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Come out fighting

4 May 09

The economic downturn in general and the collapse of the property market in particular has battered the legal profession. But as Robert Outram and Andrew Beach report, Scotland’s firms also see opportunities on the horizon

by Robert Outram and Andrew Beach

For the legal profession in Scotland, even storm clouds have silver linings. While there’s no doubt that the economic downturn has hit law firms hard, there is some comfort to be had.

For example, Maclay Murray & Spens has been acting for Lloyds Banking Group, along with Linklaters, on Lloyds’ takeover of the beleaguered Bank of Scotland (Shepherd and Wedderburn’s Paul Hally is also acting as court reporter in this transaction). Maclay Murray & Spens is also acting for the administrators of the Dunfermline Building Society.

Magnus Swanson, chief executive at Maclays, says: “There’s a case where, out of adversity, there could be some interesting legal work.”

“I believe there is a flight to quality,” Swanson argues. “If you get the best guys competing for what business there is, clients will opt for the best and the least risky option. So I believe we are being squeezed a little less than some further down the chain.”

One of the most difficult issues for the corporate law firms is what to do with trainees. Typically, training places are offered two years in advance, saddling firms with commitments they may be struggling to keep. Maclays and many of its competitors are encouraging some of their intake to defer, voluntarily, for a year.

Swanson adds: “We’re making strenuous efforts to find alternative routes or secondments for some of our trainees who will be graduating later this year.”

Patrick Andrews, chief executive at Shepherd and Wedderburn, is keenly aware of what’s happening in the market.

“Activity has slowed in our capital markets work, or in some cases come to a full stop, but in terms of corporate activity, that has been replaced by a flow of restructuring and insolvency instructions,” he says.

“Significant corporate deals have meant that our level of activity across the board has been good.

“The level of activity is down in property, but not by as much as one might have expected. We’ve been helped by a number of new client wins including Sainsbury last year, which has been very active in Scotland.

“Our renewable energy practice, onshore and offshore, has been going like a fair.”

“We had a limited round of redundancies, predominantly in the property field and predominantly in the Edinburgh office. We laid off 14 people in February.”

Shepherd and Wedderburn has also been hiring. Andrews says: “We’ve continued to build and invest with the appointment of new partners in May last year, and the appointment of Stephen Turnbull, a corporate finance partner in our London office who joined us from Linklaters, Alastair Frood, a litigation partner in Glasgow, from DLA Piper; Brenda Harris, a restructuring and insolvency specialist who recently joined our London office and was previously a partner at Eversheds.

Michael Murphy, managing partner, MacRoberts, says: “Any areas affected by the shortage of liquidity are seeing a downturn, especially corporate finance and banking. For us, though, real estate has been holding up better than last year, perhaps surprisingly.”

Litigation, employment, private client work and the insolvency sectors have been busy, and the firm recently hired Alan Meek, a former insolvency partner with HBJ, to head its corporate recovery practice.

Murphy says: “We have not had to lay people off, but we have been very careful as far as recruitment is concerned.”

MacRoberts is planning a move to new offices in Glasgow in early 2010, near Broomielaw. Murphy says: “I’m expecting it will change the way we work, and the way the different teams communicate with each other.”

Dundas & Wilson sees revenues up almost 25 per cent on the previous period. Managing partner Donald Shaw says: “The financial year to April 2008 was our most successful to date. The first six months of the 2009 financial year have been more challenging but we have maintained our increased revenue over that period.”

Shaw cites the firm’s success in winning a place on the legal panels for some key clients in the public and private sectors, including the Scottish Government, National Grid and Lloyds TSB Group and its subsidiaries, including Scottish Widows.

He adds: “We continue to recruit in key areas, for instance with the arrival of Hugo Coetzee as a partner specialising in project finance in our banking team. We also have recruited two further partners in the sphere of major projects and energy who will join us in June 2009.”

At Biggart Baillie, Murray Shaw was appointed senior partner and chairman on 1 January, while Alasdair Peacock has recently taken over as managing partner from Derek Ellery.

