Editor: What is the government’s view on the existence of a debt crisis in the UK?
King: The government’s view is that there certainly is a debt crisis and that the previous government left Britain in an over-indebted state. The current government has introduced a series of austerity measures that are designed to restore normalcy. While the original plan was to accomplish this goal by the next election, which is due in 2015, many feel the country’s restoration will not be complete until 2017 or 2018. This delay is caused in part by the banking crisis, which resulted in substantial government ownership – over 40 percent and over 80 percent – of two of our major banks. Having taken on these bank assets and recapitalized the banks, the government became considerably more indebted than it intended to be.
Editor: How do the eurozone debt crisis and austerity measures imposed on members of the EU affect the UK economy?
King: Notwithstanding the sea that physically separates Britain from Europe, the UK economy is not disconnected from other European economies. First, many businesses in the UK financial center are euro-related in one way or another, particularly in the government and corporate debt markets. Second, many industrial companies operating in the UK either are based in one or more countries in continental Europe or have significant operations there. The UK is not isolated; thus, troubles in Spain, Italy, Greece or Portugal will hurt us, just as positive developments in this critical market – if a solution is found and stability returns to the eurozone – will help us.
Editor: The World Bank rated the UK fourth in the world as a place to do business. What benefits do you see that would attract companies to London rather than to alternatives in Europe, such as Frankfurt?
King: The biggest benefit is London’s concentration of talent, both professional expertise in areas like law, accountancy and investment banking and also in business. Though substantially regulated, the UK economy is less regulated than a number of other economies; we have a high tax rate applicable to the top earners but a relatively simple and comprehensible tax system, certainly when compared to some tax systems in the rest of Europe. A further benefit is the ease with which a non-European Union company can establish business operations here; there are relatively few barriers to entry.
Editor: How does Prime Minister Cameron’s recent veto decision with respect to changes in the Lisbon Treaty affect both the UK’s overall economic/business environment and, particularly, London’s position as a preeminent financial center?
King: While the true impact will become apparent over time, Prime Minister Cameron stated that these actions were intended to protect the City of London – which accounts for 10 percent of UK GDP – from transaction taxes on financial transactions and from overregulation. Other politicians express the contrary view that his action leaves Britain in an isolated position within Europe, but it is far too early to decide who is correct.
Among Cameron’s specific concerns was the fact that the UK wants to impose higher capital requirements on its banks versus those that would be adopted by the EU. Having strong, well-capitalized banks keeps London’s financial center attractive to business and enables Cameron to be seen as protecting the UK retail customer.
More generally, those of us who work in the financial world have dealt with regulation from Brussels for over 30 years; we have grown accustomed to the idea that a significant number of rules that apply in the UK are made at the European level. The key is to ensure that the rules are generated as a result of proper consultation with all relevant parties. It is rare for aberrant proposals from Brussels to succeed and become law, and indeed, the UK has become quite adept at influencing that process. Thus, I am less worried than some of my peers about the tide of regulation from Brussels.
London remains the dominant financial center in Europe – arguably the major financial center for international business apart from New York – and we don’t expect that status to change. In fact, if anything, Cameron’s decision may well have increased London’s dominance within Europe.
Obviously, those of us who work in the City are very happy about that prospect; however, we are not complacent because London’s preeminence as a financial center, in Europe and globally, could be lost very easily in the wake of bad decisions about regulation and taxation. Preserving London’s attractiveness as a base for managing U.S. business operations throughout Europe is and has been a consistent government priority.
Editor: We understand that U.S. taxes create a disincentive for American companies to repatriate large amounts of income. Are those funds being used to make strategic business acquisitions instead?
King: Certainly that disincentive is one of the drivers. We are seeing companies with strong balance sheets and a lot of cash, including investment-grade companies that can borrow easily, looking for ways to deploy resources efficiently. We’ve been doing deals for such companies in Europe, and though India and China present fairly significant challenges, there is a lot of interest in transactions there.
Editor: One of China’s declared objectives is outbound investment, including investment in manufacturing abroad. Have you seen that in your office?
King: There haven’t been major transactions by Chinese companies coming into the UK; in fact, we’ve actually seen a lot more from Indian companies. The biggest employer in the UK manufacturing industry is now an Indian company and its subsidiaries. We are seeing some smaller, under-the-radar transactions from China, and we are expecting some major investments by the Chinese into Europe generally over the next few years. The firm has offices in China with which we can work on these deals.
