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Issue 78
May 2008
Facing the future What’s in the cards for Europe’s law firms? Class actions Italy, the Netherlands and Romania
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What’s in the cards for Europe’s law firms? 18
In a two-part series, RICHARD TROMANS highlights five key factors that will shape the future evolution of European law firms. This month he assesses the potential impact on legal practices of outside investment, evolving technology and the battle over conflicts
he last decade has seen bewildering growth and change for the legal profession – an evolution that is far from finished. This sector in its modern form is still barely out of the cradle, yet globalisation is pushing ever harder on the accelerator while, at the same time, increasing legal needs are driving firms to offer faster, more sophisticated and more commoditised services. To cope, every business model a law firm can imagine is being tested – from high-end transactional global firms, to international mid-cap alliances, to super boutiques, and many other configurations in between. The market is rich in legal species catering for a myriad of clients that have an ever-growing set of practice needs. With this much impetus for innovation and so many diverging strategies in play, there is plenty of room for market change. Central to this transformation will be how different law firms respond to future challenges thrown up by external financing of firms, competitors outsourcing legal work to cheaper locations and the potential to fall foul of conflicts.
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External investment UK law firms will be able to take external finance from non-lawyers, including
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private equity funds, and also float on the stock market from 2011 following the approval of the Legal Services Act 2007 (LSA). And despite aspersions cast on the concept of outside investment by highprofile European lawyers there are signs that the UK tide may be difficult for the continent to resist. The Dutch are rumoured to be looking at the issue, and Per Magnusson of Sweden’s Magnusson Law Firm says: “If it happens in the UK then eventually it will happen in Sweden too.” Although hardly publicised, Garrigues managing partner José María Alonso points out that the Spanish government is also in the process of allowing law firms to list up to 25 per cent of capital. This is via the publication of a March 2007 law known as the ‘Ley Sociedades Profesionales’, which seeks to modernise the country’s service sector and is similar to the UK legislation. It is understood that no major Spanish firm has yet listed – although it is still early days. Mr Alonso adds: “I don’t have anything against this possibility, provided the law firm that uses this financing tool makes every effort to maintain its independence and ethical standards.” In Australia, where public listing of law firms is already allowed, the listed Slater
& Gordon is proving to be a great success. The firm has grown exponentially and also has managed greatly to increase profits and share value since listing in 2007. Indeed, despite some commentators predicting that only bulk law firms would take such investments in the future, some quality entities are not dismissive of the idea. Richard Price, senior partner at London-based CMS Cameron McKenna, comments: “A great many professional services firms – Goldman Sachs, Accenture and before them the stockbrokers – have taken advantage of raising external capital when this prospect became available to them. All those businesses that have done this have seen their scope, scale and profitability increase dramatically.”
EU directive impact The availability of the listing option in the UK and Spain could force the issue. It might run counter to the EU Rights of Establishment Directive if other EU countries move to stop European-based listed law firms operating elsewhere on the continent. The directive stipulates that an EU state cannot unfairly prevent another member state’s law firm carrying out its business in their jurisdiction. If its business model is reliant on external
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Despite aspersions cast on the concept of outside investment by high-profile European lawyers there are signs the UK tide may be difficult for the continent to resist
financing then an EU state might be forced to accept the position. That could result in a roll-out of the external finance rules across Europe in an attempt to create a level playing field. There are potentially compelling financial reasons for doing this. Tony Williams, of Jomati Consultants, observes: “A key issue will be that law firms will receive long-term capital that is not debt. Partners tend to be debt averse.” Equally, the partner benefits of any sale of shares in the firm would be counted as capital gains, not standard earnings and thus be at a lower tax rate. Also, for founding or senior partners that hold a big slice of a firm’s equity, selling up to non-lawyers could prove to be a lucrative exit strategy ahead of their retirement. But not everyone is excited by this. Lawyers at some traditional European independents forecast that it will never happen – even in the UK, despite being allowed by law. Others point out that external finance may face serious regulatory problems in the US too – notwithstanding if there was permission in Europe. American lawyer Bob Sattin, president of the TAG Law referral network, comments:
“There could be implications for attorney-client privilege if communications have to be disclosed to outside directors. Lawyers must have an undivided loyalty to their clients and public ownership imposes a duty to stockholders that could/would interfere with the purity of the lawyer’s obligation to his or her client. The duty would be compromised even with minority public ownership because duties exist to minority as well as majority shareholders.” He adds that in the US, where such flotations or private equity fund buy-ins would be banned because of strict rules on multi-disciplinary practice and non-lawyer ownership, there could be other problems: “I would think that in-house counsel [in the US] would be suspect of using European firms that have public ownership for these [regulatory] reasons.” Rainer Loges, managing partner of Herbert Smith’s German affiliate, Gleiss Lutz, notes dryly: “External finance? From a German perspective I have to ask, who needs it? After all, we have never even taken out a bank loan. The growth we require we can handle by
the cash flow we have. So, equity funding is a bit of an alien concept for us.”
