Legal Services Act set to reshape the market
The Legal Services Bill received Royal Assent on 30 October and became the Legal Services Act.
The creation of the bill sparked huge debate about the future of the legal sector: allowing non-legal businesses to buy or take a stake in law firms will blow the profession wide open and introduce a level of competition heretofore unknown.
“I have reservations about how much of an inroad non-legal businesses can make into the sector,” Law Society president Andrew Holroyd told The Lawyer.
“That’s slightly tempered by what happened when the estate agents market opened up and outside investors came a cropper.
“There’ll be a clear distinction between commoditisation and commercial law firms.”
Despite Holroyd’s reservations, the Automobile Association (AA) has already launched a website aimed at giving free basic advice to its customers on buying homes, leasing property and writing wills. Irwin Mitchell is assisting the AA and its rival the RAC on will-writing services as it aligns itself with high street brands seeking to break into the legal sector when the Legal Services Act takes effect.
Other firms with volume operations, such as asb law, Dickinson Dees and Russell Jones & Walker, have been busy positioning themselves for the advent of the act.
At the same time financial institutions are eyeing the sector and flooding it with letters offering investment. Around 30 per cent of the UK’s top 100 law firms told The Lawyer they should be free to attract external investment.
Speechly Bircham managing partner Michael Lingens revealed that, while most firms had been keeping an eye on developments, things had moved “a little bit further with us”.
“In a very crowded mid-market, the issue is, ‘how do you differentiate yourself?’,” said Lingens. “One route might be an IPO.”
LG’s former senior partner Bill Richards said: “We’re interested to see if raising external capital would give us the opportunity to improve our business in a way that our current model doesn’t give us.”
The market is watching and waiting to see who moves first.
Lawyers make millions on back of sick miners
One of the stories of 2007 was the extent to which lawyers were cashing in to the tune of £1bn thanks to their handling of claims for sick miners through the British Coal Compensation Scheme.
The news, first broken by The Lawyer (9 April), revealed that 30 firms shared a pot of £800m for processing claims in relation to respiratory disease and vibration white finger.
The month-long investigation undertaken by this magazine also unearthed that one law firm involved in the compensation saga was home to the UK’s richest lawyer Jim Beresford, senior partner of Beresfords Solicitors, who had taken home £16.8m in a single year.
Beresford supplanted Avalon Solicitors senior partner Andrew Nulty, who the previous year had made £13m.
The revelation that lawyers were receiving such high incomes compared with the 58,000 miners who were being paid less than £1,000, of whom almost 4,000 banked less than £100, led to a national campaign headed by Lord Lofthouse of Pontefract and media pressure on the Government to start an inquiry into what had gone so wrong.
The then Prime Minister Tony Blair bowed to demands and launched an inquiry into the miners’ compensation scandal. Since then the Solicitors Regulation Authority (SRA) has seen some law firms actually hand back fees and the Law Society pay out up to £100,000 to sick miners.
The impact of the exposé also saw the SRA come down hard, including on Law Society Council member and partner of Welsh firm Gabb and Co Glyn Maddocks.
Much progress has been made since the scandal broke more than six months ago, but it is expected that all of the issues will not be resolved for nearly 10 years, with the SRA having to investigate more than 50 claims against lawyers and law firms.
Private equity’s bumper year
Private equity has rarely been out of the media spotlight this year, with high-profile take-privates of household names and a Treasury select committee interrogation of the industry’s key players. Then there was the credit crunch.
Undoubtedly the most talked about deal of the year was Kohlberg Kravis Roberts’ (KKR) take-private of Alliance Boots, which not only saw a major high street brand come into private ownership, but also threw up pensions issues with wide-ranging implications. Slaughter and May, led by Frances Murphy, acted for Alliance Boots in the £11.1bn mega-buyout, while KKR turned to Clifford Chance.
The entire deal nearly drew to a halt when Alliance Boots’ pension fund trustees queried the funding of the scheme amid concerns over the highly leveraged nature of the transaction.
High leverage, the mark of all private equity transactions at the beginning of 2007, forced the industry to take a major brake when the credit crunch impacted at the end of summer. When global liquidity all but dried up, only the smallest private equity transactions completed.
Which perhaps was just as well, as it gave the market as a whole the chance to get its head around the Walker report, which requires greater levels of disclosure from private equity-owned companies.
Paradoxically, the credit crunch has also had its benefits for private equity, with several houses, such as Olivant and Cerberus, upping their profiles again by entering the bidding war for Northern Rock, the UK bank that quite literally hit the rocks when lack of liquidity sent its business into disarray.
While at the time of going to press a consortium led by Richard Branson’s Virgin Group was named as the preferred bidder for Northern Rock, the private equity houses remained in the auction.
Private equity activity may have stalled, but the industry must still be in good health, otherwise former Clifford Chance managing partner Peter Cornell would not have decided to join Terra Firma in October.
Rocky relationships of the year
When the credit crunch hit, Northern Rock was unprepared and had to ask the Bank of England for emergency funding as it became a target for a bevy of buyers.
The reverberations hit the legal market in no small way, as law firms jostled for positions with a few controversially winning roles with several parties.
The saga reawakened a debate about conflicts that refuses to die as clients increasingly turn to the magic circle for the most important deals.
Freshfields Bruckhaus Deringer got the ball rolling. Until 18 September, it was advising the Bank of England on Northern Rock until Northern Rock came calling for corporate advice. The bank called in Clifford Chance.
Allen & Overy, meanwhile, was advising Northern Rock on its banking arrangements and was also appointed by Virgin Group on its bid for the bank.
