CC risks banks’ wrath with due diligence liability cap

Clifford Chance

has implemented a formal policy of liability caps in all of its corporate due diligence deals despite strong resistance from certain banks, a move that will be watched closely by other City firms experimenting in this field.

The magic circle firm has managed to cap its liability at €40m (£27.17m) on vendor due diligence work and, more controversially, has managed to extend this policy to buy-side due diligence to €70m (£47.56m). This applies to reports relied on by both its clients and also by third parties and the banks.
Clifford Chance executive partner and general counsel Chris Perrin said: “It’s something we’ve been developing for some time. We sensed that the market was moving in that direction.”

Along with Clifford Chance, Ashurst has also introduced caps in its engagement letters with corporate plcs. Linklaters general counsel Raymond Cohen is also strongly behind caps beyond vendor due diligence. He said: “The market is moving towards having caps in many areas and we’re supportive of that. We’d seek to have caps wherever possible.”

Ashurst head of corporate Adrian Clark said: “We review it on a case-by-case basis, but certainly, if you have the right clients, we’ll try to negotiate them.”
Research by The Lawyer shows that most City practices have introduced caps on vendor due diligence as a matter of course.

Linklaters corporate partner Charlie Jacobs said: “It’s pretty standard these days to see caps on vendor due diligence of up to £25m. If we’re doing vendor due diligence, we’d try to stick it on.”

But a small number of firms, including Clifford Chance, have pushed to cap their liabilities beyond vendor due diligence as mega-deals with increasingly tight timeframes become the norm on the M&A landscape.

Allen & Overy corporate partner Andrew Ballheimer drew a comparison with firms converting to LLPs, saying: “The drivers are the same: it’s all about risk management.”

Cohen said Linklaters’ stance was in line with its conversion to an LLP.
While clients, particularly private equity houses, are generally accepting of the trend, some investment banks are vehemently opposed to the concept. It is understood that the Royal Bank of Scotland (RBS) and Credit Suisse will not accept liability caps, with RBS making it a condition of its legal adviser panel membership.

Perrin could not confirm whether all client feedback on Clifford Chance’s move had been positive, stating merely that it had been implemented successfully.

But beyond the banks clients have been coming round to the idea, because caps are a prominent part of their dealings with other types of adviser.
Clark said: “Corporate clients are more open to the concept of caps because they’ve been getting them for years from their accountants.”

Although lawyers are not obliged to use it, the figure of £25m on vendor due diligence has become market practice. The figure is derived from a 1998 memorandum of understanding between the British Venture Capital Association (BVCA) and the then big five accountants, which capped liability depending on deal size. £25m was the agreed cap on deals worth more than £55m.

One Freshfields Bruckhaus Deringer corporate partner said: “The logic is, if clients were okay with accountants capping at £25m on vendor due diligence, they should be okay with lawyers doing it.”

Vendor due diligence is a less controversial area to cap, because essentially lawyers are facilitating a transaction for potential buyers who are not their clients. But the fact that environmental advisers, accountants and commercial due diligence providers all implement caps on the buy-side is leading lawyers to conclude that they can be more aggressive in pursuing caps beyond vendor due diligence.

Furthermore, given that the BVCA guidelines apply to vendor due diligence only, firms have no single way of concluding caps on the buy-side.

Clifford Chance uses its €70m, while Travers Smith has capped beyond £25m recently on the buy-side. Meanwhile, at Ashurst, Clark said he would cap in engagement letters based on a multiple of legal fees.

Clifford Chance is not the first firm to have a formal policy beyond vendor due diligence: that accolade goes to Eversheds. Head of corporate at Eversheds Rob Pitcher told The Lawyer that the firm has had a cap on vendor due diligence and on the buy-side for more than six years.

But other top firms, including Freshfields and Slaughter and May, are more cautious in including caps beyond vendor due diligence. Freshfields head of corporate Tim Jones said: “If others did it then obviously we’d follow, but we’re not looking to lead the market in this area.”