Legal Market Overview
It’s an election year in the US, and with the presidency up for grabs there are several potential consequences for the legislative and regulatory landscape that law firms will be keeping an eye on. Regulation and agency enforcement in a few closely watched industries have been relaxed, and in fact, President Trump and the GOP are fairly open about their desire to ease environmental and financial services regulations in particular. However, with the House now controlled by Democrats, Congressional investigations committees have taken a more active role in certain somewhat polarizing industries, and this stance may become the norm at the federal level if the Democrats were to take the White House in 2020.
Looking first at environmental regulation, the President’s clear commitment to deregulate was reflected in the submission of the country’s intent to withdraw from the Paris Climate Agreement. International implications aside, this decision is particularly controversial given that the process will not be completed until after the 2020 US elections. Domestically, the EPA has abandoned the Obama-era Clean Power Plan in favor of an approach that allows states more autonomy in determining their own rules on carbon emissions. It was also announced in 2019 that the EPA will change the way calculates the health risks of air pollution.
In response to deregulation at the federal level, lawyers have reported a marked increase in state enforcement actions, with California (as expected) being among the most active environmental regulators and enforcers. Moreover, a rise in the area of ESG investing across the board is perhaps an encouraging indication that though the federal government is taking a passive approach to environmental regulation, some in the private sector have developed a greater sense of moral responsibility in the preservation of the environment.
One of the areas most affected by the rise in ESG investing is, of course, oil and gas. Although US oil and gas production is close to an all-time high, funding into the sector, at least from the large commercial banks, has been noticeably reduced. As a result, exploration and production companies have had to look elsewhere for capital, and have found private equity investors to be among the most willing participants in the industry. The lack of liquidity in the market has also had an impact on M&A, particularly in the upstream segment. As a caveat, there has been some interest in US E&P stocks, both from foreign investors and private equity. Indeed, lawyers had hinted that, on top of what are fairly deflated public company prices, there is a sense among some investors that these companies are being undervalued, making them all the more attractive for potential investments.
Despite the speculation, however, and despite truly impressive figures for US oil and gas production, energy stocks have still been an outlier in what was otherwise a thriving equity market. Indeed, energy stocks have been among the worst performing stocks over the past decade. Moreover, in the S&P 500 sector weightings, energy has dropped from 15% in 1990 to only 5% in 2019. This performance may seem counter-intuitive in a de-regulated (and de-regulating) industry, encouraged as it may be by a president championing US energy independence; however, there is a clear rationale behind the relatively weak performance in the public market. After all, to say that oil prices are skittish and unpredictable sounds like quite the understatement, bearing in mind the market anomaly that occurred with the WTI in April 2020.
A final point to note in the energy market is the strong performance in the renewables sector over the past year, and actually, over the past two decades. The country’s renewables sector has grown remarkably since 2000, and while fossil fuels still account for the largest proportion of energy consumption, according to the Energy Information Administration, in April 2019 the US generated more electricity from renewable sources than coal for the first time ever, with renewable sources providing 23% of US electricity generation during that month, compared with coal’s 20%. Further, although President Trump has been vocal about his intention to revitalize the US coal industry, a considerable number of coal-fired plants have been closed over the course of his term. Of course, oil and natural gas remain the primary sources of energy, thought there is no doubting which direction the market is heading.
The bulk of the research took place before Covid-19 hit the US, and although energy has been one of the most volatile areas since the virus phenomenon, in 2019 all eyes remained firmly fixed on international trade, and specifically on its implications for US-China relations. Following allegations by the Trump administration regarding China’s currency manipulation, the US Department of the Treasury concluded in its most recent report to Congress that such manipulation had not occurred, but China and nine other trading partners were still added to the Treasury’s monitoring list.
In January 2020 a pact was concluded between the two countries, which are looking clearly like trading competitors rather than trading partners. The pact was signed with the aim to ease the escalated tension and relax some of the retaliatory tariffs adopted by both countries; however, certain key issues were left out of the agreement, including those surrounding the countries’ rivalry in the telecoms sector, China’s subsidy programs, and a number of other tariffs that remained in place. As least for trade, the Covid-19 crisis came with what seemed to be silver linings: in February 2020, China cut tariffs on $75bn in US goods, while the White House considered lifting further tariffs in seeking economic relief. However, this was followed by President Trump’s announcement that new tariffs may be imposed due to China’s response to and involvement in the coronavirus outbreak.