Marks & Spencer
Freshfields knows the conflicts rules only too well. This summer its head of corporate finance Barry O’Brien landed a fine for two breaches of the Solicitors’ Code of Conduct. Back in 2004 O’Brien 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.
Three years and a Solicitors Regulation Authority investigation later, O’Brien entered an open plea at the Solicitors Disciplinary Tribunal. He had to pay £9,000 in fines for two breaches of the Code of Conduct, plus the Law Society’s £50,000 costs. Freshfields said it would pick up the bill.
A quarter of lawyers want to quit
The Lawyer revealed that an astonishing 24 per cent of lawyers wanted a change of career in a survey by YouGov.
The result underlined the recruitment and retention crisis facing City firms. The trend was especially pronounced in the lower mid-market of £25m-50m-turnover firms, where more than 50 per cent of associates wanted out.
Seventy per cent of those who said they wanted to quit cited the possible drop in salary as the reason for doing so.
Sexual orientation in the workplace
JPMorgan continued to be a prime mover in pushing diversity to the forefront of law firms’ minds. In March it summoned its key relationship partners from its panel law firms to a meeting with a view to bringing their policies on lesbian and gay employees into line with the bank’s own policy.
In May it took it one step further by kicking off its panel review and bringing in diversity as a criteria for UK law firms for the first time.
The bank sent out requests for proposals, which asked law firms to provide information on their diversity make-up.
Gay rights advocacy group Stonewall asked to meet Clifford Chance in the wake of a discrimination claim brought by former competition partner Michael Bryceland.
The sexual orientation claim was thought to be the first against a UK law firm. It was settled in April for an undisclosed amount.
Clifford Chance responded by launching a lesbian, gay, bisexual and transgender network that Stonewall described as “a positive step”.
‘Lawyers charge too much’ shock
In-house counsel were shocked when The Lawyer revealed the full extent of escalating legal fees.
Average partner hourly rates at magic circle firms rose by 67 per cent, from £375 to £625, during the past four years, with the cost for specialist tax or regulatory advice coming in at around £700 per hour. At national firms partner rates spiralled by 89 per cent, from £185 to £350 an hour.
Magic circle goes west…
The UK’s magic circle firms all looked to New York as a major focus for expansion.
Clifford Chance relaunched its US practice following its first major strategy review in seven years. The formal recommitment to its £150m US business meant a sustained lateral drive and the relocation of rainmakers to New York. The firm was attempting to differentiate itself globally from the rest of the magic circle, but others would soon follow.
Linklaters managing partner-elect Simon Davies revealed he would kick off his term of office with an ambitious plan to make the firm a major player on Wall Street.
Linklaters sent banking head John Tucker to New York as Americas managing partner with a remit to do for the US practice what he had done for banking.
… but BLP ditches US partner
Berwin Leighton Paisner (BLP) and New York firm Kramer Levin ditched their formal alliance after five years of cooperation.
The association was set up in October 2002 and was seen by both firms as a prelude to a full merger, but it came to an end amid dissatisfaction on the part of BLP.
Kramer Levin was downgraded to the status of ‘preferred firm’, of which BLP has 100 in 50 jurisdictions around the world.
BLP monitored the level and quality of referrals for more than a year ago before deciding to withdraw from the alliance.
The plan was to create a global energy/infrastructure firm. Management and partners all seemed initially keen, but the negotiations dragged on and eventually petered out.
Smith J v Addleshaws
Mr Justice Peter Smith seemed to have had enough of the bench after it was revealed he was in negotiations with Addleshaw Goddard in a £750,000-a-year package for him and a court assistant, which would have equated to the top of the Addleshaws’ equity.
However, five months of talks broke down at the end of May after the judge pushed for a decision from the firm.
The saga came to light when Smith J was slammed by the Court of Appeal for marring his judgment with his personal feelings in a recusal application.
The case of Howell v Lees-Millais was due to be heard on 28 June, but Addleshaws, whose head of the private client group Paul Howell was one of the parties, on hearing that Smith J would be presiding over the case, requested he be recused.
The revelations sparked an inquiry by the Office of Judicial Complaints.
Freshfields Bruckhaus Deringer
The restructuring of Freshfields Bruckhaus Der- inger accounted for the departures of 100 equity partners and cost the firm around £50m, but it was Peter Bloxham’s claim that dragged the firm’s dirty washing right into the glare of the public eye.
Former head of insolvency Bloxham, who retired from Freshfields in October 2006 to take advantage of the firm’s old pension scheme, filed a £4.5m age discrimination claim with the Employment Tribunal in November. In July 2007 Bloxham had his week in court.
The Freshfields hierarchy was in court to give evidence, and between it and Bloxham an intriguing picture was painted of a firm in flux and all the politics behind it.
We heard about the high-billing stars known as the ‘superheroes’ and the group of older partners dubbed the ‘grey panthers’. Bloxham himself was painted as a lawyer lost out of time in the midst of an alien modernisation programme.
Ultimately Bloxham lost the case. He felt some vindication in the tribunal’s finding that he had been discriminated against – but it was found that the discrimination was proport- ionate and in line with the firm’s ultimate aim of reforming its pension scheme.
Freshfields breathed a sigh of relief, while Bloxham moved on to become ‘policyholder advocate’ at Prudential.
THE LAWYER AWARDS 2007
Law Firm of the Year:
Trowers & Hamlins
International Law Firm:
Kirkland & Ellis
Paul Maher, Mayer Brown
Debbie D’Aubney, HSBC