March 15, 2021 | 8 minute read

Brown Rudnick Advises Clarks on £100 Million Private Equity Investment

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Brown Rudnick

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Brown Rudnick

Brown Rudnick acted for Clarks, the iconic British-based shoe retailer, in relation to a £100 million private equity investment as part of its group restructuring process, and a company voluntary arrangement (“CVA”) for C.& J. Clark International Limited involving its portfolio of c.350 stores in the UK and Republic of Ireland. The CVA was approved last November by over 90% by value of those creditors voting at a virtual meeting. LionRock Capital, a Hong Kong based private equity provider, acquired a majority stake in Clarks in return for injecting £100 million. The deal was conditional upon Clarks’ shareholder approval which was obtained just before Christmas last year.

Completion of this deal represents the culmination of an eleven months role for Brown Rudnick advising Clarks and places the international shoe retailer on a stable financial footing for the future. We are extremely pleased with this outcome for Clarks given the challenges it faced arising from the global pandemic and the significant pressures this unprecedented event exerted on the business.

Putting the Clarks deal in context

The Clarks outcome is all the more significant in the context of the challenges faced by high street retailers generally and the recent spate of high profile retail insolvencies, such as Arcadia and Debenhams, where it did not prove possible to prevent significant store closures and loss of employment. On-line retailers, ASOS and Boohoo, acquired the brands and websites of those two retailers, thus enabling returns for creditors in the insolvency process to be maximised but consigning these high street operations to the history books after a long period of declining footfall, lack of investment and changes in consumer behaviour. Whilst the Clarks family owners had little option but to relinquish control of their international shoe business, after nearly two centuries of ownership, Clarks' business is recapitalised and now in a position to shape its future with the backing and support of LionRock Capital.

Problems remain for the retail sector

Looking back, it seems the pandemic has served in many respects to expose “winners and losers” on an accelerated basis in the retail sector. Whilst leading on-line retailers and discounters have performed relatively well during the pandemic, there remain many high street retailers in urgent need of support and restructuring; more insolvencies can be expected as the UK begins to emerge from lockdown, despite unprecedented Government business support measures. Even some of the UK’s historically strongest high street retailers are rethinking their business model, closing flagship stores, re-negotiating rents with landlords and reducing unnecessary floor space in the process.

These activities, whether consensual or otherwise, are having significant knock-on effects for institutional real estate investors with recent market reports revealing net outflows for many, most obviously evidenced by empty shopping centres, reduced rent collections and declining valuations. Some high- profile shopping centre owners have fallen into administration already and more are likely to follow as they struggle to service their debt burdens as a result of significantly lower rent receipts from retail, leisure and hospitality tenants. City councils, real estate owners and developers are being forced to re-think city centre space as stores continue to close and envision the creation of "destination centres" for consumers keen for new experiences and fresh ways of shopping.

Government support measures

The Chancellor, Rishi Sunak, announced in his recent budget that the Government is to provide extended business rates support for eligible retail, hospitality, leisure and nursery businesses in England occupying a qualifying property. Temporary measures announced by him involve an extension to the expanded retail discount (2020/21) for 3 months for eligible properties at 100% relief, uncapped, for the period commencing 1 April 2021 to 30 June 2021 and from 1 July 2021 to 31 March 2022, at 66% relief for eligible properties, with a cash cap of £2 million for businesses required to close as at 5 January 2021 and up to £105,000 for businesses to be permitted to open at that date. However, the Government has delayed its long-awaited business rates report until the Autumn, citing economic uncertainty and the need for clarity around the state of public finances as reasons for this delay. So, no fundamental reform of business rates seems likely for the foreseeable future, heaping more pressure on high street retailers over the medium term.

The Chancellor did, however, announce an extension to The Coronavirus Job Retention Scheme, or “furlough scheme”, which comes as some measure of relief to high street retailers anxious to retain staff despite the current uncertainty resulting from the pandemic. This business support measure had been due to close at the end of April 2021 but has been extended to the end of September. In summary, the furlough scheme pays 80% of employees’ wages for the hours they cannot work in the pandemic. Employers will be expected to pay 10% towards the hours their employees do not work in July, increasing to 20% in August and September as the economy re-opens.

