From the completion of Brexit to the election of a new U.S. president to the ongoing global pandemic, the year ahead promises to be filled with changes, challenges and—yes—new opportunities. While one of our lawyers highlights how our remote-work reality necessitates a reimagining of compliance programs, another details the optimistic outlook for M&A and finance. Others discuss the tremendous innovation in life sciences and tech spurred by the pandemic, potential changes in anti-corruption enforcement under President Biden, and how private equity has emerged as one of the strongest-performing asset classes. As 2021 picks up speed, our lawyers share their perspectives on the actions to take and the trends to watch this year.
Cross-border transfers will continue to be a focus area of GDPR compliance in 2021, following the landmark Schrems II decision invalidating Privacy Shield and impacting other transfer mechanisms. We already see trends emerging in compliance following the decision and in anticipation of the finalized set of new approved Standard Contractual Clauses, with organizations expected to reassess their international data flows, conduct transfer risk assessments, and implement supplementary measures accordingly. The continued free-flow of data across borders is critical for businesses operating internationally and with even EU-U.K. data flows in the balance post-Brexit, the challenge for organizations to ensure compliance and safeguard such data flows has never been greater.
In addition, the increased use of technology (including AI and innovative uses of existing tech) brought about by the challenges of 2020 triggered a surge in the volume and frequency of personal data processed on a global scale. As malicious actors take advantage of vulnerabilities and weak security controls, cyberattacks and data breaches are on the rise. In parallel, new and evolving legislation regulating the processing of such data is emerging worldwide—and with increased regulation comes greater enforcement. Businesses operating internationally will face increasing challenges in ensuring compliance with the myriad of ever more stringent, sometimes conflicting, rules and regulations.
Advances in cutting-edge technology—artificial intelligence, data analytics, facial recognition and the like—mean this compliance task needs constant fine-tuning. Regulators are keen to work with companies to engender proactivity and ensure effective management of these challenges. My advice is to work with regulators and be an active part of the compliance dialogue.
Last year my partner Rob Silvers advised that clients conduct cyberattack exercises in 2020, and that needs to be the theme again this year. In 2020, we not only saw huge portions of our workforces move remote very quickly, but also witnessed how hackers have evolved into sophisticated adversaries focused on far more than stealing credit cards. Few companies had the time to conduct an exercise while facing the pandemic, but now is the time to make sure that your cybersecurity readiness program matches your new reality.
On the privacy front, we have seen equally seismic shifts in privacy regulations and regulatory enforcement priorities. Clients should spend the time to determine how, both in this pandemic and in the post-pandemic world, their data is stored, used, and transferred and then determine if there is a disconnect with the new regulations in any of your relevant jurisdictions.
The continued growth of private late-stage financing rounds offers a potentially attractive option through which companies can attract significant funding either leading up to or in conjunction with an IPO. Properly structured with a view toward a future or concurrent IPO, such late-stage rounds can provide a strategic benefit for both issuers and investors—from a valuation, marketing, and financing perspective. Companies may also desire to bring in strategic partners or anchor investors that invest in the company irrespective of the IPO.
The pre-IPO financing rounds often take the form of a straight equity offering of common stock, but can also include convertible securities or other debt instruments. Companies should also note that the number and types of investors willing to participate in pre-IPO financing rounds have increased over time and now include large mutual funds, hedge funds, sovereign wealth funds, family offices, and crossover investors, as well as special purpose vehicles of private investors, many of which have traditionally focused on public markets only. Companies considering a late-stage private placement in advance of or concurrently with an IPO should consult with counsel and the other offering participants well in advance to ensure that the objectives of all involved parties are achieved through proper planning and structuring of the transaction.
Geopolitical risks and increasingly stringent regulatory measures toward foreign investments have slowed down the pace of outbound expansion by Chinese companies. Although China now emphasizes both domestic and international development under the “dual circulation” model, the rationale for continued global investment remains compelling. In the longer term, Chinese investors will continue to look for investment opportunities overseas, but to ensure success in cross-border transactions, it is ever more important to properly identify and manage pre- and post-deal risks, and have appropriate strategies and compliance procedures in place.
