The news last November that US-based Fulbright & Jaworski LLP would join the Norton Rose Group to create Norton Rose Fulbright (NRF) came on the heels of the announcement that Canada's Fraser Milner Casgrain LLP would combine with SNR Denton and France's Salans under the name Dentons.
Both combinations had significant US components: Fulbright is an 850-lawyer US powerhouse with 17 offices worldwide; and SNR Denton was created by the 2010 merger of Sonnenschein Nath & Rosenthal, another US-based firm that boasted over 800 lawyers, with London-based Denton Wilde Sapte.
The announcements answered two key questions about the Canadian legal market: first, Norton Rose Group's foray into Canada, which swallowed up Canadian legal icons Ogilvy Renault LLP and Macleod Dixon LLP in 2011, was never going to be a one-off; and second, the forces of globalization were starting to disassemble, if not dissolve, the hands-off tradition that (Torys LLP-Haythe Curley aside) dominated the mentality of major Canadian and US firms towards cross-border mergers in a continental legal market marked mostly by “best friends” as the favoured form of association.
“The fact that two Canadian firms have agreed to mergers that have big US components is a breach of tradition,” says Jordan Furlong of Ottawa, who is a member of Edge International, a legal consultancy. “That makes it more likely that we could see as many as five to seven global firms entering the Canadian legal market before the end of this decade.”
But what form will future associations take? Both NRF and Dentons have structured themselves as a Swiss verein, an entity that allows its member firms to join internationally under a single brand without sharing revenue or profit, thereby maintaining their independent status for liability and regulatory purposes.
“The verein was originally intended for small domestic social organizations but has become a common structure for professional-services firms seeking cross-border combinations that need to address thorny issues of local professional regulation that prohibit many one-firm combinations,” says Edwin Reeser, a California-based lawyer and consultant who was formerly the managing partner of Sonnenschein Nath & Rosenthal LLP's Los Angeles office.
“The verein structure also avoids undue complexity and cost associated with competing rules on taxation to individual partners on worldwide operations and serves to accommodate widely disparate cultural, economic and political issues at the local operational level where participation by other verein members would be an unacceptable intrusion.”
Given the endemic cynicism of the profession, however, it is perhaps not surprising that the growth strategies of NRF and Dentons came under attack. Indeed, a Legal Week poll, taken well before the partners of the three firms involved in Dentons even voted on the new combination, found that only 28 per cent of respondents regarded the move as a “good deal.”
But much of the cynicism focused on the form, rather than the substance, of the transactions, with a great deal of discussion as to whether joining a verein amounted to a merger. As critics saw it, a verein was merely a loose association of separate profit pools that would never achieve the seamless service and uniform professional excellence that attracted clients to law firms that were fully financially integrated.
“The problem with the verein is that it endorses independence over integration,” says Patrick McKenna, an international legal consultant based in Edmonton. “But certain firms, like Baker & McKenzie, have managed to overcome that, partly by having common performance standards, quality-management officers and quality audits at least once every three years.”
Still, in the minds of many, vereins are but a passing fad, a Band-Aid solution designed to avoid the legal and practical obstacles to true international mergers in favour of an illusion driven by a fear of missing the tidal wave of globalization in the profession, or worse, by a desire to shore up underperforming partnerships.
“The reality of the Swiss verein is that the strategic imperative of developing an international platform quickly before the market is gone is more important than full financial integration from day one,” says Tony Williams of Jomati Consultants LLP, a UK-based legal consultancy.
In other words, but for the availability of the facilitating verein structure, the international combinations in the Canadian market may not have happened — or at least not yet or not on the scale that they did.
“After years of anticipation, true global consolidation on a significant scale is occurring in the legal industry,” write Nick Jarrett-Kerr and Ed Wesemann in the fall 2012 issue of Edge International Review. “The driving influence appears to be the availability of a structural vehicle that assists firms in dealing with the legal and functional hurtles of international mergers. That vehicle is the Swiss Verein.”
The evidence in support is telling. Three of the top five revenue-producing legal entities on American Lawyer's Global 100 – Baker & McKenzie (first), DLA Piper (third) and Hogan Lovells (fifth) – are vereins. Four of the top 25 (including Norton Rose) are vereins. Yet another member of the top 25, CMS Legal, is structured as a European Economic Interest Group (EEIG), which also has separate profit pools and is operationally similar to a verein; although liability is not shared, the group shares a unified strategy and a central cost-sharing budget as well as matter, knowledge and conflict-management systems.
Overall, eight of the top 100 are vereins or verein-like entities, including Squire Sanders, Dentons, and King & Wood Mallesons (the March 2012 combination of Chinese firm King & Wood and Australia's Mallesons Stephen Jaques).
“The verein is a structure that has worked well for professional-services firms for decades,” says Aster Crawshaw of London, a partner in the Addleshaw Goddard's professional services team in the UK, who has a particular interest in the international structuring of professional-services firms.
But critics – with K&L Gates LLP Chairman Peter Kalis the most vocal among them – remain unconvinced. In an American Lawyer article entitled “Grand Illusion,” Kalis argued that some of the verein firms listed on the AM Law 100 were firms in name only. He was particularly harsh on DLA Piper. “When the music stopped, the verein known as DLA Piper was simply a referral arrangement between two firms,” Kalis writes.
If it was otherwise, Kalis asks, why would the Brazilian Bar association regard the country's arm of Baker & McKenzie, the oldest legal verein, as sufficiently independent to avoid recent regulatory scrutiny as an international firm that might be engaging in the unauthorized practice of law in the country?
