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Chapter 6: The Legal Environment
Mike Lynch, CEO of Autonomy, a British software company
Mike Lynch set up Autonomy in 1996,
when he was just completing his PhD at
Cambridge University. Since then, it has
grown rapidly, becoming Britain’s
biggest software company by market
value, overtaking Sage in the process.
Autonomy’s success has owed much to
Lynch’s entrepreneurial drive, although
he plays down comparisons with Bill
Gates of Microsoft. Mr Lynch built the
business in the growing sector of
enterprise search. Its business is
described on the company website as
‘meaning-based computing’, or
software which handles unstructured
data. Unstructured data can be text,
images, audio and video – anything
which is not numerically based.
Organizations are accumulating more
and more unstructured data, now
accounting for 80% of the world’s data.
With the rise in global communications
traffic and interactions on social media,
the growth in unstructured data is
outstripping that of structured data,
such as payrolls and data on financial
performance.
Autonomy’s software aids
organizations in identifying, monitoring
and archiving the different types of
content, contributing to greater
operational efficiency. Importantly, it
also enables organizations to meet
compliance requirements which are
increasingly important for businesses.
Lynch cites new demands for corporate
governance as one of the reasons
Autonomy is gaining more customers.
Firms must now reveal more and more
for government and industry regulatory
bodies. When firms are involved in
lawsuits, it is particularly important to
produce all the relevant pieces of
information to the court, showing an
audit trail extracted from all kinds of
data, including email, text and audio.
Mr Lynch cites the advantages of his
firm’s programmes in complying with
the US Federal Rules of Civil Procedure,
which lays down the rules for court
documentation.
Law firms are among Autonomy’s
customers, as are financial firms. These
areas have brought in new clients in the
wake of the financial crisis. Mr Lynch
speculated in 2005, ‘What happens
when the SEC knocks on the door and
says we want everything to do with a
certain subject?’ (Sturgeon, 2005). Or, a
CEO might be called before Congress
because something has gone wrong.
Although not involved directly, the CEO
must answer the awkward questions at
short notice, knowing that the hearings
are being aired on global media. These
examples he gave five years ago have
turned out to be more relevant than
even Mr Lynch could have foreseen at
the time.
His latest compliance software is in
social media, allowing companies to
search social media interactions by
employees, customers and others. As in
other innovations, his development of
this software has been in response to
regulators who increasingly demand
this type of monitoring. In the US, they

include the Financial Industry
Regulatory Authority (FIRA) and the
Federal Trade Commission (FTC).
Among Autonomy’s customers are
firms such as Astra Zeneca and BAE
Systems. But government departments
have also figured among his clients
from his firm’s early days. They include
the US Department of Homeland
Security and the US Department of
Energy. Mr Lynch has made a number
of acquisitions of smaller specialist
software companies, in order to serve a
wider range of client needs. Enterprise
search is a growing sector, in which he
competes against heavyweight rivals,
including Microsoft, IBM and Google.
2016 update:
Impressed by the success of Autonomy
and its potential for future
developments, Hewlett-Packard (HP)
acquired Autonomy in 2011 for just
over $11 billion, a price that seemed far
too high to many outside observers at
the time, but probably one that
reflected HP’s desire to reposition itself
in software services. Thereafter the
company was HP Autonomy. The
takeover soon led to a dispute. HP
announced that it had been misled by
Autonomy over the value of the
company. It was compelled to write
down the value of its new acquisition
by $5 billion. This huge writedown
caused HP’s shares to lose value and
led to the launching of several civil
lawsuits against HP by angry
shareholders. Lynch left the company.
HP launched a civil claim in London
against Mike Lynch and his former
2
Autonomy was listed as a public
company in 1998, when the dotcom
boom was riding high. Two years later,
the dotcom crash struck, sending the
share price of Autonomy down 90%. Mr
Lynch was philosophical, saying, ‘No
one needs a billion pounds’ (The
Economist, 2009). Although not in the
Bill Gates league, he is now a billionaire
too.
Sources: Vietch, M. (2009) ‘Autonomy
CEO Mike Lynch is in the search for
meaning’, CIO, 24 July, at
www.cio.co.uk; Sturgeon, W. (2005)
‘Interview: Mike Lynch, founder of
Autonomy’, 19 September, silicon.com
at www.silicon.com; The Economist
(2009) ‘Out on its own’, 28 February.
finance director for £3.4 billion, the
equivalent of the $5 billion writedown.
HP accused Lynch of fraudulently
misrepresenting the value of the
company. Lynch himself took a robust
stance, saying that the problems were
with HP’s poor management of the
business. He filed a claim against HP for
damages due to the negligent
misstatements they had made about
him.
At the request of HP, investigations into
accounting anomalies were
commenced by the Serious Fraud Office
in London, but in 2015, the SFO
announced it was closing its
investigation of the sale of Autonomy
to HP, as there was not enough
evidence to commence a prosecution
of Lynch for fraud.

