Ethereum is Merging?

Before we dive in, I just wanted to take a moment to honour Her Majesty. Queen Elizabeth II was a common thread in most of our lives, and her death marks the end of an era. She will always be remembered for her strength and determination over her 70-year reign.

Today's read (12 minutes):

• Ethereum is merging?
• Why is unemployment still low?
• The era of Supermarket Trade Mark disputes
• Case: Addleshaw Goddard advises on company secrets dispute
• Deal: Allen & Overy acts on packaging company deal
• Numbers Time: Irwin Mitchell reports a 50% drop in profits
• A roundup of the top business news of the week

plus answers to your questions!

Ethereum is merging?

You might have heard about the upcoming Ethereum Merge. I thought this could be an interesting topic to cover as undoubtedly crypto is taking an increasingly prominent role in society, and ultimately it is something that law firms and their clients will have to contend with.

This story aims to give you (1) a brief overview of what the Merge is and why it is significant; and (2) show how it could impact law firms and their clients.

Ok, so what is the Merge?

The Merge is the name the crypto-community has given to the point at which the Ethereum blockchain will transition from using “proof-of-work” as a consensus mechanism—the method by which all the computers maintaining a blockchain agree to add new transactions to it—to using “proof-of-stake”.

They call it the Merge because, for almost two years, a separate proof-of-stake blockchain, called the Beacon chain, has been running alongside the original Ethereum one. Some compare the process to changing the engine of an aeroplane mid-flight.

Proof-of-work is hugely energy intensive, requiring large amounts of computing power, and has resulted in blockchains, such as Ethereum and Bitcoin, consuming as much energy as small countries. Proof-of-stake will require 99.9% less energy to operate. The effect on emissions will be as though, overnight, Chile had been switched off.

How does this impact law firms' clients?

• Reduction of energy consumption could bring new investment to this space, and create opportunities for clients.

The reduction of crypto’s environmental impact is a huge point. Many businesses have avoided any involvement in crypto partly because of the risk of being associated with the negative climate impact. Removing this factor from Ethereum means that more businesses could see it as an investment opportunity.

Decentralised applications (dApps) are a useful example of these opportunities for clients. Some of these are financial applications (DeFi apps) that operate on top of the blockchain and are extremely efficient, in part because they automate the functions of a financial system. Smart contracts automatically match buyers and sellers or borrowers and lenders at exchanges. A paper produced by the IMF found that the marginal costs of financial intermediation by DeFi apps were about a third as much as rich-country banks and a fifth of emerging-market banks.

Until now, the efficiency for users is dampened by how slow, and expensive using the Ethereum blockchain can be. When the network is busy, the charges to record transactions, called “gas fees”, can spike to as much as $100 for a single transaction.

However, at an Ethereum conference in Paris, Vitalik Buterin (its founder) said Ethereum today can process about 15-20 transactions a second. This Ethereum…it’s going to be able to process 100,000 transactions a second. This adds immense scalability to Ethereum, meaning that businesses will be able to build more at a cheaper cost. It would also be a huge step towards onboarding users who expect seamless and free transactions.

How does this impact law firms?

• Supporting clients on the legal side of making the above opportunities viable.
• Top Departments: Commercial, Corporate, IT

Clients may see the reduction in energy consumption, and fees as a sign they need to invest in Ethereum either by creating dApps or by leveraging the technology for their business, e.g. take control of their supply chain process by recording all products that flow through it on the blockchain, to track every stage.

Law firms may be asked to advise on making these opportunities possible, i.e. what contracts or structures are needed to make this legally secure. Commercial and Technology departments will probably be at the forefront of these developments. They may, for example, be asked to draft service contracts to develop dApps or contracts to assign intellectual property ownership to blockchain-based inventions.

I would also expect Corporate departments to be heavily involved in structuring deals (e.g. mergers, acquisitions, joint ventures) in this area if we see an in-flow of cash from private equity firms or funds looking to capitalise on the Merge. And we're not starting from scratch here. For the fifth quarter in a row, Q2 2022 saw over 40 Blockchain M&A deals, and they are on track to surpass last year’s record. Meanwhile, Blockchain venture funding stabilised at $6.5B in Q1 2022.

Another query that clients might have relates to the security of the blockchain and whether there is any risk of it being taken over by single parties. To take control of the Bitcoin or Ethereum blockchain, an attacker needs 51% of the total computing power used to mine the currency. Rough estimates put the cost of this at $5bn-10bn. However, to attack a proof-of-stake blockchain would require buying up and staking half of all tokens, which would currently cost around $20bn.

Why is Unemployment still low?

