High Noon in Kowloon

Denton Goddard Richards Butler was set to become a major player in the global legal market until Denton Hall pulled out. Philip Hoult investigates the truth behind the collapse of the mammoth deal and asks where next?

A clash of personalities rather than irreconcilable differences caused the downfall of Denton Goddard Richards Butler – the planned name of the global law firm that never was.

At least that is the opinion of one of the key players, who believes a deal between Denton Hall, Richards Butler and Theodore Goddard could have been pulled off if Richards Butler's Hong Kong office had been less aggressive.

As stated in the terse press release that announced the collapse of the talks, disagreement about the merger of the Hong Kong offices of Denton Hall and Richards Butler prompted Dentons' withdrawal from the negotiating table.

One source says that, having ferried backwards and forwards to Hong Kong at least four times in the past two months, Dentons' managing partner Jonathan Tatten lost his patience with the negotiating tactics of Richards Butler's Hong Kong office.

Tatten and his team had accepted that Dentons' Hong Kong practice would bear the brunt of the inevitable, post-merger job losses.

But, The Lawyer understands, they did not enjoy being constantly reminded of that fact by Richards Butler's Hong Kong partners, who were led by managing partner Chris Howse and Robin Nicholson. Tatten also had niggling doubts as to whether Richards Butler's Hong Kong practice, with its domestic M&A and banking bias, really subscribed to his vision of a merged firm with true international ambitions.

Richards Butler's Hong Kong partners are phenomenally successful and have an aggressive “eat what you kill” reputation.

When Theodore Goddard and Richards Butler first approached Denton Hall about a possible tripartite merger in mid-summer, everyone recognised that Hong Kong would be one of the major sticking points.

Richards Butler's Hong Kong partners have their own local profit sharing arrangement, providing them with significantly higher drawings than partners throughout the rest of the firm. The most senior partners are understood to take home an astonishing £1m a year.

All three sides recognised the potential pitfalls of integrating the hugely profitable Hong Kong practice into a fully merged Denton Goddard Richards Butler, without significantly diluting the Hong Kong partners' profits.

However, The Lawyer understands that the Richards Butler partners in Hong Kong were prepared to accept a greater pooling of profits as they recognised the benefits that a stronger corporate and banking practice in London would bring them.

But they felt that their success, and the fact that they had weathered the Asian crisis better than many of their counterparts, meant they were in a position to drive a hard bargain.

“They may have been in a good position, but they didn't need to ram it down everyone's throats,” says one source.

Partners at Richards Butler's Hong Kong office deny this version of events and say that the Hong Kong issue was just an excuse to allow Dentons to pull out.

Nevertheless, their aggressive negotiating style was not well received by Dentons, faced as it was by a slump in morale among its Hong Kong staff over the uncertainty of their futures in a recession.

It is understood that Dentons feared its Hong Kong practice would fall apart, with the risk of its staff leaving in droves.

So when Tatten reported back to a partnership board meeting on Friday 16 September, the decision was taken to pull out.

Dentons was not going to sacrifice its Hong Kong office at the altar and calls were duly made to Theodore Goddard and Richards Butler.

Partners at all three firms were told at meetings late on Monday 19 October.

So where does this leave the three firms?

Theodore Goddard and Richards Butler have announced that they will press on with their merger negotiations. This in itself is no surprise, as Theodore Goddard made the first move when it approached Richards Butler over a year ago.

For Theodore Goddard's managing partner Peter Kavanagh, a merger with Richards Butler would still give him one of the things his firm prizes most – access to a sizeable network of overseas offices.

Richards Butler would also benefit from Theodore Goddard's better London corporate and banking practices – something that Richards Butler's Hong Kong office will appreciate.

However, if they do pull off a merger they will have to face up to the reality, as Cameron McKenna has done, that they will need another large merger to really compete with the top five and the best US firms.

For Dentons, the collapse of a second round of tripartite talks – the firm pulled out of discussions with Cameron McKenna in 1997 – is another blow to its aspirations to create a global law firm.

Sources at the firm have admitted that they would have been interested in a tie-up with Theodore Goddard, an option which now appears to be closed.

Despite these setbacks, the firm's chairman James Dallas last week reaffirmed its commitment to a global strategy. “You have to make a decision if you are outside the top five,” he said. In this light, it may come to regret not sacrificing its Hong Kong office.

But its board faces a number of immediate challenges. It will have to bed down its recent acquisition of the 42-lawyer Middle East practice of Fox & Gibbons. And it will also have to boost morale in Hong Kong.

But Dentons is in a better position than it was after it was forced to pull out of the Cameron McKenna talks.

With its market-leading projects/energy and media practices, it is now more focused, although it may struggle to keep those unlikely bedfellows together.

Its partners have recently agreed on a new partnership deed, which includes new profit-sharing arrangements.

The deed also allows any future merger to be pushed through with an 85 per cent majority – previously unanimity was required, which forced it to leave the Cameron McKenna discussions.

So if Dentons' board, and Tatten, have the stomach to try again, will it be third time lucky?