The world is undergoing rapid technological change, spurred on by the Covid-19 pandemic. The fusing of people, process and technology, on a global scale, is fundamentally changing the way business is done - optimising existing business models and creating new sources of value.
The business advantage generated by digital transformation means it has become an existential necessity for companies. Success requires boards to carefully navigate the complexities of the evolving digital landscape and legal departments will need to support the business through its transformation while transforming themselves.
Digital transformation was high on the board agenda even before Covid-19, but the pandemic has placed even greater emphasis on the benefits that technology can bring. Improving existing business processes, generating new sources of revenue and building organisational resilience are now, more than ever, imperatives for all companies and business units, including legal departments.
This has driven many companies to rethink and accelerate their digital transformation strategies. However, the technologies that companies are looking to benefit from come with novel issues for legal departments to navigate, while the broader organisational changes needed to embed that technological change – for example, to people, processes and practices – give rise to a range of challenges that boards and their advisors must address.
In this guide, we explore the legal, regulatory and ethical issues that companies should consider as part of their digital transformation.
We explore each of these means of managing liquidity in greater detail and suggest steps that companies should consider in the short term and in the months ahead. We would expect various combinations of these options to be adopted by companies facing a cash crunch. In every instance, directors must take particular care to discharge their legal duties to the company and its shareholders and creditors. Click a above box to read more.
POLLING DATA AREA
Legal department transformation
The transition from core to cloud, implementation of machine learning for data intelligence and participation in blockchain-based digital ecosystems – each underpinned by an explosion of data that has resulted in part from the rapid growth of the Internet of Things (IoT) – can all help further business objectives.
To support and protect the business as it transforms, legal departments must successfully navigate the web of legal, regulatory and ethical issues brought about by these new and emerging technologies.
The unprecedented opportunities brought about by digital transformation has made it one of the most important strategic issues on the board’s agenda.
To realise those opportunities, boards and their advisors must successfully identify and address a range of complex legal, regulatory, ethical and governance challenges that permeate all areas of the business as people, process and technology combine.
As with all business units, digital transformation is driving a fundamental shift in the way that legal departments and their operations teams function.
To deliver strategic value to the business and build resilience through this change, legal departments must partner with business units and successfully identify opportunities to upskill their people and transform their processes through the use of novel and emerging technologies.
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Companies should review all discretionary spending and cut it out where possible. Some costs, such as travel and hospitality, will reduce by virtue of the restrictions put in place by governments around the world but companies should review all expenditure to identify where cost savings can be achieved both in the short term, while work patterns are disrupted, and looking ahead as normality resumes.
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Legal and Regulatory
© Herbert Smith Freehills 2020
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
Last updated 21 July 2020
Legal department transformation
The most immediate action a business facing a collapse in revenues can take is to reduce its costs and expenditure.
Analyse and audit your company’s current technological ecosystem and conduct due diligence on your legal and contractual capability to upgrade.
Stay abreast of developments in industry standards and legal requirements in an era of big data and interoperable technology.
Be proactive in assessing the legal and regulatory framework for the technology and data your company is using or will use in the future.
Consider how new technology can be implemented in your existing ecosystem and develop a strategy to negotiate future contracts and licensing requirements.
Identify risk areas for your business in the context of regulatory uncertainty in the face of rapidly developing technology.
Fuelled by data that sits on infrastructure deployed on-premise or in the cloud, emerging technologies such as artificial intelligence (AI) and machine learning, automation, the Internet of Things (IoT), digital twins and distributed ledger technology (DLT) are all changing the way we generate, share, record, process and analyse information. Their benefits lie not just in their application individually, but in their ability to be applied in concert to generate unique insights, build digital ecosystems, enhance employee activities, transform the workplace and deepen customer interactions.
But for all of their benefits, each technology comes with its own legal, regulatory and ethical risks and issues that legal departments must successfully navigate to support and protect the business. Often, those issues are far-reaching, complex and cover new ground that may require the analysis of laws and regulations that were simply not developed for the digital age, particularly where technologies converge.
Technology is driving a fundamental shift in the way that businesses operate. It has become a key commercial and competitive differentiator, helping companies to optimise existing business processes, generate new sources of value and build organisational resilience.
Looking further ahead
LOOKING FURTHER AHEAD
Technology is a constant force that business units and legal departments must master by staying grounded in today’s capabilities while simultaneously scanning the horizon for tomorrow’s innovations.
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For example when using immutable ledgers such as blockchain.
For example when receiving cloud-based services such as Software as a Service (SaaS).
For example when using artificial intelligence or machine learning that may generate new intellectual property.
For example when entering into exclusivity arrangements with a technology supplier.
These issues may include:
Competition law issues
Audit governance structures for key business areas and operations and the legal and contractual structure of any digital processes and products currently in place.
Consider what changes are required to ensure your organisation is future ready and identify the legal, contractual and regulatory requirements of these changes.
Update existing company policies in preparation for the implementation of transformation, including anticipating regulatory uncertainty and changing societal norms and expectations for how an organisation should operate.
