Will Diageo's next legal skipper alter course?

IT IS all change at Diageo. The drinks giant has spent the last year-and-a-half consolidating following the merger of Guinness and Grand Metropolitan (Grand Met) in 1997. It has sold a number of surplus US brands, its top directors are leaving, and the legal department is feeling the wind of change.

As reported last week in The Lawyer, Diageo's no-nonsense general counsel, Ken Mildwaters, is to leave the company in June. His departure coincides with a fundamental restructuring of the legal department.

For about six months after the merger, staff in the 65-strong merged legal department in London and the US were not told whether they would keep their jobs. In all, about 4,000 jobs were lost in the merger, including many high level positions, but in the end the legal department escaped relatively unscathed.

Now it looks as though the reprieve was temporary. Mildwaters' successor, Roger

Myddleton, would only say: "Diageo is conducting a review of the legal function."

The legal department roughly mirrors Diageo's corporate structure. It is split between the London headquarters, United Distillers & Vintners and Guinness Brewing subsidiaries - also both in the capital - and US subsidiaries Burger King in Miami and Pillsbury in Minneapolis. It is this structure that the review will initially address, although The Lawyer understands job cuts have not been ruled out.

Mildwaters, former general counsel at Guinness, has said he is leaving to spend more time lecturing at Harvard Business School. He was in the US and unavailable for comment at the time of going to press.

He was recruited by Guinness to prepare the company for consolidation in the drinks market. He spent three years doing this, and was far more heavily involved in the merger than a head of legal would normally be.

A source suggests this stems partly from criticism of Guinness during the 1990 trial of former chief executive Ernest Saunders, and others, when it was discovered the company's general counsel had been kept completely in the dark.

After the merger, Mildwaters confessed to a sense of "let-down", and this may be the reason for his departure.

Although his title was general counsel, Mildwaters had little to do with the day-to-day running of Diageo's legal department. This was handled by Dave Scott, former general counsel at Diageo shareholder LVMH (a French luxury goods company).

Mildwaters was instead responsible for a number of international "special projects". A source says: "Ken may have had these projects, but he had been involved in about the biggest project you could get, and I think he might have got bored."

Mildwaters' successor, Myddleton, is Diageo's company secretary and former general counsel with Grand Met. One legal source says both men are "very focused, effective lawyers", who are part of the new breed of dynamic in-house counsel.

But their styles are very different. Mildwaters is Australian, and described as "a character" with an individual approach to business. By contrast, Myddleton is "very English" and "more conservative" than Mildwaters.

But perhaps the most significant difference lies in the two men's approach to external panel firms. Mildwaters used many firms at Guinness and seemed to value the individual relationships he had with medium-sized players more than the capability and reputations of magic circle firms.

Myddleton's more orthodox approach makes him "very much a Slaughter and May man". He used Slaughters and Herbert Smith at Grand Met, and is said to favour large, blue-chip law firms.

The difference is illustrated by the firms that acted for each side during the merger, with Grand Met using Slaughters while Guinness employed Theodore Goddard and Norton Rose.

Diageo's main panel is listed (in public sources) as Theodore Goddard, Norton Rose, Dibb Lupton Alsop, Dewey Ballantine and Linklaters - although Linklaters does very little work for the company.

What is unusual for a company the size of Diageo - which ranks 11th on the FTSE100 - is that Theodore Goddard and Norton Rose get the most work.

A source confirms that Theodore Goddard has Mildwaters - who left the firm to join Guinness in 1994 - to thank for this. They add that Mildwaters is "very loyal and supportive of the people who work for him".

Mildwaters even made Theodore Goddard the official "lead firm" in the merger - to which Norton Rose took exception. "I don't think that's the way Norton Rose would see it," the firm's managing partner David Lewis remarked at the time.

Theodore Goddard's high-profile role in the merger - and the involvement of Norton Rose - raised eyebrows in the City, as does its continuing roles on Diageo's panel.

A prominent partner at a big City firm says: "We were extremely surprised that Theodore Goddard was involved in the merger."

Another top City lawyer comments: "I would expect a blue-chip company like this to have one of the blue-chip firms as its first relationship lawyer.

"It would also, no doubt, have a second firm for conflict situations.

"It would also have specialist lawyers for specialist issues. That's the way big corporates tend to handle their legal affairs."

Myddleton's known preference for blue-chip outfits means Diageo's idiosyncratic choice of law firms looks set to change.

A source who knows both men says: "I would expect some contraction on the panel because I don't think the likes of Myddleton and his senior line lawyers favour a multiplicity of law firms on the kind of divide and rule basis that Ken favoured."

So which of the big firms will benefit from the changeover?

Freshfields might have been expected to gain because senior partner Anthony Salz is a close acquaintance of Diageo chief executive Tony Greener.

But Freshfields would face a conflict of interest because it acts for Guinness shareholder LVMH, as well as Canadian drinks giant Seagram. Therefore, the two firms most likely to benefit from the upheaval are Slaughters and Herbert Smith.

Besides acting for Grand Met during the merger and being Myddleton's favoured firm, Slaughters still does work for certain operational divisions of Diageo, most recently advising on the disposal of Dewers.

Herbert Smith, meanwhile, acted for both Guinness and Grand Met before the merger, so it was ruled out. However, the firm still does work for Diageo, the most recent being the disposal of the troubled Inntrepreneur chain.

A Herbert Smith source says the firm hopes that "old relationships die hard" and it will feature more prominently in Diageo's plans when suitable work is available.

Not surprisingly, the change at Diageo is a sensitive subject with the firms on

Diageo's panel, especially Theodore Goddard and Norton Rose. A Theodore Goddard partner would only say: "I'm not in a position to discuss Diageo with you."

Norton Rose senior partner David Lewis was just as unforthcoming, saying: "I'm not going to make any comment", before hanging up.

So why all the sensitivity?

A senior Clifford Chance partner remarks: "An organisation the size of Diageo is a major client. It could be that it accounts for a large-ish proportion of those firms' work."

Diageo's new general counsel is not expected to slash and burn, but his preference for blue-chip firms means business could be up for grabs.

The winners and losers are expected to emerge in the coming months and, while some will be toasting the change, others may well suffer from brewer's droop.