Freshfields seeks way out of partnership pitfalls

THE TUESDAY INTERVIEW: Law firm's new head grapples with a problem long familiar to accountants. John Eisenhammer reports

Anthony Salz pauses prudently before speaking, visibly weighing his response. The experience of many years amidst the cut and thrust of financial takeovers is one thing.

Assuming the mantle of senior partner at Freshfields, becoming the public persona of arguably the City's pre-eminent law firm, is something altogether different.

As the one chosen to take Freshfields into the next millennium, Mr Salz is being looked to as the architect of change in a financial services industry already undergoing radical transformation. For City lawyers, he concedes, it means facing up to the biggest change of all, breaking with the century-old partnership culture.

"We obviously feel, for the global business we are aspiring to be, personal liability in the traditional way for partners is something of an anachronism and ought to be changed in time," he says. "Conducting business around the world incurs a different scale and sort of risk.

"To have a partnership trying to do that globally seems to me not what the unlimited personal liability was originally envisaged to do. It is fast becoming outdated and inappropriate given the scale of the business."

Mr Salz is less persuaded by the other line of argument against the partnership - that it is not an effective method of running a modern, complex business. "I am not so fussed about partnerships in terms of management issues; you just have to change the culture to adapt to new conditions. It is the risk factor for individuals that is paramount."

Freshfields has appointed one of its top partners to conduct informal soundings, developing ideas of how the business might achieve a reasonable level of liability in the increasingly risky environment of international financial deals. So far, Mr Salz admits, there are no obvious answers. "I don't have the solution as to what would be the acceptable way of changing this. There are a variety of ways, doing it contractually with each client, registering in another jurisdiction, or pushing for statutory change."

For inspiration, the big law firms like Freshfields are keeping a close eye on their accounting colleagues in those other City bastions of the partnership tradition. Alarmed at the escalation in litigation, leading accountancy firms have been rushing to find ways of limiting exposure to the "nuclear' claim. KPMG led the way last year by incorporating its auditing arm, which faces the greatest risk of litigation.

Shortly afterwards, Price Waterhouse and Ernst & Young announced they were looking at re-registering in Jersey under new laws on limited liability partnerships.

The lawyers are some way behind the accountants on rethinking the partnership structure, mainly because they are still less international and are not yet facing the same dramatic lawsuits. But the spectre of the wipe-out claim is beginning increasingly to disturb the sleep of the legal senior partners. Clifford Chance, another leading City law firm, is being heavily sued over its involvement in the Canary Wharf development, incidentally with Freshfields acting for one of the bank claimants.

Mr Salz, who took over from John Grieves on 1 May as senior partner at the 253-year-old law firm, ranks high in the elite group of heavyweight corporate finance lawyers in the City.

Over the past 15 years he has been involved in many of the big corporate deals, including most recently the Glaxo Wellcome and Lloyds TSB bids. Such prominence has not been without its pitfalls, however, and many in the City still remember Mr Salz for his controversial involvement in the Guinness scandal, where he was the company's main legal adviser in its takeover bid for Distillers.

Living in Hampshire with his wife and three children, he persists in being a fanatical Southampton supporter, and is one of Freshfield's large group of ambitiously close-to-scratch golfers. Word has it he toyed with turning professional at one point.

It is to the future, and notably the United States, where Mr Salz spent a year with a big Wall Street legal firm in the Seventies, that the new senior partner is focusing his attention on how to develop the business. It is hardly surprising, given that the lawyers work hand in hand with the investment banks on mergers and acquisitions, joint ventures and securities offerings, that a firm such as Freshfields should be feeling the same competitive heat as the City merchant banking big battalions.

As business has become international, so those chasing it have been forced to develop global reach. That in itself is a challenge for Freshfields as it opens offices abroad, trying to establish local credibility overlaid by international expertise, mainly coming from London. Ten years ago the business had four offices, now there are 14 world-wide, containing 163 partners and nearly 650 lawyers.

Increasingly, however, Freshfields is running up against the ambitions of the big US law firms, often brought in on deals by the Wall Street investment banking behemoths which dominate international financial dealings. In Europe and Asia, markets in which the top British firms feel they have a traditional lead, Freshfields is increasingly feeling the lack of an American extension to its expertise.

The size of the US capital market means that there in effect cannot be an international equity offering without placing part of it in the States, governed by its complicated securities legislation. That gives the US investment banks and their home-grown law firms a built-in advantage - something City merchant banks have been grappling with for some time. Now it is the lawyers' turn.

Freshfields has been slow on this front. Clifford Chance and Allen & Overy, City law rivals, have busily built up chunky New York teams. That in itself leaves Freshfields with little option, and Mr Salz is anxious to make up lost ground.

But the oft-mooted transatlantic big-league legal merger or takeover is, according to Mr Salz, one of the big questions for later this century or the early part of the next. "For the time being, at least, my answer is only to do the US build-up organically. There are problems to managing something straddling the Atlantic, and maintaining the dynamic we have today to motivate people would be quite a challenge."

Unlike the merchant banks, City law firms do not suffer from a huge size handicap when it comes to competing with their US rivals. Largely thanks to the enormity of their home market, Wall Street's investment banking giants such as Merrill Lynch or Goldman Sachs dwarf anything the City has managed to produce.

But on the legal side of the financial markets, the British firms have been quicker to expand internationally. "I worked in New York in the late Seventies and Freshfields then was quite a lot smaller than the Wall Street majors.

"Now we are bigger than most, that is true of all the big City firms, which have grown faster over the last 15 years than the Americans."

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