Politics, Protectionism and Technology Revolution – Uncertainty Brings Opportunities!
It's All About the Core
The Technology Revolution Drives Transactions
DIFFERENCE THAT MATTERS
Dispute Academy – Preventing Future Disputes
LEGAL TECH LAB – Legal Problems Rethought
FinTech and Regulation – Creating Opportunities
Is Your Organization Taking Pole Position in ICT Contracting?
Politics, politics, politics – all of a sudden it's everywhere! I cannot remember ever having had so many lively discussions about politics with investment bankers and transactional lawyers as in recent months. These people, whose interest usually only extends to where the next transaction could be found, are suddenly passionate about the expected results of elections and the policies of the election winners.
"Protectionism leads to poor economic development, human rights violations and eventually to international conflicts" said a leading international investment banker recently. It's straight talk, investment bankers sure don't beat around the bush – protectionism is the path to war.
At the same time the Economist predicts that the success of multinationals that has continued for decades may be turning, or may in fact already have turned before Trump and Brexit. Trump doesn't really represent new economic thinking, he is merely part of a protectionist tendency, which we have already seen in many countries where populistic movements have gained ground and in the United Kingdom and Russia.
Perhaps globalisation has come to the end of the road…
It is said that about 40% of M&A-transactions in the world are cross-border deals. This percentage is expected to remain on the same level, despite the protectionist tendencies. If walls are built against international trade, international companies may need a presence on both sides of the wall. Countries are getting more restrictive against foreign purchasers of businesses. For example in Germany, we have seen the first measures taken against Chinese purchasers of German companies. At the same time China is tightening outbound M&A approval processes to protect its currency reserves.
Protectionism and the increase in regulation affect cross-border transactions and lead to lengthier M&A processes. A long M&A process leads to a higher degree of uncertainty whether a deal will actually be completed. When the completion of a large transaction takes nine or even eighteen months, unexpected things are bound to happen on the market and in the world, which may affect the willingness of the parties to complete the deal that seemed optimal at the time of signing.
Finland is an open and export driven economy. That is not very trendy these days. About 60% of Finland's foreign trade is with the EU and the rest with other countries, such as Russia, the US and China. From an economic point of view, Brexit is a bigger challenge to Finland than Trump. UK's position in the EU and London's dominating position as the European capital of finance and capital markets mean that Brexit is a dramatic event for the EU and a threat to our economic development. The fact that EU rules are embedded in English legislation and its structures brings an enormous challenge to the financial system in a situation where London no longer is situated in the EU. At the same time, the imminent fall of the Transatlantic Trade and Investment Partnership ("TTIP") negotiations is a serious set-back for the potential development of trade between Finland and the whole EU, on the one side, and the US, on the other.
All this political drama right in the midst of a previously unseen technology revolution that quickly changes the entire landscape for many businesses! We are in fact experiencing two opposing trends, protectionism versus new revolutionary technologies, such as global platform based business models. The value of such business models typically increases with the number of their network participants. What we're seeing is a battle between ever increasing collaboration and isolationism!
"We are in fact experiencing two opposing trends, protectionism versus new revolutionary technologies, such as global platform based business models"
Since companies and law firms cannot change or control these developments, we should jointly look for the opportunities in these changing times. If you are puzzled by the effects of new policies and technologies on your business, give us a call. It is likely that you'll find a friend wrestling with the same challenges.
I am, as always, an optimist – protectionism can never win over constructive cooperation!
"Every company will be a technology company" exclaimed a slide of Linda Liukas at Nordic Business Forum Sweden in January 2017. That's the go-to phrase of our 4th industrial revolution, the digital economy, an era of apps for everything. Certainly, for not being "Ubered", everyone needs to adapt and evolve. But is there more to it than "being a technology company"?
Dr. Aki Hintsa, physician of many top Formula 1 drivers, emphasized holistic wellbeing and the importance of recognizing one's core on the road towards sustainable success. While he coached individuals, his teachings got me thinking about D&I's core. Since 1899 we've been engineering landmark transactions, solving major disputes and been there for our clients in times of significant changes - even revolutions. Over the years we've adapted our strategies, systems and processes but some things have remained. Such as strive for excellence.
For a long time, the bedrock of excellence in law firm business in general was cutting-edge technical capability in legal rules and documentation, and for the best of the best, it also showed in the proper use of commas and widths of margins.
