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No one could have predicted that an obscure legal structure designed to be used by Swiss sports clubs and other nonprofits would end up fundamentally reshaping the legal industry.

The Swiss verein, which allows firms to combine more easily and retain their existing forms, has been adopted in almost every major cross-border law firm tie-up of the past decade, including those that created Dentons, DLA Piper, Hogan Lovells, King & Wood Mallesons, Norton Rose Fulbright and Squire Patton Boggs. (Baker McKenzie and Littler Mendelson are also vereins.) Vereins now account for five of the world’s 15 largest law firms by revenue, according to The American Lawyer’s Global 100 survey—including three of the top six.

But could the structure’s popularity be coming to an end?

Both of the last two large-scale transatlantic combinations that required new holding structures eschewed the verein in favor of a U.K.-law entity called the company limited by guarantee (CLG). In early 2016, Canada’s Gowlings and U.K. firm Wragge Lawrence Graham & Co. opted for a CLG in their merger, becoming the first Global 100 firm to use the structure. Sutherland Asbill & Brennan and U.K.-based Eversheds also used the CLG structure when they merged in February, as did Wilson Elser Moskowitz Edelman & Dicker for its four-way insurance alliance, which launched earlier this month. ( Last month’s deal between Norton Rose Fulbright and Chadbourne & Parke involved the U.S. firm joining an existing verein.)

At first glance, the choice of CLG over verein appears to be of little consequence. The two structures are remarkably similar in principle and practice. Both allow a flexible approach to governance and result in member firms that are distinct legal entities with limited liability. They also prohibit the distribution of profits across the network, although member firms can share costs, and pseudo profit-sharing is possible through contracting arrangements.

Vereins and CLGs do differ in one important area, however: Risk.

Gowling WLG strategic development director Jenny Hardy told The American Lawyer that the firm initially assumed that it would use a verein for its formative combination last year. But ultimately it decided that the CLG had “more certainty” regarding its legal position.

That’s because of a fundamental—if untested—question of whether vereins are meant to be profit-seeking enterprises to begin with.

Joining the Club

The verein structure was originally created for use by non-profit-making organizations, such as charities and societies. Indeed, the German word verein actually means “club” or “association.” Aster Crawshaw, a professional practices expert at Addleshaw Goddard, said that there is a lingering question over its use by commercial businesses, such as law firms. “There is a risk, albeit one that is dismissed by many Swiss lawyers, that if the verein is used as the governance entity of a network whose members carry out commercial activities, the verein could be deemed to be invalidly incorporated,” he said.

If a verein were declared invalid, the network could suddenly find itself treated as a general partnership. In ordinary circumstances, this is no big deal—the legal market is filled with such businesses. But this would also mean that the member firms would lose their limited liability status and instead have unlimited joint and several liabilities. This would obviously have hugely significant implications in the event of a legal claim against one of the member firms.

Tina Williams, a partnership expert and chair of London law firm Fox Williams, said that this risk has caused the verein to “fall out of favor” among commercial organizations. Big Four accounting firms KPMG and Deloitte both established vereins in the 1990s but later ditched the structure—the latter converting to a CLG in 2010. EY and PricewaterhouseCoopers are also CLGs.

The public audit work carried out by accounting firms opens them up to particular risks—liability to third-party investors, for example. Law firms, on the other hand, mainly face claims from clients, and a firm’s engagement with a client is typically subject to terms of business that limit liability.

Nevertheless, law firms may see CLGs as providing additional insulation. The structure is governed by the U.K. Companies Act, which provides CLGs with a solid and well-defined legal footing, whereas vereins operate according to general principles of Swiss law that are more open to interpretation.

There is a downside to being subject to the Companies Act, however. It means CLGs must adhere to a far more extensive—and potentially arduous—set of rules than they would with a verein. The U.K. Companies Act is one of the longest acts in British legislative history, running to almost 700 pages; the Swiss Civil Code provisions for the verein cover a mere five pages.

CLGs also face greater public disclosure obligations, including the requirement for the network entity’s accounts to be publicly available at Companies House, the U.K.’s official registrar of companies.

The only structural rule imposed upon vereins, on the other hand, is the requirement to form a vorstand—essentially a board of directors. Almost every other aspect of a verein firm’s organization is defined by its own strategic and management decisions and not by any restrictions inherent to the structure.

And for many vereins—particularly those formed as the result of a transatlantic combination—the structure holds another, even more important attraction: jurisdictional neutrality.

“Many of the vereins in the legal sector have a large U.K. firm as one of the founding members, [so] using an entity incorporated in the U.K. as the network governance vehicle may exacerbate any impression that the network is dominated by the U.K. law firm,” Crawshaw said. “Although largely an optical consideration, in many cases it is a more immediate issue than the technical legal risk.”

As long as that legal risk stays hypothetical, in other words, the attraction of Swiss neutrality for some firms will endure. But as global consolidation in the industry continues, more firms are banking on the British model.

Chris Johnson is based in London, where he writes about global law firms and the business of law. Contact him at cjohnson@alm.com. On Twitter: @chris_t_Johnson.

