Samples European Lawyer Magazine

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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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Middle East in focus Update: the European Company Issue 77

April 2008

Energy sector heat

The third way Alliances accelerate in confidence

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Emerging markets cushioning the crunch Executive pay Issue 76

March 2008

Sovereign wealth funds

Going separate ways When partnerships can’t work it out

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What’s in the cards for Europe’s law firms?

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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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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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ECJ parries on privacy-copyright clash The music industry and internet service providers alike are out of tune with ECJ guidance on a recent Spanish copyright case, leaving member states to manage the tricky balancing act between their conflicting rights. ISABEL DAVIES and STUART HELMER report 16

he European Court of Justice (ECJ) has missed an opportunity to clarify the position regarding clashes between the fundamental rights of privacy and confidentiality, and attempts to crack down on copyright infringement on the internet.

In a case that – owing to its far-reaching repercussions – was closely watched by copyright holders and internet service providers (ISPs), the court recently handed down a decision in Productores de Música de España (‘Promusicae’) v Telefónica de España SAU (‘Telefonica’) (C-275/06), which dealt with the obligations of ISPs

T

and other telecommunications providers when asked to divulge the personal data of third-party copyright infringers in the context of civil proceedings.

The decision followed a reference made by the Spanish Commercial Court in relation to proceedings between Promusicae, a notfor-profit organisation comprising music and audiovisual producers and publishers, and telecommunications provider Telefonica.

In November 2005, Promusicae had asked the commercial court to order Telefonica’s disclosure of the personal details of certain individuals whom

Telefonica provided with various internet services.

Promusicae alleged that those entities were engaged in copyright infringing filesharing, specifically using the KaZaa file exchange programme. Promusicae possessed the internet protocol addresses of the alleged copyright offenders, together with the exact dates and times of the infringements, but it needed the identities and physical addresses to be able to pursue civil proceedings against the individuals.

In December 2005, the Spanish court granted Promusicae’s request.

Telefonica responded with an appeal on the grounds that forced disclosure of personal data was only permitted in the context of a criminal investigation or for the purpose of public security or national defence – not in the context of prospective or actual civil proceedings.

The commercial court stayed the proceedings and made a reference to the ECJ to clarify the discretion, if any, member states had according to community law in relation to ordering the disclosure by ‘operators of electronic communications networks and services, providers of access to telecommunications networks and providers of

imprisonment following conviction. In addition, directors, managers, secretaries or other similar officers (or a person who was purporting to act in any such capacity) will still be subject to the current law of secondary liability (covering consent/connivance/ neglect) under the Health and Safety at Work Act 1974 in relation to the organisation’s conduct. In fact, the new legislation positively anticipates simultaneous or sequential prosecutions for corporate manslaughter and a breach of health and safety legislation arising out of the same set of circumstances.

Some commentators have asserted that the new act will result in few

prosecutions. However, in terms of risk management and potential legal costs, the question is not how many prosecutions there will be but how many investigations, and how should an organisation best react.

Whenever the police investigate a work-related death, they will now do so with a view to prosecuting the organisation for corporate manslaughter, as well as individuals and the organisation for breaches of health and safety legislation. The scope of future investigations has been significantly broadened by this legislation and more individuals will be involved whether as suspects or witnesses.

General principles

>corporate manslaughter imposed and the terms of any remedial order made.

(Although the power to impose a publicity order is not yet in force; it is expected in the autumn of 2008). An organisation that fails to comply with a remedial/publicity order will commit a further offence and be liable to a separate and further unlimited fine.

Devastating consequences If an organisation is convicted, the consequences could be devastating. The sentencing advisory panel currently advocates a fine of between 2.5 and ten per cent of average annual turnover during the three years prior

to sentencing. For the largest organisations, a fine could easily run into hundreds of millions of pounds. In addition, the associated bad press following compliance with a publicity order, which the sentencing advisory panel currently advocates ought to be imposed on every offender, would only worsen the position.

Although the act specifically does not apply to individuals and abolishes the common law offence of gross negligence manslaughter so far as it applies to organisations to which the act applies, the offence of gross negligence manslaughter will still apply to individuals, who often receive a sentence of

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internet

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

17

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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Shedding light on the shadowy world of referrals 18

Europe’s foremost independent law firms talk to RICHARD TROMANS about their varying levels of reliance on revenue generated via other firms, formulating successful referral strategies and adapting them to changes in market conditions hen a lawyer says the word ‘client’, in most cases people think of a company, a bank or a rich individual.

However, for all law firms, whether national players or small boutiques, some of the best clients they will ever have will be other law firms. Equally, although law firms rely on the talents of their own partners and associates to give quality advice, it’s the other law firms they often send a client to that could cost them their reputation.

While a global law firm may receive no more than five per cent of its revenue from referrals from other practices around the world, independent firms in small markets like Switzerland can receive as much as 70 per cent of their work from outside.

Others, in bigger markets such as Italy, France or Germany, can still see large chunks of their revenue coming via the grace and favour of foreign lawyers.

