SPAC Mania: A Volatile Market and Undaunted Backers

In the last two years, Special Purpose Acquisition Companies (SPACs) have taken the financial world by storm, outdoing both IPOs and direct listings. SPACs have increased speed and the certainty of deal completion. However, SPACs are notorious for allowing companies to make projections about future performance—conduct that is strictly prohibited in traditional IPOs. In the face of increased regulatory and judicial scrutiny, and in a cooling market, it is unclear whether they will have a lasting place in the capital markets or will prove to be a passing fad.

While many companies have followed through on their mid-“de-SPAC” financial projections, many others haveunderperformed and left investors holding the bag.  of For instance, last year, Grab Holdings Ltd. began trading on Nasdaq after closing its SPAC merger at a $40 billion valuation with almost no redemptions. However, its shares fell following their listing debut, taking its market capitalization down to around $12 billion.

Though redemption rights originally acted as a risk reduction mechanism for investors by providing a “money-back guarantee,” the rocky performance of many post-de-SPAC companies had led to redemption rates as high as 97%. In the event of such radical redemption rates, the cash proceeds of de-SPAC transactions for the company are drastically reduced. As investors continue to redeem their funds at an increasing rate, SPACs are struggling to fulfill their minimum cash requirements that are crucial to close the transaction.

This phenomenon has led many SPAC companies into short-term agreements with alternative asset managers and private equity groups in order to replace cash being pulled out by investors. The redemption option creates uncertainty as to the amount of cash available after the business combination takes place, and SPACs are attempting to mitigate this risk by issuing securities to institutional accredited investors in a PIPE transaction that is contingent upon closing of the initial business combination. Under the provisions of such agreements, asset managers and private equity groups agree to buy shares from investors who are willing to withdraw their funds and the company gathers enough funds to meet its minimum cash requirements.

However, even with the security of a PIPE transaction, going public via a SPAC poses risk for private companies. For instance, in December 2021, Virgin Orbit closed a deal with NextGen Acquisition Corp II where Virgin Orbit had expected to raise $483 million in total gross proceeds, including a $100 million Private Investment in Public Equity (PIPE) transaction led by Boeing, AE Industrial Partners, and others. However, due to an 82.3% redemption rate ahead of the transaction, the SPAC’s trust account lost $315 million. As a result, the company only raised half of what it had originally anticipated.

According to SPAC Research / SPAC Alpha, last year, while the average monthly SPAC redemption rate ranged from 7%-43% from January to July, the market witnessed a 60% redemption rate from July to November as the range jumped to 43% to 67%. As the SPAC frenzy appears to have cooled down and more companies are starting to perform poorly in the stock market, SPAC executives are getting desperate to close their deals.

Many critics argue that the agreements illustrate how desperate SPAC executives are to close their deals and how alternative funds have targeted the investments to generate returns, with dealmakers viewing the terms granted as very favorable to the funds. Amidst all the regulatory scrutiny and poor performances, while entering into agreements with forward funds may ensure that deals get closed, such transactions may add to the financial crunch being faced by the public companies and may not solve long-term problems.

The Delaware Court of Chancery has also been looking more critically at SPACs in recent months. In In re Multiplan Corp. Stockholders Litigation, while the key issue revolved around fiduciary duties in the context of SPACs, the court also highlighted the significance of robust disclosure of material information so that all risk factors can be carefully considered. The court held that certain key officials of the SPAC, including its directors and CEO, violated their fiduciary duty of loyalty to the SPAC’s stockholders by failing to disclose material information regarding its target.

However, despite changing market conditions and an increased regulatory scrutiny, SPACs are here to stay, and the SPAC deals in the future will be of higher quality. Despite all the risks present, SPACs may attempt to protect themselves from high redemption rates in many ways. For instance, “bulldog provisions” limiting the percentage of total outstanding shares a single shareholder can redeem have begun to appear in SPAC agreements.  SPACs may be down right now, but these setbacks likely do not mean it is the end for the instrument. SPACs have revolutionized the capital market, and while they may need to change for it, it will need to change for them too.

A Digital Dollar: Pending Homework for the Fed

The history of money is entering a new chapter. The world’s central banks are realizing that they need to respond to the increasingly proliferating cryptocurrencies and stable coins. The alternative they propose is a digital fiat currency backed by central banks that functions similarly to traditional fiat money, so-called Central Bank Digital Currency (CBDC). It will operate just like cash, but instead of carrying it in a physical wallet or putting it into a bank account, it would be stored and accessed digitally, make payments more cost-efficient, and increase access to financial services. All told, as of February 2022, 91 countries are exploring CBDC at one level or another with some researching, some testing, and a few already distributing CBDC to the public.

