Terry Neville: John Lewis Partnership

The John Lewis Partnership’s legal department is going to have its hands full in the upcoming months as the retailer embarks on its largest single acquisition to date. Last month John Lewis’s supermarket arm Waitrose stole a march on its larger rivals by snapping up 19 of the 52 stores put up for sale by Sir Ken Morrison in the wake of his £3bn takeover of Safeway.

Wm Morrison Supermarkets, which is being advised by longstanding legal adviser Gordons, agreed to sell off 52 stores to satisfy the competition concerns raised by the Office of Fair Trading (OFT). The acquisition, comprising 18 Safeway stores and one Morrisons store for an undisclosed amount, will add more than half a million square feet of selling space to Waitrose’s existing 144 branches.

John Lewis director of legal services Terence Neville, who will be heavily involved in the negotiations, says: “It’s obviously very satisfying to be able to achieve this, especially because the acquisition will take Waitrose into the north of England for the first time.”

Waitrose’s most northerly store currently is in Newark, near Nottingham. The Morrisons deal, which is subject to approval by the OFT, will give it additional outlets in Harrogate in North Yorkshire and Otley in West Yorkshire.

Lovells property partner Michael Stancombe, who is also the client relationship partner for John Lewis, is leading the team advising the retailer on the Morrisons acquisition, assisted by senior corporate associate Kalpesh Tanna. But Lovells’ appointment is no great surprise. The City firm has enjoyed a rock-solid relationship with John Lewis since 1988, when Neville brought in the firm to replace Clifford Chance.

Over that period Lovells has acted for John Lewis on most of the property work that it has outsourced, such as the £104m acquisition of 11 Somerfields stores in 2000.

“Our experience of dealing with [Lovells] on issues of this kind is such that we would typically go to them directly. I’ve found them to be extremely proficient and, as one might expect, they bring good commercial acumen to the transaction, which is very important for deals of this kind,” says Neville.

Lovells also advised John Lewis last May when the retailer linked up with HFC Bank, a member of the HSBC Group, to jointly manage the John Lewis, Peter Jones and Waitrose store card businesses. And re-cently the firm worked alongside Neville when he negotiated a major distribution agreement with Hayes.

Neville says that he also farms out major pieces of litigation to Lovells. Last summer the firm steered John Lewis through what he describes as “a trial of strength against the [Inland] Revenue”. The case, which dates back to the mid-1990s, concerns an arrangement between John Lewis and Netherlands-based Rabobank. In 1995 the property holding company for John Lewis assigned its entitlement, for a period in excess of five years, to the rent generated from five of its freehold properties to the bank in return for a £25.5m lump sum.

The Inland Revenue concluded that this payment was taxable as income. John Lewis, however, was advised by Lovells and pre-eminent tax barrister David Goldberg QC that it should be taxed as capital.
Fortunately for John Lewis, last July the House of Lords turned down the Inland Revenue’s application for appeal against the Court of Appeal’s decision against it in December 2002.

Although Lovells gets the lion’s share of John Lewis’s legal work, Neville says he does have relationships with other firms, including Dechert and West End firm Freeman Box.

John Lewis’s in-house legal department comprises six lawyers and a deputy company secretary (who, incidentally, is also a qualified solicitor), which handles commercial and some real estate work.

The relatively small team also handles virtually all of John Lewis’s employment work, including drafting and negotiating compromise agreements and representing the retailer at industrial tribunals.

“A big chunk of our in-house legal work is employment-related, because John Lewis as an employee-owned company is a business that’s very employee-conscious,” explains Neville.

Indeed, John Lewis is unique because it is the only large business that is entirely employee-owned. All the equity of the business is held on behalf of the retailer’s employees by an English-incorporated trust company called John Lewis Partnership Trust Limited (JLPTL), which in turn owns shares in John Lewis Partnership plc, the principal holding company. The principal subsidiary of the latter company is John Lewis, the parent company of Waitrose.