Enforcing regulations However Jomati’s Mr Williams says: “There are issues, such as conflicts of interest, but regulation can deal with that. Practical problems can be worked out.” He adds that the best way to handle any concerns arising from external finance is simply to ensure that regulations are strongly enforced. Others add that cultural objections would soon disappear when partners realised how much money they could make from listing shares in their businesses. Recently, one senior partner from a top-five French law firm revealed he would welcome listing his firm on the stock market. He suggested that it was not impossible that UK-style rules would come to Paris. This is impressive as France, out of all EU countries, is one of the most conservative on legal ethics. One of the key grumbles for partners at any expansionary firm is that the growth in coverage and revenue comes at the cost of a drop or freezing of partner profits. In a fluid recruitment market, such profit drops can often trigger partner departures. A listed firm may still have to pay a dividend to shareholders, but that might be less than the cost of the cash needed to expand if obtained by a bank loan or taken directly out of profits. Meanwhile, it is likely, given the
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Law firms simply don’t want to admit just how formulaic some parts of their legal work is
strength of growth of the global legal market, the value of law firm shares will rise significantly for some time. From another side of the legal sector, Marc Bartel, a recruiter for Heidrick & Struggles in France and the UK, marvels at the potential such listings could have on the personnel market. “Take a global firm with a £1 billion turnover. One might provisionally value them at five times their turnover, say £5 billion. If one did a 20 per cent initial public offering (IPO), the firm would receive £1 billion in cash. That would be cataclysmic.” Mr Bartel notes how much recruitment that would then translate to if a firm used its sudden windfall to start raiding rivals. It would be staggering and change the market for ever. But law firm IPOs of that size are unlikely in the near future. A firm with £1 billion in revenue can already finance almost anything it wants, and banks would be more than happy to lend huge sums. So there is no immediate need for the magic circle to beat a path to the FTSE. However, smaller players that only have revenue of about £50 million and can’t see any way of expanding fast other than selling to a global, might see in external finance a means to grow rapidly and keep their independence. With plenty of ready cash on hand, a mid-size firm could quickly hire in talent and effectively buy out other law firms. Private equity funds would also bring with them management skills on how to improve business, further helping the firm to grow and become more profitable. This remains one of the most divisive issues for independent law firms. Some see such change as inevitable, while others can hardly believe a serious practice would even look at it. Hengeler Mueller’s Rainer
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Krause speaks for many when he says: “The essence of business, particularly where there are outside investors, is the pursuit of profit. Let us not be mistaken, at Hengeler Mueller we too pursue profit, but our principal objective – our raison d´être and ethos – is to serve our clients.” Still, one could argue that you can serve clients and indirectly benefit nonlawyer shareholders simultaneously. Many other business sectors also say they are only there to serve the customer, from bankers to surveyors, and these sectors allow external investment. This argument will run and run, and divide strongly along law firm culture lines. However, as seen in Australia, listed firms are already here. The genie is out the bottle.