Lynch and his former finance director
went on to start a technology fund
called Invoke Capital. Its first major
investment was Darktrace, a
Cambridge-based start-up
cybersecurity firm founded by Lynch in
2015. The software entrepreneur aims
to create software technology to
combat cyber-attacks. Darktrace has
Some discussion questions:
 What were the issues in HP’s takeover of Autonomy?
 What lessons are there in this case for large companies that take over small
innovative ones?
Is Uber transforming the world’s taxis?
Uber was launched in 2010 as a start-
up business in San Francisco, where its
founders first offered a luxury,
chauffeur-driven taxi service under the
name of UberCab. But, noticing a
shortage of ordinary taxis in the city,
they soon came up with the idea of a
low-cost alternative to the
conventional taxi, which became
known as a ‘ride-sharing’ service. The
idea behind it was that anyone with a
car could offer a ride to passengers as a
one-to-one transaction. Drawing on his
technology background, co-founder
and CEO, Travis Kalanick, devised a
convenient app that could be
downloaded by anyone, allowing the
driver to offer rides to customers,
whenever and wherever needed. The
fares were set by Uber, and the driver
would hand over a percentage of the
takings to the company. This formula
could easily be rolled out in any city in
the world. In the post-crisis economic
3
attracted interest from investors,
including a US venture capital firm,
resulting in a valuation of over $100
million. This success is good news for
Lynch, who has been so long embroiled
in legal battles with HP.
environment of 2010, the low-cost ride
was sure to be attractive. However,
Kalanick’s global aspirations would
come up against legal and regulatory
hurdles in most cities, where
frameworks for licensed taxi operators
are the norm. Mr Kalanick would say
these are too restrictive, but local
authorities are conscious of public
safety factors. Licensed taxi drivers
usually face background checks and
other legal requirements, whether they
are self-employed or are employed by a
company.
Undeterred, Uber has expanded
rapidly, from operating in 9 cities in
2012 to 311 in 2015; 170 of these are in
the US. In many of these cities,
including the US locations, Uber faces
legal challenges. Its start in San
Francisco was indicative. A cease-and-
desist order was issued by the San
Francisco Transport Agency in 2010,
which drew public attention to Uber,

and also attracted public support for
the company, seen as the victim of
bureaucratic interference. Kalanick has
adopted a combative approach to these
legal hurdles, trying to navigate around
them and also launching lobby
campaigns to get the law changed. He
has expanded aggressively, sometimes
going ahead with expansion plans in
cities where the regulatory
environment is hostile. Despite these
challenges, he can claim considerable
success for Uber’s rapid rise as a global
business. He sees himself as
championing the consumer, who wants
a good service at a low price; and also
benefiting the drivers, who are able to
make money as and when they please.
To aid in his lobbying activities, in 2014,
he hired an expert in political
communication, the man who led
President Obama’s presidential
campaign in 2008.
Is the business able to navigate the
legal challenges? Uber refers to drivers
as ‘partners’, which is ambiguous. In
California, Uber drivers have been held
by the courts to be employees rather
than self-employed people. The courts
in most countries look at the degree of
control the company exerts over the
worker, to determine whether the
driver is an employee or self-employed.
Uber controls the driver’s fares and
monitors the car’s movements, but
does not control the driver’s hours. If a
driver is an employee, Uber as the
employer would have to pay
employment taxes. Alternatively, if the
driver is self-employed, the driver
would be responsible for acquiring a
licence. In Germany, UberPop was
banned, and the company then
launched UberX as an alternative,
4
paying the 200-euro licence fee for
each partner driver. In France, UberPop
was fined for running an illegal minicab
service in Paris in 2014, and was
banned in 2015. This led to violent
clashes with licensed taxi operators,
who are highly regulated in Paris. Two
of Uber’s senior executives were
arrested and brought to trial in France
for running an unlicensed taxi service
and holding private data illegally. While
they could have faced prison sentences,
prosecutors instead sought fines and a
ban on company office-holding. The
company has faced legal problems in a
number of other countries, including
Spain, the Netherlands, China and
India. In most of its locations, Uber
faces local competitors, keen to have a
share of the ride-sharing business,
especially if the legal climate thaws.
Despite the legal and competitive
challenges, Uber has been popular with
large investors, attracting backing
estimated to be over $50 billion, an
extraordinary achievement for a young
private company. It is likened to other
companies in the ‘sharing economy’,
such as Airbnb, with which it is often
compared. But the two companies
differ markedly, and not just in the
more conciliatory approach to lobbying
adopted by Airbnb’s CEO, Brian Chesky.
Mr Kalanick insists that Uber is an
innovative ‘platform’ rather than a taxi
business. But the essence of the service
is that a driver is paid to carry the
passenger, which makes it closer to the
traditional business transaction of
hiring labour. Labour laws and
employment protection are put in place
by governments everywhere in the
public interest. Uber as a company has
set out to evade them or override them