In strict legal terms, John Lewis is not actually owned by its employees, explains Neville. “Their stake in the business comes from what our founder called the sharing of power, gain and knowledge,” he says.

Neville says John Lewis’s employees share power because they play a major part in decision-making. Meanwhile, they make a gain because all the retailer’s profits are distributed as a percentage of salary (note that the same percentage applies to all employees).

In addition to the department stores and supermarkets, John Lewis operates John Lewis Direct, the internet business that was relaunched in October 2001. But the company’s expansion into internet businesses does not end there: it also owns around 40 per cent of Ocado, the fledgling online food business.

Neville argues that the rising popularity of the internet is likely to have major implications for the retailing sector. “In my personal view, if you take the development of the web to its logical conclusion, it’s quite reasonable to assume that when the current generation of schoolchildren turn into adults, shopping on the web will become second nature,” he explains.

Neville also predicts that he will spend more time handling corporate governance issues in the future. “Despite our unusual corporate structure, we’re still a plc – we’re listed but not quoted. In many ways that’s a very comfortable position to be in, because, for example, we can develop our business without constantly having regard to the City,” he says.

But there are also disadvantages – “for example, we can’t raise capital through the stock market”, he adds.

John Lewis’s unusual corporate structure also makes it difficult to apply all the principles of the Combined Code on Corporate Governance, particularly Derek Higgs’s revisions to the group. For example, it would be difficult for the group to have all of its elected directors on the remuneration committee.

However, so far so good, because as the Higgs Report currently stands, only some of the revisions are relevant to John Lewis. But if the Financial Services Authority follows the International Accounting Standards Board’s lead and does away with the distinction between quoted and unquoted companies, then the fact that John Lewis is not quoted will make no difference.

“If that were to happen John Lewis would obviously have to rethink its structure,” explains Neville. “But not in such a way as to interfere in any way with the original trust settlements.”

Historically, John Lewis has not been an acquisitive group, but all that appears to have changed as it is clearly taking advantage of the buoyant supermarket sector. Nevertheless, Neville remains cautious about the future. “Retailing as we know it is going through very challenging times,” he says. “New and different channels of retailing have appeared over the last few years, which weren’t foreseen 20 or 30 years ago. So it’s hard to believe that there won’t be some further advances in the method of retailing in years to come.”

John Lewis milestones 1864-2004
1864: Founding of partnership
The partnership dates back to 1864, when John Lewis set up a draper’s shop in Oxford Street. This was later developed into a full-scale department store.

1905: Acquisition of Peter Jones
John Lewis acquires the Peter Jones department store in Sloane Square, where his son Spedan Lewis began an experiment in sharing power with his staff.

1929 and 1950: Creation of two settlements in trust
Spedan Lewis created two settlements in trust, which provided for the distribution of profits among partners, established a written constitution for the business and transferred all his rights of ownership to trustees.

1937: Acquisition of Waitrose
At the time, Waitrose comprised 10 small full-service food shops. Self-service was first introduced in 1951 and the first supermarket was opened in Streatham in 1955.

2000: Acquisition of stake in Ocado
Waitrose takes a stake in Ocado, the online food business that started to supply customers in 2002.

2001: Acquisition of Buy.com
In 2001 John Lewis bought the UK operations of Buy.com, which later became the technology store within the expanded johnlewis.com e-shopping site.

2002: Acquisition of Somerfield stores
Waitrose acquired 11 Somerfield stores, ranging from stores in Cornwall to Norfolk.

2004: Acquisition of Morrisons stores
Waitrose announced the acquisition of 18 Safeway stores and one Morrisons store. The third and final phase of the refurbishment of Peter Jones was also completed.

Terry Neville
Director of legal services
John Lewis Partnership

Organisation John Lewis Partnership
Sector Retail
Employees 59,000
Pre-tax profits £174m for year ending 31 January 2004
Legal capability Six
Director of legal services Terry Neville
Reporting to Stuart Hampson, chairman
Main law firms Dechert, Freeman Box and Lovells