Branding alone, Kalis argues, is an insufficient basis for regarding an association of law firms as a single firm. Otherwise, he says, networks like Lex Mundi and even best friends who put a name to their arrangement, would qualify. “Once the American Lawyer permits inclusion of vereins and other confederations that do not share a single profit pool [in the magazine's revenue and other rankings], it's difficult to discern a coherent limiting principle,” Kalis concludes in his article.
Indeed, he goes so far as to maintain that vereins “ossify differences” among law firms rather than facilitating their elimination. “What about the vexing tax, regulatory, and accounting issues of the U.S., U.K., and other legal regimes that are said vastly to complicate global expansion?” Kalis pointedly adds. “What about them? If you have the will to create a single law firm partnership when you combine firms, you retain leading advisers, work your way through the complications, and get the deal done the right way.”
Most importantly, Kalis insists, the financial integration marking the traditional single-profit-pool partnership serves clients best because it allows the structuring of incentives toward an institutional goal of seamless service.
“Because all contributing ships rise with the common tide, collaboration ranks atop the pantheon of firm values,” Kalis writes. “Partners, offices, and practice groups a half-planet away are joined at the financial hip, and the most obdurate among them can see, or can be made to see, the benefits to both clients and firm of collaboration and the sharing of opportunities, relationships, benefits and risks.”
When K&L and Australian firm Middletons combined under the K&L banner in January 2013, it was the first time a global firm had undertaken a full financial integration with an Australian firm. The move means K&L will have 2,000 lawyers in 46 offices on five continents operating under a global governance and partner compensation scheme drawing on revenues exceeding US$1 billion. If Kalis does bring his firm to Canada, it's not going to be by way of a verein.
But, as the Australian experience illustrates, K&L and other single-profit-centre advocates of expansion are not the only potential players coming to our country's legal market. Canada's market bears important similarities to its Australian counterpart, most particularly in the small number of large firms in the country and the large energy component of the economy that is so attractive to US and UK firms.
In this regard, it is perhaps significant that the big Sydney and Melbourne law firms were pursuing national partnerships in the '80s much as Canadian firms did about a decade later. “Now the ambitions of most of the [Australian] national law firms are global, reflecting those of their clients,” writes Paul Redmond, emeritus professor in the faculty of law at the University of New South Wales in an article entitled “Globalisation and the Australian Corporate Law Firm.”
But, he adds, “They are taking strikingly different routes abroad.” Indeed.
The first transactions took place in 2010 when Norton Rose combined with Deacons and DLA Piper combined with what is now DLA Phillips Fox. Both are now vereins. By contrast, Allen & Overy and Clifford Chance raided local firms for heavy hitters in targeted practice areas, adding them as partners to its global roster.
The next flurry of activity came in 2012, when four major Australian firms approached global expansion in very different ways. In March 2012, Blake Dawson merged with Ashurst to become Ashurst Australia. The firms announced that they had “combined their practices in Asia” and would be moving to a full merger contingent on a further partnership vote.
“This seems a conventional law firm merger between two firms with a similar history and culture although with practices in different regions,” Redmond writes. “The firms will be fully integrated with a view to the partners drawing from a single profit pool from 2014 and sharing the profits from the combined Asian practice until then. The next step in contemplation seems to be a merger with a major US firm.”
Next came Mallesons Stephen Jaques, which joined with King & Wood to become King & Wood Mallesons in the first combination ever between a Chinese and a Western law firm. Because Chinese law prevents Chinese and foreign lawyers from sharing profits, the merged firm will maintain three profit pools: one for China, one for Australia, and one for a merged Hong Kong office.
Then, in April 2012, Allens Arthur Robinson and Linklaters formed an “integrated alliance” that will preserve the firms' independence even as they share profits from joint ventures in Asia. “In contrast to the Blakes and Mallesons arrangements, Allens and Linklaters eschew use of the term ‘merger'; each will retain their own firm names, identity and brand,” Redmond observes. “The Allens-Linklaters ‘integrated alliance' is a hybrid arrangement, a step up from the ‘best friend' relationship that Allens has long had with UK firm Slaughter & May under which each referred work to the other and worked jointly on transactions where possible.”
The integrated alliance is non-exclusive and allows Allens and Linklaters to work with other firms as they see fit. Subsequently, Linklaters entered into an exclusive alliance with South Africa's Webber Wentzel and also announced that it would be “working closely” with Saudi Arabia's Abdulaziz AlGasim Law Firm.
Finally, in June, Herbert Smith and Freehills announced what the firms called a true merger, a single partnership with one profit pool. The announcement meant that, in the course of three short years, six of Australia's top revenue-producing firms chose to form global relationships, albeit in a variety of different ways.
But which choice will work best for major Canadian firms seeking to expand their international presence?
A caution is appropriate here: by way of furthering this article, we are concerned only with mergers, which we define as combinations evidenced by the parties having adopted a common brand – which is to say, relationships in which one of the parties in the combination has given up its identity as expressed in its former firm name. While that can be said of both vereins and single-profit-pool partnerships, it cannot be said of best friends, networks like Meritas and others, or any associations in which the member firms do not surrender their identity to a foundational brand.
To be sure, Canadian firms may choose something other than merger to assert an international footprint. But, arguably, those that retain their identity are not contributing to the alleged “hollowing out” of the Canadian legal market and therefore are beyond the scope of this article. In any event, the upshot is that Canadian firms seeking a merger have two choices as to structure: the single-profit partnership or the verein, or variations of either.
“A financial merger would be a good thing, but whether it is necessary is an entirely different question,” says John Coleman, managing partner of Norton Rose Canada LLP. Those who beg to differ, like Kalis, point out that none the Big Four accounting firms, which are historically the most high-profile proponents of vereins as structures for international professional-services firms, are vereins any longer.
