Article - Chambers Student Guide

Corporate law

In a nutshell

Corporate lawyers provide advice to companies on significant transactions affecting their activities, including internal operations, the buying and selling of businesses and business assets, and the arrangement of the finance to carry out these activities. Here are some of the terms you’ll encounter.

Mergers and acquisitions (M&A): this is where one company acquires another by way of takeover (acquisition), or where two companies fuse to form a single larger entity (merger). The main reasons for a company to execute an M&A transaction are to grow its business (by acquiring or merging with a competitor) or add a new line of business to its existing activities. M&A can either be public (when it involves companies listed on a stock exchange) or private (when it concerns companies privately owned by individuals). Equity capital markets: where a private company raises capital by making its shares available to the public by listing itself on a stock exchange and executing an initial public offering (IPO), as a result of which it becomes a public company (or plc). The London Stock Exchange (LSE) and New York Stock Exchange (NYSE) are the most prestigious exchanges, but companies may list in many other exchanges worldwide. Once listed, the shares can be bought and sold by investors at a price determined by the market. Private equity funds/houses: manage multiple investment funds comprising investors who commit capital and mandate the private equity house to invest in numerous businesses on their behalf. Private equity: covers a range of transactions in which private equity funds are invested in or used to acquire privately held companies which have potential for growth. Private equity houses typically execute leveraged buyouts, using significant bank loans to complete the purchase of these businesses. A private equity fund’s aim is to realise its investment by selling on portfolio companies at a profit or by way of an IPO of their shares on a stock exchange. Venture capitalists: groups of wealthy investors who provide capital to start-ups and small companies with perceived long-term growth potential. It typically entails high risk for investors but has the potential for above-average returns. Corporate restructuring: involves changes to the structure of a company and the disposal of certain assets, either because the company wants to concentrate on more profitable parts of its business; or because it is facing financial difficulties and needs to free up liquidity.

What lawyers do

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Negotiate and draft agreements – this will be done in conjunction with the client, the business that is being bought or sold, other advisers (eg accountants) and any financiers.
Carry out due diligence – this is an investigation to verify the accuracy of information passed from the seller to the buyer, or from the company raising capital to the investor. It establishes the financial strength of the company; the outright ownership of all assets; whether there are outstanding debts or other claims against the company; any environmental or other liabilities that could reduce the value of the business in the future. If shares or bonds are being offered to the public, the report will take the form of a prospectus and must comply with statutory regulations.
Arrange financing – this could come from banks or other types of investors; they will wish to have some kind of security for their investment, eg participation in the shareholding, taking out a mortgage over property or other collateral.
Gather all parties for the completion of the transaction, ensuring all assets have been properly covered by written documents that are properly signed and witnessed. Company law requires that decisions are made at properly convened board meetings and recorded in written resolutions.
Finalise all post-completion registrations and procedures.

The realities of the job

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The type of clients your firm acts for will determine your experiences. Publicly listed companies, major private equity houses and the investment banks that underwrite deals can be extremely demanding and have a different attitude to risk than, say, rich entrepreneurs, owner-managed businesses (OMBs) and small to medium-sized enterprises (SMEs). To deal with such clients, a robust and confident manner is required and stamina is a must.
Corporate transactions can be large and complicated, with many different aspects of the company affected in the process. Lawyers need to be conversant in a variety of legal disciplines and know when to refer matters to a specialist in, say, merger control (competition), employment, property or tax.
Corporate deals involve mountains of paperwork, so you need to be well organised and have good drafting skills. Above all, corporate is a very practical area of law, so commercial acumen and a good understanding of your clients’ objectives is a must.
Corporate work is cyclical and therefore the hours lawyers work can vary depending on the general state of the market and the particular needs of the clients, whose expectations have risen even further since the widespread use of instant modes of communication.
The most junior members of a deal team normally get stuck with the most boring or unrewarding tasks. The banes of the corporate trainee’s life are data room management (putting together and caretaking all the factual information on which a deal relies) and bibling (the creation of files containing copies of all the agreed documents and deal information). More challenging tasks quickly become available to driven junior lawyers.
You need to become absorbed in the corporate world. If you can’t develop an interest in the business media then choose another area of practice pronto.

Current issues

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Much of 2009 was marked by a dearth of M&A transactions, due to frozen credit markets. While the total value of deals rose in the first half of 2011 compared with the same period in 2010, the actual number of deals continued to fall – there was profitable work to be had, but a lot of competition for it.
Companies have been finding it more difficult and expensive to borrow money from banks, and there has been far less funding available from non-bank lenders such as hedge funds and pension funds. In such a volatile market, buyers and sellers are finding it hard to reach agreement on the value of assets. The result has been a massive reduction in deal volume and value.
Leveraged buyouts, which are traditionally financed using a significant amount of borrowed money, saw a particularly sharp decline in value and volume after 2008, but made a comeback in 2010 and 2011. Private equity players have also increased their focus on restructuring portfolio companies.
Cash-rich investors have their pick of the best assets and often acquire businesses at a significant discount due to lower company valuations. There has been growing interest from emerging markets investors and sovereign wealth funds, particularly from the Middle East, in acquiring assets in the UK and elsewhere. Foreign bidders launched more than half the takeovers of UK-listed companies in the first quarter of 2010 – almost double the amount for the same period in 2008. Although the US is still the largest overseas bidder for UK companies, emerging market bidders like China and India are catching up fast.
Private equity has become a leading source of finance for buyouts. As M&A activity slowed in 2011, private equity grew to account for 45% of the deals by number and almost 75% by volume, according to a study by the Centre for Management Buyout Research (see here).
Prior to the general election, UK investors were hesitant. After the announcement of the Emergency Budget in June 2010, it was feared that many investors would pay hefty tax bills on inflationary gains. Longer-term investors could lose out significantly following a rise in capital gains tax (18% lower rate and 28% higher rate). Some fear that raising CGT could drive investment overseas and discourage international investors from placing equity investments in the UK.
Big-ticket energy work – in both oil and gas and renewables – is on the up and up. Joint ventures between companies are increasingly popular on large projects, and government support for investments ensures greater regulatory stability.
A sound grounding in corporate finance makes an excellent springboard for working in-house in major companies. Some lawyers move to banks to work as corporate finance execs or analysts. Company secretarial positions suit lawyers with a taste for internal management and compliance issues.