Technology and outsourcing No law firm could exist today without IT, but is the end of the modernisation
process drawing near? Hardly, say the experts. Computers will do more than manage documents or facilitate sending data from one lawyer to another. Richard Susskind, a leading consultant on computers and law, predicts the future will see ever-brainier computers, not just helping, but replacing, some junior lawyers. Mr Susskind forecasts that ‘commoditisation’ of the law will play heavily into the hands of the digital gurus. The more systematised a piece of work becomes – that is to say, a repeatable element rather than a one-off opus of legal genius – the more it can be handed over to computers. If you can programme the processes that are needed to draft a legal document then you don’t need an expensive associate to handle it. “Some [lawyers] feel that it’s insulting to talk about the commoditisation of the law, or they think this means legal work that they can’t charge properly for,” adds Mr Susskind. He stresses that clients will respond well to more work being done by computers, noting that it is law firms themselves that would prefer not to use computers to do more legal documentation. The face-value reason for this is simple: staffing up deals increases the bill. Although associates are expensive, they still return huge dividends to the partners that employ them.
EU directive impact But clients themselves are already heading down the digital road with their own legal and contractual documents. Sabine Detweiler who works in the inhouse documentation team at Sal Oppenheimer, the German private bank, reports: “In the documentation department for equity derivative products, computer technology is capable of delivering satisfying results wherever a repetitive process exists and requires the execution of similar documentation in large quantities.” However, she adds, at the moment such expenditure on IT only makes sense when a particular product is being generated repetitively. But, in the
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future, when computers are smarter, this process could also apply to more generalist work. The problem may be that law firms don’t really want to admit just how formulaic some parts of their legal work is. Even a major merger and acquisition deal will have swathes of documentation that is routinely mixed with plenty of complex and thoughtful legal work. The trick is to untangle – or, to use the techie jargon, to ‘unbundle’ – the basic functions from the sophisticated advice. To a certain extent this is being done already, but in a more piecemeal and inefficient way. Associates fit together readymade legal documents retrieved from law firm computers. Most firms’ mainframes also store all previous deals so lawyers don’t have to reinvent the wheel, and most also keep large databases of standard templates for all manner of work. Thus, as we are half-way there, why not just cut out the middle man with a smart computer and leave the junior associates out of the equation? Naturally, some lawyers are sceptical of such talk. For example, David Frank, practice partner at elite London-based firm Slaughter and May, observes: “There may be some developments in this area, but the major firms concentrate on valueadded work where automation is not really an option.” However, technology is not the only route to managing the commoditisation of legalese. Outsourcing looks set to extend beyond the level of back office paper shuffling in places such as Bangalore. The new development that some are looking at is the use of trained lawyers in cheaper locations – from Malaysia to New Zealand – handling large amounts of ‘real’ legal work for law firms in the EU or US. The point is this: if a local lawyer can be trained in English law but still live in a country with lower costs, what is to stop a US or UK law firm employing them to
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Will the conflicts issue draw a line under growth not only for the globals but also for the largest independents in smaller jurisdictions?
practise the law at half the price of associates or paralegals in London or New York?
Going to India Today many UK and US firms already use legal process outsourcing companies in India. They handle everything from ediscovery for US litigation to filling in documents for bankruptcy filing. In effect, many outsourcing companies do as much as one can without actually needing to declare their staff as functioning lawyers operating in a registered law firm. But that all looks set to change. Princeton economics professor Alan Blinder has considered the next step – large-scale off-shoring of associate workforces to cheaper locations. Just as the manufacturing industry moved its main production centres to developing countries, so too could law firms. Vital work may stay with the best-trained and valuable home jurisdiction lawyers, but other functions could be sent
electronically elsewhere. Unlike manufacturing, the end product of the legal industry is virtually free to transport as it is just data. One could ask: if using lawyers in cheaper locations is such a good idea, why haven’t the London firms set up big teams of junior associates in provincial cities such as Liverpool or Hull to handle basic tasks? Perhaps one reason is that cost savings would not be great. Rents and salaries in the north of England are lower, but not radically. Yet when you compare costs in India to those in London, then you start to see significant savings. But, regardless of the debate, things are moving to developing countries already. US firm Howrey took a big step when this February it created an Indian base to handle intellectual property documents. Managing partner Robert Ruyak comments: “We don’t see this as outsourcing, but adding to our capabilities.”