I am optimistic about the outlook for M&A and finance in 2021 and into 2022. The pandemic has created severe challenges for everyone, but in the short to medium term the macro level outlook for finance is favorable. Interest rates are and will likely remain at historic lows for some time while economies rebuild and several economies are focussed on increased capital expenditure on infrastructure projects. Risks will remain in the system: government finances are stressed, with record borrowing levels and reduced tax receipts; economic activity is severely depressed and the SME sector is very fragile; and there are concerns about significant asset bubbles in both the equity and debt markets. A major challenge will be getting people back into work and helping them to rebuild their lives.
However, with Brexit and the U.S. election in the rear view mirror and vaccines being rolled out, we can have greater confidence in our investment decisions and greater confidence in the medium- to long-term outlook. This should create a positive environment for deal making in acquisitions and also for financing balance sheet repair. There will be intense competition for assets, opportunities, and market share. Healthcare, technology, digital platforms, green energy, packaging, logistics, chemicals, and the like will be sought after, and there will be opportunities to put fallen angels back on their feet in sectors such as entertainment, travel, certain retail operators, and sport.
Many companies operating in China and across Asia should plan ahead for enhanced white collar investigations, enforcement, sanctions, and trade controls in 2021. Companies should prepare for the U.S. Department of Justice (DOJ) to strengthen its Foreign Corrupt Practices Act (FCPA) enforcement and prioritize its investigation of trade secret theft and economic espionage, as announced in its review of the “China Initiative” in mid-November 2020. U.S.-listed Chinese companies in particular will face intense scrutiny as the Securities and Exchange Commission (SEC) moves ahead with new regulations, following high-profile cases of accounting fraud and audit irregularities. Chinese companies must also manage the risks of escalating sanctions and trade controls by the Office of Foreign Assets Control (OFAC) and Bureau of Industry and Security (BIS) for U.S. national security purposes.
As a new U.S. administration continues to be tough on China, it will also impact U.S. companies operating in China, and across the Asia-Pacific region. All companies here should review their internal practices in 2021, and be ready to act in multijurisdictional investigations and cross-border enforcement.
2021 will be a landmark year for compliance, as companies must integrate additional areas covered by international, European, and national standards. They will need to comply with EU legislation (to be adopted in 2021) requiring businesses to carry out due diligence on potential human rights and environmental impacts of their operations and supply chains, and carefully watch other EU initiatives on sustainable corporate governance. Compliance within companies will therefore need to adopt a more holistic approach, examining a variety of external pressure points. New authorities, like the European Public Prosecutor’s Office, are likely to gain in importance.
At the same time, compliance and internal control must adapt to the “new normal.” 2021 may mark the end of the COVID-19 crisis, but this will take at least several months: during that period and beyond, travel and in situ visits will be difficult. Companies need to revisit their compliance strategies for a post-COVID world. New indicators need to be developed, and trainings need to evolve, as do ways to carry out internal investigations. Paradoxically this will happen while risk levels increase in light of the amount of public money introduced into the economy and government intervention throughout the globe.
In 2020 we swiftly adapted to the new reality of remote litigation, guiding clients through hearings and bench trials conducted via Zoom and other platforms—and we expect this will continue to be the norm at least through the first half of 2021. We share our insights and best practices for this in our CLE, How to Successfully Litigate during A Pandemic. Beyond that, we and our clients are closely following the issue of discretionary denials at the Patent Trial and Appeal Board, as this adds further complexity to decisions around how we represent clients in litigation. Another key issue to watch is Section 101. While it may appear that disparate courts have different applications of 101, we are still winning 101 motions in this environment in each case in which we decide to bring them—and we continue to guide clients successfully through this changing landscape by making critical judgment decisions on when to bring such motions. As with so much else in this unprecedented time, when it comes to IP litigation there are many uncertainties and challenges ahead, but our clients know we will help them pursue the best path forward.