Today, one of the key factors that clients link to law firm excellence is efficiency. AI Ross has already been hired and solutions such as Coin and Luminance are giving young associates their lives back. Here's to technology! Fast forward ten years and I bet the best of the best in law have partnered-up with technology but are also exceptionally good at harnessing emotional intelligence, active collaboration and ability to work across disciplines. There, I believe, is excellence redefined.
Executing digital transition in working methods and service experience is non-negotiable for any first-class law firm. However, the key will be excellence in understanding the impact of the changing world to our clients' businesses, in cross silo collaboration, new ways of legal thinking and, inarguably, in human-to-human interaction. That's the kind of excellence our clients and our own people value most at D&I. That's how we operate and with that kind of culture of excellence in mind, we also recruit.
In February 2017 we were ranked as one of the TOP 10 workplaces in Finland in the Great Place to Work® Finland survey. 5 out of those 10 companies are technology companies. Or, all of them, as Linda would say. She also says that we need vision and aspirations, things we aim to use technology for. She's right but embracing new technologies with a vision may not be enough. All will try it, not all will make it. What really matters is corporate culture – our core.
New World Order
Companies are facing revolutionary changes. The rise of digital technology platforms, such as Google, Facebook, Uber and others, has given many companies a lot to digest. However, the development in technology is only the beginning; the real revolution lays in the business models and ecosystems that are built around platforms. Platform ecosystems can be seen as the bedrock of new value creation in the digital economy and they will redefine the future of all industries1. As a platform gains more users, other businesses looking for access to new customers may congregate around it. These other businesses will integrate their services with the platform leading to an intense snowball effect where the companies can collectively achieve much more than by acting alone. The inconvenient truth is that platform-based business models provide superior paths to growth and companies that fail to adapt to these new models may face a threat to their continuation.
Old Dogs - New Tricks?
Also companies in more traditional industries are preparing for the platform economy2. For example, in 2016 General Motors invested USD 500 million into Lyft, a US-based ride-share company and a rival of Uber. Another great example is Wal-Mart's recent USD 3.3 billion acquisition of Jet.com Inc, a US-based e-commerce start up known for its platform. In Finland, Nokia Corporation's recent EUR 350 million public tender offer for Comptel Corporation, a listed Finland-based provider of a platform to deliver digital and communication services, can be seen as a strategic move towards a platform ecosystem. The acquisition helps Nokia in its pursuit to sell more services and software instead of network-equipment and to create a standalone software business, which will focus on enterprise software and platforms for Internet-of-Things.
Are You the M&A Steamroller?
When a new technology (not to mention new economy) threatens to roll over you, you’re either part of the steamroller or the road. New platform ecosystems may be small, but there is only a limited window of time for companies to come up with a strategy on how to gain access to them. A 'wait and see' strategy is potentially dangerous and companies pursuing such strategy are at risk of falling behind and finding themselves forced to make rushed – and usually less successful – decisions.
The acquisition of technology assets has surged in importance as a top strategic driver of M&A3 and its role will become all the more crucial as companies in traditional industries have to adapt to the cataclysm that digital platforms will create. Companies can build their platform capabilities through acquisitions targeting promising technology companies. But before rushing to acquire that promising Palo Alto startup, it may be worthwhile considering the following points:
1Due diligence scrutinising IP, data protection and cybersecurity issues plays a major role, as these aspects have become crucial factors in a target's value. Since the exclusive ownership of software IP can be essential, all third party dependencies must be identified. The platform has to be safe for other businesses in order to attract them, which underlines the importance of the target's digital resilience and cyber readiness. Additionally, seller's warranties may be virtually worthless if the target proves not to be the sole owner of the desired technology. Unnoticed data protection issues may in turn collapse the value of the target and prevent scalability. In addition, it goes without saying that technological due diligence is a must.
2Platform-based businesses are creating new regulatory challenges to lawmakers and legislative changes may pose material risks that a buyer needs to understand. A developer of a platform, or any technology, may not have evaluated possible regulatory risks which can materialize e.g. in the areas of employment and tax regulation.
3Although acquiring an own platform through M&A may be the fastest solution, many businesses may find cooperation-based deals, such as joint ventures and licensing arrangements more useful. As the pace of technology development gets more intense, the value of owning an asset that quickly becomes outdated might be limited. However, cooperation based deals come with their own set of risks and challenges which must be diligently assessed. These issues often relate to formality of the structure and development of technology arising from jointly held IP.