In this the verein critics would be correct — but only strictly speaking. Deloitte Touche Tomatsu Limited had been legally organized as a Swiss verein for many years before it became a UK private company, limited by guarantee, in 2010; KPMG International Cooperative abandoned its verein status in 2003 in favour of a Swiss cooperative structure; Ernst & Young Global Limited is also a guarantee-limited private company; and PricewaterhouseCoopers International Limited is a limited-liability partnership.
Closer examination of the Big Four's websites, however, reveals that the structures they use today bear the essential characteristics of a verein in the sense that these structures, whatever their precise legal form, enable member firms to join internationally under a single brand without sharing revenue or profit, thereby avoiding regulatory obstacles and joint liability.
Why, then, have the Big Four either abandoned the verein or chosen an alternative, but similar, legal vehicle?
“After decades of operating as a Swiss verein, we recently decided to take a fresh look at our legal structure in order to determine whether it was the optimal organisation, now and in the future,” Deloitte told media at the time. “We concluded that, although the verein structure had served us well over the years, we had outgrown it.”
By then, Deloitte had grown to about 170,000 staffers around the world and was competing with PwC for kudos as the world's largest professional-services group. On the other hand, law firms, even global ones, have a long way to go before outgrowing the verein becomes a consideration.
According to Crawshaw, one of the motivations for the migration away from vereins may have been that there is no equivalent under British or American law. “Although there has never been a successful claim piercing the corporate veil of the verein structure, courts like to know what they're dealing with, and it can be difficult to describe what a verein is,” he says. “By contrast, there's no difficulty in explaining the UK company limited by guarantee or the LLP to a common-law judge.”
Indeed, about a year before it changed structures, a New York judge ruled that Deloitte verein members might be liable for allegedly negligent auditing by the verein's Italian arm. Although the case settled before it reached trial, the judge's refusal to dismiss the case against the affiliates must have been disconcerting to vereins everywhere. “Agency arguments have been used to test the protection from liability that a verein affords, and the protection has been found wanting in one or two cases,” says Jordan Furlong of Ottawa, who is a member of Edge International, a legal consultancy.
The overriding view, however, is that vereins do afford the protection from liability sought by their proponents. In any event, accounting firms and law firms have markedly different liability considerations. “Accounting firms are regularly subject to very significant claims from investors who are not their clients,” Crawshaw says. “Law firms are rarely subjected to claims from anyone other than their own clients, and so it is much easier for them to manage their liability profiles.”
In other words, vereins continue to be a viable structure for law firms, whether or not they still suit the Big Four. “The verein was the most efficient structure for us to achieve our goal of having a single firm using a common brand,” says Joe Andrew, Dentons' Global Chair.
So how does a Swiss verein work in practice? The answer is: that depends. “There are as many types of vereins as there are organizations that use that structure,” Andrew says. “Many bear little resemblance to each other.”
It's not hard to set up the basic structure of a Swiss verein. “Like the cassoulet, the verein is conceptually the embodiment of simplicity, yet with infinite variability,” Reeser writes in “Swiss verein — the cassoulet pot for global law practice,” an article that appeared in the San Francisco Daily Journal. “While certain aspects can be uniformly expected, it is the little details, which cannot be found without voluntary disclosure, that determine the difference between success and failure.”
The minimum requirements are that at least two officers in the company must draft and approve the bylaws. A board of directors must be constituted in accordance with Swiss law and auditors must be appointed. Beyond these minimum requirements, however, there are few limits to a verein's organization and administration.
“A verein can create anything from a very loose association to a full merger that involves profit-sharing through a vehicle other than the verein itself, and it also lends itself to moving along a continuum,” Crawshaw says. “So one must be very wary about drawing any conclusions regarding the relationship between member firms in a particular verein or about where the relationships sit on the continuum.”
The verein, then, can be a transitional structure, but it doesn't have to be. “We're not wedded to the verein, in the sense that we continue to analyze any and all structures on an ongoing basis,” Andrew says. “But it is clearly the best structure for us today and in the foreseeable future, and we do not regard it as transitional.”
The key to success, however, may be to make the internal structure invisible to clients. “A frequent theme in clients' complaints about our competitors is their frustration about the lack of consistency in the way they are treated across jurisdictions,” says Elliott Portnoy, Dentons' Global CEO. “Sometimes there's even a concern about competitive elements among lawyers from different offices.”
For its part, Dentons promises that regardless of the fact that a matter engages multiple jurisdictions, clients will receive a single invoice and a single engagement letter as well as a single primary contact. “Apart from the shared name and the shared leadership, we will also have identical standards for compensation and remuneration, and a seamless infrastructure, right down to the way a client makes a telephone call to any of our lawyers,” Andrew says.
That translates into cost-sharing, and while a verein does not allow for direct profit-sharing, it does allow for sharing of costs. “The idea behind many of the structures is to have a form of profit-sharing without sharing profits, and that's often accomplished by cost-sharing,” says Larry Chapman, a former partner of PwC and now Executive Director and CEO of the Canadian Tax Foundation.
NRF, for example, pools costs in areas like technology, marketing, training and other infrastructure. As well, the firm's drive to seamless service includes a pooling of industry knowledge for global and international clients. “We'll also remain vigilant by way of ensuring that our culture remains the same, our member firms will evaluate potential partners on the basis of similar qualities and characteristics, and the global executive committee will have the power to ratify all partners nominated locally,” Coleman explains.
He is dismissive of suggestions that vereins are loose associations that law firms can join or leave with ease. “We're not interested in an arrangement that does not have a binding effect and, to that end, we have a number of agreements that bind us to each other as firms and to the verein,” Coleman says. “As well, the admission of new members requires unanimity from existing members.”
