Despite their reputation for honesty, law firms, like any business, will put the best possible spin on their situation when speaking to the press. So when the first Swiss firm interviewed by Client Report for this article declared 2008 to have been “a year of strong growth for our firm,” we were cynical.
But as interviews continued, firm after firm said that the last year had seen healthy workflow and steady growth. “2008 was a remarkable year for us,” says Oliver Triebold, partner at Schellenberg Wittmer in Zürich. “The last few years have seen an upward trend in terms of headcount and turnover, and that has not yet stopped.” Robert Furter, managing partner of Pestalozzi Lachenal Patry, says: “We were expecting a downturn in activity in the second half of last year, but surprisingly it didn’t happen.”
How has this apparent miracle been achieved? Swiss firms claim no magic strategy. The financial downturn seizing the world economy is simply taking its time to penetrate locally. Switzerland managed 1.8% GDP growth in 2008 – down from 2.3% in 2007, but a healthy contrast to, for example, Britain’s 0.7%.i
The credit crunch has proven less problematic to a country which, despite its formidable banking reputation, has fairly low levels of consumer debt. “In Switzerland people see a credit card as a payment card, rather than a way of borrowing,” says Peter Merz, managing partner of Froriep Renggli. The result is that consumer activity remained steady in 2008. “Retailers tell us they had an excellent Christmas.”
Surely, however, the greatest banking crisis in a lifetime has shaken the country best known for its financial institutions? The travails of UBS – whose CHF8.1 billion loss in the fourth quarter of 2008 is the greatest of any company in Swiss history – are well known. And the country’s other giant bank, Credit Suisse, has also been affected.
But the country’s array of smaller private banks are cautious in lending and investing, and subsequently have been less affected by both the collapse in the value of securitised mortgage assets and the freezing-up of short-term finance. “Even at UBS, the wealth management arm has emerged relatively intact,” points out one Swiss partner.
Of course, both domestic and foreign-funded transactions have been slowed by the freeze in financing. But, say Swiss lawyers, the effect has not prevented major transactions like Roche’s bid for American biotech firm Genentech. “Financially-driven transactions will slow down, but there are still strategic investors about, and they have money,” says Robert Furter.
For those lucky enough to advise them, the Swiss banking giants’ troubles have provided a steady stream of work. “UBS and Credit Suisse kept us busy for most of last year,” says Daniel Daeniker, head of corporate at Zürich’s Homburger. The firm assisted both UBS and Credit Suisse with a succession of capital-raising and compliance exercises throughout 2008. “We had 11 partners in five different practice areas working for them for much of the year.”
Neiderer Kraft & Frey (NKF) advised the government of Switzerland and the investment arm of the government of Singapore on investments in UBS, and the Qatar Investment Authority on an investment in Credit Suisse. “So though there were not a lot of IPOs going on, they were balanced out very nicely by work in other areas,” says NKF partner Philipp Haas.
2009: a delayed reckoning?
Swiss firms recognise that 2009 is likely to prove a turning point as the downturn finally cuts into their practices. “M&A has not been severely reduced so far, but I’m fairly sure that will change soon,” says Matthias Oertle, managing partner of national firm Lenz & Staehelin. “There’s typically a time lag of 12-18 months before Swiss lawyers feel the effect of wider economic trends. We expect to see a real slowdown in activity starting in the second quarter of 2009.”
But Swiss lawyers remain optimistic that some level of deal activity will continue through the downturn. “As in other jurisdictions we are seeing an across-the-board slowdown in M&A,” admits Alexander Troller, managing partner at Geneva’s Lalive. “But transactions are still happening, albeit in different sectors and for different reasons. We’re seeing fewer transactions motivated by long-term strategy, and more driven by opportunism and the availability of cash.”
The main impact may be on the preliminary work which never comes to fruition. “The work I’d call ‘white noise’ is off the table,” says Homburger’s Daniel Daeniker. “You don’t have private equity houses deciding to buy companies over the weekend, you don’t spend time exploring possible transactions that never come to fruition. But there is a steady flow of transactions continuing in the background.”