Despite the widespread recession fears, demand for workers seems to hold strong in the US and the UK. Figures released on September 2nd show that American employers, excluding farms, added 315,000 workers to payrolls in August. The Jobs Openings and Labour Turnover Survey, released a few days earlier, shows there were 11.2m job openings in July. There were almost two vacancies for every unemployed person.

The situation in the UK is similar. The Bank of England forecasts a bitter recession, but there are near-record vacancies. The number of job vacancies in the UK reached a record high of almost 1.3 million in the three months to May 2022. Meanwhile, the UK unemployment rate was estimated at 3.8%, 0.1 percentage points lower than the previous three-month period and 0.2 percentage points below the pre-coronavirus pandemic.

This is strange, but there are a couple of reasons for it. Firstly, the current labour market has a very high churn rate. In July, payrolls rose by 0.5m, but around 6.4m began new jobs, and 5.9m left their old ones. This is because the same firms hiring workers are also firing others. Companies such as Shopify, Netflix and Robinhood are now restructuring their workforce after recent hiring sprees.

The second factor is that the market has changed after the pandemic. Many older workers have retired, opening up positions for younger ones. The employment-to-population ratio in the US remains below its pre-pandemic peak despite many workers being recalled to the jobs they were fired from during the pandemic.

How does this impact law firms' clients?

• Managing risks in firing and hiring workers.

Clients are already struggling under the financial pressure of higher interest rates, inflation, supply chain crisis etc. As a result, they need to reorganise their workforce and re-evaluate whether their recent hiring needs to be amended.

Some companies may see this period as an opportunity and invest in expanding their workforces rather than limiting them. For example, Ryanair hired staff during the pandemic and began hiring aggressively as the economy reopened. It has kept flying this summer, gaining market share as rivals have cancelled flights.

Overall, clients will want to ensure they safely manage redundancies and retain talent. To do this, they will need legal advice.

How does this impact law firms?

• Employment lawyers will be busy advising on managing redundancies, structuring hires, and dealing with unfair dismissal claims.
• Top Departments: Employment.

Employment lawyers will be asked to advise clients on how to manage their redundancies. This means avoiding the risk that any redundancy could be deemed to be an unfair dismissal, and this could lead to a dispute at the Employment Tribunal which could prove costly for the business.

Additionally, law firms will also be asked for procedures for hiring staff. Many businesses may be looking to vary their contracts to attract talent and reduce costs for example, by offering a fully remote working policy. This approach has advantages in a tight jobs market. A firm can cast its recruitment net over a wider area. Remote workers may trade off greater flexibility for lower pay. But there are obvious downsides, too. It is tough to sustain the unity of purpose when colleagues barely meet each other.

To achieve this, businesses will look for reviews of their employment contracts to confirm whether there are provisions to add on termination and how to incorporate additional terms (like remote working).

Something that caught my eye...

The grocery retail market in the UK is highly competitive. Supermarkets are constantly vying with each other to win and retain customer loyalty. Lidl has alleged trade mark, and copyright infringement of its logo in proceedings issued to the High Court. The discount retailer owns the trade mark registrations for the logo on the left. It also owns the registrations for the logo without the word Lidl (the ‘wordless mark’), shown on the right. The trial is not until February 2023, but the High Court did recently strike out one of Tesco's claims. Namely, that Lidl filed the wordless mark in bad faith as it had no intention to use it. The judge concluded that Tesco’s pleadings did not disclose any reasonable grounds for making the bad faith allegation, and it must therefore be struck out.

Top Court Case:

Vanilla Electronics has sued three former employees for damages, saying they stole confidential information and solicited some of its staff and clients for the benefit of a rival manufacturer they went to work for (Vital Electronics). Vanilla claims that the employees also misused confidential information about Vanilla's clients by sharing it with their new employer, Vital, the lawsuit alleges. This, it says, breached their duty of confidence to Vanilla, which makes electronics including SD cards, LEDs and cables.

Vanilla is represented by John Mehrzad QC and Nicholas Goodfellow of Littleton Chambers, instructed by Addleshaw Goddard.

Top Deal:

Packaging company Stora Enso of Finland acquired a Dutch maker of cardboard boxes for approximately €1.02 billion as it seeks to accelerate its revenue growth. Stora Enso said the acquisition of De Jong Packaging Group will provide it with a gateway into the Netherlands, Belgium, Germany and Britain — where it operates 17 sites — and give it a share of the market in Europe. The transaction is in line with the company's strategy of increasing market share in renewable and reusable packaging services.

Allen & Overy advised Stora Enso.

Numbers Time

Irwin Mitchell’s group profits before tax have plummeted from £43.1 million to £21.2 million, equivalent to a 51% cut, according to its 2022 financial results. Revenue at the firm has also fallen by 2.7%, from £283.3 million in 2021 to £275.7 million in 2022. The figures contrast the firm’s results from last year when it reported a 47% rise in profits.