Editor: Tell us about the role of your Supreme Court.
King: The UK has always had a venue for last appeal in what we used to call the House of Lords, which was effectively a committee of the upper house of our Parliament. That committee was renamed the Supreme Court and given its own building and separate identity, and it continues hearing appeals and rendering decisions. The intent of this change was to drive the point that this is a judicial, and not a political, process.
Editor: Do you see many international cross-border transactions using London as a venue for arbitration?
King: Yes, and not just in London. There is a definite trend toward the use of arbitration in transactions, which is driven by a number of factors. Primary among them is the fact that in some cross-border transactions, the courts in one or more of the jurisdictions either may be favorably inclined toward one of the parties or may operate slowly or inefficiently. Arbitration is a useful technique to avert these issues. The venue selected should be one of the recognized centers, and the London center clearly is one of those, as are the centers in New York, Paris, Hong Kong and Singapore.
Editor: What is the current status of the UK Bribery Act (the “Act”)?
King: Since it came into force on July 1, 2011, there has been one prosecution and conviction under the Act, which was of a UK court official who accepted a bribe in exchange for eliminating very minor charges against some defendants by removing them from the court lists. While we haven’t yet seen the specific impact of the Act in terms of a major prosecution of a major defendant, we have seen significant impact in that companies all around the world that have UK connections are revising their procedures, policies and operations to establish compliance with the Act.
Editor: As distinct from the FCPA, we understand the Act provides a defense for having a good compliance system.
King: Yes, though it’s complicated in practice. If someone within a corporate organization commits bribery, then the organization is guilty of an offense under the Act – unless it can show to the court’s satisfaction that it has adequate anti-bribery procedures in place. As a result, companies are conducting thorough examinations to ensure their existing compliance standards meet that judicial test of adequate procedures. In March 2011, the UK government provided helpful guidance to define “adequate procedures” and to enable companies to test their policies and procedures.
Interestingly, we’ve found that U.S. companies that are familiar with the FCPA need make only minor changes to their already comprehensive procedures. Small to medium-sized companies in the UK often never had formal, written policies and have had to spend substantial time and money to adopt and implement adequate procedures.
Editor: Please discuss your substantial involvement in cross-border M&A. Are you seeing a lot of transactions, and what are the trends for U.S. companies?
King: Since the 2006 to 2008 period, when we saw a lot of cross-border M&A interest in the UK, the pace of cross-border M&A involving the UK has slowed considerably; however, there were a number of transactions in the first half of this year, notably Hewlett Packard’s acquisition of Autonomy. Activity has since dropped, likely due to a lack of confidence among boards of directors in seeking really transformational transactions. At the moment, one brighter prospect is that a number of our well-capitalized U.S. clients are starting to look at UK and European companies that appear to be available for sale as a result of the current economic difficulties. Also, other companies with strong balance sheets are looking at assets in Europe, and there is a potential influx of money from China, India and the Gulf with the same focus. Given broad economic uncertainty and the inability to forecast market conditions for products and services, large companies and their shareholders are exercising caution.
Editor: What do you see happening in terms of the British counterpart of Hart-Scott-Rodino?
King: Transactions over a certain size that affect two or more EU countries are regulated from Brussels, not from London. We find that if a transaction is sensitive in the eyes of the U.S. authorities, it’s likely to be sensitive over here too. On the whole, our antitrust regulators have applied their powers sensibly, and they rarely block transactions for protectionist or other political reasons. Often these transactions involve two or more countries, but in some cases, we have represented companies doing business in 20 or 30 countries, and we have to consider antitrust issues in all of those countries.
Editor: Is your firm involved in setting up hedge funds, private equity funds and the like whose activities include looking for acquisitions?
King: Yes. While some fund raisings have been quite difficult over the past year, we have confidence in the growth of these businesses. Our London practice has recently made a very substantial investment in expanding our practice to better serve these entities. Private equity firms have significant funds to invest in Europe, including the UK; however, these transactions are currently hindered by difficulties in obtaining outside financing to leverage these transactions. When such financing becomes more readily available, we can expect to see many more private equity transactions.
The Editor interviews Peter King, Partner in the Corporate group of Weil, Gotshal & Manges LLP’s London office. Mr. King’s practice focuses on cross-border M&A, equity capital markets and corporate governance.