All of this means that trade lawyers are likely to remain extremely busy on the trade remedies front. While the US-China trade war seemed to dominate headlines and the agenda of the 45th G7 summit during the past year, the current administration’s protectionist approach to trade, coupled with the President’s criticism of global governance institutions and multi-lateralism, led to other wide-ranging consequences for the global trade regime. In particular, the dispute settlement system (DSS) of the WTO was paralyzed in December 2019, following the US’ refusal to participate in the appointment of new judges to the Appellate Body (AB). Although the US was the most passionate proponent of the establishment of the AB over two decades ago, this barely came as a surprise under the current administration, which essentially left the WTO’s top adjudicatory organ with only one acting member. As a result, lawyers who handle issues in the WTO realm are not expected to act in relation to pending AB disputes; however, they are still advising on other stages of the DSS, such as WTO panel proceedings.
As far as any domestic legislative changes are concerned, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) remains a widely discussed topic in the market. The FIRRMA essentially expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) and subjected new types of transactions to national security review. The two final regulations issued by the CFIUS entered into force in February 2020, and broadened its reach to cover certain real estate transactions, among other changes. In this area, general compliance advice and the newly introduced mandatory filing system will continue to generate a stable flow of work for trade law practitioners.
Returning to the theme of deregulation, both federal antitrust enforcement bodies in the US, the Federal Trade Commission (FTC) and the DOJ, are perceived to be increasingly politicized. While the DOJ’s Antitrust Division is often reported to be open to settlements, Democratic commissioners at the FTC are rather more proactive, and have asserted the agency’s authority in cases where they consider the DOJ to be too lenient. Put simply, the authorities’ respective antitrust strategies are often divergent and unpredictable. That aside, the agencies jointly released a draft for revised vertical merger guidelines on January 10, 2020. The announcement serves as a subtle recognition that the current guidelines (which date back to 1984) are unequipped to serve the current market. A clear reminder of that reality was the DOJ’s unsuccessful court challenge to AT&T’s merger with Time Warner in 2019.
Lawyers have also reported that the corporate investigations and white-collar criminal defense space has remained quieter under the Trump administration, not only in relation to antitrust offenses, but also in the area of financial crime. There is a feeling that the main federal enforcement agencies lack a grand strategy, and as such, enforcement has slowed down. It was hoped that William Barr, who became Attorney General in 2019, would settle the waters at the DOJ; however, many practitioners have lamented his time as AG, and indeed, some feel that his tenure will be stained by partisanship.
There is still, however, a buzz of activity in the market. Federal investigations are still being launched in relation to alleged Foreign Corrupt Practices Act violations, and, reflecting the administration’s political priorities, there has been an increase in investigations in the healthcare industry; for instance, those concerning False Claims Act violations and opioids. In this regard, the combined actions of state and federal enforcement agencies and AGs has had implications for lawyers handling product liability litigation. The past year has seen an uptick in cases going to trial – particularly higher exposure cases. This is partly thanks to some extremely large verdicts, most notably in opioid-related cases.
Where federal agencies have quieted down, state attorneys general, including New York’s Letitia James, have picked up some of the slack. There has also been an increase of work involving foreign enforcement agencies across Latin America, Europe and Asia, and work in the white-collar crime and investigations space has demonstrated a continued trend of multi-jurisdictional and multi-agency response.
As previously mentioned, this research cycle does not reflect the market tumult of the first half of 2020. Though there were hints at panic in the Asian equity markets early in 2020, the coverage in this guide reflects the undeniable strength of the US capital markets throughout 2019.
The US corporate bond market bounced back in 2019, following a contraction in 2018 that saw debt value drop by around 19%. Record-low interest rates, combined with a more stable investor climate put the debt market back on track, with investment grade bonds returning 14.2% in 2019 — the best performance since the financial crisis. In the first week of September alone, $140m worth of new corporate bonds were issued globally, which marked the largest weekly volume on record. Of note, US investment grade issuers were the main contributors to that total, raising roughly $72bn over 45 deals. The boom lasted well into the end of the year, with AbbVie selling $30bn worth of bonds in November to support its acquisition of Allergan, which represented the fourth-largest bond deal in history.
