Money before morals? Firms bullish on acting for controversial clients

Should firms concern themselves with the ethics of clients’ business activities? By Margaret Taylor

Law firms claim to be obsessed with increasing their diversity and reducing their carbon footprints, so the assumption is that lawyers are a pretty politically correct bunch. But how far does that political correctness stretch when it comes to client relationships?Countless deals are announced every day and it’s not unusual to see an online gambling company seeking a market listing, a tobacco giant merging with a rival or a vivisectionist buying up a new lab. In an age when ethical investing and planet saving are constantly in the spotlight, do law firms take a moral or ethical stance when it comes to clients, or are they happy just to pocket any fees that come their way?Herbert Smith famously refused to act for any online gaming companies when the industry turned to the capital markets at the beginning of the decade. The decision was perhaps vindicated by the troubles experienced by the sector last year, although Richard Fleck, global relationship partner at Herbert Smith, points out that the firm was heavily criticised for being ultra-conservative at the time.

“We took a view that internet gambling might be illegal in certain states in the US and decided not to act on any of the IPOs when the companies were first taken to market,” he says. “We were asked to work for some of the companies and after carrying out an analysis, we declined.

“Our analysis of US law was that it was improper to represent these companies. Rather than taking the view that it wouldn’t be a problem because there’s nothing the law could do for organisations outside the US, we decided not to act for anyone.”

Although Herbert Smith took a particular stance when it came to internet gambling, and the firm weighs up the business interests of all prospective clients, it was happy to act for a client operating in the highly contentious animal testing sphere. A brave call considering another City firm backed out of floating an animal testing company over fears for staff safety.

The firm in question had no reservations about acting for the company, which tested on animals for medical reasons, until the bank acting as nominated adviser decided to pull out. Although the company was considered to be carrying out good work, the bank abandoned the IPO because of the threat that animal activists posed to staff whose names were linked to the deal. After considering the danger to its staff, the law firm involved followed suit. The company later floated with a fudged business description in its prospectus. For Fleck, however, Herbert Smith had to remain strong in the face of animal activists’ hostility when it acted for Cambridge University on a vivisection-related case.

“We had a number of situations where we had threats that people would blockade our building, but we didn’t back down,” he says. “There was a rather unproblematic event and the Broadgate security people at our office dealt with it.

“Herbert Smith has a tradition of not being persuaded not to act because someone doesn’t like it, although the biggest issue would be the security of staff.”

The point in the Cambridge University case, says Fleck, is that the client was seeking to enforce a legitimate right in relation to a patent. Therefore, regardless of what the client’s activities involved, the firm was not faced with any ethical considerations when asked to act.

That said, while firms claim not to be influenced by the actions of a militant minority, threats to staff safety remain real. Another firm that was acting for an animal testing company exercised its right under LLP legislation to exclude lawyers’ home addresses from the public record held at Companies House.

The list of business activities that come in for scrutiny from the ethical police is endless, with tobacco, pornography, oil, arms and gambling all on the hit list. Although tobacco is as contentious for the potentially exploitative nature of its operations as the heath risks its products create, firms are happy to act for such companies. Particularly as defending them can result in huge levels of fee income.

Pointing out that anything that can damage the firm’s reputation must be taken into consideration when acting for a client, Osborne Clarke corporate partner Patrick Graves says the firm has acted for Imperial Tobacco for many years. Osborne Clarke took over Imperial’s in-house function in the 1980s and, while there has been a reasonable amount of corporate activity in the intervening period, the firm has earned most of its fees from defending the company.

From Graves’ point of view there is no moral question involved in acting for Imperial. The company is operating a legitimate business and, while he personally may not approve of smoking, he does respect people’s freedom to smoke. Similarly, Herbert Smith acts for British American Tobacco and has no issues with that.

Peter Bradley, corporate finance partner at Stephenson Harwood, says that while the firm may choose not to act for companies whose activities seem barely legal, such as players in the porn industry, in other cases the situation can be far more subjective.

“With something like animal testing, where there are strong views on it, I’m not sure we’d make a moral judgement, but we might make a firmwide decision,” he says. “We’d look at it on case-by-case basis and would take soundings from people around the firm. If there are strong views that we shouldn’t be acting for a company, then we’d turn it down, but it would have to be a fairly strong case for us not to do it.”

In terms of bringing companies to market, Bradley says that, so long as a company can find a broker willing to sell its stock, it should be up to investors to decide whether its activities deserve backing or not.

“It’s a market forces thing and it’s not for us to prejudge investors,” he says. “What we do is largely mechanical, so we’re not involved in tackling moral issues.”

After numerous calls The Lawyer could not find one firm that would decline a client on ethical grounds. Law firms do not make moral judgements on the business activities of their clients. Despite their newly found political correctness, so long as clients are not actually breaking any laws and continue to show them the money, firms remain happy to act.