Freshfields and the London Stock Exchange: Friends & relationships
18 November 2013 | By Jonathan Ames
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Freshfields and the London Stock Exchange have had a long and close association. Here’s how they keep things alive
As the London Stock Exchange popped champagne corks to celebrate its 200th anniversary 12 years ago, it did something a little bit crazy – especially for an institution that even staff viewed as the ‘conservative old girl of the City’.
The exchange floated on its own main market, racking up a launch value of about £1.1bn – and with that IPO a romance between its legal department and one of the world’s biggest law firms blossomed. Freshfields Bruckhaus Deringer – which only months previously had evolved from a landmark Anglo-German merger – was in the cockpit for the listing in 2001.
While not at the joystick initially, corporate lawyer Andrew Hutchings, a senior associate when the firm acted on the IPO, stepped up to the plate a few years later to advise on a clutch of bid approaches, notably a failed £1.6bn takeover offer from Australia’s Macquarie Group at the end of 2005. That was followed several months later by another unwanted suitor, Nasdaq, with the US exchange waving £2.4bn in front of the Londoners.
That approach was also seen off, with Hutchings very much at the controls of the defence. His relationship with the business has in many ways mirrored that of the exchange’s global general counsel Catherine Johnson, who took the top slot in the same year the business floated. The two are now involved in about as close a thing to a professional marriage as one can get between lawyers outside of partnership.
To understand how the relationship works, it is necessary first to assess what the client wanted from its external legal advisers.
“When choosing a firm such as Freshfields,” comments Johnson bluntly, “you take the legal knowledge for granted. It’s all about what they can offer on top of that.”
The exchange’s top in-house lawyer points out that since the 2001 flotation, the business has been “diversifying and internationalising” at a rate of knots.
Six years after the IPO, the London exchange merged with a Continental counterpart, Borsa Italiana, creating what the two described as “Europe’s most diversified exchange group”.
A year later, it cut a strategic partnership with another European exchange, Oslo Børs, for the provision of trading services to its equities, fixed income and derivatives markets.
“I needed somebody who could change with us,” continues Johnson, “a firm that could deliver to our differing international needs. Regulation, antitrust, M&A – those are key areas that need covering over several jurisdictions.”
But technical ability and breadth of reach were not the only factors on Johnson’s shopping list – the human touch was also crucial.
“We needed somebody who was going to fit into the team as part of us and act commercially,” she says. “You get some lawyers that are academic but the speed with which we are trying to get things done and the way our business works means we need people who get the commercial side of things and who are able to adapt and help us get to the right solution.
“There’s the diverse nature of our overall business and the different levels of the value chain that we operate in. Also, the competitive and regulatory environment means that we also have a lot of quite complicated antitrust issues to think through. And that doesn’t just pertain to deals – it’s a daily issue.”
The firm’s perspective
The core relationship between the exchange and Freshfields dates back to the group’s IPO and subsequent battle to defend itself against those high-profile failed takeover bids.
“During those defences, as a team we gained a deep understanding of the business and the way in which the people in the business operate,” says Hutchings. “That has enabled us to deliver a service that is appropriate for different situations.”
A transactional specialist himself, Hutchings cannot help but highlight the M&A activity that has been crucial to the relationship over the past dozen years. In addition to the 2007 Borsa Italiana merger, deals include bagging Millennium Information Technologies in 2009. The exchange picked up the Sri Lanka-based software business – which specialises in trading systems – for £18m.
Two years ago the firm advised on an aborted merger with TMX Group, which runs the Toronto Stock Exchange. The deal – described in London as a takeover and in Canada as a merger – was brewing for about a year and was touted as aiming to create the world’s largest exchange for mining stocks. But negotiations foundered, with the Londoners backing out amid suggestions that the proposal could not win the required backing of two-thirds of TMX shareholders.
More recently and more successfully, at the end of 2011 the firm advised the exchange on the purchase from Pearson of the 50 per cent stake in the FTSE International that it did not already own. And the most recent deal involved buying a 60 per cent majority interest in LCH Clearnet, with an offer valuing the multinational clearing house at €813m (£680m).