At the core, the tie that binds vereins is doubtlessly the centralized management structure to which all members must make some contribution. “This is more than just chipping in for a few salaries of leadership partners (which may be robust),” Reeser writes. “There can be substantial support of managerial and administrative staff worldwide — to the point of including entire departments. These could include significant parts of accounting, marketing, advertising, computers and software, insurance, and even business referral and bonus compensation. Thus, the ‘tithe' to the verein can be considerable, certainly to the scope of many tens of millions of dollars of operating costs, perhaps over $100 million dollars in a firm of over 1,500 lawyers.”
With that kind of investment, a verein arrangement that leaves withdrawing members with no compensation for their investments and perhaps penalties for withdrawal are certain to make most firms think carefully about a hasty divorce. They may leave, but not without a great deal of thought. “Firms in a verein can become a bit like economic prisoners,” Reeser says. “And that's where the trouble begins, because individual partners who don't feel they're benefitting enough from the arrangement will start leaving their firms.”
And what do clients really think about these debates? Are they more comfortable with verein-like structures or single-pool partnerships?
It turns out they don't really care. Pamela Woldow and Douglas Richardson of Edge International surveyed 47 chief legal officers of global companies by asking them what they thought about law firms becoming Swiss vereins. “Put simply and bluntly, clients are largely indifferent,” they write in an article entitled “Do You Want Swiss With That?” which appeared in Edge International Review.
Only five respondents indicated an interest in the structure of their law firm. One CLO's response was particularly telling. “We buy service, not structure [and] so far we've seen little evidence that service quality is affected one way or the other by a firm's legal form, other than the fact that Swiss Vereins are more common in larger firms,” the CLO said. “We probably get some benefit from bigger footprints and perhaps better internal communication. For us, the real issue is operational efficiency and stability, overall quality of service, and our judgment about whether they are delivering the value we need.”
Several respondents pointed to the advantages vereins can offer to clients, including independent revenue centres that allow for greater flexibility, partially because they are not inflated merely for the purpose of achieving a global revenue target.
In contrast, several other respondents were concerned about loose associations that were not traditional legal partnerships. “Where there is strong centralized management, they noted, there tends to be better accountability for overall services,” write Woldow and Richardson. This being said, one GC was of the view that centralization was no guarantee of quality at all.
The issue, it seems, is quality — not structure, organization or centralization. “Whether you're dealing with a single-profit pool or a verein, the challenge is to get the lawyers to play together,” Williams says. “Simply having one profit pot will not do it, although its absence can put a hurdle in the way of an alignment that produces the kind of service clients want.”
Still, Williams notes, vereins can compensate for the absence of a single profit pool with incentives like bonuses above and beyond normal remuneration and credit for referring work to other offices. “What really counts is strength of leadership and the alignment of culture, vision, values and strategy throughout the firm,” says Christopher Pinnington, Dentons' chief executive officer for Canada.
That certainly seems to be the case for the Big Four. Although they are no longer vereins, they are certainly not single-profit-sharing pools. “I think that if you look closely at the accounting firms' transparency reports, you'll see that the focus of their efforts has been on consistent, seamless service in up to 130 jurisdictions through collaboration on methodology, know-how, people management, training and a common approach to client relationships,” Crawshaw says. “That inevitably results in a great degree of cost-sharing.”
David Corbett is the managing partner of Fasken Martineau Dumoulin LLP. He is the architect of the firm's global strategy, taking the firm in a direction that departs markedly from the traditional path of Canadian firms. Rather than associating with a global firm, Fasken has become a global firm that has retained its identity while entrenching its international footprint through strategic mergers with small firms in the UK and South Africa. That makes Corbett a neutral in the debate about the relative feasibility of vereins and single-pool mergers.
“The key thing to remember is that there is no one-size-fits-all strategy that is going to work,” he says. “A Swiss verein can be fully integrated with what effectively amounts to a sharing of profits or it can be in the nature of a franchise operation. What I don't believe works is the franchise approach.”
So, will the success of future global mergers involving Canadian firms really depend on whether they are verein-like or single profit pools? Probably not. Rather, what the firms do with the structure they choose is likely to be much more influential. “This is a critical moment for Canadian firms, because it turns out that, to some degree at least, size matters,” says Daniel Sokol, a professor at the University of Minnesota's law faculty who has written extensively on the globalization of lawyers. “The winners will be the ones that integrate or at least get a head start on integration.”
After all, for some time now, there have been questions about the sustainability of partnerships as vehicles for organizing law firms. Indeed, as far back as 2006, John Flood, a professor of law and sociology at the University of Westminster, doubted their utility.
“When we look more carefully at firms such as Baker & McKenzie and Clifford Chance, the concept of partnership, enmeshed in the ideals above, is slim at best,” he wrote in his blog. “They have the appearance of partnerships but all the characteristics of bureaucracies. Today partners can be sacked as easily as associates. Firms ‘de-equitize' partners regularly. Committees of seniors and rainmakers run the firm like any corporate board of management. These are not democracies redolent of ancient Athens.”
However that may be, what is truly engaging is that Flood saw fit to lump together Baker & McKenzie, then a long-time verein, and Clifford Chance, a single-profit-pool icon. Baker & McKenzie is already in Canada and expanding its Toronto office. Clifford Chance could well come. So could others. Some more than likely will. But whether they succeed will depend on whether they can transcend form in favour of substance.
As Brad Hildebrandt and Lisa Rohrer put it in the Hildebrandt Baker Robbins Law Vision Blog: “At the end of the day, the financial details of integration behind a merger are much less important than the ability of the global firm management to effectively execute the strategic rationale of the union.”
