It’s official: the term ‘Chinese wall’ is now politically incorrect. Instead, we’re all now supposed to say “information barriers” when referring to the invisable divider that allows our City’s finest to act for more than one party on a deal.
Who this term offends is not quite clear. Could it be the Chinese population? Might it be the world’s bricklayers? Or is this sudden rush of right-onism a ruse to dress up an increasingly abused term and a steadily overmilked practice?
The past few weeks have seen enough Chinese walls running through City law firms to make Bob the Builder blush.
A quick recap has seen Clifford Chance acting for Permira, the management of Homebase, and the banks lending money to retail giant GUS, the buyer of Homebase, which in turn was being represented by Linklaters, which also acted for the original owner and stakeholder J Sainsbury when it sold its share in the group. Phew.
But the most recent example of Chinese walling was again at Linklaters. This time it was engaged in acting for long-term clients Vodafone and BT on the latter’s sale of its 26 per cent stake in French telecoms group Cegetel to Vodafone, which held 15 per cent.
Okay, so in these hard times the more clients the merrier. But all this construction work is at odds with the ultra-cautious attitude pervading other City institutions.
Post-Enron (yes it’s becoming a cliché, but it’s still casting ripples) investment banks are attempting to batten down the hatches on any leaks that could become geysers as far as Chinese walls go.
Any hint of a conflict, especially while New York State Attorney General Eliot Spitzer is on the prowl, would be enough to send any bank into spasms of panic. In relation to its legal advisers, Goldman Sachs recently put its foot down on one law firm which was acting in potentially conflicting areas, especially in the leveraged buyout market.
But while two other high-profile investment banks interviewed for this column are fine with the use of Chinese walls on private auctions and deals such as Homebase, public M&A makes them nervous.
Clients are more comfortable using information barriers for private transactions. Certainly, their seemingly increased current use could be down to factors such as an upturn in European buyouts.
Since the recession of the early 1990s, when investment banks elbowed their way into the private market following the falloff in public M&A, the idea of auctioning has become the norm.
For example, for 20 private equity houses and/or private buyers interested in a company, it soon became clear that it was time-consuming, and ultimately impossible, to instruct the equivalent number of law firms to trawl through the often turgid initial stages of a bid. And because of the Russian roulette element of private auctions, fee-wise it makes sense for firms to act for a number of different clients.
But what about public M&A? It’s questionable whether the same arguments apply. Any post-Enron concerns are often brushed out through firms’ insistence on the strength of their Chinese walls.
For example, on being approached by two clients on the same deal, law firms will run a conflict check. If a conflict does not exist some firms will ask lawyers acting on the deal to sign confidentiality agreements.
The two parties will then be separated geographically, sometimes through electronic means (that means limited access to rooms, not tagging the partners). Documents will be password protected and even administration staff will be kept separate from one another. Sometimes different servers will be used, while in some cases firms are asked by clients to use internal rooms (ie those without windows) to ensure against bugging; this has really happened.
All this, lawyers hope, should salve any Enron-related jitters. And if that is still not convincing enough, lawyers can always trot out the usual line of “it’s okay as long as the clients say it is”.
The other great argument is client loyalty. I doubt whether anyone at Linklaters would have wanted to turn down either Vodafone or BT. But isn’t that why companies have panels: to safeguard against these types of situations?
There are reasons aplenty why it’s okay to have a dual role on public work. However, whether others will see it in the same way as the firms is, quite frankly, doubtful.
Investment banks are not great fans of Chinese walls on public bids, simply because there’s no need for firms to act in a dual capacity.
Of course, the counter-balance to this is that if time is an important factor in a transaction, then a firm that knows a company back-to-front is invaluable. But a panel of firms should ensure that there is more than one firm that can competently advise a client.
If law firms think that investment banks have had a tough time of it at the hands of the national press over conflicts lately, it will only be a matter of time until lawyers face the same scrutiny.
Remember all of the scepticism levelled at legendary New York law firm Wachtell Lipton Rosen & Katz four years ago, when Ed Herlihy acted for both Banc One Corp and First Chicago NBD on their $30bn (£19.1bn) merger?
No amount of posturing or explaining about Chinese walls will alter the impression that lawyers are circumventing corporate concern by acting for who they want, and are coining it in the process.
While law firms may not face the same scrutiny about corporate governance from shareholders that companies do, they still have a responsibility to promote fairness and impartiality. And no amount of reasoning or nifty building work will save firms from stinging criticism.