Covid-19 has not been all bad news for the beleaguered gambling industry – both anecdotally and from the statistics released in the public domain the online gambling industry is having a booming trading period (a current growth rate of 13.2%). However, as the retail industry braces itself for a cautious re-opening, and the ensuing expected second wave, it is inevitable that a number of companies, with a large retail footprint will need to think about restructuring and possible sale of assets.
However, there are key regulatory issues in Great Britain that cannot be neglected at this critical time despite the wider trading challenges. Compliance adds value, which may be key to assessing the business proposition in any due diligence required by a lender in a rescue situation – it also would be ironic if the rescue package itself caused operational non-compliance. Administration or receivership (as well as creditor schemes) of any company is a priority key event needing to be disclosed to the Gambling Commission (as a licence condition requirement ) under the Licence conditions and codes of practice (“LCCP”). Disclosure needs to be made as soon as reasonably practicable, and, in any event within five working days and any failure to do so (whether intentional or not) will be treated seriously, all the more so where the story may be picked up in media in advance of disclosure. Likewise, the making of any loan by an entity not regulated by the FCA or the non-UK equivalent and any investment not by way of shares (see licence condition 15.1.2(1), (5) and (6) of the LCCP) needs disclosure. It is also not entirely clear how the Gambling Commission may regard the various governmental loans/cash bailouts to UK businesses, but it is probably best to err on the side of caution.
Restructuring falling short of an insolvency (where it impacts a key position is also notifiable) as are the breaches of banking covenants (see LCCP 15.1.2 (9) and (11)). (Any re-organisation is also a code disclosure requirement). Whilst only liquidation will cause a licence to lapse (see section 114 of the Gambling Act 2005), any large scale operational changes will undoubtedly lead to regulatory scrutiny, and may even prompt a licence review, despite the operator being able to avoid any formal creditor arrangements. Furthermore, insolvency practitioners are not necessarily or likely to be well versed in the wider regulatory constraints in selling or extracting value from regulated assets.
Operating licences are not assignable, which adds to the complexity of an asset sale, and changes of corporate control after a sale can be time consuming without any certainty of outcome, especially where there is a desire to take key functions away from the old management (prompting PML or Annex A applications). The peculiarity of the provisions under section 102 of the Gambling Act 2005 allowing for the sale to complete before Gambling Commission approval has proven endlessly perplexing for corporate advisors. Corporate restructures short of an administrative sale commonly require a financial advisor to take a Board seat, and even if this does not require the individual (likely to be from an audit firm) to hold a PML , he or she may have to undergo suitability , personal probity checks not commonly sought for other industries. In short, this would require some navigation and clever strategizing, to create value for the operational business and creditors where the regulatory issues should not be (but could very well be) inhibitors to a third-party financier’s involvement.
Also, few operators are solely based in the UK; many of the online and retail operators hold a multiplicity of licences in a number of different jurisdictions so the impact of any reporting of a restructuring event or the event itself will vary as well as the likely outcome. Worse than that there may be a jurisdictional tug of war to establish which court and legal system should lead on any administration or insolvency, and strategies around timing may be critical. The location and value of the underlying businesses may be hard to determine where, for example, IP may be used across several business verticals. The new Corporate Insolvency and Governance Bill may assist in the UK (if passed) for a moratorium on some debts but may not trump the entire insolvency process in a complex multi-national business restructure.
Key supply contracts may also be imperilled; provisions which may have created a breathing space with a properly drafted force majeure clause will in most cases still enable the non-breaching party to terminate in the event of an administration event, ceasing to trade or changes of control. Certainly, in a number of gambling supply contracts there is a catch all provision for any wider regulatory taints, and depending on the circumstances may also prompt key suppliers to consider their options prompted by, for example a distressed operator undergoing a regulatory review because of an administration event.
However, the industry has always been resilient even with the constant media and regulator criticisms and challenges it currently faces as well as the economic uncertainties. If the various financial downturns in Las Vegas have taught us anything, then banks operating regulated assets is far from ideal, albeit the various stakeholders may have little choice in the short term. What is clear is that the myriad parties involved cannot lose sight of the importance of maintaining the licences, without which there is no viable business to trade out of the crisis or to sell. Some early checks with regulatory lawyers will at least eradicate or pre-empt the predictable snags, when the energies and focus of management and third-party advisors may be elsewhere.
With thanks to my colleague David Stevens for his invaluable co-authorship