Photo of David Rievman and Heather Cruz by Dave Cross.
Today, it seems, the only thing certain is uncertainty. That was the clear consensus from a group of Skadden’s leading regulatory experts who came together to discuss the current regulatory environment and its impact on practices from mergers and acquisitions to CFIUS, the Committee on Foreign Investment in the United States.
The current volatility observed in seemingly every arena has placed even greater importance on the advice of experienced, forward-thinking and innovative counsel. We spoke with David Rievman, tax partner and head of the firm’s regulatory practices globally; Karen Hoffman Lent, head of antitrust/competition in New York; Jeremy London, a Washington, D.C.-based M&A partner; Heather Cruz, a New York partner who represents investment advisors and investment banks; Jamie Boucher, head of the firm’s Financial Institutions Regulatory & Enforcement Group from Washington, D.C.; and CFIUS and national security partner Don Vieira, also D.C.-based.
From the unexpected – the challenge of the AT&T merger with Time Warner – to the predictable – decreased enforcement from the Consumer Financial Protection Bureau (CFPB) – these lawyers who have seen it all explain the impact of uncertain times on lawyering and their experiences in successfully navigating such an environment.
Lawdragon: Can you begin by describing the current regulatory landscape and how it is impacting your clients?
David Rievman: Most attorneys across our firm have not observed the decrease in regulatory oversight or government enforcement activity that was expected with the change of administration. Instead, clients are seeking guidance to help navigate this extremely partisan environment in which the government’s agenda could quickly change.
Jeremy London: In the M&A arena, we’ve had to increasingly focus on whether a deal might be challenged or met with litigation, even for situations in which we would not have anticipated such scrutiny being an issue under the prior administration. While in previous years, the risk of having an injunction sought against a vertical merger would have been small; this year, we saw deals such as AT&T’s acquisition of Time Warner challenged in court by the Department of Justice.
Karen Hoffman Lent: We’re observing a continuation of the Obama level of enforcement and have been given no clear indication as to whether we can expect a decrease in intensity. On the antitrust front, typically we predict less significant antitrust regulation and more of a pro-business bent from a Republican administration.
Jamie Boucher: Anti-money laundering and economic sanctions activities also have continued and, in some cases, increased in recent months, in part because of congressional pressure to use sanctions and the threat of secondary sanctions against non-U.S. entities. Russia is considering and the EU has a blocking statute similar to our anti-boycott laws, to counter the U.S.’ sanctions programs. This raises conflict of law issues for clients doing business across borders.
On the other hand, there has been a decrease in enforcement on the consumer financial services side, because the CFPB is not as active under the Trump administration. This has led state financial services agencies and state AGs to become more active, to fill what they perceive as a void in consumer protection oversight.
Don Vieira: I echo what has been said: The current government has been more aggressive in its approach to national security and trade concerns than expected. Three years ago, Chinese inbound FDI [foreign direct investment] to the United States was skyrocketing month to month, with huge deals happening that were effectively and successfully able to navigate the CFIUS process. Today, we see the CFIUS process being leveraged, with bipartisan support in Congress, by the administration and national security agencies in new ways to limit Chinese investment in the U.S. At the same time, the number of non-Chinese entities that are seeking to shift some of their investments to the United States is increasing, possibly because they perceive the U.S. FDI market to be less expensive than when they were competing with very high offers from Chinese entities.
Heather Cruz: Our investment management group increasingly is collaborating with Don and the firm’s national security/CFIUS team when advising clients on raising private funds. For fundraising vehicles that feature investors from multiple international countries, we now must ask whether the presence of these investors might cause the fund to have limitations on what it can invest in, as a result of national security implications.
LD: Don, having worked on some of these national security issues from within the government, from your perspective is the current government activity you just described unprecedented?
Vieira: Yes. CFIUS and other trade tools have been at the disposal of our executive branch for a while, but they are country-neutral; in other words, they’re not tools that were designed solely to address U.S. relations with China. Nevertheless, we are seeing the CFIUS process applied at a greater scale right now and much more broadly than ever before, and with specific focus on curtailing Chinese investment in the U.S.
The U.S. government also has expanded the scope of what it considers to be a significant national security concern, and we have seen this play out during CFIUS reviews. We’re well beyond only considering investments into areas involving assets like missiles, bombs and defense work — instead, for example, personally identifiable personnel information, the physical location of real estate and the existence of software on international data networks now can factor into the issues that regulators evaluate when analyzing a proposed transaction.
LD: And, more broadly, does this high level of uncertainty with regard to the administration’s agenda feel unprecedented, as well?