As for the United States, the Federal Reserve finally released an authoritative paper on CBDC in January 2022, following past Fed experiments with a hypothetical CBDC. This marks the first step in a public discussion between the Fed and stakeholders about CBDC. In the paper, the Fed takes a comprehensive look at the advantages of CBDC, such as speeding up electronic cross-border payments in an already highly digitized world. The paper also highlights CBDC’s potential to support the U.S. Dollar’s international role and promote financial inclusion by expanding access to digital money for unbanked persons. Further, the Fed suggests that a U.S. CBDC would best serve the needs of the U.S. by being privacy-protected, intermediated, widely transferable, and identity-verified. However, the paper also discusses some issues with a CBDC, such as financial stability, changes to the structure of the financial sector market, and maintaining privacy while guarding against fraud. To explore design options for a CBDC, the paper includes 22 items for public feedback in a 120-days comment period.

Many CBDC enthusiasts, as well as some cross-border payment associations, welcomed the Fed’s paper as the first key milestone in the U.S. digital dollar policy. Still, the paper made no clear policy recommendations and offered no clear signal on where the Fed stands on the launch of CBDC, causing some economists to see this project as a long shot. The Fed emphasized that they would not proceed with creating CBDC without support from the executive branch and authorization from Congress. In fact, the executive branch gave the green light on March 9 through the President’s Executive Order on Ensuring Responsible Development of Digital Assets. One key takeaway from the order is that the Biden administration “places the highest urgency on research and development efforts into the potential design and deployment” of a U.S. CBDC. On the other hand, Congress is still divided over the need for a CBDC. Some members of Congress are concerned about privacy and surveillance issues, while others support a digital dollar to boost financial inclusion.

In contrast to the U.S. government’s slow pace, a handful of countries have firmly expressed their interest in CBDC through accelerated experimentation. Nine countries have already successfully launched a digital currency. Claimed as the first nationwide CBDC, the “Sand Dollar” in the Bahamas has been in circulation for more than a year. It holds an identical function and legal status as Bahamian cash dollars. Individuals, including non-residents of the Bahamas and businesses, can use the Sand Dollar through mobile e-wallet applications for many transactions in authorized merchants. In addition, 14 countries, including China, are now piloting their CBDCs ahead of a potential full launch.

China, as one of the world’s leading countries in the payment industry, started its research on CBDC in 2014 as part of its broader efforts to internationalize the Yuan, maintain control over its financial system amidst proliferating private cryptocurrencies, and increase surveillance over individuals’ transactions. Further, a digital Yuan would also allow Chinese firms and their trading counterparties to reduce reliance on the U.S. dollar for cross-border payments and potentially circumvent payment channels subjected by U.S. sanctions. A pilot program of China’s digital Yuan, launched by the People’s Bank of China two years ago, has reached 87.57 billion yuan ($13.68 billion) in cumulative transactions. To push the development of its CBDC, earlier this year China’s central banks released pilot versions of a digital yuan wallet mobile application (e-CNY) to expand CBDC access for selected users such as domestic banks, followed by a nationwide rollout. Furthermore, to secure the legal foundation of its CBDC, China is also drafting a general revision on the People’s Bank of China Law, which suggests that Chinese currency includes both physical and digital forms (e-CNY). The draft law provides the central bank with the broad power to plan, organize, and supervise the payment system and financial infrastructure. The Central Bank of China will have the responsibility to coordinate the work on national financial security, with the goal of developing a cyber-resilient CBDC.

As stated by a Bank for International Settlements economist, digital currencies, including CBDCs, are the next wave in the evolution of the nature of money in the digital economy. However, CBDC in the U.S. is still in its infancy. There remain unsolved issues and commonly identified obstacles. Once the world leader in digital payments and technological innovation, the U.S. is now being outpaced by its top global adversary and much of the industrialized and the developing world.


Short-Term Investors Are Behind the Increase of Your Netflix Monthly Subscription

Hopefully, this article will be more thrilling than the latest show you binge-watched on Netflix. Bill Ackman, a famous activist shareholder, announced on January 26 that Pershing Square acquired more than 3.1 million shares of Netflix in a 1.1-billion-dollar transaction. As a top-20 shareholder in the company, Pershing Square is now “all-in on streaming” and believes in the long-term growth of this industry. Looking at the big picture, this transaction compliments a growing sentiment that regulators should incentivize investors to base their decisions on long-term trends instead of short-term profits.

In 2020, Netflix’s stock price gained more than 60%. However, this price surge was motivated by the pandemicand increased media consumption causing 37 million new subscribers to join the platform. In other words, Netflix’s stock price was driven by a temporary event rather than a long-lasting growth opportunity.

