Following The Lawyer’s revelations last week (23 April), Freshfields Bruckhaus Deringer will reassess its approach to managing risk by looking at introducing liability caps in the UK beyond sell-side due diligence to the buy-side.
It has already managed to introduce buy-side liability caps in Germany and the Netherlands on several occasions, as such measures are not controversial to clients there.
As exclusively reported by The Lawyer last week , Clifford Chance has successfully implemented a formal policy of capping liability on all of its corporate due diligence work, both on the sell-side and the buy-side.
But Freshfields is thinking of extending a policy beyond the corporate arena, to finance and tax as well.
Chairman of the risk committee at the firm Julian Francis explains: “You need a coordinated approach to risk.”
Other firms are following the trend, with caps on vendor due diligence a particularly common feature.
But the increasing cross-border element to M&A deals has meant that firms have to think carefully about how risk should be limited, given that both local laws and bar regulations regarding caps differ widely across the world. The problem is a particularly tricky one for firms such as Freshfields, which are increasingly global in nature.
In Europe it is common to see liability caps, particularly in terms of third-party reliance (when third-party lenders to a winning bid in an auction rely on due diligence reports that expressly assume liability up to a certain cap) but not for firms’ own clients.
But in the US the situation is almost reversed, as there is a bar regulation outlawing liability caps. Due diligence reports stateside are prepared only with firms’ clients in mind and if reports are shared with third parties it is on an information-only basis, with many reports using language that explicitly prohibits reliance by anyone other than their client.
In Freshfields’ case, Francis says: “We try to get what caps we can. Our standard terms exclude the applicability of caps if they infringe local laws or bar regulations. We’d normally try to get caps in vendor due diligence reports, and sometimes also from buy-side due diligence.” But US lawyers on those deals would not be able to take advantage of those caps if Freshfields’ separate US LLP was sued.
The firm’s current policy on caps is “to be flexible across the world and we play it by jurisdiction”, says Francis.
Even Slaughter and May, which famously operates an international best friends approach rather than opening overseas offices, is considering the issue. In London the firm applies vendor due diligence caps where possible. But the current feeling is that asking clients for caps on the buy-side would be “non-U”, according to one corporate partner.
Meanwhile, on the Continent, Slaughters’ best friends Bredin Prat and Hengeler Mueller will typically cap third parties, but not their clients. “There’s a certain asymmetry,” said a corporate partner. But lawyers from Slaughters regularly meet with Bredin and Hengeler, along with Italian best friend Bonelli Erede Pappalardo, to discuss approaches to M&A and due diligence.
The current practice for Slaughters is that, if it is fronting a deal with its best friends, the latter will follow the more conservative UK approach and not include caps.
Similarly at Ashurst, head of corporate Adrian Clark explains that the London way of doing things normally prevails on cross-border deals. “Even if we’re doing a deal with two or three jurisdictions, there’ll be one governing law under which we prepare the due diligence report,” he says.
The terms and conditions of a due diligence report will tend to be written under English law if possible and will not be subject to local law. Ashurst private equity partner Charlie Geffen says: “Increasingly on multijurisdictional deals, the due diligence report will be written under English law.”
Inevitably, English law is increasingly used in European deals, even those that do not have an English element. One reason for this is that the source of the financing tends to be the US or the UK, with banks comfortable with due diligence reports written under English law.
“There’s also the feeling that caps will actually be enforced under English law,” concludes one corporate partner.