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Results of a vote on reclassification would supersede any court rulings

Uber Technologies Inc. and Lyft Inc. must comply with an order that requires them to reclassify their drivers as employees, a California appeals court said Thursday, siding with a lower-court ruling from August that threatened to upend the companies’ business models.

Uber and Lyft would need to comply with the reclassification within 30 days of a formal ruling, which could take several weeks.

The companies, along with DoorDash Inc., Postmates Inc. and Instacart Inc. have raised more than $189 million for a ballot initiative on Nov. 3, asking that voters exempt them from such a reclassification. That result would supersede any court rulings.

Proposition 22, as the ballot is called, is the most expensive proposition in California’s history.

Thursday’s opinion signals that California’s judiciary is siding with the state in a high-stakes battle involving the nation’s biggest ride-share and food-delivery companies. The state implemented a new law on Jan. 1 aimed at getting the companies to reclassify their drivers as employees, eligible for benefits such as paid sick days and health insurance. Those benefits would weigh the companies’ bottom line at a time when they are already struggling to turn a profit.

The companies have argued that their workers are correctly classified as independent contractors under the law even as they have raised record money asking that voters exempt them from it.

The law itself, known as AB5, doesn’t restrict flexible work. But each company has aggressively campaigned on that point, saying the reclassification would force drivers to work pre-scheduled shifts. In recent weeks, for example, Uber has sent in-app notifications to drivers saying it would only be able to hire 3 out of 10 as employees. It has separately told riders their prices would rise between 20% and 100%.

“These are not made up estimates,” Uber Chief Executive Dara Khosrowshahi said at a Wall Street Journal conference on Tuesday.

In a 70-page opinion, the appellate court said some of the arguments “sound very much like defendants are saying that they are ‘too big to be enjoined.’”

“Defendants’ detailed showing of their hundreds of thousands of drivers statewide, the size and scale of their respective operations, and the ripple effects on various third parties that they insist will flow from the trial court’s injunction” ended up arguing against them, the appeals court said Thursday, “by confirming the extent of the harm being inflicted by virtue of their undisputed failure to provide the benefits of employment to many thousands of ride-share drivers across the state.”

“Today’s ruling means that if the voters don’t say Yes on Proposition 22, rideshare drivers will be prevented from continuing to work as independent contractors, putting hundreds of thousands of Californians out of work and likely shutting down ridesharing throughout much of the state,” an Uber spokesman said. A Lyft spokeswoman said: “This ruling makes it more urgent than ever for voters to stand with drivers and vote yes on Prop. 22.”

If Proposition 22 succeeds, the companies say they will guarantee new protections to workers such as giving drivers 30 cents a mile driven to account for gas and other vehicle costs, health-care subsidies for drivers who work 15 hours or more a week and occupational-accident insurance coverage while on the job. But critics say those protections fall short compared with the benefits awarded to employees.

Uber and Lyft said they are considering appealing Thursday’s decision to California’s Supreme Court.

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Documents increase puzzle over asset manager’s illiquid bond deals

H2O Asset Management has reported hundreds of millions of euros in new illiquid bond trades with a small wealth management firm that denies any involvement in the transactions.

Belgium’s Merit Capital has insisted it did not engage in any of the trades, which H2O recorded in September in the weeks after regulators forced it to suspend its flagship funds.

The disputed transactions are fuelling a clash between the two firms that has drawn scrutiny from regulators in three countries, threatening to cause further difficulty for a former star of European asset management.

A document seen by the FT shows that H2O, a subsidiary of French bank Natixis with €22bn under management, recorded more than €370m of new “buy and sell back” bond trades last month with Merit Capital listed as broker. Some of these transactions are dated after the FT reported Merit Capital’s chairman had denied trading these bonds with H2O.

Other documents show that H2O received trade confirmations — which validate that a transaction has happened — for these trades from a different broker, Shard Capital, a London-based business with close ties to controversial businessman Lars Windhorst.

H2O’s substantial investments in illiquid bonds linked to Mr Windhorst’s businesses prompted French regulators to force a six-week fund suspension on the firm, an unprecedented intervention that ended last week. 

In another document, Shard confirmed that it acted as a broker on these deals for an unnamed third party — which was not Merit Capital — and said it reported the transactions to UK regulators as “agency trades”.

Shard Capital told the FT that it “cannot comment on trades that H2O may or may not have undertaken with third parties”.

H2O declined to comment. Merit Capital did not respond to requests for comment.

The FT has reported a series of reporting anomalies relating to H2O trades over the past year.

The National Bank of Belgium is currently scrutinising H2O’s claimed transactions with Merit Capital, while another Belgian regulator has been reviewing investments by one of Merit Capital’s funds in bonds issued by Mr Windhorst’s businesses, according to several people familiar with the matter.

Three board members representing Merit Capital’s owner, Duet Group, resigned last week. “We resigned to ensure that [Merit’s] board can operate independently” said Amit Haria, Duet’s chief financial officer, who was among those who left the board.

He added that an inspection of Merit’s Capital’s records had not revealed any trades booked against H2O. 

However, H2O claims the trades are valid because of an agreement the Belgian firm apparently signed last year that allowed the transactions to take place, according to people familiar with the dispute.

Merit Capital announced last week that H2O had presented it with what it called a “framework agreement” that set out general bond trading terms.

However, Merit Capital’s chief executive Jan de Coninck said the firm disputed the validity of the document because its board had not previously seen or approved it and Merit Capital did not hold the required licence.

“We were convinced that the disclosures in H2O’s annual accounts were an error because on our side with H2O there is no agreement and there are no transactions”, Mr de Coninck said in a press release last week, adding that Merit Capital would “take legal action”.

After the FT revealed H2O’s significant exposure to bonds linked to Mr Windhorst last year, the asset manager said it had sold some of these securities. Last month it emerged this sale had never closed. H2O then entered into complex buy and sell back trades in a move that some commentators saw as an effort to make its balance sheet look less risky.

H2O’s auditor KPMG flagged that several of its funds breached counterparty risk limits because of these trades, which included transactions with Shard. H2O said in fund filings that it has taken “necessary measures since mid-October [2019] to limit the exposure” to Shard.

Following the fund suspension in August, H2O revealed that up to a third of its funds were invested in the illiquid securities linked to Mr Windhorst, which it has written down by 60 per cent.

Since the fund suspension ended last week, investors have withdrawn more than €400m from H2O’s most liquid funds.