However, investments for short-term profits increase the volatility of our financial markets. Studies even find that they might cause a “price distortion, or bubble.” For example, Netflix suffered a 23% backlash when its annual subscriber growth suffered a downturn in 2021. Short-term investors probably did not account for encouraging signals, such as Netflix winning most Emmy awards in 2021 or Squid Game, which launched in 2021 and proved to be the most successful show on the platform.

On the other hand, value-driven investors were not deterred by Netflix’s slower subscriber growth in 2021. They are motivated by long term profits and took advantage of pessimistic reactions. As Ackman noted in its letter to investors, the “opportunity to acquire Netflix at an attractive valuation emerged when investors reacted negatively to the recent quarter’s subscriber growth and management’s short-term guidance.”

Pershing Square’s financing of the transaction also demonstrates that investors continuously balance short- and long-term interests. Ackman’s letter explains that the transaction was financed with $1.25 billion proceeds from an interest rate hedge. He notes that Pershing Square “could have likely realized more gains” with this interest rate hedge, but Netflix “offered a more compelling risk/reward and likely greater, long-term profits for the funds.”

Many investors would have probably stuck to the short-term profits from the interest rate hedge. In a reportfrom 2018, Nasdaq already observed a concerning “trend toward exerting pressure for short-term gains at the expense of long-term health.” The same pressure for short-term gains is probably behind the price increase of your Netflix monthly subscription. Indeed, short-term pressure pushes managers to immediately deliver results instead of focusing on value creation. A study by Graham, Harvey and Rajgopal found that “managers appear to be willing to burn ‘real’ cash flows for the sake of reporting desired accounting number.” Interestingly, their study notes that 80% of the managers would “decrease discretionary spending on R&D, advertising and maintenance to meet an earnings target.”

In the case of Netflix, slower subscriber growth means less revenues than expected. Managers could thus be tempted to spend less on content development to meet their earning targets. This might be good news for some of us desperately trying to stop spending countless hours on the platform, but less quality content would hurt Netflix’s growth in the long run. An alternative would be to increase subscription prices to generate higher income and meet earning targets. Managers implemented this option on January 14, 2022 and the stock price went up.

Similarly, Almeida, Fos and Kronlund found that companies generally buyback their shares to meet earnings per share targets. Netflix probably implements this strategy too. For example, a Forbes article from 2021 announced “Netflix Shares Plummet After Q1 Subscriber Miss, But Buybacks Coming.” This demonstrates that short-term investors and market volatility constrains managers to focus on accounting rather than improving products and business strategies.

This short-term pressure will not only prevent you from enjoying Netflix shows at $8.99 per month—it has broader implications. Indeed, corporations are currently expected to become more inclusive and to reduce their environmental impact. Implementing these changes requires substantial investments potentially reducing short-term returns. But if investors continue to focus merely on quarterly earnings reports, managers will more likely save their balance sheet rather than our planet. Regulators might thus have a role to play. For example, the SEC requested comments on the timing of earning releases and scholars suggested to allow shareholders to vote only after holding shares for a certain period of time. Hopefully, regulators will find effective ways to encourage investors to focus on long-term growth, like Bill Ackman in his Netflix acquisition.

Venture Capital Values: How China Can Shape Its Innovation Environment

In the modern era of commerce, Silicon Valley stands as a monument to fast-paced, unrestrained, competitive innovation. According to an article by Grep Ip, many countries have long envied American startup culture, and have sought to compete with Silicon Valley. China is the only country who has come close to succeeding.

China’s influx of venture capitalists in the late 90s and early 2000s helped spawn some of its more transformative industries. This growth sparked brilliant innovation that raised $111 billion last year, brought them close to the same level as the United States, and created products that even the United States had not offered. American venture capitalists clearly saw potential in China’s market, and their foresight was rewarded.

However, their celebration might have been premature. With President Xi and the CCP’s crackdown on many VC backed corporations, venture capitalists find that their rewards are waning. In the past two years, China has strengthened its antitrust laws, tightened regulations over cybersecurity, and induced self-regulation in the video game industry in response to accusations of promoting addiction. This has caused a near $1 trillion drop in market value as well as the pushing out of many high-profile VCs. China promises that this is just a fix for industry-specific issues, but the problem with these claims is that the government goes beyond simple regulation. Beijing is effectively directing innovation to serve the state’s direct interests.