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ensuring an appropriate level of quality on outsourced work.”
The group of Indian specialists will not practise the law but look after key IP and engineering issues connected to the firm’s trade mark needs. Mr Ruyak alludes to the extremely high calibre of Indian graduates, many of whom have done advanced degrees in the US or UK. He would certainly look at using Indian lawyers, based in the subcontinent, to practise New York or other US law, if and when such a move was allowed.
Conflicts
HSBC model But perhaps the clearest sign that Mr Blinder may be right comes from global bank HSBC, which has just launched a small team of lawyers in Malaysia to handle bulk English legal work. Owing to its colonial history, Malaysia is a common law country and lawyers there can easily requalify as English solicitors. HSBC’s step may seem small, but if it succeeds and law firms decide to follow this example – and not just for bulk tasks – then the legal world will be significantly altered. London-based Field Fisher Waterhouse partner Mark Abell is a strong proponent: “It is inevitable that there will be partnerships with English-trained lawyers in cheap locations around the world. It’s global economics.” He adds that it would be ‘foolish’ to think the legal sector immune to market forces. Dag Rehme, in-house counsel at Sweden’s If P&C Insurance company, comments: “More qualified work will be outsourced and countries such as India, with a huge English-speaking population and relatively well-developed infrastructure and schools, will be able to benefit from this.’ Of course, India will have to allow foreign firms to practise law in the country first, but that is a matter of time and firms can still go to many other countries. That said, some traditional legal practices still regard outsourcing as impossible. For example, Hengeler Mueller’s Rainer Krause says that even outsourcing ‘client-related IT’ would not
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be accepted at the German leader. For this kind of firm, sending out ‘real’ legal work would be tantamount to sacrilege. Also, on a practical level, it could be difficult to find people in places like Malaysia or India with German law degrees. It takes about eight years’ study to become a German lawyer and few graduates in developing countries speak the language – so German law firms might not be able to benefit from outsourcing in the future, even if they wanted to. On the other hand, many lawyers in Central and Eastern Europe speak German and are relatively cheaper than those in Frankfurt. However, driving the point home that Hengeler will not go down that road, Mr Krause concludes: “Our legal assignments and transactional work are simply not amenable to outsourcing, adding to the equation the difficulty of
Future growth funded by external investment sounds exciting, but law firm expansion often comes with a price – the increased risk of conflicts. As in almost all areas of the law, it is the UK again that has the most controversial approach in the EU. Chinese walls and client letters of consent are deemed sufficient for a firm to work with a perceived, or possible, conflict in some transactions. The point here is not to avoid all potential conflicts – which to a certain extent with UK firms being so large is impossible – but how to make sure these conflicts don’t become such an issue that you lose your best clients. At the moment UK firms can advise multiple bidders for the same target, or if there is a common interest between the clients on the deal in question. Some of the country’s lawyers are now lobbying that this does not go far enough and sophisticated clients should in the future be able to ignore conflicts in any deals they choose. This would mean, for example, firms regularly advising both buyers and sellers on M&A deals. Some clients might accept the argument that as long as they know what is going on, they can ignore conflicts. But this does not mean the UK is going to become a free-for-all, no-conflict zone. There are still tricky grey areas that will only get worse as major European companies and institutions continue to consolidate. This was illustrated by the 2004 spat between Marks & Spencer and Freshfields Bruckhaus Deringer after the retailer, a former client, learned the law firm was advising Philip Green, the man bidding with a consortium to take over the company. By then Slaughter and May was acting for M&S, but the latter still didn’t like a former adviser helping the man who wanted to stage a buy-out.
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piece of real estate, the trend will become more relaxed.”
