PARTNERSHIP: An Introduction

Partnership Introduction 

by

Fox Williams LLP

Market Conditions 

The financial performance of the professional services sector (and large law firms in particular) has exceeded expectations, with the financial year 2020-2021 seeing some exceptional results. The average rise in profits per equity partner at the Top 50 UK law firms was the biggest rise for at least 14 years. Results indicate that the financial year 2021-2022 could see even better performance for some firms, with others consolidating the previous year’s profits outperformance. A number of law firms have announced a record number of promotions to partner, which is commonly a sign of increased performance and business confidence. The UK has seen a rise in the number of class action cases, buoyed by the availability of litigation funding. The UK is now likely to be the most popular venue for Europe-wide group litigation claims. In the near term, recession is being predicted and business insolvencies are up beyond the pre-pandemic levels. Inflationary pressures are likely to put a hold on performance, particularly for firms which have significantly increased fixed costs in response to the demand for junior staff.

Mergers 

With the end of the pandemic period, during which merger activity ceased or proceeded slowly, there has been a spate of transactions reflecting the usual range of reasons for expansion or finding a new home. The long talked about merger of two UK Top 50 firms, Clyde & Co and rival BLM, created a combined firm with annual revenue in excess of £700 million. Another UK Top 50 firm, Weightmans, merged with long-established RadcliffesLeBrasseur, doubling the size of its London office. UK Top 100 firm Royds Withy King merged with Goodman Derrick to form a new firm RWK Goodman. A notable deal on the international front was the Addleshaw Goddard tie-up with Dublin-based Eugene F Collins.

Transactions in the accountancy sector were dominated by the disposal by PwC of its global mobility tax and immigration services business to private equity firm Clayton, Dubilier and Rice for about USD2.2 billion. Domestic activity was on a smaller scale. Azets continued to be busy on the acquisition trail, including establishing a presence in Yorkshire with the acquisition of Garbutt + Elliot.

Listed Firms 

A new listed firm in the accountancy sector was Dow Schofield Watts. A successful listing on AIM raised finance to expand its platform model. Knights acquired law firm Coffin Mew for £11.5 million to expand into the south of England. Gateley made its largest acquisition to date, acquiring chartered surveyors Simthers Purslow for £20 million. Ince acquired corporate finance adviser and stockbroker Arden. The IPO plans of Mishcon de Reya, approved by the partnership in 2021, were permanently put on hold due to market conditions.

Team Moves 

The stalled IPO of Mishcon de Reya was not without cost. In addition to a number of individual partner departures, a team of 18 partners and lawyers left the firm to join Greenberg Traurig ahead of the planned float. Large-scale team moves have declined in frequency in recent times, but there were two standout moves in 2021 and 2022. Boris Bronfentrinker led a team of 13 partners and lawyers to Willkie Farr & Gallagher from Quinn Emanuel Urquhart & Sullivan, representing a significant loss of revenue for the London office. Another US law firm London office departure saw Natasha Harrison, the former firmwide co-managing partner at Boies Schiller Flexner, take the vast majority of the firm’s London lawyers and clients to launch a boutique litigation practice, Pallas Partners.

Regulatory Environment  

Non-lawyer ownership of law firms is decided at state level in the USA. Several states have been considering allowing this change, which was introduced in the UK back in 2011. Arizona licensed a multidisciplinary firm, including legal services, with non-lawyer ownership. There have been false dawns before in this arena in the US, but this may be the start of a new approach.

Further proposals for audit reform, such as the “managed shared audit” which would require UK registered FTSE 350 companies audited by a Big 4 firm to share part of the audit work with a challenger firm, are moving at a slow pace. The current audit regulator, the Financial Reporting Council, has for the first time issued guidance for auditors to assist with exercising professional judgement. The backdrop to this position is the huge fines awarded against Big 4 firms for audit failures. PwC was fined over £5 million for failures on audits for construction companies Galliford Try and Kier. KPMG was fined over £14 million for providing false and misleading information in relation to its audits of construction firm Carillion and outsourcing firm Regenersis. In terms of scale these fines were paltry in comparison to the USD100 million fine imposed by the SEC on EY for mass cheating by audit employees on the Certified Public Accountant exam and continuing professional education courses.

War in Ukraine  

After many wars which have involved Russia over past decades it was a surprise to most that the invasion of Ukraine would have a significant impact on professional services in the UK. Some changes were imposed by law. The criteria for making a person subject to financial sanctions were changed. Overnight Russian clients, for whom large firms had acted for many years, became subject to sanctions. In many cases their personal circumstances, including their historic source of wealth and political connections, had not changed. International firms took steps to distance themselves from Russia, closing their Russian offices, with staff there forming their own firms. Firms made announcements of their position and response to the invasion and their approach to acting for Russian clients, at a level not seen before. These developments were followed by government announcements of greater powers for courts to dismiss so-called SLAPPs (strategic litigation against public participation) by which claimants with deep pockets use legal proceedings to prevent public scrutiny.

Culture  

Will the war in Ukraine mark a new dawn in the importance of ethical judgement in professional service firms? There are already reports of Russian individuals having difficulty in finding legal representation in the UK. This is sometimes not just an ethical issue. PI insurers are taking a far greater interest in firms’ approach to acting for Russian clients than other national client groups. Firms have not historically had a problem generally with acting for clients from countries well known for human rights abuses.

The Solicitors Regulation Authority, the main regulator of lawyers in the UK, has issued guidance to firms to look after their staff’s wellbeing and to protect staff from bullying, harassment, discrimination and victimisation. This has firmly stamped workplace culture as a regulatory issue and seeks to prevent firms operating an environment where, in particular, junior staff feel unable to report a problem.

With wellbeing in mind it would be a surprise if there is a return to full-time attendance at the office. A recession and a consequent fall in demand for junior staff may lessen the desire to have policies which have working from home as a principal component in attracting and retaining staff. It is worth remembering that many firms achieved record performance when their workforce was mainly at home and it is difficult to argue with that.