What can we learn from these events? Not that corporate regulation is inherently bad, nor that the current state of near hands-off regulation in the United States is particularly desirable, just that there are tradeoffs to consider. Some of these regulations are desirable for their own targeted effects. Anticompetitive behavior can itself slow innovation by raising barriers to entry and choking out competition. Protecting data security is a good thing too, as investors are more likely to put their money in areas that are less susceptible to leaks or liability. Even limits on video game playing time, as intrusive as a regulation is, potentially has a positive effect on education. However, if we want to seriously regulate, we should expect some levels of dampening innovation. Conversely, if we want to encourage unrestrained innovation and fast-paced market growth, we may need to forego some regulation.

The problem with the regulatory scheme in China is that the government appears to be utilizing its laws to direct industry toward its particular goals. For example, China’s desire to catch up with the United States in the semiconductor industry has allowed semiconductor investors more freedom to operate. This regulatory scheme conflicts with the very nature of venture capital, which depends on freewheeling, entrepreneurial innovation to survive. VC investments make are high risk and often subjected to rigid discipline, which produces transformative ideas and inventions. This investment model cannot survive in an environment of near total state control, where the direction of investment is subject to the interests and goals of the administration. It is also quite self-defeating, as industries often influence and inform each other. Innovations in artificial intelligence may mean innovations in automated processes and commercial software. Innovations in antibiotics may mean growth in both medicine and commercial farming. Shutting off other forms of innovation while narrowing in on one goal shuts it off from the economic boons of tangential industry.

There is a more important lesson to learn, and one that China’s tech industry could learn as well. If China is serious about competing with the United States, it has to take stock of its values and goals. Innovation is desirable not just for economic means, but to serve a variety of state interests. Innovation can lead to growing living standards at home, and an expansion of both soft and hard power abroad. Innovation is beneficial to soft power as a means of opening up new industries and reaching foreign markets that the US can exert influence through. And innovation is also beneficial in developing hard power because these new technologies, including artificial intelligence, can often become tools of war. A country that wants to remain competitive militarily, as well as economically, cannot be indifferent to the benefits of innovation.

“Monopoly”, “Monopsony”, “Middleman.” FTC Takes Big Tech Head-On

Nearly 100 years ago, Supreme Court Justice Louis Brandeis wrote “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.” Keeping those words in mind, the U.S. House Democrats’ antitrust subcommittee published an Investigation of Competition in Digital Markets report in late 2020 demonstrating the need for serious reform and action to rein in the unfair power that Big Tech companies hold today in their respective markets. Following the report, President Biden issued an Executive Order with the aim to ensure strict enforcement of his antitrust policies. Biden then appointed Lina Khan, the progressive author of the controversial Amazon’s Antitrust Paradox article, as Chair of the Federal Trade Commission (FTC). Khan was a surprise appointee but a clear indication of the administration’s strong pro-enforcement and pro-competition approach to antitrust. Today, Khan is leading the charge against Big Tech with just one mantra in mind – any harm to competition is enough justification to go after companies that use their size and market power to squash competitors.

For decades, antitrust law has been implemented with the aim to prevent dominant companies from capturing the market. Over the last couple of years, regulators at the FTC and the Justice Department have been aggressively, albeit, unsuccessfully attempting to rein in the unfettered monopoly power of Big Tech using this traditional monopoly theory. In 2020, the FTC sued Facebook alleging that the company had been anti-competitive in its personal social networking market wherein it had a dominant position. But a federal judge dismissed the antitrust suit citing “lack of evidence” on the part of the FTC. Recently, the FTC, led by Lina Khan, refiled the antitrust suit, and in January 2022, the regulator secured a major victory when a U.S. District Judge denied Facebook’s motion to dismiss. The court held that the FTC had enough facts to plausibly establish that Facebook possesses monopoly power and had “willfully maintained that power through anticompetitive conduct.”

But more interestingly, the FTC has now come up with an innovative argument that has not previously been seen in the antitrust ecosystem. Regulators are now focusing less on consumer harm and leaning towards how Big Tech dominance harms businesses that sell goods and services to, and on, tech platforms. Apple, Google, Amazon, and Meta all depend on their suppliers. Whether for ad space on Meta and Google, apps on iOS, or small-scale manufacturers on Amazon, the FTC is taking a strong stance that these platforms are middlemen who by virtue of their powerful hold over the market, are adversely impacting sellers on their platforms. In fact, there is a new word now being thrown around by the regulators – “monopsony”. As opposed to a monopoly, the seller in a monopsony is not the dominant party. Instead, it is the buyer who is the dominant party. Just as monopolists can affect consumers adversely, regulators are arguing that monopsonists can similarly control and adversely affect sellers.

