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WHAT DOES THE EUROPEAN COMMISSION’S NEW DIGITAL REGULATION MEAN FOR X AND ELON MUSK?
After AI, digital platforms such as Amazon, Google, and Facebook are the most ever-changing and fast-paced. These companies, or as the European Commission calls them, the ‘gatekeepers’, have become an integral part of our lives. Their dominant position allows them to influence democracy, society, and the economy.
To address these companies’ significant advantages over their competitors and consumer choice, the European Commission has set a high global benchmark for regulating digital services with clear obligations tailored to the importance of the online platforms, namely by upgrading the current rules governing digital services by introducing the Digital Markets Act 2022 (DMA) and the Digital Services Act 2022 (DSA), creating a single set of rules applicable across the EU.
The DMA was signed into law in 2022, and companies targeted by the Act have until 6th March 2024 before enforcement begins. The Act aims to ensure a level playing field for all digital companies by setting clear rules to stop big tech companies from imposing unfair conditions on businesses and consumers while boosting innovation, growth and competitiveness to help smaller companies and start-ups compete with prominent players.
It also tackles political hot topics like misinformation, political interference, and even the misuse of artificial intelligence (AI). It targets 22 gatekeeping companies, such as Google, Amazon, Apple, Meta and Microsoft.
The European Commission will enforce the Act, giving it the authority to investigate and sanction impermissible behaviour when such companies abuse their dominant position by allowing Europeans to switch between competing services and report misuse and ‘harmful’ content.
The DSA seeks to give control back to the users over personalising their profiles, for example, by allowing them to have more transparent information as to what and why a product or service is recommended to them as well as banning targeted advertising and enforcing the use of sensitive data for minors.
This control protects users from harmful and illegal content by tackling political or health-related disinformation through the introduction of better rules for the protection of freedom of speech. It also ensures that products sold online are safe by providing users with a clear understanding of genuine online sellers.
The aftermath of enforcing the new legislation
Shortly after it was passed as a law, the European Union started enforcing the new Regulation.
Thierry Breton, a European commissioner in charge of enforcing the EU’s digital laws, sent Musk an urgent letter warning that his social media platform X, formerly known as Twitter, was spreading illegal content and disinformation after the Hamas attacks on Israel.
This was deemed a breach of the DSA, and it was demanded of X that the ‘illegal content and disinformation’ was not disseminated, with Breton stating that ’we have from qualified sources, reports about potentially illegal content circulating on your service despite flags from relevant authorities.’
Following these statements by unknown sources, the EU’s digital rights chief has put Elon Musk in the position of deciding to comply with the DSA or face the consequences of fines as high as 6% of its global revenues.
Breton also said the platform needs better mitigative measures and calls upon the billionaire CEO to respond within 24 hours. This challenges Elon Musk’s stance to defend and support an anything-goes approach to free speech. The Act is thus facing its first significant test and may lead the controversial billionaire into a legal showdown with EU regulators.
As a response, the platform has expressed they are actively working on improving the community notes on matching video and image posts. In many cases, users who have liked, shared or replied to a post will automatically receive notifications flagging or noting that the post was inaccurate.
If the community notes are not found acceptable, what is the alternative?
The alternative is X’s withdrawal from Europe. This would not be surprising since its engagement with the Code has been steadily dwindling, considering Musk’s approach to protecting free speech at all costs. While adherence to the Code was previously voluntary, it is now binding under the DSA. Thierry Breton is not afraid to use it as he vowed to ‘thoroughly enforce the DSA and fully use our new powers to investigate and sanction platforms where warranted.’
Will Elon bend to the newest attempt of control over what he calls ‘free speech’, or will he pay for attempting to defend free speech?
This is the first standoff between the maverick billionaire and the EU that could have significant implications for either party; Elon Musk fights for free speech, and the EU wants to make an example of this issue and showcase how serious they are in protecting the digital space by using the new legislation.
In Thierry Breton’s words, ‘the real test begins now’.
