Today's read (11 minutes):
- Why are Chinese Companies listing in Switzerland?
- The new US Industrial Policy
- Will the EU collect windfall profits from Energy Companies?
- Case: Google loses Appeal in €4.3B Antitrust Case
- Deal: Gowling WLG advises on Aurrigo International listing
- Moves and Numbers
- A roundup of the top business news of the week
Why are Chinese Companies listing in Switzerland?
Four Chinese companies have recently debuted on the SIX Swiss Exchange (SIX), Switzerland’s main stock exchange, raising a total of l $1.5 billion.
They are not the only ones. In fact, Switzerland is increasingly becoming the go-to spot for Chinese companies' public listings.
At present at least 10 other Chinese companies are preparing for listing on SIX, including Fangda Carbon New Material, Lepu Medical Tech, Sany Heavy Industry, Will Semiconductor and Eastroc Beverage Group, though some are also considering London and Frankfurt as potential venues.
This trend has been achieved through the use of a Global Depositary Receipt (GDR). A GDR represents shares in a foreign company and trades on the local stock exchanges in investors' countries. GDRs make it possible for a company (the issuer) to access investors in capital markets beyond the borders of its own country.
In July, SIX officially launched the Swiss GDR-leg of the China-Switzerland Stock Connect, providing a new offshore source of trading liquidity for stocks listed on the Shanghai and Shenzhen exchanges.
How does this impact law firms' clients?
- Chinese companies see the Swiss market as their best opportunity to raise capital at present.
The market for Chinese issuers has been largely closed off this year due to delisting threats due to unresolved auditing agreements between China and the U.S. Securities and Exchange Commission. China’s massive crackdown on data-heavy Chinese companies and their foreign listings, which started last year, has also spooked major tech companies that were looking to launch initial public offerings (IPOs).
The Hong Kong capital market is also suffering from a slowdown, partly due to the city’s zero-COVID policy, which has negatively impacted investor confidence. Hong Kong’s second-quarter IPO raising this year fell 90% from the year before.
The Swiss market offers much needed economic and legal stability for these companies which can also benefit from less stringent requirements on SIX than on the Hong Kong Stock Exchange.
Additionally, valuation for the shares are not only higher, but the post-listing maintenance fees of SIX were also lower than those of the Hong Kong Exchange. The process is quicker than having a Hong Kong IPO, and allows these companies to put themselves in front of major European investors.
How does this impact law firms?
- More corporate and capital markets work in Switzerland.
- Top Departments: Corporate and Capital Markets.
Top law firms are already capitalising on this trend. Baker McKenzie, Linklaters, Clifford Chance and King & Wood Mallesons have already benefited from the first wave of companies that have listed on SIX, advising on the issuances of Shanghai-listed Keda Industrial and Ningbo Shanshan, and Shenzhen-listed GEM and Gotion High-tech. Baker McKenzie and Linklaters were involved in all four listings, advising both issuers and underwriters.
There are some key legal issues that law firms will make clients aware of. One key point at issue is whether the proceeds from SIX raisings can be used for overseas investment projects or construction projects, and to what extent they can be retained overseas. At present there is some uncertainty on this, therefore law firms will need to carefully advise their clients based on the facts at hand.
Another area of concern is the coordination of disclosure in the A share market and the Swiss market, since GDR issuers are Chinese companies listed on mainland Chinese exchanges, and many are unfamiliar with Swiss laws and market practice. Law firms will need to advise clients on this compliance, and the use of Swiss law as part of their transaction documents.
Despite this recent surge in activity, European listings have never been particularly successful in sustaining interest from Chinese issuers. In 2018, Chinese home appliance manufacturer and distributor Haier Smart Home Co. floated GDRs in Frankfurt, sealing the first share IPO on the China Europe International Exchange.
After Haier, though, only four other Chinese companies—Huatai Securities, China Pacific Insurance, China Yangtze Power and SDIC Power Holdings later went public in London through the Shanghai-London Stock Connect scheme, which was launched in 2019.