Still, with transaction activity unlikely to return to pre-2008 levels for some time, flexibility is the key to staying busy. The Swiss legal profession’s generalist approach makes it very adaptable, lawyers say. “All of our lawyers are experienced and competent in two or three different areas,” says Patrick Schellenberg, senior partner of Geneva’s Budin & Partners. “So while we have almost no M&A activity right now, our lawyers are advising on tax issues, litigation, and general commercial matters. Nobody has nothing to do!”
Most firms hope restructuring work will keep their corporate lawyers busy. “Suddenly, we have a huge restructuring department,” admits one managing partner. But how easy is it to carry out such an about-turn in strategy? The transition, says Daniel Daeniker of Homburger, is not too difficult. “The average restructuring is 70% corporate work; as long as you have experienced insolvency people to do the other 30%, you don’t need to do a lot of retraining,” he points out.
Homburger is benefiting now from its decision to set up a restructuring working group two years ago. “It was either a very prescient decision, or a very lucky one, depending on who you ask!”
Companies wanted
One trend which Swiss law firms are nervously hoping continues is that of international companies moving their legal corporate headquarters – and often their physical head office – to Switzerland. “Redomestications have snowballed in recent years,” says Franz Hoffet, head of competition at Homburger.
Switzerland was always a popular choice for European headquarters – Yahoo, for example, moved theirs to Switzerland from Britain in 2008 – but, says Hoffet, it is increasingly being selected as the location for global headquarters as well. The trend began in 2001 when tobacco giant Philip Morris relocated its global operations centre to Lausanne. The latest example is global security company – and pioneer in the use of law firms – Tyco, which in January announced its intention to relocate its place of incorporation to Switzerland.
For companies such as these, which move to Switzerland from the US or other European jurisdictions, the primary attraction of Switzerland is its low corporate tax rates – as low as 14% in the Canton of Zug (the country’s 26 Cantons set their own tax rates). But in recent years companies have started to relocate to Switzerland from low-tax offshore locations as well. In 2008, insurer ACE relocated from Bermuda and drilling company Transocean moved from the Cayman Islands.
Swiss lawyers point out that while offshore locations may be the cheapest places to do business, Switzerland can combine low costs with a more suitable environment. A recent study by KPMGii found that Switzerland’s highly-skilled workforce and good infrastructure were as important as its tax framework in attracting international companies. “Geneva and Zürich frequently top polls of the most attractive places to work and live,” points out Franz Hoffet.
As Patrick Schellenberg of Budin & Partners puts it, “you can have a real, operating headquarters here, rather than just a paper base like is often the case in offshore jurisdictions.” In addition, companies come to Switzerland from offshore for its “financial and regulatory stability,” says Philipp Haas, whose firm NKF advised ACE on their relocation.
For the firms lucky enough to land the work, a large redomestication can be a bonanza. “It’s been some of the most interesting work we’ve been involved in in the last year,” says Philipp Haas of the ACE deal. “You have to redesign the company to meet Swiss law – everything from corporate governance to employee benefits.”
It’s complicated by the fact that Swiss corporate governance law has key differences to other jurisdictions. Unlike in the US, for example, only shareholders can remove board members, change a company’s auditor or resolve to pay a dividend
But will this lucrative and interesting workflow continue in 2009? “Redomestications ought to continue, as the basic reasons for them – excellent infrastructure, reasonable taxes and a stable regulatory environment – still apply,” says Lorenzo Olgiati, a partner in Schellenberg Wittmer’s Zürich office. The recent KPMG report concluded that moving headquarters to Switzerland as part of a tax-focused restructuring could result in “a significant financial reward.”
But it also noted that the benefits were less certain where a company is in financial difficulties than when it is profitable. “Whether companies have the courage to initiate any major projects at the moment remains to be seen,” says Franz Hoffet.
A contentious turn
Of course, with slowdowns come disputes. For the most part, though, Switzerland’s lawyers, like those elsewhere, are still waiting for the deluge of credit crunch and downturn-related litigation to start. “In Switzerland it’s normal to spend a year or more trying to settle a dispute before starting litigation,” explains Peter Merz of Froriep Renggli. “We’re still finishing off disputes stemming from the internet bubble!”
