The End of Germany's Industry?

Electricity costs are causing big problems for Germany's industry. Womble Bond Dickinson and Leigh Day act on equal pay claim. DLA Piper advise on PlayUp merger.

Today's read (13 minutes):

• The End of Germany's Industry?
• How the UK Mini-Budget will impact Law Firms and their Clients.
• Case: Womble Bond Dickinson and Leigh Day act on equal pay claim
• Deal: DLA Piper advise on PlayUp merger
• A roundup of the top business news of the week

plus answers to your questions!

The End of Germany's Industry?

The strength of Germany's industry has been undeniable for a long time, allowing the country to become a leading global economy. However, this could change as the German industrial sector faces off with spiralling energy costs.

The electricity price for next year has already increased 15-fold, and the price of gas ten-fold.

In July, the industry consumed 21% less gas than in the same month last year. That is in part because firms used energy more efficiently. But the fall was primarily due to a dramatic reduction in output. In June, the Kiel Institute for the World Economy, a think tank, revised down its forecast of GDP growth in 2022 by 0.7 percentage points to 1.4%. It expects the economy to contract in 2023 and inflation to rise to 8.7%.

The results are in plain sight. German blue chip stocks have suffered more amid this year’s market turmoil than counterparts elsewhere, dropping by 27% since January in dollar terms, almost twice the fall in Britain’s FTSE 100 or America’s S&P 500 index.

How does this impact law firms' clients?

• Higher Energy costs = reduced production and issues in supply chains.

The impact on clients is not the same across the board and will likely hit many of Germany's top industries.

Smaller companies are struggling more than bigger ones. A recent survey of 100 medium-sized multinationals found that almost a quarter of firms with fewer than 1,000 employees have cancelled or declined orders or are planning to do so, compared with 11% of those with more than 1,000 staff.

The popular bread industry is also suffering hugely from the energy crisis. Bakers need electricity and gas to heat ovens and run kneading machines. This is all topped off by the ever-increasing costs of flour, butter and sugar, as well as higher wages for workers.

Bigger energy-intensive businesses such as chemicals or steel face similar problems. Their issues are further exacerbated by the need to compete with rivals in other countries where the energy remains cheaper. BASF, a chemicals giant which uses natural gas both to generate energy and as an industrial feedstock, has already cut production and may need to slash it further. Thyssenkrupp, a large steelmaker, has lost half its market value since January.

Clients in the automotive industry are dealing with their own challenges. Orders are slowing down as inflation reduces consumers' available cash. Car companies cannot easily modify production processes. Instead, they will cut costs by slashing spending on administration and research and development.

How does this impact law firms?

• Relocations could create corporate and commercial work, whilst Employment and Restructuring are set to stay busy.
• Top Departments: Commercial, Corporate, Employment, Restructuring and Insolvency.

With energy prices likely to remain high for a while, 2-3% of Germany’s industrial companies that use energy-intensive processes are expected to relocate abroad. These moves could create demand for corporate and commercial lawyers to advise on setting up operations in other countries. These could include agreements with local producers, mergers and acquisitions, and advice on compliance with local production laws. Additionally, the company may look to buy up land to build new factories, which would require advice from real estate and construction lawyers. Plus the necessary employment advice about staffing the new factories, whilst complying with local employment laws.

A larger share of industrial companies will reduce their production this winter and next. For example, ArcelorMittal, another steel giant, announced plans to close down two mills in northern Germany and put employees on furlough. Stickstoffwerke Piesteritz, Germany’s largest producer of ammonia and urea, two important chemical inputs, shut down its ammonia factories in Saxony-Anhalt.

The problem is that the issues of a company do not occur in a vacuum. They have severe effects on the larger intrinsic global supply chain. Indeed, the ArcelorMittal shutdown has triggered a shortage of AdBlue, a product crucial for cleaning the engines of the diesel trucks that help connect Germany to markets abroad. Further supply chain breakdowns could easily lead companies to fold on their contractual obligations. This could generate work for commercial lawyers on the enforceability of contract terms, and for litigation lawyers on option to pursue the liable party.

