Whose side are you on?
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12 October 2007
There is one issue that has been obsessing the media and lawyers alike what happens to beleaguered mortgage lender Northern Rock.
Northern Rock was the first UK bank to have a run on it in more than a century. It had to ask the Bank of England (BoE) for emergency help and is, at press time, a target for a handful of bidders, among them US private equity houses JC Flowers and Cerberus and a consortium led by Sir Richard Bransons Virgin Group.
The banks position is certainly troubling but what is particularly worrisome for lawyers is which firms are being drafted in to advise the cast of players in the saga. There are a whole host of protagonists, yet the same law firm names keep cropping up, throwing up questions about conflicts of interest.
A conflict of interest in its most basic sense is when someone in a position of trust has competing professional or personal interests. For UK lawyers, a conflict occurs when they advise a party that has interests that run to the detriment of an existing client. The Solicitors Regulation Authority (SRA) code of conduct says there is a conflict when: You owe, or your firm owes, separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict.
There are some exceptions. Solicitors can act for two parties if there is a common interest or in situations such as a private equity auction, where there are several bidders for one asset. In such cases, firms need explicit permission from both clients to act.
But even a client waiver is not enough in some cases: firms cannot advise buyers and sellers on the same deal because, as far as the SRA is concerned, a related matter is something involving the same asset or liability.
The Law Society clarified its position on confidentiality waivers last year. Since then, firms have been able to include a clause in their standard terms of business to their clients that allows them to advise one client despite possessing confidential information about a rival, as long as sufficient information barriers are in place.
If a lawyer is proven to have acted on a case despite a conflict of interest, they could be fined or even struck off.
And yet, when it comes to the Northern Rock deal, it seems de rigueur to have at least two roles, with Allen & Overy (A&O) and Freshfields Bruckhaus Deringer both advising two parties.
Freshfields has been Northern Rocks go-to adviser for more than a decade, so it is hardly surprising that when Northern Rock first alerted the BoE that it was in trouble, general counsel Jasan Fitzpatrick called Freshfields.
However, Freshfields has an even longer relationship with the BoE. It is Freshfields oldest client and Freshfields even traces its 250-year history back to when the BoE first instructed it.
But despite Northern Rocks problems starting in mid-August, documents seen by Lawyer2B.com show that Freshfields was advising the BoE until at least 17 September. The document in question is the record filed in Companies House of the emergency facility.
Freshfields claims that at that point there was no conflict of interest because Northern Rock had drafted in magic circle rival A&O to advise on banking matters. So on the emergency facility, Freshfields was on one side of the table for BoE, and A&O was on the other for Northern Rock.
But the question remains: why advise the BoE on the Northern Rock matter at all if it had become obvious well before that the firm had already been instructed by Northern Rock? So far, it is not a question that Freshfields has answered.
Meanwhile, in addition to its role for Northern Rock, A&O is advising the consortium led by Virgin Group, which is mooting a bid for the bank. Virgins group general counsel Josh Bayliss told Lawyer2B.com that he was happy that this did not present a conflict of interest as it was a separate transaction. For its part, A&O defended its dual roles on Northern Rock, maintaining that they pose no conflict of interest. These are two separate transactions, therefore there is no conflict, said a firm spokesperson. Both Virgin and Northern Rock were fully aware of the situation and they were happy to give us their informed consent in order for us to act.
It is important to realise the context in which the firms are operating: yes, these are all top-drawer firms that you would expect to see on such a high-level banking deal, but there are important historical lessons that should have been learned.
Freshfields knows the conflicts rules only too well. This summer, its head of corporate finance Barry OBrien landed a fine for two breaches of the Solicitors Code of Conduct. Back in 2004, OBrien accepted an instruction from billionaire entrepreneur Sir Philip Green, who wanted to bid for Marks & Spencer (M&S). But M&S was already a corporate client of the firm. Freshfields had not been M&S's go-to firm for some years, but it still had one particular matter open, the contract between the high street chain and the designer of its Per Una line George Davies.
Green had staked 500m on Per Una, a source close to the deal told The Lawyer. Merrill Lynch, Greens financial adviser, had also flagged up Daviess contract as an important battlefield if the bid went hostile. It should be noted that Merrill Lynch and Goldman Sachs, also part of the consortium, were the real drivers behind Freshfields being approached in the first place.
Slaughter and May, which advised M&S on the ultimately unsuccessful takeover, applied to the High Court for an injunction restraining Freshfields from acting. It was granted.
Three years and an SRA investigation later, OBrien entered an open plea at the Solicitors Disciplinary Tribunal this summer. He had to pay 9,000 in fines for two breaches of the code of conduct, plus the Law Societys 50,000 costs. Freshfields said that it would pick up the bill.
A&O does not have a clean copybook either. It sparked a conflicts row in 2003 when it took on two positions in the bid for supermarket chain Safeway. A&O advised ABN Amro, financier to bidder WM Morrison, at the same time it was advising Dresdner Kleinwort Wasserstein, financial adviser to rival bidder Wal-Mart. A&O was subsequently investigated by the Law Society but did not result in any fines.
Both Freshfields and A&O have overhauled their conflicts-checking systems since then. Both have dedicated teams whose job it is to check a new instruction with matters and clients already on the firms global books.
Freshfields was cautious enough to bring in bluechip conflicts expert Charles Hollander QC of Brick Court Chambers to advise on its position in the Northern Rock deal.
There is no evidence that the Law Society believes that either A&O or Freshfields has a conflict of interest in the Northern Rock deal. Arguably, that means that the firms new conflict checking systems are working.
If you speak to any corporate partner not just at A&O or Freshfields the standard response to conflicts is that it is a nice problem to have. If both clients are happy that a firm is advising on a deal then surely thats the best of both worlds: you keep your old client, gain a new one and act on a lucrative deal twice over.
One partner at a City firm said that the Northern Rock saga really shines a light on the diverging philosophies of firms: should their priority be their clients or getting the transactions through the door?
Perhaps thats the real conflict here.
A LIST OF THE ADVISERS SO FAR
Northern Rock: Banking Allen & Overy; Corporate Freshfields Bruckhaus Deringer and Ogier
Bank of England: Until 18th September Freshfields; after 24th September Clifford Chance
The Treasury: Slaughter and May
Northern Rocks creditors: Bingham McCutchen
JC Flowers: Herbert Smith
Virgin Group: Allen & Overy
Lloyds TSB: Linklaters
Olivant: Sullivan & Cromwell