Julius Melnitzer is a freelance legal-affairs writer in Toronto.
Both combinations had significant US components: Fulbright is an 850-lawyer US powerhouse with 17 offices worldwide; and SNR Denton was created by the 2010 merger of Sonnenschein Nath & Rosenthal, another US-based firm that boasted over 800 lawyers, with London-based Denton Wilde Sapte.
The announcements answered two key questions about the Canadian legal market: first, Norton Rose Group's foray into Canada, which swallowed up Canadian legal icons Ogilvy Renault LLP and Macleod Dixon LLP in 2011, was never going to be a one-off; and second, the forces of globalization were starting to disassemble, if not dissolve, the hands-off tradition that (Torys LLP-Haythe Curley aside) dominated the mentality of major Canadian and US firms towards cross-border mergers in a continental legal market marked mostly by “best friends” as the favoured form of association.
“The fact that two Canadian firms have agreed to mergers that have big US components is a breach of tradition,” says Jordan Furlong of Ottawa, who is a member of Edge International, a legal consultancy. “That makes it more likely that we could see as many as five to seven global firms entering the Canadian legal market before the end of this decade.”
But what form will future associations take? Both NRF and Dentons have structured themselves as a Swiss verein, an entity that allows its member firms to join internationally under a single brand without sharing revenue or profit, thereby maintaining their independent status for liability and regulatory purposes.
“The verein was originally intended for small domestic social organizations but has become a common structure for professional-services firms seeking cross-border combinations that need to address thorny issues of local professional regulation that prohibit many one-firm combinations,” says Edwin Reeser, a California-based lawyer and consultant who was formerly the managing partner of Sonnenschein Nath & Rosenthal LLP's Los Angeles office.
“The verein structure also avoids undue complexity and cost associated with competing rules on taxation to individual partners on worldwide operations and serves to accommodate widely disparate cultural, economic and political issues at the local operational level where participation by other verein members would be an unacceptable intrusion.”
Given the endemic cynicism of the profession, however, it is perhaps not surprising that the growth strategies of NRF and Dentons came under attack. Indeed, a Legal Week poll, taken well before the partners of the three firms involved in Dentons even voted on the new combination, found that only 28 per cent of respondents regarded the move as a “good deal.”
But much of the cynicism focused on the form, rather than the substance, of the transactions, with a great deal of discussion as to whether joining a verein amounted to a merger. As critics saw it, a verein was merely a loose association of separate profit pools that would never achieve the seamless service and uniform professional excellence that attracted clients to law firms that were fully financially integrated.
“The problem with the verein is that it endorses independence over integration,” says Patrick McKenna, an international legal consultant based in Edmonton. “But certain firms, like Baker & McKenzie, have managed to overcome that, partly by having common performance standards, quality-management officers and quality audits at least once every three years.”
Still, in the minds of many, vereins are but a passing fad, a Band-Aid solution designed to avoid the legal and practical obstacles to true international mergers in favour of an illusion driven by a fear of missing the tidal wave of globalization in the profession, or worse, by a desire to shore up underperforming partnerships.
“The reality of the Swiss verein is that the strategic imperative of developing an international platform quickly before the market is gone is more important than full financial integration from day one,” says Tony Williams of Jomati Consultants LLP, a UK-based legal consultancy.
In other words, but for the availability of the facilitating verein structure, the international combinations in the Canadian market may not have happened — or at least not yet or not on the scale that they did.
“After years of anticipation, true global consolidation on a significant scale is occurring in the legal industry,” write Nick Jarrett-Kerr and Ed Wesemann in the fall 2012 issue of Edge International Review. “The driving influence appears to be the availability of a structural vehicle that assists firms in dealing with the legal and functional hurtles of international mergers. That vehicle is the Swiss Verein.”
The evidence in support is telling. Three of the top five revenue-producing legal entities on American Lawyer's Global 100 – Baker & McKenzie (first), DLA Piper (third) and Hogan Lovells (fifth) – are vereins. Four of the top 25 (including Norton Rose) are vereins. Yet another member of the top 25, CMS Legal, is structured as a European Economic Interest Group (EEIG), which also has separate profit pools and is operationally similar to a verein; although liability is not shared, the group shares a unified strategy and a central cost-sharing budget as well as matter, knowledge and conflict-management systems.
Overall, eight of the top 100 are vereins or verein-like entities, including Squire Sanders, Dentons, and King & Wood Mallesons (the March 2012 combination of Chinese firm King & Wood and Australia's Mallesons Stephen Jaques).
“The verein is a structure that has worked well for professional-services firms for decades,” says Aster Crawshaw of London, a partner in the Addleshaw Goddard's professional services team in the UK, who has a particular interest in the international structuring of professional-services firms.
But critics – with K&L Gates LLP Chairman Peter Kalis the most vocal among them – remain unconvinced. In an American Lawyer article entitled “Grand Illusion,” Kalis argued that some of the verein firms listed on the AM Law 100 were firms in name only. He was particularly harsh on DLA Piper. “When the music stopped, the verein known as DLA Piper was simply a referral arrangement between two firms,” Kalis writes.
If it was otherwise, Kalis asks, why would the Brazilian Bar association regard the country's arm of Baker & McKenzie, the oldest legal verein, as sufficiently independent to avoid recent regulatory scrutiny as an international firm that might be engaging in the unauthorized practice of law in the country?
Branding alone, Kalis argues, is an insufficient basis for regarding an association of law firms as a single firm. Otherwise, he says, networks like Lex Mundi and even best friends who put a name to their arrangement, would qualify. “Once the American Lawyer permits inclusion of vereins and other confederations that do not share a single profit pool [in the magazine's revenue and other rankings], it's difficult to discern a coherent limiting principle,” Kalis concludes in his article.