Businesses are on the verge of a new era. Although platforms are causing a paradigm shift in how business is conducted, adapting to them does not necessarily mean abandoning your existing business model. The old and new models may complement each other. A key observation is that companies should come up with a strategy for building a foundation for their future platform-based business – the emergence of which seems inevitable. Having a platform strategy and implementing it successfully is one of the main elements in a company's future success.
Building the basis for your own platform-based business entails many challenges. Here are key takeaways to keep in mind when building your company's digital future through transactions.
- Don't be a drifting raft. Have a strategy how to systematically build your capabilities to integrate your business with a platform-based business model.
- Get your due diligence right from the start. Rigorous due diligence is essential. Cyber security, IP and data protection related issues merit special attention.
- Be prepared. Understand and be prepared for the regulatory risks that new unconventional business models may create.
- Be dynamic. M&A is not a cure-all, consider also other options.
Partners from left to right: Juha-Pekka Mutanen (Finance; Capital Markets), Jan Ollila (M&A; Arbitration), Mikko Eerola (M&A; Energy), Hanna-Mari Manninen (Finance; Capital Markets), Kai Holkeri (Tax)
Senior Partner, Head of M&A & Private Equity
Partner, Co-Head of M&A & Private Equity
Associate, M&A & Private Equity and Finance & Capital Markets
Today any of the following could land on your desk: a new supplier agreement, data processing agreement outsourcing the processing of your company's employee data or a submission to a court or an arbitral tribunal.
There are few things in-house counsels dread more than disputes. Litigation at a court or an arbitral tribunal has a way of damaging relationships, harming reputations, and spending money, time, and talent. Everyone involved in international negotiations, contracts and corporate transactions knows that disputes are steadily increasing.
However, they are also increasingly avoidable. "Prevention of disputes is the key. The most successful resolution of a dispute is preventing it from ever existing", says Jussi Lehtinen, Partner, Head of Dispute Resolution. Lehtinen feels strongly about preparing for the unexpected both in the contract negotiation phase and when litigation is inevitable. "Disputes need to be nipped in the bud to produce win-win solutions instead of leaving open terrain for bitter fights that can leave both sides damaged", Lehtinen says.
Lehtinen is the father of the D&I Dispute Academy ("Riitelykoulu" in Finnish) where he shares insightful advice and best practices in tailored training sessions. "It would be short-sighted to think that managing the dispute at hand would be enough, even when victorious! Defending my clients' best interests over time requires me to help them in preventing their future disputes." In D&I Dispute Academy, as in his daily work, Lehtinen engages a multi-disciplinary D&I team to make sure that companies' legal and business teams are well prepared for preventing disputes.
In the era of smart use of assets like business data, customer databases, innovations and other intangible property, holistic cross-practice considerations in contract drafting are extremely vital. One of the increasingly topical areas in which dispute resolution needs to be addressed is privacy and data protection clauses.
Along with the significance of data as an asset increasing and the new EU General Data Protection Regulation entering into force, the number of privacy and data protection related disputes will undoubtedly increase. "Solid data protection knowledge is worth nothing in case a dispute due to a data breach or a liability issue arises. We need to look beyond apparent facts and consider potential future disputes already when drafting data privacy clauses", says Jukka Lång, Partner, Head of Data Protection, Marketing & Consumers.
"As disputes have become increasingly more complex, parties have become increasingly more knowledgeable. We were suddenly discussing current dispute proceedings in Sweden and in the United States and comparing them with the Finnish system",
says Jussi Lehtinen after the session of the Dispute Academy with in-house counsels and representatives of the management of a Finnish company with operations worldwide.
"It would simply be bad advice not to consider dispute resolution when drafting data privacy clauses. Solid data protection knowledge is worth nothing in case a dispute arises due to a data breach or a liability issue"
For organizing a Dispute Academy training session for your team, please contact our Partners:
An exciting pilot project Legal Tech Lab has been launched at the Faculty of Law, University of Helsinki. The father of the idea, Kimmo Nuotio, the Dean of the Faculty of Law, is very excited about the project. With the laws changing as a result of digitalization, he feels strongly about lawyers needing to set the pace for this change.