Rievman: Some of the uncertainty we are experiencing is due to the volume of key decision-making positions that remain unfilled in the current administration. Without the ability to consider the agendas of specific individuals, it is difficult to discern what are and will be the policy objectives of the regulatory agencies. That said, in the tax arena specifically, the uncertainty has much more to do with questions raised by the far-reaching 2017 Tax Act and with questions around the “stability” of the new rules than with unfilled positions in the administration. IRS and Treasury are fully engaged in the process of promulgating guidance on the new tax law provisions, but it is a massive exercise, and a large number of policy and technical decisions need to be made. And since it is already affecting taxpayers, there is tremendous time pressure to issue guidance and to get it right. Because tax planning or business planning — like the decision to locate a new plant in or outside the U.S. — takes a lot of lead time and has significant long-term consequences, uncertainty in the stability of the new regime is a very big deal. These things don’t turn on a dime, and as a result I think we’ve seen many businesses proceed quite cautiously.
Boucher: The U.S. isn’t the only jurisdiction experiencing and contributing to this uncertainty — Brexit and global trade issues are additional factors impacting many of our practices, including tax and financial regulation. The increased tensions among the U.S., Europe and other allies is unprecedented in terms of what I have experienced historically in my practice. The U.S.’ unilateral decision to step out of the Iran agreement has consequences for other allies whose businesses have reengaged in that country and are now facing the risk of U.S.-imposed secondary sanctions.
LD: Following up on Jamie’s statement that the U.S. is not the only country contributing to an environment of uncertainty, can you discuss the global regulatory landscape and how it is impacting your clients and practices?
Cruz: The increasingly global nature of the regulatory overlay is one of the biggest recent changes I have observed as a private fund lawyer. When I started my career, the main areas of focus were the SEC and the Advisers Act. Now regulatory regimes in Europe, Asia and the Middle East are more active, and clients wishing to offer their private fund globally must consider how to navigate multiple jurisdictions’ regulations from the outset of product development. Despite these new considerations, we are still seeing an increased level of private fund formation. Capital is being raised, and it will be sitting on the sidelines when the market moves in one direction or another.
Lent: Enforcement and merger review across the world has become more complex and involved. It used to be that the U.S. and the EU were the primary jurisdictions of concern when assessing the competitive impact of transactions. Over the past year, China has become much more aggressive in its review of mergers and application of theories of competition, and new competition agencies are emerging and beginning to assert authority in other locations around the globe. The ASEAN jurisdictions (Singapore, Thailand, Malaysia, Cambodia, Vietnam, Philippines, Myanmar, Indonesia, Laos, Brunei) have all been ramping up their competition enforcement, establishing regimes and regulators where previously there were none, and improving and strengthening those regimes that already existed. In particular, merger control and enforcement in Singapore, the Philippines and Vietnam has become more stringent lately. These jurisdictions are expected to become more active in policing local conduct as well, which has long lagged in the region.
Vieira: We’re seeing something similar in the national security space. Historically, the United Stated has taken the lead, through CFIUS, among Western countries in evaluating the national security concerns raised by FDI. Though the British and French have always had processes of their own, they have not utilized it as aggressively as the United States. In recent months, however, we have started to see a greater interest among even more Western nations, not only France and the U.K. but also Canada and Australia, in policing FDI through increased national security reviews.
LD: Jeremy, on the deal side, is this environment affecting dealmaking?
London: My general sense is that the trade war, increased tariffs and the 2018 midterms, among other issues, have affected deal activity. While businesses are still thinking about innovative ways to increase their bottom lines, companies appear to be taking a more conservative approach to strategic decision-making. Instead of swinging for the fences on M&A right now, clients appear to be focusing on steadily hitting singles and doubles for the near term. There also are added considerations for cross-border M&A as a result of U.S. tax reform, such as where to domicile the surviving entity and how to structure the combined enterprise’s supply chain.
LD: What are some of the other specific areas in which regulatory developments or implications have created new issues for clients?
Rievman: The 2017 changes to the U.S. tax code are far-reaching and there are many crucial aspects that will need to be further interpreted through IRS and Treasury guidance and possibly corrective legislation. There is a tremendous burden on U.S. and non-U.S. corporations to understand and comply with the new law, wrestle with its ambiguities, model its impact on their ongoing operations, understand potential planning pitfalls and opportunities, and identify where it may make sense to restructure. This has resource implications as well.
Boucher: I would also mention the EU’s General Data Protection Regulation. It assigns penalties for data breaches that, because they’re tied to global revenues, are very significant. “Data” is very broad — including what you’re writing on your notebook and what’s in your computer — so now we must ensure that both our client interactions as well as the guidance we give them on specific matters are compliant with this new piece of legislation.
Lent: Clients whose businesses are becoming increasingly international now need to be cognizant of global regulatory implications, beyond those in the U.S., that hadn’t been on their radar when they were focused domestically. As corporate entities extend their global platforms, their foreign conduct at times is subject to U.S. regulation, depending on whether it is directed toward or has a substantial effect in the U.S., as well as the oversight of other jurisdictions’ regulatory bodies. I have seen examples of this among my many clients in the professional sports world — the NBA is doing a lot more business in China, and the NFL is having games in London and Mexico.