In the eyes of the FTC, Big Tech platforms are abusing their power and position as monopsonists as they are, in effect, proxy buyers for all consumers on their platforms. The longstanding view that vertical mergers usually pose no threat to competition is also being undone by the monopsonist view. It is not essential whether mergers or acquisitions of smaller players make the market more efficient. Rather, it is more important to ensure that Big Tech companies do not accumulate too much power and that competition remains healthy for all consumers and sellers alike. This is especially true where these companies are deciding how the market works, how the pricing is done, and at the same time participating in them. Take Amazon as an example– it creates the rules on how sellers are to participate on its platform, it decides how the goods are displayed on its platform, it further decides on how advertisements are placed, and how delivery charges are to be priced. Moreover, Amazon itself takes part in the marketplace by selling its own products on the same platform. Thus, Amazon wears two hats or maybe even three. This makes Amazon a prime target for FTC scrutiny.

The Biden administration has made it clear that the power these firms possess must be curtailed to promote competition. Amongst the recent changes, vertical mergers are now being scrutinized even more closely. Policies are being implemented requiring firms to obtain multiple approvals before confirming acquisitions with the FTC, having a right to question even after acquisitions close. It is evident that Lina Khan is here to challenge and change the status quo. Big Tech platforms, on the other hand, will not go down without a serious fight. Without serious congressional and legislative backing, Khan will find it hard putting to test her antitrust theories in a system dominated by capitalists, politicians, lobbyists, and the federal courts.

The Collapse of Abraaj Group: Dubai’s Challenge in Retaining Investor Confidence

Roughly four years after the collapse of the private equity firm, Abraaj Group, Dubai’s financial regulator has provisionally fined its founder, Arif Naqvi, $135.6m for misleading investors about the use of their funds. Abraaj was once seen as a trailblazer for the industry, providing a path for foreign investors into global emerging markets operating across Africa, Asia, Latin America, Turkey, Central Asia, and the Middle East. Before its collapse, it managed around $14 billion in assets across emerging markets in different funds focusing on different sectors and markets. The collapse of Abraaj––which at its peak was one of the largest emerging markets investors––has sent shockwaves through the region’s financial industry, consequently undermining the Middle East’s regulatory overlook of pooled-investment vehicles.

Dubai Financial Services Authority previously fined two Abraaj group entities almost $315m for deceiving investors, misusing investor money, and carrying out unauthorized activity in Dubai International Financial Centre. Naqvi was central to an attempt to cover up a $400m shortfall across two of Abraaj’s funds by borrowing money for the purpose of producing bank balance statements to mislead investors and auditors. He also arranged a $350m loan from a private individual to make Abraaj appear solvent. The fine, however, as indicated by officials, is unlikely to be paid given the administrators’ inability to raise funds to pay back creditors, who were owed more than $1bn amid Abraaj’s collapse––as Naqvi comingled assets through different funds along with the asset management arm and used limited partners’ funds inappropriately. The shortfall in funds and Naqvi’s cover-up through debt was due to Abraaj’s failed transaction to sell a $1.77bn stake in K-Electric to Shanghai Electric Power. The collapse caused industry executives to be critical of the Dubai authorities for their inertial response during the crisis, claiming that they had failed to protect the financial hub from reputational damage.

After Dubai Financial Services filed claims against both Abraaj Group as a company, and personally against its largest shareholder, Naqvi, the Securities and Exchange Commission (SEC) also filed a claim against Abraaj and Naqvi for defrauding the funds they advised, which had US-based limited partner-investors. This was in violation of the anti-fraud provisions of Section 206 of the Investment Advisers Act of 1940 which prohibits misstatements or misleading omissions of material facts and other fraudulent acts and practices in connection with the conduct of an investment advisory business. But perhaps just as consequential for Naqvi is the Dodd-Frank Act, which provides extraterritorial jurisdiction to U.S. federal courts regarding actions or proceedings brought by the Commission or the United States for violation of section 206 of the Investment Advisers Act.

However, despite the extraterritorial reach of the Advisers Act and the U.S. federal courts, both U.S. investors and other investors from the region are not safeguarded. For example, although the SEC filed a claim against Abraaj and Naqvi, enforcement of that claim remains elusive as Naqvi currently resides in the United Kingdom and is fighting an extradition case to the U.S. to stand trial. Thus, extraterritorial jurisdiction and enforcement of judgments serve as a barrier for safeguarding the interests of U.S. based investors.