Nuotio had been gathering signals from the field for quite some time and along with his law students, his own interest on the subject grew. "I was, however, well aware of our brand image that it was us lawyers at the university who were the slowest to execute any new ideas, perhaps sociologists being the only group arriving to the crime scene later than us." After attending "Startup sauna" (Aalto University supported accelerator program for startup teams) to find out what was being discussed there, Nuotio was determined to act. Pieces of the puzzle fell into place when he realized he already knew a brilliant leader who could start a pilot project at the law school together with a community of professionals and their own students.
The person Nuotio had in mind was LL.D Riikka Koulu, a research fellow specialized in legal technology, legal automation and dispute resolution.
Lab on Purpose
The Lab's mission is to bring something new to the legal field: a new way of looking at legal services, new tools to facilitate participation and a forward-looking mindset. Koulu feels passionate about raising awareness about the possibilities of legal tech and the Lab's role in providing critical insights into technology. Her aim is to create a one-stop-shop for academic and practical information on digitalization of legal practices, both nationally and globally. According to Koulu, topical research with strong practical angle on, e.g, blockchain, robotics and AI, all new phenomena in Finnish legal landscape, is badly needed.
"With topical research on blockchain, robotics and AI we're answering to a growing need."
The Lab has already two major events planned for 2017: Legal Tech Conference on June 9 and Legal Tech Hackaton in early October. They will also initiate a Thesis Bank as a match-making service connecting the industry’s need for practical information with LLM students looking for tech-related thesis projects.
Collaborating in Advisory Board
One essential part of the Legal Tech Lab is its Advisory Board comprised of well-known professionals from all areas of legal tech, from law firms to start-ups, and from academia to software companies and beyond, including also D&I's Jukka Lång, Head of Data Protection, Marketing and Consumers practice.
Supporting the Lab's work is fully aligned with D&I's digitalization strategy centered on understanding the clients' business needs in this era of pervasive change. Lång believes in the network ideology of sharing and brainstorming in an open community with the same colleagues one would normally compete with for winning new clients. "It is the new normal for thinking ahead and creating big ideas" Lång says and explains that the same applies in today's client work as well. "Truly innovative solutions that open up undiscovered opportunities are not possible to achieve in solitary silos." In Legal Tech Lab, this is what seems especially inspiring to Lång. "Our own culture-based operating model, D&I Powerhouse, is all about cross-practice collaboration where we holistically combine specialist knowledge with the clients' business needs. Thinking ahead, that's what is needed for challenging status quo and creating sustainable value to the client - and the society as a whole."
"Collaboration in an open community is the new normal for creating big ideas."
D&I is proud to sponsor the Legal Tech Conference on June 9, 2017.
LEGAL TECH LAB crew from left to right: Kristian Lauslahti, Hanna Pakaslahti, Riikka Koulu (Director, Legal Tech Lab), Jenni Hakkarainen, Lila Kallio, Ilkka Toikkanen
Regulation is being actively discussed in the FinTech field in Europe. Regulators struggle to balance openness to innovation with protecting consumers and investors. While discussion on the right balance between enabling innovation and reducing risks is on-going, anyone involved in the financial services market should be interested in recent regulatory developments in the European Union (EU).
FinTech Regulatory Framework
To begin with, there is no "FinTech regulation" per se. Instead, the EU regulatory framework is highly fragmented and various regulations and directives apply to FinTech related businesses. It is therefore better to concentrate in specific areas such as payment services in order to understand the development. The key question is whether regulation can be seen as an enabler to growth and innovation for financial technology.
"The key question is whether regulation can be seen as an enabler to growth and innovation for financial technology."
PSD2 as a Path for Innovation
One of the regulatory provisions most clearly focused on FinTech is the Directive (EU) 2015/2366 on payment services in the internal market (PSD2). PSD2 aims to promote the development of an efficient, secure and competitive payments area. It is a major change set to impact the innovation and security of payments across Europe and update payment services regulation in line with market developments.
PSD2 extends the scope of regulation to new types of payment service providers. These so-called Third Party Providers are divided in two types: Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs). AISPs are providers that can connect to bank accounts, retrieve information from them and offer multi-bank account details under single portal. PISPs are providers that initiate payment transactions and offer, for example, an alternative to the use of payment cards.
According to PSD2, banks are obliged to open up their infrastructure for payment initiations of PISPs as well as for requests for customer account information by AISPs. This means that banks must provide Third Party Providers with access to bank accounts of customers who explicitly give their consent thereto. Third party access will be implemented through open Application Programme Interfaces (APIs).