Brexit has added an additional layer of antitrust review. Companies cannot solely consider how the EU competition authority will view their deal, but also now must contemplate how the U.K. might weigh the transaction. It remains to be seen what the mechanism will be for review in the U.K. and what the policy priorities will be.
Boucher: And as a result of Brexit, global financial institutions now have to decide where they are going to domicile and must determine whether they will need to be separately licensed in the United Kingdom. Germany, France and Ireland are actively courting a number of U.K. lending-based investors. Deciding whether to re-domicile has practical, human considerations based on a city’s infrastructure, as well as regulatory implications to consider.
LD: What about Dodd-Frank issues? There seemed to be some excitement around potential reform, which was followed by a lack of satisfaction with what’s been proposed. Where are we at now?
Boucher: On the one hand, regulators have what they consider to be legitimate concerns — to ensure that financial institutions and systematically important participants in the system are adequately capitalized in the event of another financial crisis. At the same time, when you look at the level of assets at which congressional requirements should kick in, most of the focus thus far has been on the community and regional banks, which feel overburdened as a consequence of issues primarily associated with much larger asset class financial institutions. This tension has resulted in significant partisanship in Congress about what degree of reform is needed, and it has become very difficult to move new legislation forward.
Cruz: It’s very similar from a Volcker Rule perspective. In May 2018 the Federal Reserve Board solicited comments on a proposal to simplify and tailor compliance requirements of the Volcker Rule. The proposal contained over 400 questions and solicited 163 responses from the industry. However, to date we have not seen the agencies adopt any form of these proposed simplifications to the Volcker Rule.
LD: To tackle another big topic: It seems like a lot of your clients are dealing with a complex nexus of issues related to technology, data privacy, cybersecurity and even possibly espionage. How do you help your clients navigate these complicated, evolving issues?
Vieira: The firm provides cybersecurity incident response and crisis management advice on how to navigate these sensitive issues, often prior to an actual incident, but also in response to standard cybersecurity- and cybercrime-related events. That said, many of our clients are sophisticated companies that already have significant investments in defending their systems and usually can deal with day-to-day cyber issues on their own. With these clients, we advise on matters of increased complexity and sensitivity, many involving nation-state actors who have the resources and capabilities to penetrate sophisticated defenses. In these situations, we also help manage the resulting engagement with the U.S. government or foreign governments that are sometimes implicated.
London: Cybersecurity due diligence also has become a big part of the advice we provide on M&A transactions, because cybersecurity issues are inherited when one company buys another. As Don said, many of our clients have become very sophisticated about cyber issues and expect a heightened level of sophistication from their counsel — regardless of the focus of their practice. Boards are proactively raising the issue of cybersecurity contingency planning more often, already with a detailed understanding of what this means and what systems and processes they have in place.
Vieira: I agree. We often are enlisted at the behest of the board, the general counsel, the CEO or some combination of them to help plan for the future. That often involves walking through mock scenarios along with their incident response personnel and outside security vendors.
Cruz: Our private fund clients also are increasingly focused on cybersecurity. From the institutional investor perspective, when they’re conducting operational due diligence, they want to understand what systems are in place to address data privacy concerns. Similarly, there is a need to know how the cybersecurity standards of a fund’s service providers have been vetted and what due diligence has been implemented. All of these proactive inquiries help our clients be prepared should an actual cyber incident occur.
Boucher: This due diligence process with regard to potential investors goes beyond a cybersecurity inquiry. Our clients also want to make certain that none of their potential co-investors is subject to U.S. economic sanctions or are from a jurisdiction where there’s a high degree of corruption and money laundering.
LD: Karen, what about from the competition angle — are your clients facing new challenges associated with technological innovation, and what might that mean for competition in an industry?
Lent: In the EU, and to some extent in China, there has been more aggressive enforcement based on innovation theories of merger control, where a company’s research and development efforts might generate a result that appears anti-competitive. We have seen the European Commission rely on innovation and R&D theories to drive major divestiture decisions in global deals, such as the Dow/DuPont merger and GE’s acquisition of Alstom’s power and grid business. Issues involving conglomerate effects also have played an outsized role in certain cases, including in high-tech industries where a strong position in a “neighboring” market rather than a strict horizontal overlap or vertical relationship has led to remedies for global transactions that received unconditional approval in the U.S. (such as the now-defunct Qualcomm/NXP transaction).
Historically, the U.S. government has focused more on whether a proposed merger may result in a company obtaining too high of a market share and less on issues that arise from innovation, data and technology.
LD: Jamie, getting back to the topic of sanctions, does this stand out as a substantially more active time than years prior?