Among other factors, the firm attributed the contraction to a “strategic deal” in September 2021 to withdraw from the volume personal injury market to focus on more complex personal injury cases, which has led to an expected dip in overall revenue.

Answering your questions!

Q: Nuclear power energy is an increasing trend that could provide an alternative to the more capital-intensive and time-consuming wind and solar energy. If clients engage law firms in this respect, what practice areas might be involved and could you expand on what lawyers will be expected to do in those areas? - Jinnie

Ludo: Great question! This is a highly regulated area, and there are quite a few points law firms will be expected to advise on. Below I have summarised some key ones!

Planning and Regulatory advice is also crucial to comply with the requirements of the ONR. To assure the safety of nuclear installations in the UK, ONR works on a system of regulatory control based on a robust licensing process by which a corporate body is granted a licence to use a site for specified activities.

Other busy areas include Commercial and Corporate. Nuclear station projects usually require a lot of funding, and a common structure to achieve this is via a joint venture whereby multiple parties pool together resources to achieve their goal. This will require extensive contract drafting and corporate advice to ensure all parties are clear on ownership and liability is delineated e.g. by way of a shareholder agreement which sets out all the shareholders' responsibilities.

As an add-on to this, law firms can also expect to assist parties investing in the nuclear plant on employment, real estate and construction issues. These will be crucial to source the land required for the build and to proceed with its development and maintenance. As always, if any other businesses are acquired as part of the process, lawyers will also need to keep an eye on TUPE's involvement and advise their clients accordingly.

Additionally, law firms can expect to advise clients on issues with waste disposal and litigation arising from the use of the station. For example, someone might complain about it, or bring a claim against the nuclear station because they think it negatively affects the surrounding environment.

Another point is that the government enacted the Nuclear Energy (Financing) Act 2022 (Nuclear Act) on 31 March 2022. Part 1 of the Nuclear Act sets out the procedure for designating a nuclear generation company as eligible for funding through the regulated asset base (RAB) model. Law firms may be required to advise on the provisions of this Act and also on their options to secure funding through it. To this point, you can mention that there are two criteria for such designation:

1. the Secretary of State is of the opinion that the development of the nuclear project is sufficiently advanced to justify the designation of the nuclear company in relation to the project; and
2. the Secretary of State is of the opinion that designating the nuclear company in relation to the project is likely to result in value for money.

Another point is what happens if the station goes into insolvency. Part 3 of the Nuclear Act sets out a ‘special administration regime’ which would apply should a nuclear company become insolvent. If a nuclear company with a RAB contract becomes insolvent, the Government can apply for a court order to appoint a special administrator to manage the company and the nuclear plant. This is done to reduce the risks of consumers being deprived of the intended benefits from financing the building of a nuclear power plant and reduce the risk of needing a replacement source of electricity generation, which would further increase the cost of electricity to consumers.

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Business News Roundup

The European Central Bank lifted its benchmark interest rate by three-quarters of a percentage point, to 0.75%. In July the rate was raised from a negative rate of -0.5% to zero, which was the first increase in a decade. As with other central banks around the world, the ecb is under intense pressure to tame inflation, which stood at an annual rate of 9.1% in the euro zone in August. The day before the ecb’s decision Canada’s central bank lifted its main interest rate and also by the same amount, taking it to 3.25%, the first time it has been over 3% since 2008.

opec+ decided to cut output of oil by 100,000 barrels of oil a day, defying Western governments' call to the cartel to increase production in order to keep prices down. The cut is small (global demand is about 100m barrels a day), taking output back to where it was in August. The price of oil has dropped, from almost $125 in early June for a barrel of Brent crude to under $90 this week for the first time since February. opec's move shows it does not want the price to fall much more.

China’s central bank moved to shore up the yuan by reducing the amount of foreign currency that banks need to hold. Meanwhile the yen fell to ¥144 against the dollar, its weakest level since 1998. Meanwhile, the pound plunged to $1.14, its lowest level since 1985, amid dire forecasts about the British economy.

The Biden administration gave more details about its plans for subsidising the production of semiconductors in America. Around $28bn will be provided for cutting-edge logic and memory chips, $10bn for current-generation chips, and $11bn for a new technology centre and other institutes. The government wants to boost domestic expertise in semiconductors, and reduce the reliance on chips from South Korea and Taiwan.

Volkswagen said it would list Porsche in an IPO on the Frankfurt Stock Exchange in either late September or early October. The flotation could raise as much as €10.6bn which would make it the biggest stockmarket listing in Europe since Glencore in 2011.