In most markets, to have a client that represents as much as five per cent of your income is seen as a potentially risky position. So, for some independent firms, not just their business model but the very life of the firm is dependent on referrals.

Clearly, law firms that can increase referral work will boost revenue, yet very few have a truly structured way of doing this.

How a law firm handles its external referrals can be just as crucial.

Sophisticated clients always want the best advice and will not easily forgive a law firm – global or independent – that refers work to a lawyer who does a poor quality job.

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the European Lawyer February 2008

Even firms with 30 offices around the world have to worry about where they send their work. And for the independents, while they may have a network of close friends to refer to, what if they upset that friendship because they receive more than they send? Undoubtedly referrals are a strategic minefield that needs to be carefully thought out and managed.

Inbound work The value of referrals can often be downplayed in the legal market. This is because lawyers like to talk about their ‘real’ clients, especially marquee names like Goldman Sachs, or E.ON. Few practitioners in independent firms like to brag about the fact they get a large part of their pay packet via Clifford Chance or Linklaters. Earning a living by taking work handed to you by foreign lawyers may not seem as glamorous as winning it in a beauty parade, but for many European firms it constitutes a large portion of their income.

The nation most dependent on referrals from outside its borders is Switzerland. For example, Froriep Renggli partner Peter Merz comments: “If you look at work referred into our firm it is between 60 and 70 per cent of our total.” He points out that the firm’s representative branches in Madrid and London play an important role in ensuring that referrals from other practices are hoovered up and sent back to the Swiss offices to handle. Mr Merz explains the main referrers are UK, German, Italian, Spanish and American law firms. Without these Froriep would obviously be a lot poorer. In fact, one could argue that if there were ever a significant drop in these referrals the firm could no longer function.

One way such a dramatic scenario could enfold would be if those referral firms, especially the UK-based multinationals, decided to set up in Zurich and Geneva.

But Mr Merz is confident: “We do not expect the globals to enter the Swiss market in the near future.” One reason being that law firms say they are happy with the way the Swiss handle work referred to them.

A partner at another Swiss firm adds: “The reason that the globals set up their own offices in Italy was not because it would benefit their revenue that much, but because they were worried about how client work was dealt with by the top Italian firms.” That is to say, the leading Italian independents may be great firms but they did not want to conform to Anglo-Saxon protocols and bureaucracy. The famously calmer and consensual Swiss on the other hand are more than happy to do work as foreign firms would like it. The fact that the Swiss market is small also helps deter new entrants.

Another leading Swiss firm, Bär & Karrer, likewise greatly values inbound referrals. Managing partner Eric Stupp says they account for around 50 per cent of his firm’s work, although some instructions also come from investment banks that recommend their clients to them.

Mr Stupp explains that the non-referred work is a combination of long-term clients that have got to know them well already – such as the major banks – and Swiss clients that come to them because they are visible in the local market. However, with 50 per cent of work still coming from firms like Linklaters or a major US player, Mr Stupp needs to keep focused: “If our referrals started to drop we would have to increase our marketing efforts, and if they continued to fall further we would have to think about forming an exclusive relationship with one of the global firms.” He adds that another emergency alternative would be to do what Hengeler Mueller did in Germany whereby it stuck adamantly to independence and weathered the merger storm that ensued in the late 1990s.

Right now this scenario of referral collapse in Switzerland is very unlikely, but it is something that has happened in Germany, France and other European markets where international firms came in and started keeping all their referrals to themselves. From this we see that the global model is not just about offering clients the mythical ‘seamless service’ but also keeping as much work as possible inhouse. It may never have been a deliberate strategy to put the rival local players out of

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law firm referrals

business, but one can envisage how a sudden famine of referrals could quickly undermine some independent firms’ business models.

Different strokes But between these extremes there are a range of other models. One such is demonstrated by Italian firm Studio Legale Sutti and could be called the ‘middle tier attraction model’. Name partner Stefano Sutti stresses the practice is purposely designed to attract work from other law firms and says that about 40 per cent of its total comes from referrals. “For us referrals are crucial. Thus, marketing and being visible in the press is important,” he explains. He adds, however, that some of the top Italian firms do not receive so many referrals, partly because the globals already have offices there to handle a lot of the quality M&A work, while big Italian clients like Fiat do not need to be told who the best banking regulatory lawyer in Italy is.

Clients that use elite firms like Bonelli Erede Pappalardo often come straight to them. If not, then they go to a Clifford Chance or Linklaters, and such firms handle everything from New York, to London, to Milan.

Hence a lot of the top instructions do not go through the referral system.

However, Studio Legale Sutti does not work so often in this part of the market. Their wider and more mid-cap set of practice areas are of real use to UK/US firms that do not have coverage in Italy and do not want to bring in a top-tier corporate and finance firm like Gianni Origoni Grippo & Partners to handle a mid-sized cross-border joint venture. “We pay a huge price to be an independent firm because we have no captive market,” says Mr Sutti. That is to say, an arguably mid-cap independent firm cannot guarantee domestic clients will keep coming to them. Mid-market deals are often more about pricing and the services required are easier to replicate. There are therefore a lot of mid-market players, so it is hard to corner this segment of the market.