With the cost reduction strategies in the car industry, we may see some producers curtail their green initiatives. Some will probably relocate production to lower-cost countries, whereas others might put the electric car strategies on temporary hold. These plans may be subject to governmental scrutiny subject to the producers having pledged to meet specific emission targets within identified timeframes. Failure to meet this could make the carmakers liable to fines and expose them to litigation.

German companies are also expecting a round of annual wage negotiations with Germany’s powerful unions. Those between IG Metall, Germany’s biggest union, and employers in the giant car industry are about to kick off, and it is expected that IG Metall will not accept anything below an 8% increase. This puts further pressure on Germany's industrial companies by further increasing their costs. Companies in this sector will need employment advice on managing these negotiations and on claims that could arise from redundancies.

The higher energy costs are becoming harder for businesses to pass on to consumers. Hakle, a maker of loo roll, has filed for insolvency after being unable to pass onto clients the huge increase of production costs. Just as in the UK, we can expect a new wave of insolvencies to come through the market which will in turn generate a spike in demand for advice from restructuring and insolvency lawyers.

How the UK Mini-Budget will impact Law Firms and their Clients.

This morning, Kwasi Kwarteng announced his mini-Budget with tax cuts and support measures. The Chancellor revealed that the basic income tax rate would be cut from 20% to 19% next year, while first-time buyers will benefit most from the stamp duty cut. He also confirmed new investment zones to boost business spending.

Below I identify key points and how they could affect law firms and their clients.

Tax

The Chancellor has:

• abolished the top rate of income tax and will cut the basic rate from 20%to 19% from April 2023. From next year, the UK will have a single higher income tax rate of 40pc with the additional rate of 45pc scrapped.
• cancelled the planned increase in corporation tax from 19pc to 25pc next year
• confirmed that the 1.25 percentage point increase in National Insurance will be scrapped from November. The Chancellor said this would save workers on average £330 per year.
• announced a stamp duty cut. Homebuyers will not buy stamp duty on the first £250,000 of the property's value, instead of the current level of £125,000. First-time buyers will not pay stamp duty up to £425,000, up from £300,000.

How does this impact law firms and their clients?

The tax updates will generate more work for tax lawyers as clients (both individuals and companies) try to understand how the changes will affect them. Businesses will be happy to see that the corporation tax has been held at 19%, whereas higher-income individuals are set to benefit from the national insurance cuts. The cut to stamp duty could support home buyers. According to the Government, first-time buyers in London and the south-east could save as much as £11,250 under the new measures. However previous Government cuts have driven up property values because sellers add the theoretical saving to house prices. The government’s stamp duty holiday is regarded by property analysts as one of the reasons behind rapid house price growth in the two years since.

Business Investment

Kwarteng says the government will bring forward plans to streamline regulations and remove EU-derived laws. The chancellor says a list of critical infrastructure projects will be “prioritised for acceleration”.

The chancellor confirms that almost 40 investment zones will be created with business tax breaks. Areas including the Tees Valley, West Midlands, Norfolk and the west of England are in the running.

How does this impact law firms and their clients?

One of the key aims of the mini-budget was to stimulate growth. These measures are expected to greater activity in the construction market. If successful, this could create demand for advice from construction and real estate lawyers as investors look to capitalise on the accelerated project process, and investment zone tax breaks. Law firms operating in the tax breaks area can expect an uptick in demand from businesses on making the most of these tax breaks. The new measures mean that on newly-occupied business premises, there will be no business rates to pay whatsoever. And if a business hires a new employee in the tax site, then on the first 50,000 pounds they earn, the employer will pay no National Insurance.

Energy

Kwarteng also reiterated the details of the energy bills reform. The Energy Price Guarantee will cap the unit price that consumers pay for electricity and gas, limiting the average household bill to £2,500. The Energy Markets Financing Scheme will provide loans to cash-strapped energy suppliers while businesses will benefit from a discount on their bills.

How does this impact law firms and their clients?

The plan would help businesses cope with the soaring energy costs, which are making it unviable for some factories, pubs and shops to keep running as prices rise and winter approaches. Energy providers will be asking law firms for advice over the losses they will incur from the cap e.g. how can they claim back these losses, are there any limitations, would any circumstances lead to a failure to secure these back. Meanwhile, businesses will see this as a life line to keep down their costs, and stay afloat. They will want to understand how the price cap works, and how it impacts their operation.