As global competition accelerates, corporations are trying to best position themselves in the use of intellectual property. There is a growing number of litigations and arbitrations arising out of performance and interpretation of licensing and collaboration agreements. Japanese corporations have been involved in a growing number of legal disputes over licensing and collaboration agreements in all industry segments and, in particular, technology, retail, and life sciences segments. Our global litigation platform finds unique opportunities to serve clients in this growing area.
The events of 2020 accelerated the convergence of traditional life sciences research and technology research that we have already been witnessing for many years. In response to COVID-19, many of our clients entered into or expanded joint development partnerships across the life sciences and tech industries to leverage the disparate expertise of these industries to develop novel solutions. We expect this convergence to increase exponentially in 2021 and beyond, along with attendant legal issues. Our expertise in IP issues surrounding both life sciences and tech has uniquely positioned us to guide our clients through this convergence and help them address a multitude of intellectual property issues (including patent eligibility, ownership, and enforcement/defense) arising from these research and development efforts.
2021 marks the “great reset,” an opportunity to build a more sustainable and equable economy as we recover from the pandemic. Leaders around the world, including President Joe Biden, have made clear their commitment to pursue energy policies that will achieve a cleaner energy economy and net-zero emissions. In Korea, we eagerly await further details of a new economic initiative called the Korean New Deal announced by South Korean President Moon Jae-in, which focuses on converting the Korean economy to a low-carbon economy. As the policies gain momentum, I expect significant cross-border business activities in this field. In particular, I anticipate increased M&A deals involving clean energy technologies, including electric and hydrogen-fueled automobiles, rechargeable batteries, solar and wind power, and emissions reduction.
As we enter 2021, expectations are cautiously optimistic in Brazil. With interest rates at historical lows and a devalued currency in Brazil, the second semester of 2020 saw a record wave of IPOs and the pipeline for 2021 is even longer. Hoping to recover lost ground on economic growth after 2020, the Brazilian government has announced plans to speed up the privatization of state-owned companies and to push economic reforms, particularly tax reform, through the Congress.
As the new regulatory frameworks for strategic sectors, including sanitation and natural gas, are implemented, we believe investment opportunities will abound for international investors. Our clients should stay in the loop for strategic opportunities, particularly the specific sectors that have demonstrated resilience during the COVID-19 pandemic. As our clients consider these cross-border opportunities in Brazil, we recommend that they carefully evaluate the choice of law for agreements to secure adequate contractual protections in a potentially complicated transactional environment in 2021.
Amid the global macroeconomic turbulence in 2020, private equity (PE) has emerged as one of the strongest-performing asset classes. Whilst deal-making reached a nadir in Q2 as the world adjusted to the onset of COVID-19, an unusually strong Q4 saw buyout funds close not only a significant number of transactions but also ones marked by ambitious and innovative structures. Sentiment in the limited partner (LP) community remains buoyant: general partners are perceived to have acted more decisively and effectively in shoring up portfolios in comparison to previous economic downturns and the majority of LPs expect to maintain or increase their exposure to PE across 2021. Government support, in the form of near-zero interest rates, quantitative easing, and stimulus packages (albeit without unfettered access for PE portfolio assets), has also bolstered conditions for deal execution.
However, competition for quality assets arguably remains fiercer than ever. Whilst buyout firms have nimbly refocused on sectors that have demonstrated resilience, the result has been a flight to quality, with heavy dry powder targeting a smaller pool of assets. There is every reason to be optimistic that such positive traits will continue in the next 12 months, with the caveat that if assets in sectors experiencing a more pronounced downturn fail, public and regulatory scrutiny on management of such assets will intensify.
In 2021 private debt will continue to encounter many challenges with respect to certain existing investments, but also many opportunities to deploy fresh capital. With the additional knowledge medical experts have gained regarding COVID and the rollout of therapeutics and vaccines, 2021 could deliver heavy deal flow to the private equity (PE) and private debt providers. We saw a preview of this in Q4 of 2020, which was like no other quarter I can recall in terms of deal volume.