Freshfields had to explain itself to the regulators. But it is difficult to blame Freshfields for going after a major deal. In such a big firm, which needs so many transactions to feed its hundreds of partners, turning down work on a multi-billion-pound merger is extremely hard to do. As firms grow, there is a corresponding enlargement in remuneration expectations and the need to take all work on offer. This will trigger more potential conflicts.
Jettisoning clients
Overlooking technicalities In other parts of Europe, conflicts are well known to be a touchstone for argument. In Sweden for example (see issue 76), the local bar has just reaffirmed the need for law firms only to accept one bidder at an auction, while in Portugal some practices are experiencing conflict pressure because of the small size of the market. Will the conflicts issue draw a line under growth not only for the globals, but also for the largest independents in smaller jurisdictions? Or will clients go the other way and say to law firms they do not mind ‘technical’ conflicts that can be overlooked, or even ignore blatant conflicts as long as they agree to them? France’s Antoine Maffei, a name partner at De Pardieu Brocas Maffei, certainly doesn’t think it will get easier to avoid or manage conflicts: “People are sensitive about this subject. Some lawyers use Chinese walls like it’s a magic word, but there are lots of holes in Chinese walls.” And Mr Krause adds: “In the last few years there has been a hardening of attitudes by clients and regulators alike. The issue of conflicts has been exacerbated by the creation of global mega law firms. Our review of potential conflicts includes keeping an eye on future repercussions of accepting a particular mandate.” He and other independent firm partners point out what appears to be common sense: smaller practices have less conflict risk than global firms. This is true, but does it really do independents any good now or will it in years to come? Mr Maffei, for one, notes that when globals have client conflicts this does not
mean his own firm gets the whole job, but usually just the precise part that triggered the problem, such as advising on intercreditor issues on a project finance deal. Equally, just because independents are small does not mean they are immune to conflicts. De Pardieu is on the local panel for Société Générale – which may face possible takeover bids from a variety of other French banks. Clearly, the firm will have to make sure it stays clear of perceived conflicts if the bank does not chose it to lead on any takeover defence. Spain’s Uría Menéndez managing partner José María Segovia further complicates the situation by envisaging two developments: “Clients will be more concerned about conflicts on structural matters, such as discussing the core business and strategy of the company. However, for minor matters like selling a
If this is correct, law firms aiming for the best and most sophisticated work will need carefully to study their roster of corporate clients, and decrease them if necessary, while firms offering less transactional advice and more full-service support work could find they are in a stronger position. This trend may also accelerate the differences between toptier transactional firms and mid-cap to high-end full-service practices. Transaction-focused globals will not necessarily have to shrink in size either, just because they lop off clients that cause structural conflicts. Instead they will have to refill their roster by searching out more top-level clients in a wider array of industries and jurisdictions to prevent running into conflicts with those they decide to keep. If UK lobbyists get their way and clients can one day ignore all conflicts, the big transactional firms would really clean up. However, if partners surveyed here are a good reflection of market feeling, attitudes to structural conflicts are getting harder not softer. The last word goes to a client. Ms Detweiler at Sal Oppenheimer bank observes: “I do not believe that clients will become more relaxed about conflicts issues, as competition concerns will prevail.” However, she adds that this does not mean a move in the other direction either, rather that firms will “have to become increasingly innovative [with the help of IT] in creating Chinese walls and/or implementing technology to assure confidentiality to their clients”.
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Next month: In-house developments, client needs, future moves for the UK and US globals, and a panel of partners from leading European independent law firms discuss the challenges ahead Senior writer and Paris correspondent Richard Tromans has now left the European Lawyer. Articles in this issue of the magazine were completed before his departure.