The firm announced a number of redundancies at the end of last year, which Shaw says was something it had never had to do before.

“Some areas are doing well, such as private clients, and dispute management,” he says. “My own department – infrastructure, environment and transport – is not as busy as it was last year.”

He says the domestic property market is showing signs of increasing activity, adding, “I think corporate activity will take longer to come back and when it does it will not be the same.”

Alan Thomson, chairman of McClure Naismith says: “We have a broad-based, diversified legal practice with a strong presence in both Scotland and London. This has allowed the firm to capitalise on growth sectors, such as restructuring/refinancing, commercial and property litigation, social housing and the public sector. While we are not immune to a tough market, we are weathering the storm.”

The firm has appointed David Thomson, who joined as a commercial property partner from DLA Piper, and promoted Rory Jackson to partner within litigation.

Thomson adds: “While property finance is down, our capital markets team has just advised on a $930m reverse takeover and admission to the PLUS market of a company investing in commercial property in Kuwait City. Our employment and litigation teams are busy, and construction has had a significant new project, the £900m Health Facilities Scotland programme.”

Fraser Jackson, partner with HBJ Gateley Wareing, says: “Our rapid growth over the past few years has slowed, although our financial year just ending will still show a 6 per cent increase in overall turnover in Scotland.”

Not surprisingly, Jackson says the firm’s residential and commercial property activities have been hit by the downturn, but he says other areas remain active. He says that total staff numbers have reduced over the past year, mainly through positions not being filled, but partner numbers increased in the period.

Like others, Joyce Cullen, chairman of Brodies, says her firm has felt the impact of the downturn. “Our clients who have been involved in corporate transactional work, corporate finance and property development have all been affected, so our lawyers in those teams have been affected.

“We have spent a long time building up these teams and we are very keen to keep them but we have to respond to the market conditions.” Brodies has made six staff redundant, although the firm’s overall headcount is up year-on-year.

She says the past year has seen some significant hirings by Brodies, including an insurance team from DLA Piper headed by Toby Seton and a corporate tax team from MacRoberts led by Isobel d’Inverno.

David Dunsire, executive partner at Tods Murray, says that commercial and residential property and corporate M&A work has reduced significantly, but he says the remaining areas of the practice are holding up well. “The economic turmoil forced us to review our staffing levels last year and, regretfully, 17 jobs were lost, of which three were solicitors,” he says.

Looking ahead, he said the firm was continuing to win substantial new business. “Our capital projects team has established an enviable reputation. Furthermore, our banking and finance teams continue to be a first choice of referral in Scotland from US and City law firms.”

At Morton Fraser, chairman Bruce Wood also sees the changes in the legal profession as an opportunity. “Invoice finance in particular is thriving in the recession and has benefited from the inability of banks to finance business needs,” he points out.

The past year saw the firm merging with Skene Edwards, bringing in three new partners, while Maggie Moodie joined as a partner from HBJ Gateley Wareing where she was head of litigation. “We enhanced our tax service with the arrival of a new director of tax, Heidi Poon, and our English private client offering has continued to grow under Rory Collins.”

The firm doubled the size of its Glasgow office and in November its Edinburgh operations will move to offices in the new Quartermile development.

At Harper MacLeod, chief executive Martin Darroch – a CA by background – is relatively upbeat. He says the firm expects to see growth of four per cent in its latest financial year, it has had a 100 per cent success rate in retendering for existing clients, and has picked up major new clients such as the Forestry Commission, Highlands and Islands Enterprise, Arcadia and Scottish and Newcastle.

“Obviously we have seen a slowdown in real estate and corporate, but we have still punched above our weight in those markets,” he says. “We have not lost any staff, and we have made no redundancies or reductions in hours. What we did was move 20 per cent of our non-partners out of the areas where we saw a slowdown and put them into growth areas – insurance, debt recovery and insolvency, and banking.”