as part of its business model. This
approach has aroused critics as well as
admirers.
Sources: Ingham, E. (2014) ‘Start-ups
take note: Uber made it big, but did
they get it right?’, Forbes, 5 December,
at www.forbes.com; Herne, A. (2015)
‘Why the term “sharing economy”
needs to die’, The Guardian, 5 October,
at www.theguardian.com; Waters, R.
(2014) ‘Uber is leading the battle of the
taxi apps into a war of attrition’,
Financial Times, 17 October, at
www.ft.com; Bremner, C. (2014) ‘Uber
chiefs held by police as war on app
The Philippines: a good place to do business?
In May 2015, a fire in a slipper factory
in Valenzuela, a northern suburb of
Manila, caused the deaths of 74
workers. Ignited by sparks flying from
welding operations into unlabelled
chemicals nearby, the fire lasted for
seven hours. Of those in the building,
only 45 came out alive. The workers in
the building had little hope of escape.
Fire exits had been blocked or locked,
and metal grilles had been placed on
windows. The factory was owned by
Kentex Manufacturing, a local
company. The fire occurred on the
second anniversary of the Rana Plaza
textile factory disaster in Bangladesh, in
which over 1,000 workers lost their
lives. The Rana Plaza disaster was
viewed as a turning point for health
and safety in Asian factories, prompting
concerted efforts by businesses and
governments to improve building and
fire safety. However, the Philippines
5
accelerates’, The Times, 30 June, at
wwwthetimes.co.uk.
Questions for discussion
 How does Uber differ from a
conventional taxi business?
 Summarize Mr Kalanick’s
approach to the legal and
regulatory environment in the
cities where Uber is launched.
 Suggest ways that Uber might
have approached a launch in
Paris so as to avoid the bitter
relations with the authorities
and the court cases.
 Should Uber be allowed to
operate freely in cities using its
present business model? Why?
blaze suggested that much still needs to
be done. Investigations were launched,
but the victims’ families were doubtful
that anyone would be held
accountable.
The jobs Kentex provided were the type
of low-skilled factory employment that
developing economies rely on. They
were poorly paid, but in a country of
high unemployment, jobs such as these
are valuable, and have been
encouraged by the government.
President Benigno Aquino, who was
elected in 2010, had promised to
transform the country, once known as
‘the sick man of Asia’, into a thriving
economy. Reducing poverty and
corruption, he felt, went together. He
promised to ‘transform the
government from one that is self-
serving to one that works for the
welfare of the nation’ (Southgate,
2015). Encouraging foreign direct