The opening of banks' infrastructure to Third Party Providers is accompanied by strict security requirements. PSD2 requires Third Party Providers to apply strong customer authentication when a customer initiates an electronic payment transaction and accesses its payment account online. Banks must, however, be of assistance also in this respect and allow Third Party Providers to rely on the customer authentication procedures provided by the banks.
In terms of other changes, PSD2 includes, for example, new reporting obligations and provisions to protect consumers and distribute liability. The aim of PSD2 is also to strengthen the role of the European Banking Authority (EBA) to coordinate supervisory authorities and draft Regulatory Technical Standards (RTS).
To summarize, from a PSD2 perspective, the answer to the key question presented above is clear. Regulation can be seen as an enabler to growth and innovation. PSD2 in itself is even more – it is a significant regulatory improvement that together with financial technology can change the whole payment services market as we know it.
Follow these PSD2 issues
Market participants will have to examine the legislation of their country of incorporation, as there might be some deviations from PSD2 on local level. Furthermore, market participants will have to wait for some critical further information, as only the EBA's RTS will give guidance on how some remaining security issues including strong customer authentication and standards for secure communication will be solved.
PSD2 must be transposed into national law no later than 13 January 2018. A different date of application is foreseen for the EBA's RTS on strong customer authentication and secure communication, as the RTS will be applicable 18 months after its entry into force, i.e. the adoption of the RTS by the European Commission expected during spring 2017. This would suggest the earliest possible application date of the RTS to be at the end of 2018.
PSD2 is often seen as a challenge to banks and an opportunity for Third Party Providers and consumers. This is a simplified view of the future as, for example, many banks have started to re-think their business models and strategies, and PSD2 enables also businesses (and not just consumers) to use Third Party Providers to manage their finances. The next question is, therefore, with all the financial technology and new regulation, what kind of innovations will there be to satisfy everyone in market?
Partner, Co-head of Finance and Capital Markets
Over the past years customer organizations launching new ICT projects have become increasingly accustomed to offering their own ICT project or procurement contract templates as part of the RFPs (Request for Proposal). Lately, however, e.g. the cloud services suppliers have been somewhat more reluctant to accept customer contracts as a starting position for the negotiations. In fact, the cloud service suppliers have increasingly insisted and pushed for using their own standard cloud services contracts.
This battle-of-forms situation leads to a question: Are cloud services so different when compared to the more traditional ICT services and on premise –licensing? Does the mere fact that customer wishes to procure a cloud services solution entitle the supplier to adopt a take-it-or-leave-it bargaining position?
Things are never black-and-white; however, from customer's perspective a short-sighted acceptance of supplier's standard terms "as is" without using any real negotiation effort is definitely a risky approach. If your organization is procuring several types of different ICT services and solutions simultaneously, you would be better of to have the possibility to effectively compare and evaluate different suppliers' offerings also from contractual risk management perspective. Using your own contract structure and contractual documentation also makes it easier for you to protect your organization from contractual pitfalls. It also enables you to align the multi-vendor co-operation and related service level agreements of the suppliers in an effective way.
So how can you as a customer manage the tendering and negotiation process in a manner that takes your organization to the pole position in this battle-of-forms race?
First, certainly you must have your own organization aligned and ready for the battle. Your ICT procurement and sourcing teams should have adopted clear processes and contractual documentation for inviting tenders for the ICT projects. Ideally, at least a term sheet of the key legal provisions should be attached to your RFP.
Secondly, you need to have the right line-up in place for the negotiations. Your dream team should possess adequate knowledge of the relevant business requirements within your organization, the necessary ICT sourcing expertise as well as experienced legal skills.
Thirdly, as a customer you should embrace the race mode in the negotiations. Having at least 2-3 actual suppliers taking part to the tendering competition is the key. There are far too many examples of situations where one supplier has been 'given a project' before finalizing the contract negotiations. This type of approach is like trying to win a formula one race with a punctured tyre – challenging to say the least.
Effective ICT contracting may require a change in perspective and a new approach, however, this transformation project within your organization certainly pays off in the end. The reasonable price tag on better contractual documentation saves your company from many troubles and costs down the line in ICT projects. Be ready and eager to take your pole position!
Partner, Head of Technology & Outsourcing