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Issues for financial sponsors and their UK portfolio companies

At Linklaters we aim to deliver legal certainty in a changing world. This means supporting you in preparing for future requirements, as well as in relation to current issues.

Political uncertainty, climate change, new technologies, social media and the impacts of globalisation create new challenges for businesses every day. There is continual growth in what falls within the scope of either regulation or the social licence to operate. To be resilient, you and your portfolio companies need the right governance and legal structures, even though these are not alone sufficient to meet all the challenges they face.

The issues covered in this publication are ones which we think will be particularly topical this year. They all demonstrate the need to build an appropriate culture and to understand expectations of employees, society, investors or governments that are not necessarily set out in black and white. But they are also underpinned by legal obligations, risks and liabilities.

We hope funds and financial sponsors investing in UK companies, and their portfolio companies, will find that the issues highlighted here resonate with their own thinking. We would be delighted to discuss any of them with you.

Issues for Boards 1

New rules to overhaul governance and senior management responsibility in 2019

If 2018 was the year of GDPR, 2019 is the year of another four-letter acronym: SMCR (the Senior Managers and Certification Regime). By December, FCA-authorised firms including private equity houses, fund managers and regulated advisers need to identify which individuals have what management responsibilities within their firm, document their responsibilities and ensure that both those people and most other staff in their organisation comply with new regulatory requirements, including FCA-prescribed conduct rules. Significant time and resource needs to be dedicated to prepare for this over the next nine months.

Issues for Boards 2

How financial sponsors should deal with greater foreign investment restrictions in M&A deals

Sponsors, and portfolio companies engaging in bolt-on acquisitions or carve-outs, are facing a significant extra hurdle when obtaining regulatory approval for their deals. Governments around the world are scrutinising many more proposed inward investments on the grounds of national security, national interest and protecting strategic industries from foreign control.

Issues for Boards 3

Fit for purpose?

Having a clear purpose – both aspirational and realistic – is a critical part of any organisation’s success. Recent corporate governance developments mean that 2019 may be a good year for sponsors to work with boards of portfolio companies to review their company’s purpose. It needs to drive strategy and actions and be embedded in the company’s culture.

Issues for Boards 4

Stakeholders to have a greater influence on private companies

New rules mean that boards of large private companies will have to report on their governance. This need to disclose internal arrangements and stakeholder engagement may prompt boards to review current practices. This will apply to many financial sponsor-backed companies in the UK.

Issues for Boards 5

AI: Ethical? Safe? Lawful?

Artificial intelligence (AI) is the latest in a long line of disruptive new technologies. It creates opportunities but also raises new challenges and broader ethical questions. The algorithms used in AI operate in a “black box” and have no common sense or ethical override. This creates new legal issues and sponsors have a role to play in ensuring these are properly considered both within their own organisation and at portfolio company level.

Issues for Boards 6

Settling: getting the balance right

If properly worded and fairly applied, confidentiality clauses still have a place in settling employment disputes. However, boards need to be clear about why, how and when they are being used.