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data storage services’ of personal data. In other words, to what lengths could or should national courts go to ensure effective protection of copyright? The ECJ was firstly concerned with the general principle enunciated in article 5(1) of directive 2002/58 (on privacy and electronic communications), which provides that member states must safeguard the confidentiality of communications transmitted via a ‘public communications network and publicly available electronic communications services’, and should prohibit the storage of such data by anyone other than the user, unless consent is obtained. Exceptions are available to this general rule in the form of article 15(1) of the same directive, which stipulates that member states may adopt legislative measures to curtail the obligation when to do so would be a ‘necessary, appropriate and proportionate measure within a democratic society to safeguard national security … defence, public security, and the prevention, investigation, detection and prosecution of criminal offences or of unauthorised use of the electronic communication system’. In relation to the exceptions listed, there is an express reference to article 13(1) of directive 95/46, which enables member states to adopt
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legislative measures to restrict the obligation where it is necessary to protect the ‘rights and freedoms of others’. The ECJ held that this included the protection of fundamental rights, such as the right to property (intellectual or otherwise) and the right to an effective remedy, and that the protection of property would necessarily include the protection of such property in civil proceedings.
Not duty bound The ECJ then dealt with the three directives that the national court in Spain had specifically mentioned, all of which, the Spanish court contended, stressed the need for member states to strive to provide adequate protection and means of redress to the holders of copyright and victims of copyright infringement respectively. The ECJ stated there was nothing explicit in the wording of any of these directives to suggest that operators of electronic communications networks were duty-bound to disclose personal data in the context of civil proceedings, and in fact article 8.3(e) confirms that efforts to ensure effective protection of copyright apply without prejudice to
statutory provisions that ‘govern the protection of confidentiality of information sources or the processing of personal data’. The ECJ then tackled the crucial question in this case and many others like it: how do you reconcile conflicting fundamental rights? An obligation to disclose personal data in the context of civil proceedings would reinforce the standing of the rights to both property and an effective remedy,
but at the expense of the right to private life. Therefore, perhaps it was inevitable that the ECJ effectively gave a non-committal decision: it is for the member states to strike a fair balance between the competing fundamental rights, always mindful of the principle of proportionality, and always consistent with community directives. In other words, the ECJ will not impose the relevant obligation on anyone – as long as member states do not contravene community law and acknowledge the /continued on page 44
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Hills and windmills Legal practices whose home is the notoriously flat expanses of the Netherlands have in recent years experienced some uncharacteristic highs and lows. ESTHER MARTIN reports on how firms are adapting to this increasingly less predictable market 40
or the Netherlands legal market, even more than most jurisdictions, 2007 was a year to remember. Here, the global M&A bonanza of the first six months played itself out in an unprecedented spate of huge transactions, including the largest bank takeover in history – the epic battle for ABN Amro. Even apart from the slew of law firms involved in some aspect of this extremely complex acquisition – in which a bid from the UK’s Barclays Bank for ABN Amro was eventually thwarted by a rival bid from a consortium comprising the Royal Bank of Scotland, Spain’s Banco Santander and Belgium’s Fortis Bank – legal practices found themselves feasting on a spread of uncharacteristically large deals for this market that included: Groupe Danone’s takeover of Royal Numico, Akzo Nobel’s acquisition of ICI, Schering Plough’s purchase of Akzo Nobel’s Organon biosciences unit and the Unibail-Rodamco merger. In addition, Euronext Amsterdam saw a series of major transactions, such as Advanced Metallurgical Group’s IPO. All of this work seemed at odds with the trend in the Dutch legal market of recent years