Boucher: Absolutely. Congressional legislation in response to concerns about Russian election tampering and the use of the Global Magnitsky Act, which is a tool that we’re seeing used by the government to designate individuals for human rights abuses and corruption, has resulted in increased sanctions. Both Russia and Iran are very large economies, so navigating those issues can be very involved and nuanced, particularly because Russia is now responding with blocking statutes that prohibit companies that are active in Russia from complying with the U.S. sanctions. The last round of individuals designated under the Global Magnitsky Act were identified because of alleged corruption; and with respect to other jurisdictions, certain Burmese generals, for example, have been included because of human rights abuses. This means that, short of actually finding someone guilty of corruption in a court of law or through an investigative proceeding, the U.S. government now has the tools to impose penalties through designation — their assets are frozen and U.S. persons can’t conduct business with them.
Cruz: Sanctions also are a focus from a private funds perspective because of the issues they raise when a fund is considering deploying capital in a particular jurisdiction. Our investment management practice works very closely with Jamie and others to understand whether a particular investment by the fund is permissible and whether the fund can accept capital from a particular investor.
LD: For most of your clients, it sounds as if you constantly have to engage in multilevel contingency planning, anticipating different scenarios?
Rievman: Contingency planning has always been important, but when there are as many different contingencies as clients are facing right now, day-to-day operations can be affected if there isn’t a careful plan for how to allocate internal resources. As a result, companies are increasing their focus on diversifying their risks. For example, businesses have committed substantial resources to model the effects of the new tax law on their ongoing operations and on proposed mergers, acquisitions and divestitures. Under the new law, such transactions can potentially impact the business’ tax position in significant and unexpected ways. These exercises are complex, and often require businesses to run multiple scenarios to take into account alternative outcomes with respect to ambiguous or unaddressed aspects of the new law. This can be an intricate and time-consuming exercise.
London: The increasing importance of the diversification of risk has impacted the dealmaking environment. For clients that would have pursued an M&A transaction alone three or four years ago, we now might discuss with them structuring the deal as a joint venture, thereby sharing the risk while still advancing their specific business goals.
Vieira: Understanding and addressing CFIUS risk has become a more critical part of navigating the deal process. As a result, we are often engaged by the board and the highest levels of management to work with investment bankers and others to develop transaction scenarios aimed at maximizing value in a manner that addresses that risk.
LD: Let’s go deeper into how the different disciplines at Skadden work together. Do you consider the regulatory landscape through the lens of a particular client matter, collaborating across practices as needed? Or, do you first form multidisciplinary groups to tackle the implications of regulatory changes?
London: I think there’s a bit of both. Often, when we identify a new regulatory development as one that may potentially impact our clients, we assemble across practices to determine which clients will be affected and in what ways, and how proactively to educate them and advise them on how to prepare and respond. Similarly, when clients come to us for advice in a particular area or on a specific transaction, we often mobilize a global, cross-practice team to provide guidance that addresses all of the regulatory issues implicated by the underlying matter.
M&A, for example, brings all the regulatory disciplines to bear, both as a diligence matter and as a forward-looking planning matter. So all members of the regulatory teams, together with the lead transactional lawyers, work on the project and coordinate their analyses.
Cruz: For our investment advisory clients, our global network is essential, as they must consider the implications of the often-global regulatory regimes in which they operate as an investment adviser as well as the multifaceted tax and regulatory regimes their funds face as buyers and sellers of portfolio companies across the globe.
Boucher: On the financial institutions compliance and enforcement side, for example, we might work on a matter involving a non-U.S. company that is cooperating in an investigation with a variety of different government agencies. Our proposed solutions often require a global, cross-practice team to ensure compliance with local law pertaining to data protection and banking secrecy, among others.
Lent: Different regulatory bodies have different priorities, and a transaction might have an easier time obtaining regulatory approval in one jurisdiction than another. Our clients are able to access a global network of antitrust and competition attorneys, as well as our unparalleled M&A team, subject matter specialists — including tax, investment management, CFIUS and national security — and deep bench of litigators. In each of our locations, we have teams with extensive experience before each of the key regulators. This makes a huge difference both for merger control, where a global deal might have filings in 20 jurisdictions, and for cartel advice, where companies must often consider the implications of conduct (and leniency) in various countries around the world, given that regulators increasingly cooperate among jurisdictions.
Rievman: Our mandate is to ensure that our clients make decisions that reflect a correct understanding of the facts on the ground and how these facts are applied within the complex, and evolving, worldwide regulatory landscape. Increasingly, there isn’t much precedent to apply to a particular set of circumstances and assess the risks imposed by new regulatory controls. Excellent judgment, the depth of our capabilities across practices and regions, and the collective experience of the firm — which includes that of former government officials who were involved in developing many of the regulations we touched upon today — become critically important.