Rover saga reaches the City as Herbert Smith wades in

Phoenix and directors cower behind top ten firm as proceedings commence. By Husnara Begum

Weil Gotshal & Manges‘ role advising Premier Foods on its £172m acquisition of Marlow Foods from Montagu Private Equity is a good example of how to hold on to a client while it evolves. Premier, which owns Ambrosia, Lloyd Grossman, Typhoo and Branston, was until recently a portfolio company of Weil private equity client Hicks Muse Tate & Furst. But last year Hicks Muse, advised by Weil London head Mike Francies, floated Premier on the London Stock Exchange. Hicks Muse then split its US and UK operations, leaving Weil with the US side.

Nevertheless, the firm retained its grip on Premier, which it now counts as a standalone client. Corporate partner Ian Hamilton (pictured), who led the team on the Marlow deals, said: “It’s an ideal scenario, but we had to work hard to maintain a relationship with Premier after its float because we were suddenly independent to its new shareholders.”

Montagu was advised by Eversheds Manchester partner Daniel Hall. Lovells appears to have made some ground in the battle for Barclays Bank after the firm advised the bank on the purchase of the wealth business of ING Securities Bank (France) from ING Group. Lovells has been having a frustrating time of late after being repeatedly passed over by Barclays in favour of Clifford Chance. Clifford Chance has made no secret of its ambitions to capture Barclays as a key client, a fact which has been made even more likely by the fact that a former partner at the magic circle firm Mark Harding is now the bank’s general counsel.

But, as first reported on (10 June), the battle could only just be heating up after Barclays announced that Freshfields Bruckhaus Deringer has now also entered the mix following its addition to Barclays’ general advisory panel two weeks ago. Freshfields has been searching for a major banking client ever since Royal Bank of Scotland chief Fred Goodwin effectively sacked the firm and brought in Linklaters a couple of years ago. However, Freshfields’ appointment to Barclays’ panel could be just the opportunity it has been looking for.

As the drama surrounding the spectacular collapse of MG Rover continues to unfold, Herbert Smith has stepped into the fray.

The City firm has landed the high-profile mandate to advise new client Phoenix Venture Holdings (PVH) and the so-called ‘Phoenix Four’, the controlling directors of the stricken Birmingham-based car manufacturer.

Herbert Smith, which declined to comment on its role, will be delighted to secure such a plum mandate on one of the biggest failures in UK corporate history. However, over the coming weeks and months the firm will have its work cut out in defending its client as it continues to face attacks on all fronts.

Following the collapse of Rover in April this year, attention turned immediately to PVH, the directors’ acquisition vehicle led by John Towers, which bought the group from German car-maker BMW in 2000 for £10.

Towers and his fellow directors Peter Beale, John Edwards and Nick Stephenson were criticised severely in the press for their conduct in rewarding themselves with lavish pay and perks even as the volume car-maker plunged deeper into the red. Since buying Rover they have received around £40m in salaries, interest payments and contributions to their pension funds.

The Phoenix Four are also Rover’s biggest creditors because of a controversial inter-company loan between PVH and Rover. According to reports, the directors took an interest-free loan of more than £430m from BMW and then decided to charge interest on it to the car-making division.

One Birmingham-based source argues: “The conduct of the Phoenix Four will be closely scrutinised because, on the face of it, the group was structured so a lot of the money has gone to the benefit of the directors.”

Some commentators argue that the structuring is not in keeping with the spirit of what is understood to be essentially a gift from Rover’s former parent company. The move may also be in breach of the directors’ fiduciary duty to Rover.

“If that money were designed for the benefit of Rover, the interest charged to the company may be gratuitous,” says one insolvency partner.

“But on the other hand, there may have been perfectly good reasons for the arrangement – it may have even be a condition imposed by BMW,” adds the partner.

The Phoenix Four were given a cautious clean bill of health by Rover’s administrators after the latest creditors meeting on 10 June. PricewaterhouseCoopers (PwC) partners Ian Powell, Tony Lomas and Rob Hunt, who are being advised by Eversheds and Linklaters, say it now appears unlikely that the group continued to trade after it had run out of money. They also say they saw no evidence of any suspicious payments from Rover to any of the directors.

Following PwC’s findings, the Phoenix Four will no doubt be breathing a sigh of relief, but they still have a very long journey to travel before they can put the saga behind them. Indeed, sources are playing down the administrator’s findings, arguing that the administrator’s principal concern is to stabilise Rover’s business and to recover as much money as possible for the group’s creditors and not to determine whether Rover was trading while insolvent.

So, the directors still face the prospect of tough questions from the Department of Trade and Industry (DTI), which announced its own inquiry into the Rover affair at the end of May, to be led by Guy Newey QC of Maitland Chambers. One source says: “The DTI has kicked off its own inquiry ahead of the publication of the administrator’s report, either because of political pressure or because it’s found something incriminating.”

Although the remit of the DTI inquiry remains unclear, it is likely that it will focus on the conduct of the Phoenix Four and whether Rover continued to trade while insolvent.

The DTI investigation follows the conclusion of an inquiry launched in April by the Financial Reporting Review Panel (FRRP), chaired by former Simmons & Simmons partner Bill Knight, which examined the accounts of Rover and its associated companies to determine whether to seek a revision of the documents. After concluding its inquiry last month, the FRRP said its unpublished report raises “a number of questions relating to the affairs of MG Rover and its associated company” that may be relevant for the DTI to consider.

If the DTI concludes that the Phoenix Four’s conduct was inappropriate, then the past couple of months of media criticism will seem like a walk in the park compared with the sanctions the DTI has at its disposal. The department has the power to begin criminal proceedings and to seek to have the directors disqualified. Furthermore, if there is any sniff of the directors acting fraudulently, the matter may be passed on to the Serious Fraud Office.

If the DTI inquiry was not enough of a headache for the Phoenix Four, they are also being hounded by Rover’s pension trustees. The trustees, who are being advised by Birmingham giant Wragge & Co, have launched a legal challenge against PVH to strip the holding company of assets worth up to £20m.

It is understood that last month the trustees, who are acting on behalf of 6,500 former Rover employees, forced PVH to pay an initial sum of £1.7m towards the estimated £400m pension black hole facing the car-maker.

Currently, none of Rover’s three separate pension schemes qualify to enter into the Government’s new Pension Protection Fund (PPF), because not all of the companies in the Rover group are insolvent. Once the schemes enter the PPF, those employees who have already retired will be guaranteed to receive their full pension.

The fallout from the collapse of the UK’s last volume car business looks set to continue well into the summer and beyond. And with the DTI investigation expected to last a minimum of between six and 12 months, the Phoenix Four can count on a lot more sleepless nights in the future.