The Prime Minister, Boris Johnson, has announced that all non-essential retail will be permitted to re-open from 12 April 2021. However, customers will be required to visit alone or with household groups and face masks appear likely for shops until 21 June 2021 at least.

Landlords – forfeiture of commercial leases

Along with other unprecedented measures to support the economy, the Government announced on 23 March 2020 that commercial landlords were to be prevented, on a temporary basis, from forfeiting commercial leases and evicting tenants for non-payment of rent. These measures were in place originally until 30 June 2020. This period was extended until 31 December 2020 and, on 9 December 2020, the Government announced a “final extension” to 31 March 2021. These measures were brought in as part of the Coronavirus Act 2020, s.82, and apply to a “relevant business tenancy” to which Part 2 of the Landlord and Tenancy Act 1954 applies.

On 10 March, the Housing Minister, Robert Jenrick, announced a package of business support measures including an extension to the temporary restrictions on forfeiture of business tenancies for non-payment of rent in England until 30 June 2021 (which will align with the position in Wales). Further measures will be introduced by Government to regulate the minimum unpaid rent which must be outstanding before commercial rent arrears recovery can be used. It was also announced that Government will be seeking to gather evidence on commercial rents to assess what further steps might be required after 30 June 2021, ranging from phased withdrawal of the current measures to the potential for legislation aimed at those businesses most impacted by the pandemic. Government also intends to review landlord and tenant legislation later this year.

Moratorium on statutory demands and winding up petitions

The Government introduced a temporary ban on serving statutory demands and winding up petitions where unpaid debt is due to the pandemic. Statutory demands will be void if served on a company during the “relevant period” (between 1 March 2020 and 31 March 2021). Winding up petitions presented during the “relevant period” on the basis a company is unable to pay its debts will be reviewed by the Courts to determine the cause of non-payment. Where the unpaid debt is due to the pandemic, no winding up order will be made. This protection has been extended to 31 March 2021 by the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No.2) Regulations 2020 (S.I. 2020, No. 1483).

It remains to be seen if any further extension is to be made to this temporary measure to further support the economy in line with the recently announced extension to the restrictions on forfeiture of business tenancies, which would seem like the logical thing to do in the current circumstances. In this respect, it is noteworthy Government has announced its intentions to extend the power (through the Corporate Governance and Insolvency Act 2020, s.20) to make temporary amendments or modify the effects of corporate insolvency and governance legislation for an additional year until 29 April 2022.

Directors – Wrongful Trading

Under the Corporate Insolvency and Governance Act 2020 (Coronavirus)(Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020, the Government has extended temporary relief for company directors against the risks of wrongful trading (all other duties and responsibilities remain in place) for the period 20 November 2020 to 30 April 2021 (the previous period of suspension expired on 30 September 2020, which leaves a curious “gap” of seven weeks in the period before 20 November 2020). So, from 1 May 2021, company directors once again will be held personally liable for debts incurred when trading an insolvent business in circumstances where there is no reasonable prospect of avoiding insolvent liquidation or administration (subject to the defence of taking every step to minimise potential losses to creditors). It remains to be seen whether any further extension is to be made to this temporary relief in order to support directors.

Importance of planning ahead

It seems likely that a combination of these factors and the gradual paring back of the various Government support packages will lead to more high street retailers experiencing significant challenges as the economy re-opens. Well-advised directors will have anticipated some time ago the extent of additional demands on liquidity which will inevitably arise once the support measures end and have appropriate plans in place to ensure trading can continue, even if this necessitates an element of restructuring, whilst stakeholders are adequately protected. More than likely, some retailers will have have taken on significant additional debt over the course of the pandemic leaving them with little or no room for maneuver with their existing lenders should liquidity tighten further post-lockdown. Those retailers may need to consider more radical solutions in order to safeguard the position of stakeholders, preserve their business and employment.

If any readers have questions or issues they would like to discuss with us regarding their own trading position as a result of reading the above, they should get in touch so we can assist.

Watch out for an up-coming Brown Rudnick Webinar on the Retail Sector and the challenges ahead for the high street.

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