Darroch says four non-lawyers were promoted to partner status in the past year, joining himself and the firm’s marketing director as non-lawyer partners. However, he says it is not linked to any changes coming from deregulation: “We view ourselves entirely as a corporate business … so our management structure is more in line with a corporate.”

Bruce Westbrook, office managing partner for DLA Piper Scotland, says that alongside the decline in deals from “boom year” levels, there has been growth in key practice areas such as employment, litigation and restructuring.

Westbrook says: “Our work in the public sector continues to be active despite the economic downturn and we recently advised the banks funding the M80 £320m extension in January. We have also been appointed to advise Transport Scotland on procurement and contract aspects for the replacement Forth crossing.”

He says the firm has made some strategic hires in recent months, in its restructuring, litigation and regulatory and insurance teams, but had also had to make 13 people in Scotland redundant.

Alistair Morris, chief executive of Pagan Osborne, said his firm had downsized by a third, with reduced investment and a scaling back of its growth plans. “Property and financial services have been our largest victims of the recession. Clients in both of these areas have lost confidence and reverted to long periods of inactivity.”

The firm has made 18 redundancies, including losing three partners. Last year the firm sold both its financial services and family law businesses, but in April this year it announced it had acquired law firm Robson McLean.

Morris says the biggest challenges have been “handling all of the changes while being true to our values, and maintaining some forward momentum”.

He says: “Our changes appear to have worked and we are confident about our prospects. This climate is the new norm.”

Alister Fraser, managing partner at Semple Fraser, says his firm is no exception. “A significant portion of our business a year ago was transactional activity, generally lubricated by the financial markets, and that kind of activity is seriously down.”

He says that because much of the firm’s business is keyed in to transactional markets, it felt the effects of the downturn early, and had to lay off a small number of staff in October last year.

“I think that the year ahead may be slightly less bad than is feared. 2009 is an opportunity year for those who have both the nerve and the access to cash,” he adds.

The profession is facing further changes if, as widely expected, the Scottish Government’s soon to be unveiled draft legislation on regulation and competition in the legal profession implements similar changes to those already on the statute books in England & Wales. Reform would open the way for mixed practices of lawyers and other professionals, and for non-lawyers to take a full equity stake in a firm, as well as allowing legal practices to be structured as plcs or wholly owned by corporates.

Maclays’ Magnus Swanson says: “It remains to be seen how much this opens up the legal sector to the possibility of outside capital. The most important issue for us is that we would not want to be competing with large English legal firms who could carry out manoeuvres that we could not do.”

Patrick Andrews of Shepherd and Wedderburn says: “South of the border, legislation is already in place but they are still looking at the implementation. That points to the degree of difficulty in getting the balance right between proper regulation and opening up the market for legal services.

“It is critical that the ‘level playing field’ is not just about having a legislative framework that puts you on a parity [with law firms in England]. The framework needs to have regulation in place that is proportionate.”

Andrews argues that if the same regulatory framework was introduced in Scotland as in England, its size and cost would be “wholly disproportionate”, to the size of the legal market in Scotland. He says: “It could put us in the position where we have all of the enabling powers to introduce an alternative business structure (ABS), but the regulatory regime could make it too expensive to be worth considering.”

Joyce Cullen from Brodies is concerned about the impact of deregulation and the introduction of ABSs. “They pose a risk to the continuation of an independent legal profession – it’s as stark as that,” she says.

“We think better regulation would be the way to protect consumers rather than adding a new layer of types of businesses that can provide legal services, which will only add to the confusion for consumers. But independence is the issue we are critically concerned about. If there are conflicts between ethical responsibilities and commercial interests then they are more likely to be resolved in favour of the ethical duties if the owners of the business are bound by the same code as the solicitors working for them.”

HBJ’s Fraser Jackson says ABS is not relevant just now. As he puts it: “It has been back to basics for us in management terms since the start of 2008. Today is not the time to be taking gambles on new structures or funding sources – even if tomorrow might well be.”

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