Copyright The American Lawyer. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

No one could have predicted that an obscure legal structure designed to be used by Swiss sports clubs and other nonprofits would end up fundamentally reshaping the legal industry.

The Swiss verein, which allows firms to combine more easily and retain their existing forms, has been adopted in almost every major cross-border law firm tie-up of the past decade, including those that created Dentons , DLA Piper , Hogan Lovells , King & Wood Mallesons , Norton Rose Fulbright and Squire Patton Boggs . ( Baker McKenzie and Littler Mendelson are also vereins.) Vereins now account for five of the world’s 15 largest law firms by revenue, according to The American Lawyer’s Global 100 survey—including three of the top six.

But could the structure’s popularity be coming to an end?

Both of the last two large-scale transatlantic combinations that required new holding structures eschewed the verein in favor of a U.K.-law entity called the company limited by guarantee (CLG). In early 2016, Canada’s Gowlings and U.K. firm Wragge Lawrence Graham & Co. opted for a CLG in their merger, becoming the first Global 100 firm to use the structure. Sutherland Asbill & Brennan and U.K.-based Eversheds also used the CLG structure when they merged in February, as did Wilson Elser Moskowitz Edelman & Dicker for its four-way insurance alliance, which launched earlier this month. ( Last month’s deal between Norton Rose Fulbright and Chadbourne & Parke involved the U.S. firm joining an existing verein.)

At first glance, the choice of CLG over verein appears to be of little consequence. The two structures are remarkably similar in principle and practice. Both allow a flexible approach to governance and result in member firms that are distinct legal entities with limited liability. They also prohibit the distribution of profits across the network, although member firms can share costs, and pseudo profit-sharing is possible through contracting arrangements.

Vereins and CLGs do differ in one important area, however: Risk.

Gowling WLG strategic development director Jenny Hardy told The American Lawyer that the firm initially assumed that it would use a verein for its formative combination last year. But ultimately it decided that the CLG had “more certainty” regarding its legal position.

That’s because of a fundamental—if untested—question of whether vereins are meant to be profit-seeking enterprises to begin with.

Joining the Club

The verein structure was originally created for use by non-profit-making organizations, such as charities and societies. Indeed, the German word verein actually means “club” or “association.” Aster Crawshaw, a professional practices expert at Addleshaw Goddard , said that there is a lingering question over its use by commercial businesses, such as law firms. “There is a risk, albeit one that is dismissed by many Swiss lawyers, that if the verein is used as the governance entity of a network whose members carry out commercial activities, the verein could be deemed to be invalidly incorporated,” he said.

If a verein were declared invalid, the network could suddenly find itself treated as a general partnership. In ordinary circumstances, this is no big deal—the legal market is filled with such businesses. But this would also mean that the member firms would lose their limited liability status and instead have unlimited joint and several liabilities. This would obviously have hugely significant implications in the event of a legal claim against one of the member firms.

Tina Williams, a partnership expert and chair of London law firm Fox Williams, said that this risk has caused the verein to “fall out of favor” among commercial organizations. Big Four accounting firms KPMG and Deloitte both established vereins in the 1990s but later ditched the structure—the latter converting to a CLG in 2010. EY and PricewaterhouseCoopers are also CLGs.

The public audit work carried out by accounting firms opens them up to particular risks—liability to third-party investors, for example. Law firms, on the other hand, mainly face claims from clients, and a firm’s engagement with a client is typically subject to terms of business that limit liability.

Nevertheless, law firms may see CLGs as providing additional insulation. The structure is governed by the U.K. Companies Act, which provides CLGs with a solid and well-defined legal footing, whereas vereins operate according to general principles of Swiss law that are more open to interpretation.

There is a downside to being subject to the Companies Act, however. It means CLGs must adhere to a far more extensive—and potentially arduous—set of rules than they would with a verein. The U.K. Companies Act is one of the longest acts in British legislative history, running to almost 700 pages; the Swiss Civil Code provisions for the verein cover a mere five pages.

CLGs also face greater public disclosure obligations, including the requirement for the network entity’s accounts to be publicly available at Companies House, the U.K.’s official registrar of companies.

The only structural rule imposed upon vereins, on the other hand, is the requirement to form a vorstand—essentially a board of directors. Almost every other aspect of a verein firm’s organization is defined by its own strategic and management decisions and not by any restrictions inherent to the structure.

And for many vereins—particularly those formed as the result of a transatlantic combination—the structure holds another, even more important attraction: jurisdictional neutrality.

“Many of the vereins in the legal sector have a large U.K. firm as one of the founding members, [so] using an entity incorporated in the U.K. as the network governance vehicle may exacerbate any impression that the network is dominated by the U.K. law firm,” Crawshaw said. “Although largely an optical consideration, in many cases it is a more immediate issue than the technical legal risk.”

As long as that legal risk stays hypothetical, in other words, the attraction of Swiss neutrality for some firms will endure. But as global consolidation in the industry continues, more firms are banking on the British model.

Chris Johnson is based in London, where he writes about global law firms and the business of law. Contact him at cjohnson@alm.com. On Twitter: @chris_t_Johnson.

Copyright The American Lawyer. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.