing the price of items.

Currently, inflation is said to have fallen for the second month after its highest level in the last 41 years, during October 2022. Although this may raise the assumption that interest rates will be reduced, this is unlikely to be the case because prices are still high, and the only difference now is that they are increasing at a slower pace.

Many experts and the markets believe that the Bank of England will raise the interest rate from its current 3.5% rate to 4.5% by August, while some oppose that interest rates will be reduced by 2024. In the face of wage inflation and strikes from the transport and health sector, the economy is not as steadfast as it was pre-Covid, and there is little hope among the public that they can pay back what they borrowed during the recent festive Christmas season.

What does this mean for law firms?

This tumultuous period poses advantages and disadvantages for law firms.

For instance, in terms of mortgage payments, high-street law firms will find that clients are keener to cover all legal aspects of their mortgages to ensure the mitigation of any financial loss.

Investors funding energy, environmental, and property projects could seek further legal counsel for such projects to ensure that all contractual arrangements within the supply chains are appropriately construed and that the necessary risk is allocated to the appropriate provider.

On the other hand, the increase in interest rates may deter investors from investing in projects, resulting in less work for law firms.

Given that people are buying less, organizations and offices are earning less, there are fewer incentives for expansion, and overall a potential reduction in the work of commercial property lawyers as demand for commercial properties will reduce.

Article written by Nana Akua Boamah Osei

THE EUROPEAN CENTRAL BANK’S 2023 DIGITAL EURO

With the rise of Bitcoin, central banks worldwide are facing the inevitable digitization of fiat currency. Many jurisdictions have launched Central Bank Digital Currencies (CBDCs) or are exploring options for CBDCs.

In 2020, the Bank for International Settlements reported that of the 66 central banks it oversaw, more than 80% were working on CBDCs. China introduced its digital Yuan on 4 January 2022, the UK launched a CBDC Task Force on 20 April 2021, and the European Central Bank (ECB) announced it was planning to propose a digital euro bill at the start of 2023.

Like most central banks, the ECB argues that CBDCs would aid in combatting money laundering, fraud, terrorist financing and other criminal activities. However, the risks and dangers digital currency presents may far outweigh its potential benefits.

Why does the ECB want a CBDC?

CBDCs are digital cash. As such, the digital or virtual euro would be an electronic version of euro notes and coins. However, unlike cryptocurrencies, CBDCs are issued, guaranteed and controlled by central Banks such as the ECB. The Eurosystem launched its digital euro project on 14th July 2021, in a context where the pandemic accelerated the shift away from cash.

In addition to deterring money laundering, fraud and terrorist financing, the ECB’s digital euro emerge as a response to the rise of private cryptocurrencies. Like other central banks worldwide, the ECB is wary of falling behind virtual money issued by foreign private players like Bitcoin or Ethereum. That is why the EU pitches its CBDCs as a more reliable alternative to mainstream digital currency providers. According to Christine Lagarde, CBDCs would enhance the digitalization of the European economy and allow citizens and firms to make their daily payments “in a fast, easy, and secure way”.

Risks: mass surveillance and potential consumer privacy encroachments

The ECB’s CBDC can potentially encroach on consumer privacy and protection. Unlike traditional physical cash, which can be transacted anonymously, digital cash is fully programmable. This means that via CBDCs, central banks have direct insight into the identities of transacting parties. They can track, block and incentivize any transaction, ration consumption and fix expiry dates for the currency they roll out.

The digital euro can potentially be used as a tool for government surveillance and control. Christine Lagarde argued that users of CBDCs should not be fully anonymous on the basis that this would facilitate money laundering, terrorism financing, tax evasion, and other criminal activity. While fully protecting user privacy would shield such activity from being easily tracked by governments, failure to protect user privacy would expose the much larger population of law-abiding citizens to the prospect of Orwellian mass surveillance.

The digital euro could also be programmed to only be spendable at specific retailers or service providers, at certain times and by certain people. Governments could maintain lists of preferred providers to encourage spending with certain companies over others. The 2020 “Digital euro” report states that the ECB will already have spending “rules” and “requirements”.

The digital euro could follow the US’s food stamp model, where recipients receive coupons equivalent to a certain amount of money that can only be spent on food, excluding alcohol, cigarettes, or gambling.

Similarly, with a programmable digital euro, spending on goals other than those prescribed by the ECB will not be possible since CBDCs could be harnessed to censor transactions that the government deems unlawful or illegitimate.

Wider implications: unprecedented and fine-tuned control over monetary and fiscal policy

Retail CBDCs can become an important tool for central banks in implementing direct and advanced forms of monetary policy. Although the ECB’s preliminary report makes no mention of expirable CBDCs, rolling out digital currency akin to China’s new expirable CBDC would pose a serious threat to financial freedom: the ECB could decide that if a certain amount of money is not spent by a certain date, it would simply disappear from the holder’s wallet.

With governments limiting the amount of money individuals can hold in their accounts, building long-lasting wealth would be nearly impossible. Conversely, if inflation runs rampant, the ECB can contract the money supply by simply withdrawing it from digital wallets.

Fiscal policy can also be conducted much more directly with programmable money. The retail CBDC protocol could be changed during economic turmoil to reflect a carrying tax. This means that people would be punished for holding cash by automatically having a percentage of their money deducted from their wallets every month.

Finally, with advanced technological surveillance, filing a tax return or having local tax authorities might not even be necessary. Incoming and outgoing payments and account balances would be known to the central banks and the government. Taxation would become programmatic, built into the software.

Implications for the legal sector

As often highlighted by central banks and other policymakers, the introduction of CBDC would raise important legal questions that scholars and regulators would need to examine.

Some of these touch upon the fundamental relationship between money, the State, and the law:

• Do central banks have the authority to issue digital “currency”?
• Can CBDC be “real” currency?
• Should digital currency be legal tender?

In the absence of a clear response, the monetary system will struggle to adopt CBDC widely, and the digital space might become populated by private alternatives.

Regulators must also determine the CBDC’s regulatory framework, which consists of rules on the licensing of electronic money institutions, required initial capital and own funds, general prudential rules, oversight, and rules safeguarding funds received in exchange for electronic money.

If the CBDC is adopted, lawyers may experience an influx of interest from EU clients in a variety of areas, including data protection, tax, consumer protection, insolvency and payment systems and settlement finality law.

Article written by Wanjiru Chigiti