towards firms favouring a ‘lean and mean’ strategy – that saw, for instance, NautaDutilh trim down with a well-publicised restructuring and DLA Piper cut loose its Rotterdam office. The impact is evident: a yearly report on law firms in the Netherlands by publisher KSU has tracked a discernable shift from a dip exhibited by last year’s figures towards growth in fee-earners over the past year. Elite domestic firm De Brauw Blackstone Westbroek’s numbers working in the Netherlands and sworn in by the Dutch bar (not including the notarial sector) moved from 229 in 2006, to 226 in 2007, to 247 this year; NautaDutilh’s figures swung from 277, to 254, to 274; while Loyens & Loeff echoes this pattern by recording 178 in 2006, 173 in 2007 and 189 in 2008. Allen & Overy, the frontrunning Anglo-Saxon firm in the market, had 151 Netherlandsqualified lawyers in 2006, 144 in 2007
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and 167 in 2008; meantime Clifford Chance appears to have undergone a surge in the past year with 126 in 2006, 127 in 2007 and 147 in 2008. Some other practices’ figures also reveal ongoing growth, such as: CMS Derks Star Busmann at 149 in 2006, 152 in 2007 and 161 in 2008; Stibbe with 135 in 2006, 155 in 2007 and 160 in 2008; and Boekel De Nerée at 105 in 2006, 106 in 2007 and 122 in 2008. The increases, explains Eddie Meijer, managing partner at Houthoff Buruma, are clearly linked to the market boom: “It was not so much that firms had growth strategies as they simply didn’t have enough hands to do the work. Last year set records in a number of fields.” Of course, the onset of the credit crisis in the latter part of 2007 has significantly altered the picture. Other than a €137m loss on its exposure posted by NIBC (the country’s fourth-largest bank), there has been an absence of major writedowns among Netherlands financial institutions related to the subprime meltdown – but nonetheless, as elsewhere, large deals (particularly those driven by private equity) are now scarce. In February, for instance, came news that the acquisition of NIBC by Icelandic bank Kaupthing – which has taken a serious knock from the credit crisis – was called off. Simmons & Simmons’ Gerhard Gispen, who heads the firm’s Dutch financial markets department in Amsterdam, says that on the whole the impact has been limited so far, however: “We do see the effects in our securitisation practice, where activity has slowed. Activity has also decreased in the real estate finance market.” And Mr Meijer notes: “A huge number of deals originate from London or the US and this proportion has become significantly less in the last three to four months, with somewhat fewer referrals from these centres.” Obviously, the subsidence of bigticket work is having an impact on players at the top of the market. “There may be some firms with lawyers taking guitar lessons,” is how Boekel De Nerée’s head of corporate/M&A, Ferdinand Mason, puts
it. But, as with wider trends across jurisdictions, mid-market transactions are still providing legal practices with fodder. Mr Gispen observes: “M&A deals of €500m and under remain quite active. As a whole as a firm, we are still looking at a very busy year.” Anglo-Saxon law firms, particularly magic circle players, already enjoy a substantial presence in the market. Now, with the recent sale of a number of Dutch corporates to foreign interests, there is currently speculation that domestic practices will lose some of their traditional client relationships. Mr Mason admits: “I certainly think there’ll be a shift and panels will be reviewed.” But Mr Gispen maintains there is a two-way blurring of the distinction between home-grown and foreign law firms’ client pools: “There is clearly a tendency for larger Dutch corporates to bring their work to international law firms, but foreign clients are also going more to local practices.” Another increased threat for local legal players from the magic circle firms is a byproduct of the economic slowdown. Van Doorne managing partner Onno Boerstra says there is intensified competition in the mid-market: “The Anglo-Saxon firms were doing most of the billion euro crossborder deals. Now they are fishing in our pool – although in order to do so they will have to readjust their fee structures and way of working.” A common theme expressed by lawyers is the redirection of attention towards strategic buyers, whose purchasing power has been strengthened relative to private equity funds’ recent difficulties in obtaining highly-leveraged finance. Mr Mason comments: “There’s been huge changes over the past year with respect to where law firms are focused. Practices with private equity expertise are working on transforming that knowledge into something strategic clients can use.”