investment (FDI) was a key policy. As
the end of his six-year term
approached, the Philippines had made
impressive strides, with growth rates
over 6%. The rate of growth peaked at
7.2% in 2013. FDI increased 60% from
2013 to 2014. But most of this growth
has been in the fast-growing service
sector, especially business process
outsourcing (BPO). BPO comprises call
centres and back-office activities for
large investors such as Morgan Chase
and HSBC. This sector was expected to
bring in an estimated $25 billion in
revenues in 2016. Aiming to attract
these investors, the government sought
to raise the country’s ranking in the
influential ‘ease of doing business’
index published by the World Bank.
This has meant cutting red tape and
bureaucracy, and has also involved
offering investors incentives such as tax
holidays and freedom to employ
foreign nationals. The ranking of the
Philippines rose impressively, from 136
(out of a total of 189 countries) in 2012
to 103 in 2015 (World Bank, 2015).
However, one of the reforms was a less
strict enforcement regime for factory
safety.
Not all Filipinos are feeling the benefits
of economic success, and living
standards have hardly risen over the
last six years. In 2015, 28.8% of the
population were living beneath the
poverty line, which was an
improvement of just 0.5% on 2009. The
revenues from BPO, while impressive,
are still not as much as revenues from
remittances from migrant workers,
which are estimated at $27.4 billion.
Despite its economic growth, the
Philippines is not creating enough jobs
to sustain households and raise living
6
standards in places like Valenzuela.
Attracting manufacturing FDI would
help in this regard. But, arguably, the
government’s policies of reducing red
tape contributed to the Valenzuela fire.
Kentex Manufacturing has strongly
asserted that it had all the necessary
permits for its operations, but relevant
government offices have denied this.
The Bureau of Fire Prevention said it
had not issued a fire permit, and
indeed, had found failings in the
building. But a business certificate was
issued to the company by local
government officials, who seemed not
to know of the problems with the fire
permit, even though the fire permit
was a prerequisite for getting a
business certificate. Each set of officials
has blamed the other. Valenzuela is a
rundown area where fires are common,
usually in slum dwellings. Kentex
workers were exposed to chemical
fumes that present health risks, and
they also complained of excessive
hours and wages below the legal
minimum. The majority worked on a
piece rate, and were treated as casual
workers. They described lax fire safety
precautions. About 35 families of
victims are now suing the factory
owners and the government office that
issued the business certificate. One
survivor said, ‘There were no fire
escapes and no storage for the
chemicals, no labels on the chemicals’
(van der Zee, 2015). President Aquino
laid the blame on the local mayor who
issued the business certificate. The
mayor strongly denies responsibility.
The president had promised to curb
corruption, but the country’s politics
are dominated by family dynasties that
are associated with corrupt practices.
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President Aquino, himself a member of Business Rankings’, at

one of these dynasties, oversaw a
period of growth, but did not transform
the system in the way he had wished.
All the candidates to succeed him are
connected to dynasties; they include
three members of the family of former
dictator, Ferdinand Marcos. Investors
are likely to be wary.
Sources: Pietropaoli, I. (2015)
‘Philippines factory fire: 72 workers
need not have died’, The Guardian, 8
June, at www.theguardian.com; van
der Zee, B. (2015) ‘The inside story of
the Kentex disaster: “74 people died,
but no one is in prison”’, The Guardian,
20 July, at www.theguardian.com;
World Bank (2015) ‘Ease of Doing
www.doingbusiness.org; Southgate, L.
(2015) ‘The legacy of Philippines
president Benigno Aquino’, Global Risk
Insights, 25 August, at
www.globalriskinsights.com.
Questions for discussion
 What were the legal failings that
caused the fire in Valenzuela?
 What legal reforms would be
needed to prevent future
disasters such as this?
 What are the underlying
political and social issues in the
Philippines?
 What are the legal risks for FDI
investors in the Philippines?