Therefore, investors seeking to invest in the Middle East or any emerging market through a private investment pool in places such as Dubai will want more holistic and stringent approaches protecting them. The SEC’s extraterritorial reach is not enough for U.S. investors. Dubai and its Financial Services Authority would need rules and disclosure requirements similar to those required by the SEC. This will restore investor confidence in the Authority as a safe-guarder of their interests in the region, especially after having witnessed the world’s biggest private-equity insolvency as per the WSJ, and the Authority’s subsequent inertial response during the collapse of the firm. For example, the Financial Services Authority could look to the SEC’s recent move to require more private companies to routinely disclose information about their finances and operations. Applying such strict rules and enforcement could potentially prevent the “future Abraaj” from committing fraudulent activities with regards to its funds and provide peace of mind to investors.

Access to capital within emerging markets can sometimes be scarce, especially for risky investments such as start-ups, projects that have significant barriers to entry, or investments that develop the economy. An additional layer of risk with loose pooled investment vehicles will consequently affect foreign investment and development and further damage the Dubai Financial Center’s reputation as a safe haven for investors. If Dubai wants to retain its position within the Middle East and emerging markets, it needs to make an effort to have its new regulatory efforts noticed.

Pandemic Accelerates “Paradigm Shift” to Hybrid Work in Big Law

During a time of heightened demand for business, the “pandemic generation” of new lawyers has an unprecedented amount of leverage in the world of big law. This month, Davis Polk joined the handful of top firms—including Millbank, Cravath, Goodwin Procter, and McDermott Will & Emery—offering yet another round of pay increases for incoming associates. Though the compensation competition is alive and well, firms are also prioritizing other aspects of associates’ experience to retain top talent. Progressive hybrid-remote work policies are one of its top priorities.

Long are the days when five days in the office were the status quo for large firms. The pandemic has proven that associates can be just as effective working remotely; thus, it is no surprise that associates are reluctant to give up the flexibility that remote work allows once Covid-19 recedes. In fact, recruiters worry that in-demand associates who feel “bullied” into the office may look elsewhere. “We’re not expecting that people to come back five days a week. Ever,” said Julie Jones, Chair of Ropes & Gray. Although hybrid work is the future of big law, what exactly does that look like?

Many top firms are pursuing an office-centric hybrid approach that requires a fixed number of days in the office. Firms like Skadden, McGuireWoods, and Cadwalader now require associates to come into the office at least 3 times a week. Many believe that this structured approach will allow firms to strike the right balance of flexibility and in-person relationship-building, training, and mentoring, aspects of the associate experience that are especially important for a profession built on an apprenticeship model. In an in-person office setting, facetime with higher-ups and impromptu hallway meetings are easier to come by. There is a stark difference between calling a supervising associate to ask a small question and briefly stopping by their office. Still, firms that intend to adopt more flexible approaches could reap relationship-building benefits by encouraging regular in-person meetings or social activities to naturally lure associates back into the office and facilitate organic meetings.

An in-person requirement may also permit firms to sidestep information exchange hurdles. These obstacles may arise under more unstructured approaches in which in-office days are completely voluntary. Whether firms adopt fixed-day requirements or give associates more leeway, firms must take important preventative measures as it transitions from the remote-only system. For example, although firms utilized various technology platforms to facilitate team communications during the lockdown, it must ensure that the unplanned in-person check-ins are properly documented. This is crucial to keep remote party members informed. Firms will also have to figure out how to handle hybrid calls, whether by asking associates to log in individually from their desks or by re-configuring conference rooms to accommodate the new arrangement.

As Omicron infections continue to decline, firms are eager to resume office re-openings. Reed Smith, Goodwin Proctor, Morrison & Foerster, and Wilson Sonsini are amongst those targeting returns in late February and March. Of course, the details of the new hybrid approach will need constant tweaking, and firms will have to work to ensure that “people don’t get lost in the shuffle” as big law accommodates this new paradigm shift. Little doubt remains, however, that “hybrid work is the future.”

Damned If They Do, Damned If They Don’t – Should asset managers take a position on ESG matters?

Owning 22% of an S&P 500 company is a nice position to be in. Your goal regarding this investment is to maximize “your” company’s profit (maybe while trying to be a good “corporate citizen”) is clear cut. You advocate for and support market and non-market strategies that lead to those ends. It gets more complicated if you own large stakes of two companies with conflicting interests, let’s say, for example, a wind farm and a coal mine. In that case, what is your stance on clean energy subsidies?

Now imagine owning a significant stake in the whole economy, with all the intricate conflicts this includes.What do you do now? Do you try to maximize each company’s profit? Do take a passive stance, vote with management, and don’t intervene? Or do you try to adapt a holistic view and base your decisions on what would be good for your portfolio overall? This is basically the position the biggest three asset managers, BlackRock, State Street, and Fidelity, are in. As of 2021, they collectively own around 22 % of the average S&P 500 company, and they and commentators alike have wondered how best to balance the interests of their portfolio companies and investors.