This is unlike Italy’s legal elite who are close to the government and the big industrial groups like Fiat or Benetton and

are seen as automatic choices for Italian mega-deals. Sutti is not such a firm and so has to encourage work from abroad to boost the bottom line. One way to do this is to offer a different service from other Italian players with a more purely domestic practice. Sutti’s multiple office expansion into the Balkans has been part of this and now UK or other firms come to Sutti in order to handle work in places like Serbia or Croatia.

However, some independents that are targeting better corporate work do also manage to win a significant number of referrals. Nörr Stiefenhofer Lutz, a German practice certainly on the way up in the eyes of its rivals, says that around 30 per cent of its M&A work comes from foreign law firm referrals. This is impressive in light of the competition it is up against (see issue 73 cover story). With nearly every major US and UK firm in Germany having a corporate and finance practice, still being able to draw in considerable M&A referrals is a sign of health rather than purely of dependence – although it would be fair to say not all of these transactions are the mega-deals that the globals are chasing. Nörr partner Dr Thomas Schulz comments: “We specifically target firms that do not have offices in Germany. We can take better care of these referrals than the global firms here. We treat each job with utmost care and this is part of our foreign policy.”

Such a strategy is getting easier to promote these days, especially after firms like Freshfields Bruckhaus Deringer cleared out the top lockstep partners in Germany who did not bring in enough megadeals. This can only reinforce the feeling that some of the globals are grudgingly doing mid-cap transactions just to keep the volume up, as opposed to a firm like Nörr that is earnestly trying to capture this work and, when it can, the top-cap deals. Equally, a referral to

Nörr is likely to come from firms like Macfarlanes in the UK, who are focused on just this part of the upper mid-cap to lower top-tier instructions. So, all along the referral line the client is in the hands of lawyers used to giving such work their full attention.

But, when one looks at independent firms that are only targeting the very top of the German market, just as the best of the globals are, we see something one might not expect. Take Hengeler Mueller for example. One might think that such a famous independent firm would be drowning in referrals from foreign counterparts. But the reality is the opposite says partner Dr Markus Meier: “The estimate is difficult, but probably we get only about 10 to 20 per cent of our work through referrals.”

One reason for this low level is that when it comes to the major work that Hengeler is after, it is already there doing pitches to clients alongside its best friends such as Slaughter and May. “A significant part – perhaps 40 to 50 per cent – of our work comes through our best friends concept. We pitch together and do not sit and wait for a referral,” Dr Meier explains.

And Hengeler gets invited to all the best pitches because, like other top firms, its reputation for corporate advice is well known. In this way its referrals are really for the work that

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contributors to this issue Bugge, Arentz-Hansen

Tomasz Wardyński CBE

Dr José Miguel Júdice

José María Segovia

Columbia Law School...........................................................................page 3

PULINA WHITAKER is a UK employment law and benefits specialist in the London office of King & Spalding...............................................page 10

PETER ASHFORD is a partner and head of commercial dispute resolution at English law firm Cripps Harries Hall................................page 11

MICHAEL O’KANE is a partner and JASVINDER NAKHWAL an assistant solicitor in the fraud and regulatory department of London-

Stefan Brocker based Peters & Peters......................................................................page 12

SWITZERLAND René Bösch

ROBIN CONRAD is executive vice president at the Washington DC-

Homburger

UNITED KINGDOM David Frank

based National Chamber Litigation Center (the public policy law firm of the US Chamber of Commerce). Ms Conrad filed an amicus brief in the

Slaughter and May

AUSTRALASIA

Stoneridge case on behalf of the US Chamber.................................page 14

Fred Chilton Allens Arthur Robinson

STEPHEN PRESTON and LYNN CHARYTAN are partners at the

CANADA J William Rowley QC

Washington DC office of Wilmer Cutler Pickering Hale & Dorr..............page 15

McMillan Binch, Toronto

Stefano Sutti Studio Legale Sutti

UNITED STATES

LUXEMBOURG

Alston & Bird LLP, Atlanta, Georgia

Philippe Dupont Arendt & Medernach

Sydney M Cone III

Bernard L Greer Jr

Cleary Gottlieb Steen & Hamilton

NETHERLANDS Willem Calkoen NautaDutilh

JOHN COFFEE is the Adolf A Berle Professor of Law at New York’s

RICHARD TAYLOR is a lawyer in the commercial dispute resolution group at London-based Olswang... ................................................page 18

MICHAEL CHEROUTES is the co-ordinator of international pro bono and an attorney specialising in project finance at the Denver office of

FOUNDING CHAIRMAN Ramon Mullerat OBE (1999-2006)

Washington DC-based Hogan & Hartson.......................................page 54

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the European Lawyer April 2008