While there have been few cases brought so far, however, Swiss firms are busy consulting with potential litigants and preparing cases. Smaller firms are generally advising investors considering suing banks and asset management companies, while larger firms are generally advising the institutions themselves. “There are thousands of investors who’ve lost money as a result of the crisis and are willing to sue,” says Patrick Schellenberg. “But only a few have done so up till now.We’re mostly at the stage of preliminary discussions or trying to negotiate a settlement.”
Two aspects of the crisis look set to generate the most disputes: the collapse of Lehman Brothers and the mammoth fraud perpetrated by Bernie Madoff. “We see the consequences of Lehman Brothers and Madoff in many places,” says Lorenzo Olgiati. “Sometimes it’s the larger banks assessing their exposure, sometimes it’s asset managers, or their clients who are upset about their losses. People are trying to get back even a percentage of their losses.”
As the year progresses it will become clearer who is most exposed to litigation arising from these calamities. According to Lalive’s Alexander Troller, “Switzerland’s traditional private banks were mostly isolated from Madoff. But there are a few smaller banks which were more exposed to Madoff ’s funds than others, and a few local asset management companies who had the bulk of their portfolios in Madoff ’s products. Local law firms are receiving many enquiries now from disgruntled clients who’ve lost a significant amount of their portfolio because of the fraud.”
An established legal hierarchy
Overall, Switzerland’s law firms remain cautiously optimistic about the year ahead. “We don’t expect our financial results to diminish this year,” says Patrick Schellenberg of Budin & Partners. Oliver Triebold of Schellenberg Wittmer agrees. “We’re confident that we can maintain a satisfactory level of activity.”
But if the downturn does severely impact law firms’ work levels – and growth – this year, it may shake up what has been a fairly stable legal market. Unlike other European jurisdictions, the Swiss legal market has not been disrupted by the arrival of large numbers of foreign law firms.
“There are two reasons for a large US or UK firm to open in a new jurisdiction: either because it’s an exciting market, or because you need expertise in that jurisdiction that local firms don’t provide,” argues Robert Furter of Pestalozzi Lachenal Patry. “No-one questions the quality of expertise of Switzerland’s firms, and the market simply isn’t big enough to be very attractive.” UBS and Credit Suisse, points out Furter, do most of their most complex investment banking transactions in London anyway.
The complicating factor in Switzerland is geography: the economy is based around two poles, Zürich in the German-speaking East and Geneva in the francophone West. Apart from a series of mergers in the 1990s that created national, bilingual firms like Lenz & Staehlin, the legal market has remained divided along these lines, and is dominated by large Zürich-focused firms. Homburger and NKF, for example, only have offices in Zürich, while Bär & Karrer has a small Geneva office.
In Geneva, firms are typically much smaller – Budin & Partners, with only 21 lawyers in the city, is still one of its largest firms. Partners at the larger, national firms predict consolidation in the market. “Right now many smaller firms are considering merging with each other,” says Peter Merz of Froriep Renggli, which has offices in Geneva, Zürich, Zug and Lausanne, as well as London and Madrid. “It’s a question of headcount: you need 60 or more people to make an impact with international clients.” In February, Schmid Eversheds, the Swiss ally of the UK national firm, expanded into Geneva through a merger with MCP Avocats.
But partners at smaller firms dismiss the need for a step change in size. “A hundred lawyers means a lot of people to find work for in a relatively small economy,” retorts Patrick Schellenberg of 28-lawyer Budin & Partners. His firm has offices in Geneva and Lausanne only. “If we need to do something in Zürich, we go to Zürich. If we need to make submissions to the Zürich courts we send them to one of our ally firms there.”
The chances are that, even if the downturn affects Swiss law firms more seriously than they currently expect, it will be over before it can reshape the legal market significantly. Current projections see the economy returning to modest growth of 0.3% in 2010.iii
If nothing else, Switzerland’s proudly independent firms can be confident of remaining uninvaded by US and UK firms for a few more years. Those firms, after all, have their own downturn to deal with.
i Source: Economist Intelligence Unit
ii “Switzerland – still an attractive location for headquarters of international corporations,” available at http://www.kpmg.ch/mediareleases/13595.htm
iii Source: Economist Intelligence Unit