The United Kingdom Legal Market – The View From Tudor Street

Wednesday, December 21, 2011 - 12:58

The Editor interviews John Phillips, Partner-in-Charge of Jones Day’s London office.

Editor: What is your role in the London office?

Phillips: I have been the partner-in-charge since April 1, 2011, and I’m enjoying that role enormously. We have a partner-in-charge in every one of our 35 offices across the world, and my role is to look after the office and take it forward. In 2012, I am looking to grow our presence in London.

Editor: Where are you located in London?

Phillips: We are on Tudor Street, which is near St. Paul’s and next to the Thames River. We’re in between the Embankment and Fleet Street, once the home of our newspaper industry.

Editor: Please describe the current economic and business environment in the UK. How is the Cameron government handling your debt crisis?

Phillips: The current UK economic climate is very difficult. We have little or no growth and unemployment is high. Base rates are 0.5 percent, and most of the other weapons in the government’s armory have already been used in an effort to promote growth. 

We are looking for growth to come from the private sector at a time of government cuts and austerity and a lack of consumer confidence. The government is committed to reducing our borrowings and the deficit, which previously was out of control. On the bright side, the UK’s credit rating is still AAA – with no immediate prospect of a downgrade.  

The UK government is strongly committed to that deficit reduction program. While there are protests against the cuts, I would say there is general support because there is an understanding in the UK that more government borrowing is not going to be the answer to having too much government borrowing in the first place! Look at the difference between Ireland and Greece. Ireland has embraced the need to take austerity measures and cut its deficit, whereas Greece hasn’t. Unlike Greece, Ireland looks like it is slowly emerging from its crisis.

Editor: The World Bank rated the UK fourth in the world in terms of a place to do business. What benefits ensue for those conducting business there?

Phillips: London is a key financial market for corporates looking to raise capital.  Sixty percent of the total EU financial services market is based in London. The best way to characterize the UK approach to business is “flexibility.” We are not as heavily regulated or unionized as some countries. When we do cross-border M&A deals, there is a real advantage to the flexible approach in the UK to employee consultation and transfers of employees, for instance.

We have a flexible workforce. We have workers in the UK from all over the European Union. We offer government incentives to attract new businesses. The automotive business is a prime example of the success of that. Toyota and Nissan have factories here.

We are not as protectionist in our laws as some other countries. The UK view has always been that if you have the money you can come in and buy one of our businesses. That is why so much of our business now is owned by overseas investors. We don’t have national champions being protected against foreign ownership. When Kraft acquired Cadbury last year, there was much talk in the UK about changing our takeover rules to build in protectionism, but little came of that.

The UK is not part of the euro, although we are part of the single market of the EU, which means that although we are not directly involved in the current crisis we are, of course, affected by it. Mr. Cameron's veto of the treaty proposed in Brussels has made international headlines. We have been described as separate from the other 26 EU nations. We will see how the position develops but certainly, in the City, we see the UK as being very much part of Europe.

Our corporate tax rates are quite favorable as compared to the U.S. The rate here is 26 percent and there is not an overlay of state taxes as there is in the U.S.

Editor: What does the UK legal market hold in 2012?

Phillips: The current sovereign debt crisis in Europe has created a huge amount of uncertainty in the UK and Europe, which will surely have implications for the legal sector during 2012. 

The growing economies and populations in the emerging markets will create greater opportunities, particularly for a firm like Jones Day, which has a global presence in these markets. 

Another key area is the sea of regulatory change in Europe. Higher capital adequacy requirements under Basel III and Solvency II will create opportunities in the financial services sector, and we may see even more UK financial institutions coming under foreign ownership.

The energy sector will also be an active sector during 2012 due to the rise in commodity prices in addition to the surge in demand from China and its increasing appetite for natural resources.

These are all areas in which one absolutely has to take a global approach and be able to deliver multi-disciplinary advice across multiple jurisdictions. That is what Jones Day is set up to do and why so much of our work is cross-practice and multi-office.