Due diligence the scope of your contractual and regulatory obligations. Identify how locked in you are to current contracts, procurement and supply and assess the scale of regulatory change (including changes to your regulatory obligations), which is likely to result from long-term digital transformation.
Assess legal and regulatory issues before undertaking digital transformation projects to de-risk exposure to significant contractual disputes for business critical projects.
Consider whether your governance strategy and board composition will need to change in light of broader organisational transformation.
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Board members, management and their advisors must successfully identify and address a range of legal, regulatory, ethical and governance issues as digital transformation combines people, process and technology across all parts of the business.
To realise that business advantage, board members, management and their advisors must prepare for the impact that digital transformation will have on both their business and the wider industries and jurisdictions in which they operate. Achieving the strategic objectives of the business will require a deep understanding of its existing processes and models, as well as the potential means of optimising, supplementing or replacing them through the use of technology.
This fusion of technology and operations gives rise to a range of legal, regulatory, ethical and governance issues that board members, management and their advisors must successfully identify and address.
Digital transformation has become an existential necessity for companies. The business advantage it can generate through optimising existing business models, creating new sources of value and building organisational resilience has made it one of the most important strategic issues on the board’s agenda.
For example the legal and ethical implications of commercialising customer data as a new source of value.
For example the legal risk associated with cyber incidents relating to new data generated by optimising or introducing a new business model.
For example the legal issues relating to the classification of workers as part of a change to existing business models (particularly to low-headcount businesses).
For example the legal and regulatory issues associated with the increased use and disaggregation of outsourced suppliers (particularly in heavily regulated sectors such as financial services).
LEGAL DEPARTMENT TRANSFORMATION
Companies should review the headroom under their existing debt facilities and any weaknesses in the capital structure. Whether or not facing an immediate liquidity crisis, they should consider whether to draw down on existing facilities and whether they may need increased committed borrowing facilities.
Stay up to date on developments in legal technology and processes, such as online dispute resolution and smart legal contracts that will change how legal support is delivered and how your organisation will manage its legal rights, obligations and risk.
Get strategic legal advice on the legal, ethical and operational risks arising from digital transformation and the new areas of law that will emerge from developing technology.
Challenge your external legal counsel to assist you on the journey of legal process transformation.
Get advice from legal technology experts on how you can drive the implementation of legal technology within your organisation.
Stay up to date on upcoming changes to the legal industry and how this will reshape the content, structure and delivery of the legal support needed by your organisation.
Be ready to respond to regulatory changes (as well as broader shifts in societal norms that may drive these changes) as governments and judicial bodies adapt to an increasingly digital economy.
Firstly, legal departments are likely to require technology-driven support to deal with the increased volume and complexity of data requiring assessment in day-to-day legal work. Secondly, they will need increased expertise in the technologies being implemented within the business to properly advise and support their organisation’s digital transformation. Thirdly, an evolution from the traditional model of legal expertise being the primary service may be needed, with legal departments moving towards a more embedded solutions model that allows deeper integration with development and implementation of transformation.
Legal departments and operations teams have a unique opportunity to drive the digital transformation process within their organisation. They will need to implement technology on a wide scale, improving productivity and efficiency and automating various work streams through the use of AI, smart legal contracts, e-signatures, case-management and online dispute resolution platforms. The role of legal professionals in the face of digital transformation will change. Legal professionals will require substantive upskilling in order to implement these innovative processes effectively.
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Legal departments must draw on multi-disciplinary skill sets and collaborate within the broader organisation to harness the benefits of digitalisation which will transform legal processes and the way in which legal advice is delivered to clients.
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Digital transformation is driving change within legal departments and operations teams, creating new opportunities to generate value for the business and enabling them to provide boards and business units with professional services that meet their evolving requirements and processes.
consider if a form of impact finance is the right option in any new finance and new products offered; and
consider any additional reporting requirements, whether internal or external, the impact of those and whether internal processes need to be adapted to ensure that these requirements can be met.
Government SUPPORT: UK
Covid Corporate Financing Facility (CCFF)
The CCFF is operated by the Bank of England (BoE) to provide funding to businesses by purchasing commercial paper that meets certain minimum ratings criteria of up to one-year maturity from issuers who “make a material contribution to economic activity in the UK”. The aim of the CCFF is to assist corporates during a time when they are likely to experience severe disruption to cashflows. The CCFF was initially intended to operate for 12 months and the BoE will provide 6 months' notice of withdrawal. Companies who do not currently issue commercial paper but who are capable of doing so are able to access the CCFF (provided they meet the eligibility criteria); to do so they will need to set up a commercial paper programme, which can be done relatively quickly.
The CCFF purchases new commercial paper (at a minimum spread over reference rates) in the primary market via dealers and, after issuance, from eligible counterparties in the secondary market.
All businesses that wish to draw from the CCFF for a term extending beyond 19 May 2021 will be expected to provide a letter addressed to HM Treasury that commits to suspending the payment of dividends and other capital distributions, including share buybacks, and showing restraint on senior pay during the period in which their commercial paper is outstanding.
More details on the UK CCFF are available here.