Lean and mean The Dutch legal market has good reason to demonstrate resilience to current
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conditions – the country having been hit so hard by a slowdown from 2001 to 2003 that it was then one of the worst performing economies in Europe. NautaDutilh partner Willem Calkoen explains his firm’s response: “Five years ago we introduced more stringent evaluation procedures. As a result, partners started to think about whether they wanted to be a top player and some went to smaller firms. Then, during 20062007 we closed some departments, [to focus on more high-performing practice areas].” Now, the question for law firms is how the dramatically altered economic picture since this time last year will affect their more recent shift towards increasing headcount. Boekel De Nerée’s Mr Mason comments: “I think that the process we have seen in the market of offices being trimmed is over. However, firms have learnt from the first downturn to be wiser about how they recruit and to be far more focused on obtaining quality lawyers. The real force behind ‘lean and mean’ is the shortage of human capital here, as we have a very difficult recruitment market in the Netherlands.” Indeed, it is easy to see how the global ‘war for talent’ could be especially critical in a jurisdiction of 16.5 million people with a disproportionately high presence of multinational corporations. Lateral partner moves are a relatively rare feature of the market, so the recruitment and training of young lawyers is a key focus for firms. At Houthoff Buruma, Mr Meijer’s take on the subject is: “Of course it’s good to be ‘lean and mean’, but it’s so difficult to get high-quality young lawyers we have decided – whatever happens – not to stop our continuous effort to hire them. We are neither aiming at growth nor opposing it; we are steadily expanding organically.” This does not mean that firms have abandoned their tight control on lawyer numbers. De Brauw Blackstone Westbroek, which won lead advisory roles on an impressive suite of the market’s top M&A deals last year, reportedly didn’t make up a single equity
partner in 2007 and is shedding its Hague office in 2008. And Mr Meijer concedes that though the city is currently important as a base for the firm’s Supreme Court practice, “I don’t think it is entirely impossible that we will be forced to leave The Hague at some point.” A by-product, or accompanying trend, of Dutch downsizing has been a greater proliferation of niche outfits. Mr Gispen says: “The legal profession is dividing itself. Sizeable clients still need large firms, but there are also a growing number of niche practices.” These, Van Doorne’s Mr Boerstra points out, often have significantly lower charge-out rates, which intensifies competition on price. It has been well reported that Simmons & Simmons has lost a number of lawyers in recent months, but Mr Gispen explains this as simply part of the trend for firms to refine their respective focuses: “Our pension people left to become a niche. Now they’re our preferred supplier.” Meantime, Simmons & Simmons is zeroing in on four core sectors – financial markets, life sciences, energy and infrastructure, and technology, media and telecommunications – and, as Mr Gispen puts it: “If there are partners who feel that what they do best doesn’t fit, they leave.”
Dutch adaptability Having already corrected firm structures before the current slowdown, Mr Mason says Netherlands law firms don’t need to repeat the process but have learnt from experience: “I don’t see any ‘right-sizing’ going on, but firms are a little bit more nimble than in 2001 in terms of creating new products.” For instance, Mr Boerstra mentions that owing to increased investment and other activities in healthcare, this is a burgeoning practice area. Another example of diversification is Loyens & Loeff’s launch of an Islamic finance practice, headed up in Amsterdam. Loyens has also recently set up a Dubai office, while Mr Meijer says that an
opening in China is a future possibility for Houthoff Buruma – signs of another way in which, as in other jurisdictions, Dutch players are looking for new areas of growth. “We are focusing a great deal on the emerging markets of Eastern Europe, India and to a certain extent China,” Boekel De Nerée’s Mr Mason notes. “With the Dutch legal market so saturated,” he says, “the next level will be multi-jurisdictional knowledge – relationships with firms in emerging markets.” There is also a reverse flow of work from these countries, as Mr Boerstra observes: “Increasingly we find clients from Russia, India and the Far East investing in the Netherlands because of the tax structures here, or to undertake joint ventures or acquisitions of Dutch businesses.” One thing is for sure, in the mature and increasingly dynamic Netherlands market – with its inherent constraints on law firms’ size, shape and fee levels – legal practices are going to have no letup in their ongoing need for resourceful responses to competitive pressures. As Simmons & Simmons’ Mr Gispen comments: “The market is more volatile and less predictable, so the life cycle of a firm strategy has shortened – you have to regularly review the way you operate.” But as we have seen historically in this low-lying land that has harnessed the wind and the waterways to its profit, the Dutch are nothing if not adaptable.
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