Labour Market

The Chancellor announced that the bankers' bonus cap will be scrapped while trade union rules will be toughened up. New laws will require unions to put pay offers to a member vote, ensuring that strikes are only called once negotiations have "genuinely broken down".

How does this impact law firms and their clients?

The new laws on trade unions could lead to a spike in demand for employment advice from companies looking to understand any risks or benefits of the change. In particular, clients will be looking to understand the triggers for strikes, and define the point at which negotiations genuinely brake down. They will need advice on managing these negotiations to achieve a favourable result, but also on limiting the risk that they can lead to a full-blown strike. The rail trikes made this a popular topic in recent times, and this move could have a significant impact on curtailing their ability to continue as they did previously.

Did you know?

Japan’s yen began the year trading at 115 to the dollar. It started weakening in March and slid past 125 in April, breaking an important psychological barrier. By September, the yen had tumbled past 140, leaving markets to wonder what, if anything, would trigger defensive action. The answer came on September 22nd: as the yen nearly reached 146 to the dollar, Japan’s government stepped in to bolster the currency by buying yen and selling dollars, the first time it has intervened to stop a slide in the currency since 1998. Kanda Masato, the vice minister of finance for international affairs, called it “decisive action”. To learn more about the rise in the dollar, and interest rates check out our recent newsletter here.

Top Court Case:

Following an appeal, the Employment Appeal Tribunal held that the lower court was wrong to reject prospective claimants from joining an equal pay suit against Sainsbury's Supermarkets and LloydsPharmacy because their names were not included on a document in the early stages. There are two separate claims against Sainsbury's and Lloyds: women seeking equal pay with men and piggyback claims that seek to ensure that men do not end up being paid less than women if the women's claims are successful.

The appeal is part of long-running litigation in which staff members say they should be paid the same as employees in other roles. Other major stores, including Asda, Morrisons and retail giant Tesco, have faced similar battles with their workforces. Asda workers won a major victory at the U.K. Supreme Court in their battle for equal pay in 2021. The court upheld an earlier ruling that lower-paid shop staff, who are mostly women, can compare themselves with higher-paid warehouse workers, who are mostly men.

The claimants are represented by Andrew Short KC and Saul Margo of Outer Temple Chambers, instructed by Leigh Day.

Sainsbury's and Lloyds are represented by Dale Martin KC of Littleton Chambers, instructed by Womble Bond Dickinson.

Top Deal:

DLA Piper advised PlayUp on its merger with blank-check company IG Acquisition Corp. led by Paul Weiss and Richards Layton & Finger PA in a deal that values the online betting operator at $350 million. The deal will allow PlayUp to expand its platform to encompass many types of betting, including daily fantasy, table games, casino games and lottery. PlayUp develops its own technology to support its online betting platform, and the cash from the merger will let it continue to invest in its proprietary technology.

IG is a special purpose acquisition company. SPACs rose to prominence in 2020 but have fallen out of popularity this year. Typically, after the initial IPO, they set a timeline of 18 to 24 months to find a target company. IG's deadline is Oct. 5, 2022. The SPAC has called for a special meeting to ask stockholders for an extension to complete the merger, as it would not be completed by the deadline set during the IPO. The meeting is set for Sept. 29.

Answering your questions!

Q: Hi Ludo, ZipLaw is such a great resource. Thanks for this. My question is about nuclear energy. How significant do you think the Government’s announcement about wanting to increase their reliance on nuclear energy is? Do you think there will be an increase of m&a deals between oil and gas companies and nuclear, what trend do you think we will see? - Julia

Ludo: This is a great question. In short, I think this a very significant statement, which, if followed through, should lead to increased activity in the nuclear energy sector and boost demand for legal advice across a number of departments.