Indeed, he goes so far as to maintain that vereins “ossify differences” among law firms rather than facilitating their elimination. “What about the vexing tax, regulatory, and accounting issues of the U.S., U.K., and other legal regimes that are said vastly to complicate global expansion?” Kalis pointedly adds. “What about them? If you have the will to create a single law firm partnership when you combine firms, you retain leading advisers, work your way through the complications, and get the deal done the right way.”
Most importantly, Kalis insists, the financial integration marking the traditional single-profit-pool partnership serves clients best because it allows the structuring of incentives toward an institutional goal of seamless service.
“Because all contributing ships rise with the common tide, collaboration ranks atop the pantheon of firm values,” Kalis writes. “Partners, offices, and practice groups a half-planet away are joined at the financial hip, and the most obdurate among them can see, or can be made to see, the benefits to both clients and firm of collaboration and the sharing of opportunities, relationships, benefits and risks.”
When K&L and Australian firm Middletons combined under the K&L banner in January 2013, it was the first time a global firm had undertaken a full financial integration with an Australian firm. The move means K&L will have 2,000 lawyers in 46 offices on five continents operating under a global governance and partner compensation scheme drawing on revenues exceeding US$1 billion. If Kalis does bring his firm to Canada, it's not going to be by way of a verein.
But, as the Australian experience illustrates, K&L and other single-profit-centre advocates of expansion are not the only potential players coming to our country's legal market. Canada's market bears important similarities to its Australian counterpart, most particularly in the small number of large firms in the country and the large energy component of the economy that is so attractive to US and UK firms.
In this regard, it is perhaps significant that the big Sydney and Melbourne law firms were pursuing national partnerships in the '80s much as Canadian firms did about a decade later. “Now the ambitions of most of the [Australian] national law firms are global, reflecting those of their clients,” writes Paul Redmond, emeritus professor in the faculty of law at the University of New South Wales in an article entitled “Globalisation and the Australian Corporate Law Firm.”
But, he adds, “They are taking strikingly different routes abroad.” Indeed.
The first transactions took place in 2010 when Norton Rose combined with Deacons and DLA Piper combined with what is now DLA Phillips Fox. Both are now vereins. By contrast, Allen & Overy and Clifford Chance raided local firms for heavy hitters in targeted practice areas, adding them as partners to its global roster.
The next flurry of activity came in 2012, when four major Australian firms approached global expansion in very different ways. In March 2012, Blake Dawson merged with Ashurst to become Ashurst Australia. The firms announced that they had “combined their practices in Asia” and would be moving to a full merger contingent on a further partnership vote.
“This seems a conventional law firm merger between two firms with a similar history and culture although with practices in different regions,” Redmond writes. “The firms will be fully integrated with a view to the partners drawing from a single profit pool from 2014 and sharing the profits from the combined Asian practice until then. The next step in contemplation seems to be a merger with a major US firm.”
Next came Mallesons Stephen Jaques, which joined with King & Wood to become King & Wood Mallesons in the first combination ever between a Chinese and a Western law firm. Because Chinese law prevents Chinese and foreign lawyers from sharing profits, the merged firm will maintain three profit pools: one for China, one for Australia, and one for a merged Hong Kong office.
Then, in April 2012, Allens Arthur Robinson and Linklaters formed an “integrated alliance” that will preserve the firms' independence even as they share profits from joint ventures in Asia. “In contrast to the Blakes and Mallesons arrangements, Allens and Linklaters eschew use of the term ‘merger'; each will retain their own firm names, identity and brand,” Redmond observes. “The Allens-Linklaters ‘integrated alliance' is a hybrid arrangement, a step up from the ‘best friend' relationship that Allens has long had with UK firm Slaughter & May under which each referred work to the other and worked jointly on transactions where possible.”
The integrated alliance is non-exclusive and allows Allens and Linklaters to work with other firms as they see fit. Subsequently, Linklaters entered into an exclusive alliance with South Africa's Webber Wentzel and also announced that it would be “working closely” with Saudi Arabia's Abdulaziz AlGasim Law Firm.
Finally, in June, Herbert Smith and Freehills announced what the firms called a true merger, a single partnership with one profit pool. The announcement meant that, in the course of three short years, six of Australia's top revenue-producing firms chose to form global relationships, albeit in a variety of different ways.
But which choice will work best for major Canadian firms seeking to expand their international presence?
A caution is appropriate here: by way of furthering this article, we are concerned only with mergers, which we define as combinations evidenced by the parties having adopted a common brand – which is to say, relationships in which one of the parties in the combination has given up its identity as expressed in its former firm name. While that can be said of both vereins and single-profit-pool partnerships, it cannot be said of best friends, networks like Meritas and others, or any associations in which the member firms do not surrender their identity to a foundational brand.
To be sure, Canadian firms may choose something other than merger to assert an international footprint. But, arguably, those that retain their identity are not contributing to the alleged “hollowing out” of the Canadian legal market and therefore are beyond the scope of this article. In any event, the upshot is that Canadian firms seeking a merger have two choices as to structure: the single-profit partnership or the verein, or variations of either.
“A financial merger would be a good thing, but whether it is necessary is an entirely different question,” says John Coleman, managing partner of Norton Rose Canada LLP. Those who beg to differ, like Kalis, point out that none the Big Four accounting firms, which are historically the most high-profile proponents of vereins as structures for international professional-services firms, are vereins any longer.
