Commercial Awareness Update – W/C 12th July 2021

The round-up of the stories that a budding Student Lawyer should be aware of this week. Sign up here to get these updates in your inbox every week.

Global Minimum Corporate Tax: A Welcome Move

Article by Advaita Kapoor (3rd year B.A. LLB (Hons.) student at Hidayatullah National Law University, Raipur, India)

Global minimum corporate tax rate is an initiative proposed by the U.S.A which will overhaul the international tax rules. It asks all countries around the world to levy a minimum of 15% tax rate on all gloal corporations or multinational corporations. This move was aimed at precluding these large MNCs from escaping tax liabilities in their countries of operations by incorporating their businesses in tax haven countries. This move has received support from 130 countries as they seek to reign in highly profitable global tech companies that pay only a small percentage of their revenues in taxes.

How will this work?

Overseas profits of MNCs would be subject to the global minimum tax rate. Each country’s government will be at a liberty to set up their local corporate tax but if firms pay lower rates in one nation than in another, their home governments can levy additional tax to reach the minimum rate, removing the benefit of shifting profits.

OECD’s position

The OECD and G20 countries have further deliberated on this issue with the aim to reach a consensus. The OECD has proposed a “Pillar Two” agreement.  The first pillar would provide countries a portion of profits taxed there, albeit the tax would still be collected where the company’s fiscal basis is. This rule would initially apply exclusively to the top 100 or so corporations, but after seven years, it would be expanded. The second pillar is a global minimum corporation tax rate to prevent countries from competing over who can provide companies the lowest rate, commonly referred to as a “race to the bottom.”

While most countries have agreed on the framework, the main points of debate are the rate of tax, timeline for implementing the new rate, whether investment funds and real estate investment trusts should be covered, compatibility with US tax laws, appropriation of profits amongst the countries etc.

Though this move to harmonise global tax regimes would increase corporate tax revenues collected by the governments, there is apprehension that it would discourage foreign investments and slow global economic growth. It is imperative that the policy addresses this issue as well and not act as a barrier against global trade and investment.

You can read more here  and here.

Private Equity’s Bidding War Over Morrisons

Article by Ben Pattinson (LPC student at BPP University)

The management of Morrisons has accepted an offer from Fortress, a US private equity group, to acquire the shares in Morrisons for £6.3 billion, subject to shareholder approval, after rejecting another offer from Clayton, Dublier & Rice (CD&R) worth £5.5 billion. The news of the private equity interest in Morrisons has increased its share price to 265p per share which values Morrisons above both the current offers meaning that it is likely that a counter bid will be made by CD&R. Additionally, it has been reported that Apollo is evaluating Morrisons to make a bid to acquire the shares as they had been outbid by TDR capital in the acquisition of Asda last year. The size of the bid by Fortress makes this the largest private equity acquisition in the UK since KKR acquired Boots in 2007. The successful bidder will take the Morrisons shares off the stock market and into private ownership by the private equity fund.

Critics of private equity firms suggest that they will laden their target companies (in this case Morrisons) with debt once they exit which is usually between seven to ten years. The largest concern for Morrisons is that the private equity firm will sell and lease back the freehold property that Morrisons owns (Morrisons owns the freehold of 85% of its estate) to cover the debt used to acquire the shares. However, Fortress has indicated that it will not sell and leaseback Morrisons stores and that they will keep the Morrisons headquarters in West Yorkshire and protect the employee pension and keep wages to a minimum of £10 per hour. These promises have made the Fortress bid the most appealing, but these are only promises and are not legally binding. To be a successful bidder other private equity firms will have to increase the consideration for the shares and also make more promises which reflect the core values of Morrisons.

The bidding war over Morrisons highlights the success that the private equity industry has had in the UK this year. Buyouts are at the highest level globally for forty years. Additionally, 13 listed public companies have become private this year as they have been acquired by buyout firms. Private equity has been successful as they are sitting on a large pile of dry powder (capital ready to be invested in), also record low interest rates has made borrowing money cheap, finally, investors are willing to invest into private equity funds as they want high returns on their investment, especially if there is a threat of rising inflation. These factors have provided the foundations for an active private equity industry. Additionally, the uncertainties caused by Brexit and Covid-19 has meant that public companies in the UK have a lower value which is attractive to private equity as they can acquire the shares for a low value and sell them for a higher value on exit. If there is a news story to follow for the next couple of weeks, this is one to look out for!

You can find out more here and here.

The War of the Skies: Can the Airline Industry Recover from the Pandemic?

Article by Cian Whyte (3rd year LLB student at the University of Bristol) 

Since the dreaded announcement made by Boris Johnson on 23^rd March 2020, Airlines across the globe fell victim to volatile markets, faced financial turmoil, and ultimately suffered from political incompetence.

To put into perspective just how badly Airlines suffered from the pandemic, revenues per passenger-kilometre (the industry standard measurement of performance) fell by a staggering 66% in 2020 in comparison to the previous financial year. This is the lowest profits have been since the year 2000. So, how are Airline companies expected to recover from such a disastrous blow?

Lockdowns, social distancing, and the successful roll out of the vaccine has allowed the Airline industry look beyond the pandemic as Governments around the world prepare to ease restrictions. Slowly but surely demand for international travel will grow and the Airline industry needs to devise strategies to adapt to the new climate and accommodate the uncertain times we now live in.

The fact of the matter is that expectations need to be lowered as reaching pre-pandemic profits is simply no longer feasible. McKinsey & Company project that air traffic will not return to pre pandemic levels until 2024 with the threat of Covid-19 variants inevitably disrupting our shift to pre-pandemic normality.

Airlines need to re-evaluate the economics of their operations, especially long-haul flights. Business travel has seen an all-time low with the ability for workers to work from their own homes. Technology has facilitated a transition away from the ‘traditional’ working environment, leading a lot of companies to re-evaluate their business operations. Travel is no longer considered essential with the capability of colleagues to connect from all over the world via platforms such as Zoom and Microsoft Teams.

This lowered demand is a huge issue because most airlines were forced to borrow huge sums of money to stay financially afloat through the pandemic. The industry has now accumulated collectively £180 billion worth of debt (half of the total profit in the 2020 financial year). For the industry to swiftly recover economically, they will need the demand they once had for travel. Naturally, these debts will drive up ticket prices, having the effect of deterring crucial business these companies so desperately need. Assuming these loans have a repayment window on average of ten years, this would been ticket prices would need to rise by 3% every year to pay of the loans. The industry also needs to factor the continued demand for social distancing, sanitary planes, and masks. Although Britain has declared their Freedom Day to be 19^th July 2021 (contrary to scientific advice), this is an anomaly as most countries are easing restrictions at different rates. Flights will continue to operate with minimum capacity almost halving projected profits.

Nevertheless, air transport is key to global development and breaking down cultural boundaries. On global scale, the economic benefits of having a strong airline industry are underpinned by strong inter-city connections which enables the flow of information, goods, people, and money. The number of unique city pairs has dropped by 33% since March 2020. Many of these cities rely on strong connections due to their isolated environments and minimal resources. Therefore, there is still demand for the airline industry to make a strong recovery despite the clear challenges they face ahead. The airline industry will eventually heal, perhaps without the titans that once dominated the skies as new airlines emerge taking advantage of such an open market.