But Hutchings points out that the relationship between firm and client is by no means forged exclusively on the back of M&A deals. Indeed, he co-manages operations with fellow relationship partner and competition expert Simon Priddis.
“In the team we cover several disciplines,” outlines Hutchings. “The competition and regulation sides are important to the relationship, given the sector in which the business operates.”
And while he and Priddis run the show on a day-to-day basis, Hutchings points out that a much wider team is involved in the relationship. Other key partners include regulation specialist James Smethurst, corporate specialists Mark Rawlinson and Philip Richards, litigation expert Jon Lawrence, competition specialist Alastair Chapman and employment expert Jocelyn Mitchell.
“Several of those partners have been involved in the relationship for some time,” says Hutchings. “And they all have a good understanding of this business, so when we have a new mandate they’d know the right questions to ask and be immediately on it.”
Freshfields also allocates a core group of associates.
“Continuity is important,” says Hutchings. “And it’s a testament to the quality of the work we do – complex, interesting and stimulating – that associates are keen to stay on the account.
“We have open discussions about what the right team structure is and who the right partners are. We review that regularly and talk openly about the make-up of the team – we look at that on each transaction and mandate.”
The relationship between the key partners and the exchange is almost seamless, with the two sides liaising at least weekly, and more frequently when in full deal mode.
“When we’re involved on a transaction, we’ll be speaking to the in-house team daily, and sometimes several times during the day,” reveals Hutchings.
But even when the firm and the exchange are not in deal-execution mode, it would be an odd week if the key lawyers were not in touch either with Johnson directly or with a senior member of her team at least once.
“And it would be an odd month if we didn’t have a face-to-face relationship catch-up,” adds Hutchings. “At those meetings we talk about the full range of issues – how we’re performing on jobs, the billing position and files that are ongoing. We have separate sessions to talk about strategy, so we’ve got a good understanding of what might be coming. All that helps to inform us, so we’re able to deliver the right package.”
So far, so good is the overall feeling both sides have of the relationship.
“The reason we are with Freshfields,” says Johnson, “is that the firm is able to deliver what we need in terms of excellent technical advice. And we have quite a lot of technical challenges – not least on the LCH deal. That was complicated by an unusual governance structure with multiple stakeholders – and we were dealing with a changing regulatory environment. It was changing significantly while we were in the middle of the deal.”
There are tricky moments, but as in personal relations, communication is the key to avoiding long-term problems, says Johnson.
“There’s a lot of feedback,” she says. “We’re open and frank with each other – we don’t beat about the bush. As a result, if there are issues or disagreements they get dealt with pretty quickly, and usually face-to-face. And that’s probably one of the factors that has helped give the relationship longevity.”
Hutchings agrees. “It would be naive to say there aren’t challenges from time to time in every relationship,” he says. “But the strength of this one is that it’s pretty open and we have frank discussions with an honest exchange of views. It is much better to deal with issues that way than to let them fester.”
It is not difficult to imagine where one of the biggest potential flashpoints lies. Billing arrangements are high on all in-house agendas and this is no different at the exchange.
“How often do we review billing arrangements?” muses Johnson rhetorically. “All the time.” But she is quick to point out that, as important as fee levels are, “billing isn’t the only thing that drives a relationship. You’ve got to get all the other stuff right. But of course you’ve got to get billing right as well.”
Johnson insists on discussing fees before firing the starting pistol on a project. And the position is reviewed throughout the matter and at the end.
The general counsel explains: “That’s the only way to control your spend and make sure that the external team is doing the right sort of stuff and that we’re using my team in the right way.”
On the controversial point of whether hourly billing has reached its sell-by date, both sides are diplomatic.
“There are loads of ways you can bill,” says Johnson. “People are quite innovative these days.”
The London Stock Exchange is today something of a venerable institution, but its origins some 315 years ago are modest.
