City firms go happy capping

Our revelation that Clifford Chance has capped liability across the board on corporate due diligence will get City M&A partners scrambling to review their policies.

Up until now only Eversheds has admitted capping its liability. But as The Lawyer’s research reveals, liability caps on due diligence in M&A is seriously starting to take hold at the big City firms.

It all started on the sell-side with vendor due diligence in auctions. Because the vendor’s lawyers are facilitating a transaction for someone who is not their client, a cap on liability is relatively uncontroversial.

But caps on the sell-side have started to erode client resistance on the buy-side. Accountants have been doing this for years, which has always made corporate lawyers pretty grumpy. A Macfarlanes partner told us: “We’ve seen accountants adopt caps at every step and therefore there’s the feeling that we as an industry are playing catch-up.”

Or, as a Linklaters partner more colourfully put it, “we’re the only muppets that don’t”.

Many firms admit that they are happy to negotiate caps on an ad hoc basis, but the Ashurst approach of putting them in an engagement letter is strong meat for some (a Travers Smith partner describes that as “a bit racy for us”).

Capping liability will become the norm, but there’s no substitute for preventative measures.

“Yes, windows for doing due diligence have been shortened,” says a Freshfields partner, “but the best way to cover my arse is to sit down with the client at the very beginning and say, ‘we’ve got 10 days to go through the due diligence, and obviously we’re not going to go through everything, we’ve got to focus on what’s really important’.”

And the client reaction? Well, there’s been no meltdown at Clifford Chance or Ashurst so far. Private equity clients are always said to be the most comfortable with it. But not all are happy. One client tells us: “If lawyers want to get themselves involved in big transactions and take big fees for them, then they should stand behind the quality of their advice.”

In capping liability Ashurst, Clifford Chance and Linklaters may risk some banks’ wrath. Still, you can be sure they’ve got a great relationship with their insurers.