High-yield debt markets also made significant recoveries during 2019, after a notably turbulent 2018, which saw high-yield bond issuance plummet by 40% year-on-year. A promising start to 2019 saw US high-yield bonds post their strongest quarterly return since 2009 in the first three months of the year. Moreover, an active fourth quarter sealed a solid annual performance: over the course of 2019 high-yield bond issuance climbed by 50%, reaching the second-highest volume since 2015.
As for equities, the volatile stock market swings that characterized the second half of 2018 led to some initial investor trepidation going into 2019, but lingering fears of trade wars and potential recession were sufficiently subdued early on in the year. Overall, US equity markets surged during 2019 to post the biggest gains from stocks since 2013, driven by low interest rates, a strong economy and a booming technology sector. Among the key market indices, the S&P 500 produced gains of 29%, while the tech-heavy Nasdaq Composite recorded gains of 35%.
The US IPO market also remained strong, with 196 IPOs pricing, largely concentrated in three sectors: special purpose acquisition companies (which accounted for a sizeable 30% of IPOS during 2019); life sciences; and technology. However, equities began to stumble going into 2020 as coronavirus pandemic fears acted as a drag on the market; towards the end of February sharp declines wiped out year-to-date gains for the Dow Jones Industrial Average.
Further afield, 2019 was also a strong year for global bonds on the back of low interest rates and increased expectations of a US-China trade deal (see above). Emerging markets performed particularly well, with a resurgent Latin America proving a big draw to investors. On the equity side, global stock markets recorded their best year since the aftermath of the financial crisis. The MSCI World Index, which tracks stocks across 23 developed markets, climbed by nearly 24% during 2019, underpinned by the performances of US technology companies, a resilient Eurozone, and strong Asian markets. That said, fewer foreign private issuers came to US markets. That said, equities and international securities have been extremely volatile following widespread measures to curb the global pandemic, and indeed, global equities are looking vulnerable at the time of writing.
A final note in the securities space, players in the capital markets have been focused on the proposed replacement of LIBOR as a benchmark interest rate. Unlike LIBOR, which was calculated by banks’ submitted estimates of how much it would cost them to borrow, the proposed replacement Secured Overnight Financing Rate (SOFR) is calculated based on overnight transactions in the US treasury market. While SOFR is not prone to the manipulation that dogged LIBOR in the wake of the 2008 crash, it also does not feature different time-frames in the same way LIBOR does.
Circling back one more time to contentious (and highly politicized) federal enforcement activity, immigration continues to be a hot topic across the legal landscape. The Trump administration paved the way to uncertainty through its rhetoric relating to reduced business immigration and generally more restrictive policies. Moreover, anxieties in the immigration market have only been exacerbated by the more aggressive application of existing immigration rules. In an already diluted market, firms have been adapting swiftly to the changes and have adopted more creative lawyering and advocacy practices which can be seen in their use of technology.
Looking specifically at the firms in the market, there have been some fairly significant partner moves and firm mergers over the past year. Faegre Baker Daniels completed its merger with Drinker, Biddle & Reath LLP in February 2020, forming Faegre Drinker Biddle & Reath LLP. Another significant expansion, at the time of writing, Troutman Sanders and Pepper Hamilton are less than a month away from their combination, creating Troutman Pepper, which is set to launch on July 1, 2020. There were also some personnel shuffles in the East Coast corporate and litigation markets, where Freshfields Bruckhaus Deringer and Baker Botts, respectively, have made some major gains. One more move that might grab a reader’s attention: Robert Mueller re-joined WilmerHale in 2019, having completed his Special Counsel assignment in the highly publicized investigation into Russian interference in the 2016 US elections.
On a grander scale, for over a decade, law firms have been coming to terms with the fact that a dedicated appellate practice is a necessity rather than a luxury, and indeed, a number of those firms have clearly decided that a good way to establish a well-respected practice is by hiring a well-respected practice leader. 2019 started with the jaw-dropping hire by Paul, Weiss, Rifkind, Wharton & Garrison LLP of Kannon Shanmugam, who chairs the firm’s newly opened appellate group. A firm that quickly followed suit was McDermott Will & Emery, which secured the double hire of Michael Kimberly and Paul Hughes after a decade of experience at their prior firm. Then, to kick off 2020, O’Melveny announced the appointment of former Deputy Solicitor General Michael Dreeben, who has a stellar record at the US Supreme Court, and gained recent widespread recognition for defending then Special Counsel Robert Mueller against constitutional challenges relating to the (in)famous Russia election interference investigations.