As Herbert Smith Freehills gears up for a vote on its combined remuneration structure senior reporter Lucy Burton looks at the numbers behind the merger
Legal market anoraks are eager to hear what Herbert Smith Freehills’ (HSF) aligned remuneration structure will be. While the firm is unsurprisingly keeping mum, the vote is imminent and the differences of opinion vast. Freehills has a modified lockstep based on performance, legacy Herbert Smith a more conservative pure lockstep. As internal meetings push on, here are the numbers.
Let’s start with legacy Freehills. At the top of equity, partners have 120 points, meaning that in 2011/12 they received an annual salary of up to AUS$1.8m (£1.02m) before bonuses. Bonuses are handed to 20 per cent of partners, who receive a top up of 40 extra points, meaning work-hungry top guns took home AUS$2m (£1.13m) and new partners took home around AUS$400,000 (£226,000).
The figures, compiled by Australia’s Financial Review, show that pre-merger legacy Freehills was the top firm in Australia by revenue, leaping ahead of its rivals with a 10.8 per cent increase in turnover to $565m. Having been comfortably sitting at the top, sources say partners at legacy Freehills are reluctant to wed with legacy Herbert Smith’s more rigid eight-year lockstep, concerned a compromise between the two systems will lead to pay cuts for its top performers.
But a large chunk of these issues were discussed during HSF’s original £800m merger agreement. This included a cash call of £20m to all equity partners at legacy Herbert Smith, an effort to boost its capital structure as part of the firm’s planned financial integration with Freehills (13 May 2013). The combined firm also overhauled its financial team with the introduction of two new roles, global chief financial officer and financial director for UK, EMEA and Asia.
Neither decision was made on a whim, but proposals for a new remuneration structure are likely to swing back and forth until the modified system suits both firm. Compared to legacy Freehills, legacy Herbert Smith’s eight-year lockstep ladder runs from 43 to 100, meaning that those at the top of equity – thought to be around 65 partners – took home £931,000 in 2011/12. That is a hefty whack, though those at the bottom are surely itching for a more performance-based system.
Such an opinion might also ring true for litigation partners at legacy Herbert Smith. The London disputes team had a stellar year in 2011/12, contributing £141.7m to the City office’s turnover of £312.3m, with headline cases including Martyn Hopper (now at Linklaters) advising UBS following its $2.3bn (£1.5bn) loss from unauthorised trades carried out by rogue trader Kweku Adoboli. In comparison, corporate generated £104m, finance £31.3m and property £35.4m. Meanwhile PEP for the year fell to £840,000, compared to the £1.04m dished out to equity partners in 2008. Litigation partners were no doubt miffed not to see a payoff commensurate with their contribution.
The new remuneration model will aim to please, given that a string of post-merger exits from legacy Herbert Smith’s London office have significantly slowed in recent months. Still on track to be a hybrid of the two models, melting the two systems cleary hasn’t been an easy ride. Now’s the time to place your bets on its chances of success.
Legacy Herbert Smiths UK/global revenue
UK 200 2012: UK – £316.4m Global: £480.0m
UK 200 2011: UK – £304.9m Global: £465.1m
UK 200 2010: UK – £311.2m Global: £450m
Five bumper global deals since merger
HSF’s Hong Kong, Brisbane and London offices advised China National Offshore Oil Corporation (CNOOC) on its acquisition of BG Group’s interest in the Queensland Curtis LNG project for $1.93bn. King & Wood Mallesons advised other side.
London office led for Indian pharmaceutical company Strides Arcolab on the disposal of Agila Specialties to US generic pharmaceutical company Mylan. Listed on NASDAQ for $1.85bn. Skadden Arps Slate Meagher & Flom advised Mylan.
Hong Kong and London offices together advised China National Petroleum Corporation (CNPC), the largest energy company in China, on its acquisition of a 28.57 per cent stake in Eni East Africa Company for $4.2bn. Linklaters represented the seller.
HSF’s Sydney and Melbourne offices represented the financiers on the project financing for the $34bn Ichthys LNG project – the biggest project financing ever arranged in the international financial market. Allen & Overy acted as international counsel to sponsers, Latham & Watkins advised financiers and Allens acted as Australian counsel to sponsers.
Sydney, Brisbane and Singapore offices advised Virgin Australia Holdings Limited on its $797.2m enhanced equipment note offering.