Research indicated that large index funds have historically taken a predominantly passive stance and largely voted with management, even when it was underperforming. This might be due to fear of harming share prices by rocking the boat or simply a result of the slim fee structure that most funds have, which means that the high cost of active involvement in any company is unlikely to be offset by an increase in fees.

Others, however, have suggested that big asset managers should pursue a different approach due to their unique position. Their concept of “universal ownership” claims that traditional shareholder focused corporate governance models do not sufficiently take into account that large asset managers are uniquely and unavoidably exposed to so called “external risks.” These risks are especially true for climate change, environmental destruction, and social unrest since they effectively own a large stake in the whole economy. A common point of criticism is that asset managers do not factor those risks in sufficiently. For example, a recent report criticized Fidelity for its continued investment in fossil fuel despite the significant risk that climate change poses for their overall portfolio. Larry Fink, CEO of BlackRock, the world’s largest asset manager with over $10 trillion under management, seems to agree that universal challenges pose a risk for BlackRock’s universal portfolio. Starting in 2018, he emphasized to BlackRock’s portfolio companies that corporations have a purpose beyond the maximizing of short term profits and are responsible to their stakeholders, and therefore should incorporate environmental, social, and governance (ESG) matters into their strategy. Mr. Fink has continued to stress this point ever since, although he specifically emphasized the unique importance of capitalism to create social benefit in his latest letter.

The reason for this change in tone might be that the exceptional influence of large asset managers has come under increasing scrutiny in the last few years. Various academics and pundits have publicly worried that universal ownership might lead to anti-competitive behavior or could incentivize asset managers to influence companies in ways that benefit their overall portfolio but hurt the individual company. Furthermore, taking a pro-ESG stance exposes fund managers to criticism from those who disagree with the fundamental idea of stakeholder-capitalism. This critique is multifaceted. On one side of the spectrum are academics who argue that ESG pledges are either greenwashing, a tool underperforming managers can use to entrench themselves, or that measuring performance on ESG-metrics in a reliable way is impossible, even for the best-meaning managers or investors. On the other side are those who see ESG as nothing more than an ideology and who fear that management would use their power as fiduciaries to further personal beliefs. Critics from both angles are especially suspicious when fund managers like Mr. Fink demand that their portfolio companies implement stronger ESG strategies, given the significant leverage asset funds have over vast parts of the economy.

Therefore, asset managers face a dilemma. They always have the option to continue to pursue a traditional, shareholder-focused governance strategy. However, this means potentially harming their fund’s performance in the long term if traditional portfolio strategies turn out to be superior. And in the short-to-medium term, it is likely to upset ESG-minded activist shareholders and potentially alienate the growing number of retail investors for whom a strong ESG-approach is an important factor when deciding where to invest. Or they can demand that their portfolio companies pursue ambitious ESG-goals. This would pose the problem that – absent established measuring standards – quantifying performance on these metrics might be very difficult, harm their fund’s short-term performance, and expose them to the critique of shareholder-primacy investors and ESG-critics.

08Given a choice between two options with mixed prospects, BlackRock is apparently trying to establish a third option that would let the fund escape from this conflict. In 2021, BlackRock announced that it is going to allow large institutional investors, like pensions and endowments, to vote their shares individually on matters linked to that investment. Through this approach, BlackRock could avoid taking a stand in this issue and relocate the decision to its investors. However, it remains so be seen how BlackRock is going to implement this revolutionary feature, since so far there are not many concrete details. One thing, however, seems certain: large asset managers will continue to play an ever more important role in the economy, and it remains to be seen how their growing influence will shape the governance in the future.

Ultra-Low Fare Airlines Frontier and Spirit to Merge with Potential Regulatory Hurdles Ahead

On February 7th, Spirit and Frontier Airlines announced a $6.6 billion merger agreement between the two companies to create “America’s most competitive ultra-low fare airline.” With this merger agreement, the combined company would provide more than 1,000 daily flights to over 145 destinations. The two airlines have similar business models, offering low fares combined with charges for anything extra, including carry-on luggage. Frontier and Spirit believe this merger would increase competitive pressure to provide more consumer-friendly fares. In the press release, it’s estimated that the merged airline would deliver $1 billion in annual consumer savings.

However, many criticize both companies’ business models for their poor consumer experience. Spirit and Frontier respectively had the first and second worst customer satisfaction ratings according to the American Customer Satisfaction Index. The US Department of Transportation also reported that Spirit and Frontier received the first and third highest number of customer complaints in 2021.