However, if this trend holds up it could see sustained growth. The threat of more than 150 Chinese companies being delisted from New York still exists, and SIX may look to welcome more Chinese issuers in the near future. To stay in the US market, Chinese companies must prove that they're not state controlled, and that their auditors comply with American inspectors for three consecutive years. If they fail to do this, they will be delisted from U.S. stock exchanges like the Nasdaq and New York Stock Exchange by 2024.
The new US Industrial Policy
The US is investing heavily in its industrial sector.
An infrastructure law passed last November grants more than $20bn for new clean-energy technologies such as carbon capture and nearly $8bn for electric-vehicle charging stations. A technology bill approved in July will put $52bn into semiconductors while promising a further $170bn to support research in other fields. An act passed in August allocates $370bn to combat climate change, including investments in clean vehicles and renewable energy.
This may add up to nearly $100bn of annual spending on industrial policy during the next five years.
Of course, that might seem small compared to its total federal expenditure of almost $6trn this year. However, it would approximately double the spending that can be categorised as industrial policy.
How does this impact law firms' clients?
- Opportunities for clients to grow industrial operations and take advantage of government support.
Based on the abovementioned laws, we can expect growth in clean energy, climate change and semiconductors. These bills would allow clients in this area to invest heavily in their growth with the backing of government capital.
The semiconductor sector could be a crucial area to keep an eye on. The US government is taking a more hands-on approach in supporting the production of these goods, with $39bn set aside as subsidies for factories and equipment. An example of this is Intel’s recently built plant in Ohio. The climate law contains production subsidies, too, including up to $20bn in loans for new electric-vehicle factories.
The government will also serve as a customer for some of the emerging industries to boost their production. This was notably done in Operation Warp Speed, America’s fast-track programme for COVID vaccines. This could be particularly beneficial for renewable energy. The Biden administration believes that the procurement power of government can generate demand for 100 gigawatts of domestically made solar-power systems over the next decade—nearly as much as America’s installed solar-power capacity today.
How does this impact law firms?
- Opportunities to advise clients on industrial growth and investment in the industrial sector.
- Top Departments: Commercial, Corporate, IT, Employment.
This in-flow of cash will generate more demand from clients in respect of expanding, and growing their operations.
For example, a semiconductor provider may ask for legal advice on applying to receive subsidies, and consequently on the necessary advice for expanding to new locations. This could include acquiring new land to build factories on, hiring new employees (with employment lawyers' advice on employment contracts), and on the commercial contracts for sourcing supply of materials needed to build the semiconductors. They may also need corporate advice if they decide to merge, or acquire other businesses in the sector to accelerate their growth.
Energy and Infrastructure lawyers will also be getting involved in the boost in industrial activity. In the context of renewable energy, many providers will see this as an opportunity to construct new energy plants, and boost their production rates knowing that the government may step in to enhance their sales. This will require land acquisitions, infrastructure advice on building the plants, applying for the necessary regulatory documents, and on the management of the energy plants (depending on the specific type of renewable energy)
Solar panels could see a rapid boost based on the government requirements, and this will require extensive commercial contracts to govern their sale and installation.
Top Court Case:
Google and parent company Alphabet lost an appeal Wednesday against a landmark €4.3 billion antitrust fine. The decision from the General Court focused on a 2018 fine imposed by Brussels officials on the company for allegedly placing anti-competitive restrictions on manufacturers of mobile devices and mobile network operators to protect and bolster the dominant position of its search engine, Google Search, and the revenue from search advertisements. The fine was the largest ever given by a competition authority in Europe.
This is the second appeal the U.S. tech giant has lost against a billion-euro EU antitrust fine. Last year, the Luxembourg court of the first instance for EU law sided with the European Commission in a challenge to a 2017 antitrust fine of €2.42 billion centring on Google’s comparison shopping service. The third appeal against a €1.49 billion antitrust fine over Google’s anti-competitive behaviour in online advertising is outstanding, with a decision not expected before 2023.
Google was represented by Cleary Gottlieb Steen & Hamilton, Garrigues, and White & Case, alongside Monckton Chambers’ David Gregory and Meredith Pickford KC.
Gowling WLG advised Aurrigo International PLC announced on its listing on the London Stock Exchange, where it raised £8 million to help boost the aviation side of its autonomous vehicle business. Aurrigo said it will use the funds to invest in expansion plans that will see the continued development and future rollout of its autonomous cargo and airport luggage vehicles, such as Auto-Dolly. Aurrigo said it has developed six autonomous vehicles to date that can be used for lowering costs and tackling labour shortages.