In this the verein critics would be correct — but only strictly speaking. Deloitte Touche Tomatsu Limited had been legally organized as a Swiss verein for many years before it became a UK private company, limited by guarantee, in 2010; KPMG International Cooperative abandoned its verein status in 2003 in favour of a Swiss cooperative structure; Ernst & Young Global Limited is also a guarantee-limited private company; and PricewaterhouseCoopers International Limited is a limited-liability partnership.
Closer examination of the Big Four's websites, however, reveals that the structures they use today bear the essential characteristics of a verein in the sense that these structures, whatever their precise legal form, enable member firms to join internationally under a single brand without sharing revenue or profit, thereby avoiding regulatory obstacles and joint liability.
Why, then, have the Big Four either abandoned the verein or chosen an alternative, but similar, legal vehicle?
“After decades of operating as a Swiss verein, we recently decided to take a fresh look at our legal structure in order to determine whether it was the optimal organisation, now and in the future,” Deloitte told media at the time. “We concluded that, although the verein structure had served us well over the years, we had outgrown it.”
By then, Deloitte had grown to about 170,000 staffers around the world and was competing with PwC for kudos as the world's largest professional-services group. On the other hand, law firms, even global ones, have a long way to go before outgrowing the verein becomes a consideration.
According to Crawshaw, one of the motivations for the migration away from vereins may have been that there is no equivalent under British or American law. “Although there has never been a successful claim piercing the corporate veil of the verein structure, courts like to know what they're dealing with, and it can be difficult to describe what a verein is,” he says. “By contrast, there's no difficulty in explaining the UK company limited by guarantee or the LLP to a common-law judge.”
Indeed, about a year before it changed structures, a New York judge ruled that Deloitte verein members might be liable for allegedly negligent auditing by the verein's Italian arm. Although the case settled before it reached trial, the judge's refusal to dismiss the case against the affiliates must have been disconcerting to vereins everywhere. “Agency arguments have been used to test the protection from liability that a verein affords, and the protection has been found wanting in one or two cases,” says Jordan Furlong of Ottawa, who is a member of Edge International, a legal consultancy.
The overriding view, however, is that vereins do afford the protection from liability sought by their proponents. In any event, accounting firms and law firms have markedly different liability considerations. “Accounting firms are regularly subject to very significant claims from investors who are not their clients,” Crawshaw says. “Law firms are rarely subjected to claims from anyone other than their own clients, and so it is much easier for them to manage their liability profiles.”
In other words, vereins continue to be a viable structure for law firms, whether or not they still suit the Big Four. “The verein was the most efficient structure for us to achieve our goal of having a single firm using a common brand,” says Joe Andrew, Dentons' Global Chair.
So how does a Swiss verein work in practice? The answer is: that depends. “There are as many types of vereins as there are organizations that use that structure,” Andrew says. “Many bear little resemblance to each other.”
It's not hard to set up the basic structure of a Swiss verein. “Like the cassoulet, the verein is conceptually the embodiment of simplicity, yet with infinite variability,” Reeser writes in “Swiss verein — the cassoulet pot for global law practice,” an article that appeared in the San Francisco Daily Journal. “While certain aspects can be uniformly expected, it is the little details, which cannot be found without voluntary disclosure, that determine the difference between success and failure.”
The minimum requirements are that at least two officers in the company must draft and approve the bylaws. A board of directors must be constituted in accordance with Swiss law and auditors must be appointed. Beyond these minimum requirements, however, there are few limits to a verein's organization and administration.
“A verein can create anything from a very loose association to a full merger that involves profit-sharing through a vehicle other than the verein itself, and it also lends itself to moving along a continuum,” Crawshaw says. “So one must be very wary about drawing any conclusions regarding the relationship between member firms in a particular verein or about where the relationships sit on the continuum.”
The verein, then, can be a transitional structure, but it doesn't have to be. “We're not wedded to the verein, in the sense that we continue to analyze any and all structures on an ongoing basis,” Andrew says. “But it is clearly the best structure for us today and in the foreseeable future, and we do not regard it as transitional.”
The key to success, however, may be to make the internal structure invisible to clients. “A frequent theme in clients' complaints about our competitors is their frustration about the lack of consistency in the way they are treated across jurisdictions,” says Elliott Portnoy, Dentons' Global CEO. “Sometimes there's even a concern about competitive elements among lawyers from different offices.”
For its part, Dentons promises that regardless of the fact that a matter engages multiple jurisdictions, clients will receive a single invoice and a single engagement letter as well as a single primary contact. “Apart from the shared name and the shared leadership, we will also have identical standards for compensation and remuneration, and a seamless infrastructure, right down to the way a client makes a telephone call to any of our lawyers,” Andrew says.
That translates into cost-sharing, and while a verein does not allow for direct profit-sharing, it does allow for sharing of costs. “The idea behind many of the structures is to have a form of profit-sharing without sharing profits, and that's often accomplished by cost-sharing,” says Larry Chapman, a former partner of PwC and now Executive Director and CEO of the Canadian Tax Foundation.
NRF, for example, pools costs in areas like technology, marketing, training and other infrastructure. As well, the firm's drive to seamless service includes a pooling of industry knowledge for global and international clients. “We'll also remain vigilant by way of ensuring that our culture remains the same, our member firms will evaluate potential partners on the basis of similar qualities and characteristics, and the global executive committee will have the power to ratify all partners nominated locally,” Coleman explains.
He is dismissive of suggestions that vereins are loose associations that law firms can join or leave with ease. “We're not interested in an arrangement that does not have a binding effect and, to that end, we have a number of agreements that bind us to each other as firms and to the verein,” Coleman says. “As well, the admission of new members requires unanimity from existing members.”
