Why Every Potential Commercial Lawyer Needs To Be Commercially Aware

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What is commercial awareness?

It’s one of the aspects of vacation scheme and training contract applications which many law students find most elusive. Although you must have a genuine interest in business and the wider commercial world, commercial awareness is not about being an expert in every single industry. It should not be considered an unobtainable goal, that only specific types of people can learn. It’s about having an understanding or an ‘awareness’ (see what I did there?) of how a business operates, including the internal and external factors that impact on their decision-making. Importantly, a commercial lawyer needs to advise their clients on how to mitigate risks when these risks arise and where to seek future opportunities for investment and growth.

Here’s a short example…

What is the story?

Cathay Pacific, Hong Kong’s flag carrier, announced a recapitalisation plan, including a $5bn bailout from the Hong Kong government.

What does this recapitalisation plan consist of?

A bridge loan facility, rights issue of shares and preference shares with detachable warrants. Wow, I just chucked a lot of technical terms at you and you’re probably blown away. Without getting lost in the nitty gritty, Cathay Pacific has chosen to raise finance by accessing debt and equity markets to minimise the risk, in particular of defaulting on the loan (non-repayment), and to ensure sufficient liquidity (cash, for example) for its day-to-day business functioning (paying wages, etc). Offering a rights issue could have a dual-effect: rights issue allows companies to raise capital, although this may dilute ownership and value of the shares.

Okay…why is recapitalisation necessary?

Passenger numbers have fallen, reflecting the international travel restrictions as a result of the COVID-19 pandemic and the social circumstances in Hong Kong, including the protests. Cathay Pacific is particularly affected as it is not a domestic carrier and relies on international travel. Restrictions on international travel around the world are still in place while domestic travel is easing. Recapitalisation replaces some of the fallen revenue and allows Cathay Pacific to continue operating.

Cristina's visual of the Cathay Pacific example

What is the bigger picture?

Cathay Pacific negotiated with the Hong Kong government to provide a bailout, with conditions attached, including the Hong Government having a 6% stake of shares. Could other governments follow suit and provide bailouts to the aviation industry? The German government and Lufthansa’s shareholders have approved a bailout for Lufthansa as without the bailout, bankruptcy could have been a possibility.

Other stakeholders include aerospace manufacturers, who are affected by the decline in orders and deliveries, and insurance firms, where airlines may request premium payment delays, restructuring plans and claim business interruption.

You may even question the future of the aviation industry. Will international travel become more exclusive and less affordable for example?

This example demonstrates the different internal and external factors and risks that a business needs to take into consideration and to act accordingly. Note: the factors mentioned are not exhaustive – there are other economic, political and social points to mention.

Where can you find commercial awareness resources?

Here are some resources you can follow to improve your commercial awareness and stay ahead of the curve. Choose your favourite medium – whether it be newspapers, social media, forums or podcasts and make sure to get into the habit of reading or listening to the news regularly to harness your commercial awareness.

  1. Follow the legal press – the Lawyer, Legal Business, The Law Society Gazette
  2. Daily news - Financial Times (university students may have a subscription to the FT with their academic login details e.g. City Law School students see info on library website. Once registered, you can download the app and search for the Lex tab to access analysis of trends in different industries); Watson’s Daily
  3. Weekly news - Law Careers.Net
  4. Monthly news - The PLC magazine or access via university Westlaw subscription; The Corporate Law Academy
  5. Follow law firms on social media – Twitter, Facebook, Linkedin
  6. Podcasts – More From Law; The Commercial Awareness Podcast; FT Daily News Briefing; BBC Radio 5 Live: Wake Up to Money
  7. Legal work experience - You will have an insight into law firms and their work
  8. Networking with solicitors, barristers, business professionals and entrepreneurs
  9. Investopedia – check out this handy website for explanations of technical terms

There you have it – commercial awareness is understanding and successfully identifying business and economic trends and how these trends or challenges affect the law firm and their clients. Reflecting on pieces of commercial news you read is vital to demonstrate you are actively engaging in the topic. If there are resources you use that are not listed above, please tell us about them!

Many thanks to Cristina DeSouza for this very helpful breakdown of commercial awareness, complete with example! Cristina will be starting her LPC in September 2020 and is also a member of the Lawbore student journalist team.