Article written by Natalia Mileva
PRIVATE EQUITY RESPONSES TO IPO MARKET SHIFTS
The response of private equity (PE) firms to the IPO market has undergone a notable transformation. What was once deemed opportune in 2021 has given way to a shift in strategy, with private equity firms now opting to take previously public companies back into private ownership.
This article seeks to elucidate the strategic motivations behind this pivot, demystifying the jargon and examining the intricacies of the evolving landscape.
*For additional reading on the subject matter, please click here
How does PE work?
Private equity involves capital investments in non-publicly traded companies, typically orchestrated by private equity firms. These firms derive their returns by selling their stake in the companies to larger investors or leveraging the public markets. The latter has historically been a crucial avenue for monetising substantial assets.
What happens post-IPO?
Upon going public, the private shares held by the private equity entity become listed on the stock market. The objective is to sell these shares at a higher price than the initial acquisition cost.
However, the past year has witnessed unfavourable market conditions, leading to a decline in the stock prices of many companies taken public in 2021. This decline provides an opportunity for private equity firms to repurchase these shares at a discounted rate.
How does taking a company private improve its value?
When a company is taken private, the focus shifts to enhancing its performance. If the company struggles in the public markets, the private equity firm gains the flexibility to implement strategic measures aimed at boosting its value.
Moreover, private ownership shields the company from the intense scrutiny associated with regular reporting obligations in the public domain.
Are there good examples to know about?
Recent instances, such as General Atlantic’s decision to roll its stake in EngageSmart into a buyout led by Vista Equity Partners, exemplify this trend. Vista’s strategic manoeuvring in the sale of Cvent to Blackstone further underscores the flexibility private equity firms have in optimising their investments.
Why is this commercial awareness important for a law student?
This trend underscores critical commercial awareness points for law students, shedding light on market trends, macroeconomic shifts and important concepts worth noting.
- IPO market conditions: The reliability of public markets, which may have been taken for granted two or three years ago, has diminished. Factors such as high interest rates and the cautionary tales of recent IPO failures may lead companies to defer their public offerings.
- Private equity and public markets: Despite the seemingly exclusive nature of private equity dealings, it is essential to recognise that private equity firms actively engage with public markets. The historical profitability of listing significant assets underscores the symbiotic relationship between private equity and the public markets.
- Law firms’ involvement: While public markets/PE teams may be quieter on the going public side, they may be kept busy by PE firms taking companies private. This will demand regulatory advice from financial regulation experts and transactional guidance from corporate teams.
As the financial landscape continues to evolve, the responses of private equity firms to the IPO market offer an interesting study in adaptability and strategic foresight.
This article serves as a guide for law students seeking clarity on the technicalities of these manoeuvres and hoping to improve their commercial awareness!
Article written by Avishai Marcus
WHY WEWORK STOPPED WORKING
In 2010, Adam Neumman, co-founder of WeWork, seized the opportunity to capitalise on the shift towards flexible working, offering short-term leases on high-end office spaces across the globe.
Despite much talk, the company never entirely managed to turn a profit and has now been forced to file for bankruptcy, with a debt pile of $3bn.
Is WeWork’s downfall a symptom of a declining commercial real estate market and a sustained move towards remote working, or was the company’s risky business model to blame?
Founded in 2010, WeWork operated by concluding long-term leases on properties, transforming them into modern and well-equipped office spaces to sublet businesses. Failing to profit, WeWork derived most of its funds from investors, attracted by Neuman’s portrayal of the company as a cutting-edge tech firm aiming to ‘elevate the world’s consciousness’.
Most notably, SoftBank poured a staggering $16 billion into WeWork. In 2019, the company was valued at a considerable $47 billion in the run-up to an IPO, which was ultimately cancelled due to concerns about the governance structure granting Neuman excessive control.
Three years later, with Neumman being pushed out and the slump in the office market exacerbated by the pandemic and the digitalisation of the working world, WeWork was listed on the New York Stock Exchange at a mere $9bn. As the company’s financial situation worsened, the decision was made on November 6th 2023, to file for bankruptcy. New CEO David Tolley was promoted to navigate the bankruptcy, drawing on his experience managing Intelsat’s bankruptcy, where he succeeded in slashing their debt from $16bn to $7bn in 2 years.