At the core, the tie that binds vereins is doubtlessly the centralized management structure to which all members must make some contribution. “This is more than just chipping in for a few salaries of leadership partners (which may be robust),” Reeser writes. “There can be substantial support of managerial and administrative staff worldwide — to the point of including entire departments. These could include significant parts of accounting, marketing, advertising, computers and software, insurance, and even business referral and bonus compensation. Thus, the ‘tithe' to the verein can be considerable, certainly to the scope of many tens of millions of dollars of operating costs, perhaps over $100 million dollars in a firm of over 1,500 lawyers.”
With that kind of investment, a verein arrangement that leaves withdrawing members with no compensation for their investments and perhaps penalties for withdrawal are certain to make most firms think carefully about a hasty divorce. They may leave, but not without a great deal of thought. “Firms in a verein can become a bit like economic prisoners,” Reeser says. “And that's where the trouble begins, because individual partners who don't feel they're benefitting enough from the arrangement will start leaving their firms.”
And what do clients really think about these debates? Are they more comfortable with verein-like structures or single-pool partnerships?
It turns out they don't really care. Pamela Woldow and Douglas Richardson of Edge International surveyed 47 chief legal officers of global companies by asking them what they thought about law firms becoming Swiss vereins. “Put simply and bluntly, clients are largely indifferent,” they write in an article entitled “Do You Want Swiss With That?” which appeared in Edge International Review.
Only five respondents indicated an interest in the structure of their law firm. One CLO's response was particularly telling. “We buy service, not structure [and] so far we've seen little evidence that service quality is affected one way or the other by a firm's legal form, other than the fact that Swiss Vereins are more common in larger firms,” the CLO said. “We probably get some benefit from bigger footprints and perhaps better internal communication. For us, the real issue is operational efficiency and stability, overall quality of service, and our judgment about whether they are delivering the value we need.”
Several respondents pointed to the advantages vereins can offer to clients, including independent revenue centres that allow for greater flexibility, partially because they are not inflated merely for the purpose of achieving a global revenue target.
In contrast, several other respondents were concerned about loose associations that were not traditional legal partnerships. “Where there is strong centralized management, they noted, there tends to be better accountability for overall services,” write Woldow and Richardson. This being said, one GC was of the view that centralization was no guarantee of quality at all.
The issue, it seems, is quality — not structure, organization or centralization. “Whether you're dealing with a single-profit pool or a verein, the challenge is to get the lawyers to play together,” Williams says. “Simply having one profit pot will not do it, although its absence can put a hurdle in the way of an alignment that produces the kind of service clients want.”
Still, Williams notes, vereins can compensate for the absence of a single profit pool with incentives like bonuses above and beyond normal remuneration and credit for referring work to other offices. “What really counts is strength of leadership and the alignment of culture, vision, values and strategy throughout the firm,” says Christopher Pinnington, Dentons' chief executive officer for Canada.
That certainly seems to be the case for the Big Four. Although they are no longer vereins, they are certainly not single-profit-sharing pools. “I think that if you look closely at the accounting firms' transparency reports, you'll see that the focus of their efforts has been on consistent, seamless service in up to 130 jurisdictions through collaboration on methodology, know-how, people management, training and a common approach to client relationships,” Crawshaw says. “That inevitably results in a great degree of cost-sharing.”
David Corbett is the managing partner of Fasken Martineau Dumoulin LLP. He is the architect of the firm's global strategy, taking the firm in a direction that departs markedly from the traditional path of Canadian firms. Rather than associating with a global firm, Fasken has become a global firm that has retained its identity while entrenching its international footprint through strategic mergers with small firms in the UK and South Africa. That makes Corbett a neutral in the debate about the relative feasibility of vereins and single-pool mergers.
“The key thing to remember is that there is no one-size-fits-all strategy that is going to work,” he says. “A Swiss verein can be fully integrated with what effectively amounts to a sharing of profits or it can be in the nature of a franchise operation. What I don't believe works is the franchise approach.”
So, will the success of future global mergers involving Canadian firms really depend on whether they are verein-like or single profit pools? Probably not. Rather, what the firms do with the structure they choose is likely to be much more influential. “This is a critical moment for Canadian firms, because it turns out that, to some degree at least, size matters,” says Daniel Sokol, a professor at the University of Minnesota's law faculty who has written extensively on the globalization of lawyers. “The winners will be the ones that integrate or at least get a head start on integration.”
After all, for some time now, there have been questions about the sustainability of partnerships as vehicles for organizing law firms. Indeed, as far back as 2006, John Flood, a professor of law and sociology at the University of Westminster, doubted their utility.
“When we look more carefully at firms such as Baker & McKenzie and Clifford Chance, the concept of partnership, enmeshed in the ideals above, is slim at best,” he wrote in his blog. “They have the appearance of partnerships but all the characteristics of bureaucracies. Today partners can be sacked as easily as associates. Firms ‘de-equitize' partners regularly. Committees of seniors and rainmakers run the firm like any corporate board of management. These are not democracies redolent of ancient Athens.”
However that may be, what is truly engaging is that Flood saw fit to lump together Baker & McKenzie, then a long-time verein, and Clifford Chance, a single-profit-pool icon. Baker & McKenzie is already in Canada and expanding its Toronto office. Clifford Chance could well come. So could others. Some more than likely will. But whether they succeed will depend on whether they can transcend form in favour of substance.
As Brad Hildebrandt and Lisa Rohrer put it in the Hildebrandt Baker Robbins Law Vision Blog: “At the end of the day, the financial details of integration behind a merger are much less important than the ability of the global firm management to effectively execute the strategic rationale of the union.”
Julius Melnitzer is a freelance legal-affairs writer in Toronto.