Coronavirus Large Business Interruption Loan Scheme (CLBILS)
Under this temporary scheme, the UK Government provides a guarantee of up to 80% of loans, overdrafts or invoice or asset financing facilities of up to £25 million, £50 million or £200 million (depending on turnover) made available by accredited commercial lenders. The facilities will be offered at a commercial rate of interest and with tenors of up to three years. The intention is that this will give banks the confidence to support businesses that were viable before the CoVid-19 outbreak but are facing significant cash flow difficulties that would otherwise make their business unviable in the short term.
Companies borrowing more than £50 million through CLBILS will be subject to restrictions on dividend payments, senior pay and share buy-backs during the period of the loan, including a ban on dividend payments and cash bonuses, except where they were previously declared or agreed.
More details on the UK CLBILS are available here.
Coronavirus Business Interruption Loan Scheme (CBILS)
This scheme provides financial support to smaller businesses. It is currently available to businesses with turnover of up to £45 million. Lending is through accredited commercial banks for amounts up to £5 million with the Government providing a guarantee of 80% of the facility amount and meeting fee and interest costs for the first 12 months. Finance terms are from three months up to six years for term loans and asset finance, and up to three years for revolving credit facilities and invoice finance.
It has been confirmed that private equity backed companies are also eligible for CBILS. When assessing the £45 million turnover eligibility threshold, the business will be considered separately from its private equity investors, and its other investments. If the business’s turnover is below that threshold, they can be eligible for the CBILS, provided they meet the other eligibility criteria. However it has been reported that many private equity-backed companies have been unable to access Government support facilities because of EU State Aid rules. Under those rules, companies are only eligible for State Aid under the temporary relaxations that have been introduced for CoVid-19 where they were not already a “firm in difficulty” before January 2020. As many private equity investments are highly leveraged, and so have high interest payments and lower levels of share capital, many of them could fall into the definition of a firm “in difficulty” and so could be blocked from accessing the financial support schemes.
More details on the UK CBILS are available here.
Bounce Back Loan for Small and Medium-Sized Businesses (BBLS)
The scheme will help SMEs borrow between £2,000 to £50,000 through accredited lenders, with the Government guaranteeing 100% of the loan. There will be no fees, interest or repayments needed for the first 12 months and the term will be up to 6 years. The Government has announced that the interest rate will be a flat rate of 2.5%. Businesses claiming under CBILS, state funded schools, public sector bodies, banks, insurers and reinsurers (except insurance brokers) cannot apply for the scheme. The scheme is focused on providing quick cash to SMEs.
Proposed changes to insolvency law
The UK Government on 20 May 2020 published the Corporate Insolvency and Governance Bill, which contains the most far-reaching reforms to UK insolvency law in over 30 years.
New company moratorium: A novel, free-standing moratorium (unconnected to any other insolvency process) giving up to 40 business days of protection even without court or creditor approval during which a payment holiday will apply to all pre-moratorium debts except certain limited categories (principally for liabilities to employees and financiers). The moratorium prevents legal processes against the company, including commencing a claim, commencing insolvency proceedings, crystallising a floating charge and forfeiture. Directors retain management control. An insolvency practitioner will be appointed as moratorium monitor, responsible for ensuring that the moratorium is at all times likely to result in rescue of the company as a going concern. The monitor’s consent will be required for many company payments. Certain liabilities incurred during the moratorium will remain payable, and therefore will be effectively prioritised. Fixed and floating charge assets will be capable of disposal subject to certain limitations.
Winding up petitions: Winding up petitions cannot be presented if based on statutory demands dated 1 March 2020 to 30 June 2020. Creditors will also be prevented from winding up a company unless the creditor has reasonable grounds to believe that coronavirus has not had a financial effect on the company or that the company would have become insolvent even absent coronavirus’ effect, which will be a significant hurdle for most creditors. Winding up will now commence from the date of the order, meaning that transactions entered into between the petition and the order will no longer be void unless validated by the court.
Ipso facto (termination) clauses: Contractual clauses permitting a supplier of most goods or services to terminate supply as a result of the customer’s entry into an insolvency procedure will cease to have effect. The supplier will not be able to exercise any pre-existing right to terminate either. Suppliers will also not be able to withhold supply to the company in insolvency until pre-insolvency debts are paid, preventing ransom payments being sought.
Suspension of wrongful trading: When determining what contribution, if any, a director should make to a company's assets following a finding of wrongful trading, the Court must assume that a director is not responsible for any worsening of the financial position between 1 March and 30 June 2020. While otherwise directors may feel compelled to cease trading so as to take every step to minimise loss to creditors once they believe that there is no reasonable prospect of avoiding insolvency, directors can now take some comfort that they will not be liable for any deterioration since 1 March 2020. This reform may allow directors to continue trading though other duties of directors will continue to apply, including the common law duty to have regard to creditors’ interests when a company is likely to become insolvent. Given the purpose behind the reforms is to ensure that companies continue to trade even when they are insolvent or in financial distress, the need for directors to consider these common law duties become ever more important to avoid personal liability.
Further information available in our briefing here.
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Last updated 16 June 2020
Government and regulatory action
Existing and new credit facilities
Preserving cash and improving working capital