Moves and Numbers
In our Friday newsletter, I also include summaries of released law firms' financial accounts alongside any relevant hires. These are great points to mention in an interview as they highlight your extensive research into the law firms you are applying to.
Hogan Lovells hired finance and fintech partner Bryony Widdup from DLA Piper. Her broad practice includes advising on transaction structuring in finance for funds, broader lending platforms (including blockchain-based offerings) and digital assets. Tech and blockchain are among the areas of growth earmarked by the firm, which counts tech as one of its industry specialisms.
A few changes at Mishcon de Reya this week. Technology, media and telecoms disputes partner Mark Deem and family law partner Emma Willing left to Wiggin and Penningtons Manches Cooper respectively, while Ceinwen Hayes joined the real estate team from Bryan Cave Leighton Paisner (BCLP).
Squire Patton Boggs hired commercial litigator Lucy Webster from Eversheds Sutherland, where she was legal director. The firm also hired Marija Scekic as a director in its international arbitration practice; she joined from WilmerHale, where she was counsel. This month, the firm also added a five-strong restructuring and insolvency team from Brown Rudnick and derivatives and structured finance partner Leona McManus from Shearman & Sterling in London last week.
Linklaters senior partner Alejandro Ortiz left for Latham & Watkins' Madrid office. Ortiz is specialised in handling leading public company M&A deals in the region.
Answering your questions!
Q: I saw the EU is looking to collect windfall profits from energy companies, can you explain what that could look like? - Francesca (London, UK)
Ludo: Of course! On Wednesday, Ursula von der Leyen, the president of the European Commission proposed a union-wide scheme to skim off €140bn in “excess” profits. Energy ministers are due to meet on September 30th to agree on the details.
There are two types of profits the EU is looking at. Firstly, hose of fossil-fuel businesses, including oil, gas, coal and refinery firms, benefit from very high energy prices. To calculate what is excessive, the EU uses an average of the company’s profits over the past three years as the benchmark. If profit during 2022 is more than 20% higher than that benchmark, a third of anything above that 20% mark must be paid to governments. This is likely to receive some opposition from energy companies as the benchmark taken in account 2020 and 2021 (years of the COVID pandemic) when demand crashed and energy prices were very low.
Secondly, the EU will look at the cost of generating electricity. This varies depending on the energy used, with gas being particularly expensive. At present, because of widespread shortfalls in nuclear-power and hydro-electric generation, power plants which generate electricity using gas are the most flexible and able to fill gaps in power generation. That means that it is expensive gas-powered plants which are setting the price of energy in many European countries.
The EU proposes to cap the revenue that firms can receive on the market at €180 per megawatt hour (MWh). (The market price before the crisis was around €50 per MWh in Germany.) The €180 cap is generous to energy companies. Another Italian windfall-tax scheme imposed a cap of €60 per MWh for renewable generators. The cap is expected to remain in place until the end of March 2023, but could be extended if prices remain high.
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Business News Roundup
America’s annual inflation rate dipped in August to 8.3% from 8.5% in July, but month-on-month the consumer-price index unexpectedly rose by 0.1%. The government had hoped that falling petrol prices, now at a six-month low of $3.70 a gallon, would ease inflationary pressures. But core inflation, which does not include volatile energy and food prices, rose sharply. Household electricity bills were up by 15.8%, year on year, the biggest jump since 1981, and natural gas by 33%.
Inflation did fall in Britain for the first time in nearly a year, to 9.9%, mostly because of the decrease in petrol prices. The rate is expected to fall again, given the government’s massive energy-relief package, which will cap household bills.
Ursula von der Leyen, the president of the European Commission, gave details of a proposed windfall tax on energy companies to help households struggling with rocketing bills. Von der Leyen aims to raise €140bn from electricity companies and said that oil, gas and coal firms would have to make a “crisis contribution”.
Meanwhile, the French government said it would cap increases to household energy bills at 15% next year, and provide direct payments to those on low incomes. Uniper, Germany’s biggest gas distributor, was in talks with the government that could see it nationalised.