The merged company would become the fifth largest airline in the United States behind the “Big Four” of American, Delta, Southwest, and United Airlines. Despite this, those four airlines would still retain 80% of the US airline market, while the merged Frontier and Spirit would control less than 10%. But the Biden Administration’s aggressive approach to regulating antitrust issues signals potential regulatory hurdles ahead.

At the end of 2021, the Department of Justice filed an antitrust lawsuit against American Airlines and JetBlue for combining their operations in several Northeast airports. The Justice Department’s suit called that alliance a “de facto merger” and said that the arrangement would reduce incentives to compete in the Northeast region, harming consumers across the country with higher fares and decreased flying options. The American Airlines-JetBlue alliance would pool their gates and takeoffs; coordinate routes, schedules, and aircrafts; and share their revenues at the three main New York airports and Logan International in Boston. While not a true merger between the two airlines, but the Department of Justice treated it like one. Given this precedent, it seems very likely that the Biden Administration will either highly scrutinize the Frontier-Spirit merger or altogether attempt to block it on antitrust grounds.

The record-breaking levels of M&A activity and the highly monopolized nature of the U.S. airline industry might also explain the Biden Administration’s tough stance. Global M&A deals increased by 63% to $5.63 trillion in 2021. The United States accounted for $2.5 trillion of that total. Vanita Gupta, a Justice Department official, recently announced at an antitrust symposium that “if your company approves a merger that may lessen competition, we will block it.”

The airline industry became highly consolidated in the last 25 years through a series of mergers, resulting in the four largest airlines in the United States we have today. If the Frontier-Spirit merger goes through, it would be the first airline merger since 2016, when Alaska Airlines purchased Virgin America. This high level of consolidation might explain the anticipated regulatory barriers Frontier and Spirit face.

With such a small combined market share, the Frontier-Spirit merger typically wouldn’t attract large regulatory attention.  However, for the reasons stated above, this merger may have an uncertain future. Frontier would be purchasing Spirit in this deal, but both companies saw only modest increases in their share prices on the day the merger was announced, indicating investor wariness. The companies expect to have the merger close in the second half of 2022.

The Need for Nickel: How the U.S. Could Invest in Indonesia and a Green Future

Nickel has long been a critical resource for modern life and, because of its importance for many technologies that are central to the energy transition, demand is only rising. The recent and increasing use of nickel in electric vehicles (EVs), expected to reach 30% of total nickel consumption, tracks increases in production and sales of electronic vehicles (EVs) in the US and elsewhere. Though the US was an early leader in EVs, it has been falling behind China and Europein recent years. Expanding its access to nickel could help the American EV market take back some of its market share and support the US’s broad and growing array of limited and zero-emissions policies.

Recognizing the growing importance of nickel, Indonesia, which currently has the world’s largest nickel reserves, has been working to foster and protect its growing nickel industries. Starting by prohibiting the export of low grade nickel, recent regulations have focused on building a domestic nickel smelting industry and creating more value before the nickel leaves Indonesia. These policies will help Indonesia retain more of the profits from the global nickel trade and lead to Indonesia becoming a major seller of high grade, Class 1 nickel (used in EV batteries). These policies have been working and there has been a surge in new refinery projects in Indonesia.

Some American actors have been making moves towards extracting more nickel from Indonesia, but nothing is set in stone yet. Most publicly, Tesla expressed interest in accessing Indonesian nickel for its EV batteries, but no progress towards a deal has been reported. A major sticking point in Tesla’s proposal, which aimed to purchase unrefined nickel ore, was Indonesia’s firm commitment to keeping refining processes in Indonesia.

International investors have recognized Indonesia’s hardline stance on developing its domestic capabilities and turned their attention to Indonesian nickel refining, with multiple Chinese companies already investing. Such projects help international investors capture some of the significant value added through the refining process, as well as to secure access to the final, refined product in an increasingly competitive market for high grade nickel.

The US currently gets most of its nickel from Canada, Norway, Australia, and Finland, suppliers which have, historically, met American demand. For the moment, neither the US itself nor American companies have any investment partnerships with Indonesian nickel producers. Additionally, the cost and regulatory complexity of transporting the chemicals needed for the refining processes across the Pacific Ocean provides some economic disincentive for the US to invest in Indonesia – a barrier Chinese investors don’t face.

However, as the need for nickel continues to rise, American companies will need to look to Indonesia and, it is increasingly clear, cede to Indonesia’s terms on extraction and investment. Because of Indonesia’s increasingly strict regulations of nickel ore export, it will soon be critical to have a foothold in the country to be able to capture refining value and retain access to a sufficient supply of nickel to meet ever-growing American demand.