The Legal Services Act is another interesting development for the legal sector. It will allow outside investment into law firms for the first time in addition to allowing non-legal firms to offer legal services. It is very hard to see what the impact of this will be and at what level of the legal services market. There is at least one UK firm that has made clear its intention to attract outside capital, and this has encouraged some laterals to change firms. Some law firms do like to run a leveraged model, and the capital markets may be of interest to them. 

Editor: Concern has been expressed that the Foreign Corrupt Practices Act and the way it is being enforced discourages some foreign companies from coming to the U.S. Do you find that the UK Bribery Act is having a similar effect in the UK? 

Phillips: It’s worth noting that the final guidelines on the UK Bribery Act issued by the government so far have not yet been tested by any English court. When they are, we will have a better practical understanding of how it will be applied in practice. Because the government is proceeding so cautiously, I don’t think it will discourage companies from coming here. The Bribery Act places great emphasis on having an effective compliance program. Unlike the FCPA, such a program provides a defense against significant penalties being levied because of the actions of a rogue employee.  

Editor: What compliance programs do you suggest to your clients to bring them into conformance with the UK Bribery Act as well as the FCPA?

Phillips: The procedures that we advise are pretty common sense. The UK Bribery Act is more comprehensive in that it applies to commercial bribery generally, and unlike the FCPA, is not limited to foreign officials. Corporate entertainment presents difficulties that are being resolved in part by the guidelines issued so far, which say that "reasonable and proportionate" business entertainment does not infringe the Act. Taking a client out for a drink is clearly not a crime. However, what about taking a client out for a very expensive dinner or flying a client over to Acapulco for a week? 

Editor: Is there much activity in the area of international M&A? 

Phillips: Because there is so much general uncertainty in the macro-economic environment there is more housekeeping M&A rather than transformational M&A. There is greater scrutiny on deals. The role of the lawyer on M&A deals is now much more about identifying and dealing with risk.

The current M&A environment in Europe is interesting. Private equity is still not doing much in the way of big deals.  Part of the reason is that banks are reluctant to provide the leverage needed to make deals attractive. At the same time, there are many opportunities to acquire good businesses at attractive prices. Large corporates are using excess cash to take advantage of attractive strategic opportunities. 

There are other potential sources of finance for acquisitions, including funds and sovereign entities – the so-called "shadow banks.” These are often managed from the United States. We’re going to see more and more examples of those kinds of organizations funding acquisitions. 

China is obviously becoming more important and, for instance, is heavily focused on Africa. Chinese sovereign entities have great financial firepower. Instead of funding part only of an infrastructure or logistical project, they can fund the whole thing. They cannot only buy the mine, but can also build the town near the mine and the roads or other facilities needed for transportation to the port. 

Editor: I understand something like ten percent of the UK’s gross national product is generated by the City of London. Tell us about the IPO markets in the UK. I have heard that the AIM market has proven to be very popular with U.S. companies. 

Phillips: We have two IPO markets in the UK, The Main Market or Official List, and AIM, which is the Alternative Investment Market. AIM has been compared with NASDAQ but is smaller.

AIM has proven to be a very successful market. It has been attacked for being lightly regulated and high risk, but its level of failure is probably no greater than other junior markets, and it continues to be an important junior market for us here. 

Editor: Has the creation of the Supreme Court affected litigation?

Phillips: Not really. If anything I think there is a bigger backlog of cases awaiting judgment in the Supreme Court than there was under the old system, when the same judges sat within the House of Lords. I don’t think that is a consequence of the reorganization. The biggest change is that those judges no longer sit within Parliament. They sit within a separate part of the judiciary outside of Parliament.

Editor: Is London still thriving as an international center for arbitration?

Phillips: Yes, very much so. The London Court of International Arbitration (LCIA) has done a fine job of publicizing the advantages of choosing London as a venue for arbitration. English law is being chosen throughout the world more and more in commercial contracts and so will become ever more important in dispute resolution. That makes the London office of a truly global law firm an exciting place to be.

Please email the interviewee at jrphillips@jonesday.com with questions about this interview.