New LBO financings are still competitive, with PE sponsors vying for a finite number of attractive targets and private debt funds competing to finance those deals. While dry powder is still a factor and commercial terms have in many ways gone back to pre-COVID standards, some market improvements have been made in the commonly raised documentation areas, such as JCrew, Chewy, and Serta. On the restructuring side, COVID has created winners and losers based not only on industry, but on timing of investments and ongoing support from stakeholders in the capital structure.
I have always placed a premium on clients being proactive, not reactive, whether chasing a new deal or managing a troubled credit. 2021 will only add to that premium as clients must manage global uncertainties while remaining able to jump on new investment opportunities.
As 2020 drew to a close, funds finally felt the full economic effect of COVID, coupled with a hard Brexit. There was some panic at year-end for managers trying to finalize Brexit migrations, but overall Brexit was a non-event—without the repercussions the market expected. Now funds that are still marketing are feeling the effects of COVID: investors are much more difficult to close into funds, fundraising periods are being extended, and investors are insisting on keymen clauses and quicker deployment of cash. On the leverage side, facilities have been tested, with waivers granted at the last minute to assist the revival of various corporates.
The key for 2021 is to deploy the dry powder amassed pre-COVID into different types of credit. We are seeing the rise of “credit opportunities” funds and indeed there is market dislocation in many credits. Now could be a good time to make such investments. Managers need flexible strategies, allowing for debt and equity purchases, and including listed and unlisted debt and equity to maximize returns. Investors now seem more comfortable relying on managers’ expertise in turning companies around. We are also seeing a lot of new tax and regulatory initiatives coming to fruition this year, including ESG, SFDR, AIFMD and DAC6, which hopefully will provide more certainty for investors and a settling down of the funds market into a sustainable market.
As we headed into 2020, the biotech industry was nearing an elbow to its exponential rate of growth curve, with life sciences companies devoting significant attention to this important field of research. During 2020, we witnessed COVID-19 push life sciences into a steep, upward innovation trajectory, with groundbreaking successes achieved in timeframes never before seen. In this brave new world of biotech innovation, life sciences companies have realized it is critical to look at intellectual property from several vantage points. Companies have seen the need to examine carefully their own patent portfolios to understand the breadth of protection, and consider the portfolios of their competitors for litigation risk and exposure. At the same time, evolving legal standards, especially in the area of patent disclosure requirements, affect the calculus of the strengths and weaknesses of these patents. Paul Hastings has formed close partnerships with our biotech clients to be their trusted advisors and counsel them through these challenging times.
While 2020 was an incredibly challenging year for compliance across all industries, this was perhaps especially true for the life sciences industry, including pharmaceuticals and related sectors. As in previous pandemics and healthcare crises, with the advent of COVID-19 the pharmaceutical sector found itself on the front lines of ensuring the continued delivery of safe and effective medicines and products to the global population of patients, which entailed unprecedented challenges associated with sales, medical, manufacturing, and other issues. In addition, the life sciences sector was thrust into the role of, in effect, saving the world through the development of therapies and vaccines—in record time, no less—which raised tremendous clinical and regulatory mountains to be climbed.
In 2021, it will be incumbent on many life sciences companies to assess how their risks may have changed during the pandemic, which has proven lengthier than initially anticipated, and whether their compliance programs have remained fluid enough to adequately mitigate those risks. This assessment needs to be both a careful look back on how things went during the often frenzied pandemic times, as well as a look forward to ensure that their risk management strategies are well aligned.
As companies reflect on their 2020 business activities and plan for the remainder of 2021, it is important that legal and compliance professionals continue to engage their business colleagues to understand how the company’s strategies and activities (and hence risks) have shifted—and continue to shift—due to the pandemic. There has been a significant impact on the industry’s operations, especially on the ways in which life sciences companies interact with third parties. It is therefore imperative that legal and compliance professionals approach key risk areas with the right combination of rigor and flexibility. Depending on the company’s context, priority steps might include the following: