Businesses: What You Need to Know About Changing Laws in April 2017

Transparency Will Help Clean up Pre-packs' Image

Taking the Stress Out of Distress for U.S. Retailers

Retailers Requesting Payment in Return for Better Shelf Positioning Have Been Warned

Retailers — Can You Be Liable for Cartel Behaviour for Using Pricing Software and Algorithms?

Is Your Watch Really Swiss Made?

Businesses: What You Need to Know About Changing Laws in April 2017

[author: Nicola Conway]

From April 2017, the following legal changes are coming into effect. Make sure your business is prepared!

1. National Living Wage and other statutory payments will increase

From April 2017, the Government has announced that the National Living Wage rates will be:

£7.50 per hour for those aged 25 years old and over;

£7.05 per hour for those aged 21-24 years old;

£5.60 per hour for those aged 18-20 years old;

£4.05 per hour for those aged 16-17 years old; and

£3.50 for apprentices under 19 (or 19 or over who are in the first year of apprenticeship).

Statutory payments in relation to maternity allowance, adoption pay, maternity pay, paternity pay, shared parental pay and sick pay are also set to increase in April 2017.

2. The Apprenticeship Levy will be introduced

Many employers operating in the UK will, from 6 April 2017, be required to contribute to a new apprenticeship levy. Employers of large companies who have a pay bill in excess of £3 million each year will pay 0.5% of their payroll into the levy - which is essentially a new tax introduced to support the Government's plan to fund millions of new apprenticeships by 2020.

3. Gender Pay Gap reporting requirements will come into effect

According to the Office for National Statistics' 2016 Annual Survey of Hours and Earnings, average pay for full-time male employees in 2016 was 9.4% higher than for full-time women. As a result, from April 2017, and each April thereafter, employers of large companies (with over 250 employees) will be obligated to (amongst other things) calculate and publish on their websites accurate "gender pay gap" information relating to the relevant pay period. Employers will have until 4 April 2018 to publish their first report.

4. Supplier settlement times reporting obligations will commence

In a Government effort to combat late payment of invoices in supply chains, large businesses will be obligated to publish through a Government web-based service public reports containing details of their payment practices and policies, including (amongst other things) how quickly they settle their suppliers' invoices and what percentage remain unpaid during the relevant reporting period.

Transparency Will Help Clean up Pre-packs' Image

Pre-pack administrations are becoming more common. Four Holdings' purchase of Agent Provocateur illustrates the attraction of pre-packs — the ability to cherry-pick the best assets, acquire the goodwill of a well-known business that continues to trade, and retain its key staff without having to take on liabilities to creditors —and why existing management is likely to be supportive.

However, because an administrator is only required to provide creditors with information after the sale, pre-packs have given rise to suspicions of cosy deals, particularly as there will have been limited marketing to avoid the financial position of the business becoming widely known.

To address these concerns, guidelines have been amended. Since 1 November 2015, administrators have had to follow tighter rules: they must give more extensive information to creditors about the sale, meet standards for advertising the business and provide to creditors more explanation of the marketing of the business. Greater clarity in pre-pack deals has at least gone some way in alleviating those suspicions.

This article was first printed in Drapers and is reprinted with permission. Since its publication, it has been announced that another well-known UK brand, Jones Bootmaker, has also been rescued in a pre-pack administration deal.

Taking the Stress Out of Distress for U.S. Retailers

Despite the downturn in the retail industry, retailers should not automatically adopt a "glass half empty approach" but instead view the impending cycle as creating opportunities for companies in both the U.S. and globally. In recent months, a steady stream of analyst coverage has painted a bleak outlook for the retail industry. Between February and March 2017, BCBG Max Azria, Eastern Outfitters, hhgregg, Gander Mountain, and Gordmans were among the companies added to the long list of retailers to seek bankruptcy protection. In February 2017, Moody's Investors Service reported that the number of distressed U.S. retailers has tripled since the 2008-2009 recession. With 19 companies currently in Moody's Caa/Ca retail portfolio, industry analysts are forecasting this current distressed cycle will surpass the conditions that existed for the industry in 2008-2009. The continued growth of online retailers is expected to hasten that result.

For companies with healthier balance sheets, the current level of distress in the industry could present prospects for strategic acquisitions, to diversify, or expand domestically or globally. Likewise, retailers feeling the financial strains of the downturn may still have viable options to outlive competitors and capture market share of those less successful. In either case, to unlock these opportunities retailers would benefit from divorcing themselves of any apprehension associated with the notion of restructurings, distressed assets, or the US Chapter 11 bankruptcy process.

Buyer’s Market

Flexible retailers with an understanding of the Chapter 11 sales process can compete for the same lucrative opportunities private equity funds have historically enjoyed without significant competition from industry participants. In most downturns, there is rarely a shortage of private equity funds purchasing new portfolio companies at distressed prices. Adequately capitalized and motivated retailers can compete for these same assets. Indeed, in many cases retailers may have advantages over private investment funds, such as:

1. An enhanced ability to assume fewer liabilities and bid more competitively by leveraging existing synergies associated with supply chains, manufacturing, vendors, and labor costs;
2. An institutional understanding of the industry allows retailers to absorb assets more efficiently through reduced reliance on existing management and retention of third party operating consultants; and
3. The investment horizon to achieve an internal rate of return for industry participants is customarily longer than the typical three to five years for private investment funds, thereby providing retailers with a higher ceiling for bids.

To be competitive, retailers will need to adapt to the accelerated timetables that are customary for distressed acquisitions. Prospective purchasers may have as little as a few weeks to submit a bid. Justifiably, many companies will have reservations in pursuing transactions on such an accelerated basis. The Chapter 11 sales process offsets some of those concerns through court-approved certainty to cherry pick assets free and clear of debt, uneconomical contracts, litigation, and other liabilities. Since distressed sellers place a premium on a bid that can be executed on an expedited timeframe, retailers interested in these opportunistic acquisitions would benefit by briefing boards and executives in advance.

Don’t Deny Distress

For many financially distressed companies there is a tendency to adopt a wait and see approach. When the reality sets in that their downward earnings curve is not an anomaly, businesses will often embark on a frenzied cost cutting initiative. For retailers this usually involves an en masse closure of stores, layoffs, and price discounts. In many cases it is already too late for these reactive initiatives to have an immediate impact as lenders and vendors will begin expecting concessions from retailers to avoid the dreaded “b” word – bankruptcy.

A proactive approach to restructuring could be the difference between emerging as a leaner but profitable company instead of a retired brand with liquidated inventory. Retailers that are not currently feeling the same level of financial strains as others in the industry will benefit from implementing measures to maintain the health of the business. The pre-emptive nature of these changes will provide management and the board with greater discretion that may not otherwise be available if lenders are driving strategy. However, the steady decline in the retail industry may not leave companies with the luxury of time to phase in financial initiatives. Companies in this position are often given the choice between Chapter 11 and temporary solutions that could jeopardize the long-term viability of the business. As a general rule, Chapter 11 should be viewed as a tool of last resort. With that in mind, key decision makers would be well armed by having the wherewithal to make their own informed decisions when considering options for addressing debt, unprofitable contracts and leases.

Whether the retail downturn lasts for one year or three, the survivors should not take their success for granted. Just as dieters need to remain disciplined to preserve their achievements, it is no different for retailers. It would behoove retailers to adopt some aspects of the discipline necessitated by a restructuring as part of the fabric of future business strategies to avoid over-extending with respect to new jurisdictions, inventory levels, head count, etc. To do otherwise, would expose those companies to the same fate shared by a long list of businesses that emerged from a restructuring only to liquidate one to five years later.

Retailers Requesting Payment in Return for Better Shelf Positioning Have Been Warned

Author: Nicola Conway

In February 2017, the Groceries Code Adjudicator ("GCA")¹ clarified that retailers who directly or indirectly require or request payments from suppliers in return for shelf volume and product positioning commitments may be in breach of the Groceries Supply Code of Practice (the "Code").

The Code, which is comprised of a list of rules intended to prevent anti-competitive practices in grocery supply chains, applies to all major UK supermarkets including Aldi Stores Limited, Asda Stores Limited, Co-operative Group Limited, Iceland Foods Limited, Lidl UK GmbH, Marks & Spencer plc, Wm Morrison Supermarkets plc, J Sainsbury plc, Tesco plc, and Waitrose Limited.

The GCA's announcement comes in response to the public consultation on payments for better positioning which ran from June through to September 2016 and which enabled the GCA to investigate "how widespread these practices are…what forms they take, their impact on suppliers and their effect on competition and consumer choice." In particular, the GCA was concerned with practices which have potential to breach the Code, which clearly states that "a retailer must at all times deal with its suppliers fairly and lawfully…" (paragraph 2) and "…must not directly or indirectly require a supplier to make any payment in order to secure better positioning or an increase in the allocation of shelf space for any grocery products of that supplier within a store unless such payment is made in relation to a promotion" (paragraph 12).

The GCA has now confirmed the proper scope of paragraph 12 of the Code. In summary and in practice: "any retailer demand for payment to be made other than in accordance with the supply agreement that results in a supplier negotiating better positioning in return is not part of the normal commercial negotiations and might amount to an indirect requirement contrary to paragraph 12 of the Code".

Whilst the GCA opined that the consultation did not reveal sufficient information to merit interpretative guidance or other regulatory intervention at this stage, its statement comes as a warning to UK supermarkets. The GCA maintains the authority to conduct investigations into suspected breaches and to enforce the Code by making recommendations, requiring contraveners to publish details of any breach, and/or imposing fines.

Retailers — Can You Be Liable for Cartel Behaviour for Using Pricing Software and Algorithms?

A key issue regulators are grappling with is what antitrust liability can attach to retailers who use price matching software or other algorithms to match competitors' online prices?

In a speech made on 16 March 2017, the EU's Commissioner for Competition, Margrethe Vestager, confronted the growing issue of the use of price matching software (PMS) and algorithms. The Commissioner singled out automated systems that monitor and even adjust prices automatically across the internet as a main area of concern for the Commission.

The EU Commission recently conducted an inquiry into e-commerce called the "Digital Single Market Initiative" in which it identified this trend. The inquiry found that two thirds of retailers now track their competitors' prices using automated systems. The central concern is that the transparency of prices online is actually making it easier for companies to monitor prices and collude, with the aide of automated software. In addition there is a further enforcement problem.

EU competition law can be used to discipline such behaviour if there is some form of agreement or collusion between two or more competitors to fix or align their respective prices on the market. That is clearly cartel behaviour. However, possible scenarios suggest themselves where companies make use of PMS to match or align their prices with competitors without any form of contact with each other, let alone any evidence of collusion between two parties.

Under EU antitrust laws, regulators can only act if there is some evidence of an agreement between the parties or some form of collusion. If the use of PMS is truly unilateral and the company is not in a dominant position, are the authorities therefore powerless to act?

This issue has come up in two recent cases.

On 2 February 2017 the EU Commission opened its own initiative investigations against two electronics companies, alleging that they breached competition rules by restricting the ability of online retailers to set their own prices for hi-fi products. It is understood the effect of these suspected price restrictions may have been aggravated due to the use of pricing software that automatically adapts retail prices to those of leading competitors.

In both these cases there appears to be some element of human interaction and crucially, agreement between the participating undertakings, so even if they were using automatic software, the intent to collude on pricing was originally a human decision.

In her speech, the Commissioner commented that PMS can not only monitor and even adjust prices automatically across the internet, but it can also be used to ensure that if a distributor started advertising below recommended retail price, the supplier would be alerted who could then put pressure on the distributor to conform. Whilst minimum advertised price (MAP) policies such as this could be legal in the US and other parts of the world, in the EU these are regarded as resale price maintenance and are serious infringements of EU competition law, carrying the sanction of heavy fines and possible subsequent actions for damages.

Having discussed this issue with competition regulators, we take the view that the EU would currently have difficulty bringing a case based solely on a purely software driven choice to price fix, due to the absence of an agreement between two parties. New legislation to cover the use of automatic pricing software is likely to be high on the Commission's wish list. This would bring their approach in line with their reaction to other e-commerce abuses such as geo-blocking. In the latter case, draft EU legislation is currently being debated to combat unilateral geo-blocking practices carried out by suppliers and retailers.

In light of the Commissioner's speech and the recent EU cases on PMS, we would advise all companies using such software to seek specialist advice about its use so as to avoid any allegations of unlawful pricing behaviour.

A copy of the speech in full can be found here. 

Is Your Watch Really Swiss Made?

Most people may assume that if a watch is labelled as "Swiss made", it is actually made in Switzerland. But they would be wrong. While it is one of the most respected stamps in the luxury market, it has never meant that a watch is wholly made in Switzerland, but rather that a watch was at least 50% Swiss.

New rules are set to make it more difficult to use the "Swiss-made" label. From 1 January 2017, for a watch to be called "Swiss made", the following requirements must be met:

1. At least 60% of the production costs of the watch taken as a whole must be Swiss-based. This may include the costs of assembly, research and development and legally or industrially regulated quality assurance and certification.
2. The movement must contain at least 50% Swiss made components in terms of value.
3. The technical development of the watch and movement must be carried out in Switzerland.

The shift from 50% to 60% has been made in response to certain brands at the lower end of the market meeting the old criteria but without fully committing to the manufacturing standards long associated with the Swiss made stamp. It was easy for manufacturers to circumvent the old rule by manufacturing or sourcing many components in cheaper countries, while still claiming their product was Swiss made.

While the new regulation is now in force, all watches manufactured up to 31 December 2016 can remain in distribution until the end of 2018, even if they are not 60% Swiss made.

1. The GCA is the independent adjudicator overseeing the relationship between UK supermarkets and their suppliers.

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