Jonathan’s Coffee-House in London’s Exchange Alley is cited as its birthplace. This is where, in 1698, Huguenot broker John Castaing launched a list of stock prices called “the Course of the Exchange and other things”. This coincided with stock dealers being expelled from the Royal Exchange for rowdiness and joining Castaing at Jonathan’s, where he was writing up stock prices as well as setting exchange rates.
By the early 1760s the coffee house had become the base for as many as 150 stock brokers and jobbers buying and selling shares. A decade or so later they had outgrown Jonathan’s, erecting their own building in Sweeting’s Alley that included a ground-floor dealing room – and its own coffee house above. Originally known as ‘New Jonathan’s’, the building soon became the Stock Exchange.
By the turn of the century, the exchange launched a formal membership structure. Indeed, 1801 is seen as the birth of the modern Stock Exchange, and a year later it moved to a building in Capel Court. A decade later the first codified rulebook was published.
The exchange closed for six months at the start of World War I in 1914. but after the first shots of World War II rang out, it shut for only a week.
In 1972 it moved to a 26-storey office block with a 23,000sq ft trading floor. But, in relative terms, that structure was short-lived. Only 14 years later the market was deregulated by the Big Bang, putting paid to the single dealing room structure.
By the turn of the millennium the exchange was gearing up to float on its own market, doing so in 2001.
The London Stock Exchange Group in-house team
Catherine Johnson qualified in the corporate team at Herbert Smith in 1993. She moved to the regulation department of the Stock Exchange in 1996.
Johnson took over the head of legal slot in 2001 and is currently global general counsel, overseeing all the legal departments. She advises the board and top executives on legal issues as well as strategic initiatives.
Johnson describes the exchange’s 40-strong in-house team as “quite lean”. The UK lawyers deal with the London Stock Exchange, while a Milan-based team covers the group’s Italian businesses, including Borsa Italiana. There are also lawyers in Sri Lanka, covering the Millennium IT arm, with another team dealing with the LCH Clearnet side of the operation.
Comments Johnson on the legal department structure: “We tend to have people with specialist training, but who will have to advise on all sorts of matters as part of their roles.”
The client’s perspective
High on the list of Johnson’s requirements is that her external advisers have a good working relationship not only with her, but also with key players in the wider business.
“We don’t sit the lawyers in a corner and say ‘right, only we will instruct you and you can’t see anyone else in the business’,” she explains. “One of the key things to make the relationship work, to get quick decisions and the right solutions, is to have the lawyers able to interface with the business people with or without me being present, although usually with someone from our team. They interact with our senior management executives across the group, depending on what we’re dealing with – definitely on transactions and always when we’re looking at antitrust issues.”
Johnson’s department encourages this engagement by inviting Freshfields lawyers to meetings with the sole purpose of liaising with senior executives.
“I like to get Freshfields face-to-face with the business people,” says Johnson CHECK. “It’s a good way for Freshfields to get their heads into the business – they’re seen as part of the team.”
Secondments also play a role. While the firm’s London office – it shies away from describing it as the ‘global headquarters’ – is only a five-minute stroll from the exchange in Paternoster Square, both sides like to see the odd Freshfields associate actually working from the client’s premises.
“Secondments are good for strengthening client relationships generally,” says Hutchings, “and they are good developmentally for the individuals involved. An interesting point is – how long is appropriate? There comes a point where they go on for too long. But generally secondments are a good thing. In terms of development, they’re excellent for associates – it gives them a commercial perspective that perhaps they wouldn’t see back in the law firm.”
Sometimes they can be too successful. Johnson’s in-house team recently lured seconded associate James Kerton to join her side (“He loved it here so much that he stayed,” she quips.)
“While he was a great loss to the firm,” comments Hutchings, “it’s a great thing for us that he has joined Catherine’s team. It is in the nature of secondment arrangements that occasionally a lawyer will stay with the client and that can be a positive.”
Would the firm ever consider stepping up the secondment scheme and allocate a partner to the exchange for a set period?
“Never say never,” Hutchings replies.