The government is definitely keen to invest in alternative energy production such as nuclear energy. Aside from its statements, it has also recently announced £3.3 million in funding to support the development of cutting-edge nuclear technology in the UK, such as high-temperature gas reactors (HTGRs), helping revolutionise how the UK gets its energy. The government also relaxed planning regulations to boost the construction of energy projects. Nuclear power stations, hydrogen production and carbon capture were also included on the list of projects to speed up planning. Those technologies are currently hindered more by a lack of funding than red tape.

Below I have listed some key legal departments and trends we could expect to see with this investment in the nuclear energy sector.

Planning and Regulatory advice is also crucial to comply with the requirements of the ONR. To assure the safety of nuclear installations in the UK, ONR works on a system of regulatory control based on a robust licensing process by which a corporate body is granted a licence to use a site for specified activities.

Other busy areas include Commercial and Corporate. Nuclear station projects usually require a lot of funding, and a common structure to achieve this is via a joint venture whereby multiple parties pool together resources to achieve their goal. This will require extensive contract drafting and corporate advice to ensure all parties are clear on ownership and liability is delineated e.g. by way of a shareholder agreement which sets out all the shareholders' responsibilities.

Funding is a crucial challenge in this sector, and the government initiative aims to provide a solution. Six projects have already been selected for £2.5 million of the £3.3 million. Additionally, I think we will see more private investment flow into the sector from investors that are willing to take the risk of putting capital up to capitalise on the longer-term benefit of the UK's investment in nuclear energy.

As an add-on to this, law firms can also expect to assist parties investing in the nuclear plant on employment, real estate and construction issues. These will be crucial to source the land required for the build and to proceed with its development and maintenance. As always, if any other businesses are acquired as part of the process, lawyers will also need to keep an eye on TUPE's involvement and advise their clients accordingly.

Additionally, law firms can expect to advise clients on issues with waste disposal and litigation arising from the use of the station. For example, someone might complain about it, or bring a claim against the nuclear station because they think it egatively affects the surrounding environment.

Another point is that the government enacted the Nuclear Energy (Financing) Act 2022 (Nuclear Act) on 31 March 2022. Part 1 of the Nuclear Act sets out the procedure for designating a nuclear generation company as eligible for funding through the regulated asset base (RAB) model. Law firms may be required to advise on the provisions of this Act and also on their options to secure funding through it.

Another point is what happens if the station goes into insolvency. Part 3 of the Nuclear Act sets out a ‘special administration regime’ which would apply should a nuclear company become insolvent. If a nuclear company with a RAB contract becomes insolvent, the Government can apply for a court order to appoint a special administrator to manage the company and the nuclear plant. This is done to reduce the risks of consumers being deprived of the intended benefits from financing the building of a nuclear power plant and reduce the risk of needing a replacement source of electricity generation, which would further increase the cost of electricity to consumers.

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Business News Roundup

The Federal Reserve raised its benchmark interest rate by 0.75%, to between 3% and 3.25%. It was the third consecutive such increase and came after figures showed that inflationary pressures are moving extensively beyond food, energy and goods to services prices, such as rent. The Bank of England lifted its benchmark rate by 0.5% to 2.25%, the highest since 2008.

The German government nationalised Uniper, the biggest gas importer, to prevent it from collapsing. Uniper had been forced to turn to the more expensive spot market when Russia curtailed its gas supplies, leading to huge losses.

The UK government introduced a scheme to cut energy bills for businesses by around half over the winter by capping the wholesale price of electricity and gas, an extension of the huge financial support it had earlier promised for households. Many firms risk going bankrupt because of soaring energy costs.

Volkswagen announced that shares in Porsche will debut on the Frankfurt stock exchange on 29 September. Only a small portion of the shares being offered by VW, Porsche’s owner, will be available to the public. VW and the Porsche and Piëch families, the controlling shareholders in VW, will own most of the stock. Still, the IPO could value Porsche at up to €75bn.

Ahead of a plan to split its auditing and management-consulting businesses, Ernst & Young revealed that revenues grew by 16.4% in June 30th, the best growth rate in 20 years. Sales from its consulting services grew faster than those from accounting, although accounting still brought it more money. EY believes a break-up will allow the consultancy side to thrive, freeing it from conflict-of-interest rules that stop it from working with firms that EY audits. EY's partners will start voting on the spin-off in November.