According to Tolley, WeWork’s bankruptcy shouldn’t last more than seven months. The company has already broken more than 60 leases in the USA and amended a further 590 leases, cutting future rent obligations by $12bn.
In addition, the company has negotiated with creditors and received their backing in converting a substantial $3bn of debt into equity. This will, however, have direct repercussions on landlords and commercial real estate markets, notably in New York, where lease rejections and closures have had a significant impact on property cash flows and rents in affected areas.
The demand for office space has understandably decreased, with around 44% of adults in the UK working remotely on a part-time or full-time basis. Indeed, this year, office vacancy rates in London are at a record high compared to the last 20 years. However, this sustained move towards remote working isn’t a sign that coworking businesses can’t work, but rather that they need to be adaptable, something WeWork failed to do with its risky business model.
On average, WeWork’s leases were for 15 years, as opposed to their customers, who leased their office spaces for an average of 1.5 years at a time. With the decline in demand, WeWork thus found itself unable to rent out enough offices and unable to charge a high enough price to cover the costs of their long-term leases.
Clearly, the future of office space demands innovation and adaptability, acknowledging the shifting sands of work culture and embracing flexible models that align with these changing dynamics.
Whilst WeWork may recover from its staggering debt and history of poor governance, it will need to significantly adapt its risky and rigid business model if it hopes to finally make a profit.
Article written by Laura Perez-Pardon
THE UK SUPREME COURT’S DELIVEROO RULING AND ITS IMPLICATIONS FOR THE GIG ECONOMY
The UK Supreme Court has ruled that Deliveroo riders cannot be classified as ‘workers’ and, therefore, do not have the right to be represented by trade unions for collective bargaining, among other employment rights implications.
Since 2017, the Independent Workers Union of Great Britain (IWGB) has been fighting to have Deliveroo riders recognised by the courts as ‘workers’, as this would provide them with employment rights such as minimum wage, holiday pay, or the right to collective negotiations.
On 21st November, the Supreme Court handed down its judgement that the contracts between Deliveroo and its UK riders did not constitute an employment relationship and that the riders are, therefore, independent contractors rather than workers. The basis for the decision was that the riders could arrange a substitute to cover their deliveries without the company’s involvement.
According to the Court, this means that the riders are free to ‘reject offers of work, to make themselves unavailable and to undertake work for competitors, features which are fundamentally inconsistent with any notion of an employment relationship.’
Deliveroo has suggested that this decision represents a win for its drivers as it ensures that they have the flexibility to decide ‘when, where, and whether to work’.
On the other hand, the IWGB has described the Supreme Court’s ruling as a ‘disappointment’, stating that it ‘cannot accept that thousands of riders should be working without key protections like the right to collective bargaining’.
The union criticised the ‘dangerous false dichotomy between rights and flexibility’, arguing that there is no reason why flexible arrangements such as the option for account substitution should prevent drivers from being entitled to fundamental employment rights. The ruling will significantly affect the gig economy, not just Deliveroo and its riders.
For clarity, the gig economy refers to a labour market characterised by short-term, flexible jobs undertaken by independent contractors rather than workers who hold traditional, long-term employment contracts.
Now that the Supreme Court has established that substitution clauses constitute evidence that riders cannot be classified as workers, other companies operating within the gig economy might implement these clauses to avoid providing their workforce with fundamental employment rights.
Why might a law firm be involved?
In light of the Supreme Court’s ruling, law firms may find themselves involved in navigating the evolving landscape of gig economy regulations.
The legal precedent set by the decision could result in law firms being asked to advise gig economy platforms on structuring contracts to include substitution clauses, as this would ensure that the contracts do not constitute an employment relationship. This would allow gig economy companies to minimise the rights they owe to their workforce, potentially influencing the treatment of workers across the sector.
As companies seek to adapt to this ruling and potentially emulate Deliveroo’s approach, employment law firms may witness an increased demand for guidance on crafting contracts that mitigate legal liabilities and align with the new legal interpretation.