Brazil’s Petrobras: the fallen star

Petroleo Brasileiro, usually referred to as Petrobras, was a star performer among
emerging economies in the 2000s. Although listed on the New York Stock Exchange,
two-thirds of the shares are controlled by the Brazilian state, and the board is
dominated by government-appointed directors. Nonetheless, private investors bought
shares and expected strong growth. Petrobras’ success derived from the global
commodity boom, which saw rising demand for energy and other resources. The
political leadership of Brazil viewed Petrobras as central to government policies. The
socialist president, Luis Inacio Lula da Silva of the Workers’ Party (PT), elected in 2002,
promised to improve living standards for Brazil’s many poor people. His two four-year
terms of office were noted for lifting millions out of poverty. Creating jobs was a
priority. Building refineries in poorer regions of the country, such as the northeast, was
envisaged as aiding development efforts. The government imposed a cap on fuel prices
for domestic consumers. New discoveries of oil off the coast of Brazil in 2007 seemed
to assure a bright future for Petrobras. When President Lula de Silva left office in 2010,
he was succeeded by Dilma Rousseff, who had been chairman of Petrobras from 2003
to 2010. Her Marxist background seemed to ensure the continuation of socialist
policies. However, Brazil’s opposition centre-right parties were concerned that
Petrobras had become too politicized and should be run more on principles of what
was best for the company.
The years following 2010 saw slowing economic growth in Brazil, as global demand for
commodities weakened and prices fell. Petrobras had overindulged in borrowing in the
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boom years, and was becoming weighed down with debt, estimated to be a staggering
$137 billion by 2013. Among global oil companies, Petrobras had a reputation for
being inefficient. While the expertise of foreign oil companies was needed for
exploiting the offshore oilfields, the government had effectively frozen them out,
restricting them to financial investment only. Petrobras was not producing the
amounts of oil anticipated, and its debt burden became worrying. With its history of
close political ties, the company was also mired in a corruption scandal involving
allegations of bribes and inflated contracts, by which money due to Petrobras had
been channelled into the private accounts of political and business leaders, many of
them associated with construction companies. Money was said also to have flowed
into the campaign funds of the Workers’ Party. The scandal went back to Lula da Silva’s
presidency.
The money siphoned off by the corrupt deals, much of it flowing to offshore bank
accounts, was estimated to have been as much as $10 billion. When the scandal broke,
investigations were launched and prosecutors expressed determination to spare no
one involved, however rich or politically powerful. There have been over 100 people
arrested or charged, and 30 convictions. Some leading industrialists have been among
those arrested. In some cases, those accused have become informants in order to be
given lighter sentences. The police have called the investigation Erga Omnes, meaning
‘towards everyone’ in Latin, to indicate that all are equal under the law (Leahy, 2015).
Corruption is a familiar phenomenon in Brazil. Indeed, President Lula da Silva became
president on the heels of a corruption scandal that had brought down the previous
government.
Ms Rousseff claimed to know nothing of the corrupt payments, but, as the accusations
swirled around leading politicians, she was inevitably in the firing line. Ms Rousseff
only narrowly won a second term as president in 2014, signalling that the corruption
scandal was undermining the Workers’ Party. The disquiet was compounded by the
fact that by 2015 the economy had slumped close to negative growth. For Petrobras,
the situation had become perilous. There was fear that an inability to service its debt
could lead to a default. And its debt was relegated to ‘junk’ status by global rating
agencies.
Petrobras has had to sell assets and reduce costs. The main trade union of oil workers
organized strikes from the beginning of November 2015, angered by the fallout from
the corruption scandal. They complained that complicit executives have been enriching
themselves personally for years, and now workers were being laid off, although they
had committed no wrong. The laying off of workers has extended to construction
workers on sites in poor regions where refineries were being built. On one site,
construction workers’ salaries were stopped, and the company ceased to make social
security contributions, with the result that workers were unable to claim
unemployment benefits.
Valued at $228 billion in 2011, Petrobras had fallen to $30 billion in 2015. Minority
shareholders were angry, having seen their shares lose most of their value. Many are
pension funds in US states. Some investors have launched lawsuits against Petrobras,
alleging that it misled investors over the depth of the corruption scandal. Those who
 9

suffered, including the workers who lost livelihoods and the minority shareholders,
had no say in company decisions. Ms Rousseff faced impeachment proceedings in
2016, but many of the political leaders seeking to impeach her were themselves
accused of corruption. Reforms were urgently needed, focusing on transparency,
accountability and corporate governance, but these seemed unlikely to materialize in a
context of endemic corruption.

Sources: Davies, W. (2015) ‘The real losers in the Petrobras scandal’, BBC News, 23
April, at www.bbc.com; Pearson, S. (2015) ‘At breaking point’, Financial Times, 21
March, at www.ft.com; Watts, J. (2015) ‘Brazil elite profit from $3bn Petrobras scandal
as laid-off workers pay the price’, The Guardian, 20 March, at www.theguardian.com;
Leahy, J. (2015) ‘Top industrialists arrested in Petrobras probe as police vow no one is
immune’, Financial Times, 20 June, at www.ft.com.

Questions for discussion

 What are the weaknesses in the way Petrobras was controlled by the
government?
 What are the deficiencies in the legal environment in Brazil?
 How should corporate governance be reformed in Brazil?
 To what extent has the corruption scandal damaged Brazil as a location for
investment and doing business?
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