King & Wood Mallesons ()
Continental Breakfast: your daily update on what’s happening in Europe.
Watching events unfold at King & Wood Mallesons’ European arm over the past few months has felt like watching a car crash in slow motion.
It has been clear that things haven’t been right with the legacy SJ Berwin business for quite some time. The practice was subjected to two separate restructurings in July 2015 and earlier this year that resulted in significant cuts to the partnership. But the exits kept coming. And coming. The firm saw its regional management resign and struggled to find replacements. Its financial position worsened and its lender took a debenture of the firm’s assets in order to provide the bank greater security against its lendings.
The recent failure of a planned $18.4 million capital injection really started alarm bells ringing. The recapitalization was halted following the shock resignation of four senior partners in London, including U.K. investments funds head Michael Halford and former managing partner Rob Day. (Halford was yesterday revealed to be joining Goodwin Procter alongside several other KWM partners, who are yet to be identified. That’s a gutsy move by Goodwin, given that KWM sued the U.S. firm earlier this year over its hiring of a highly-profitable six-partner private equity team from KWM’s Paris office.)
But the real hammer blow came yesterday, when KWM announced that its European partners had comprehensively rejected a financial rescue deal from the firm’s Asia practice.
KWM’s Asian arm had offered to bail out the firm’s struggling European practice—but only if partners in the region agreed to stump up $17.4 million of their own cash and commit to not leaving for at least 12 months.
Those terms were evidently unpalatable, as just 21 of KWM’s 130-strong European partnership—barely 16 percent—backed the deal, despite having being told that they may have to repay two years’ worth of profits if they refused. (That said, a leading expert in partnership law told me that it would be practically impossible for the firm to clawback the profits, as it would not only need to be insolvent, it would need to be able to prove that partners knew when they received the distribution that the firm was likely to become insolvent .)
KWM said in a statement that its European management board is now “considering a range of strategic options, including mergers, in conjunction with the firm’s bankers and financial advisers.”
KWM recently held recently held unsuccessful talks with Morgan, Lewis & Bockius, and I can’t imagine that too many firms would currently be keen to merge with its European practice, given its current state. It seems more likely that rivals will seek to pick off partners and teams, particularly given that a recruitment consultant told me yesterday that virtually all of KWM’s European partners are on the market.
U.K. Government Expected To Downgrade Growth Forecasts In Key Economic Statement
The U.K. government will today deliver its first major economic report since the country’s decision to leave the European Union.
It is widely expected to downgrade the country’s economic growth forecasts due to Brexit-related uncertainty, slashing its prediction for GDP growth in 2017 from 2.2 percent to around 1 percent. The government is also set to announce an increase in public borrowing of 100 billion pounds ($124 billion) over the next five years.
The Autumn Statement, which outlines the government’s plans for taxes and spending, will also introduce new measures designed to help lower-income families.
Ashurst Proposes Radical Profit Payment Switch
Ashurst has proposed a radical overhaul of its compensation system that would see equity partners receive a single annual distribution of profits.
Partners at the London-based firm currently have profit paid out to them on a quarterly basis and also receive a monthly drawing, which would continue and actually increase by around 5 percent if the switch is approved following a vote next month.
The change would take effect on May 1, with partners receiving the entire distribution of profits for the current fiscal year in April 2018.
The American Lawyer’s U.K. sister title Legal Week reports that in order to receive the remainder of the profits due from the last two fiscal years, partners will need to collectively inject around 1 million pounds ($1.24 million) of additional capital into the firm—equivalent to around 4,000 pounds ($4,900) per partner.
Ashurst recently restarted profit distributions after putting payments on hold following its announcement that revenue had fallen 10 percent and its PPP crashed 19 percent in the previous fiscal year.
Magic Circle Firm Gets Nuclear Payday
A nice payday for Slaughter and May, with documents revealing that the firm has received 12 million pounds ($14.8 million) for its work advising the U.K. government on the long-running Hinkley Point C nuclear power project.
The magic circle firm was paid nearly three times as much as any other adviser on the 18 billion pounds project, according to government figures obtained by The Times. Big four accounting firm KPMG received 4.4 million pounds ($5.4 million), financial adviser Lazards received 2.6 million pounds ($3.2 million) and management consulting firm Leigh Fisher received 1.2 million pounds ($1.5 million).
The project at Hinkley Point in Somerset, a county in south west England, will be the U.K.’s first nuclear power station for more than two decades. It was first proposed in 2006, but was plagued by delays. U.K. prime minister Theresa May put the project under review in July over concerns about costs and the Chinese government becoming a significant investor in the British nuclear sector, with the project part-financed by French energy company EDF and China General Nuclear Power Group (CGNPG), which is state-owned.
But May announced in September that work on the 3,200 megawatt plant could proceed and said that the country had introduced “significant new safeguards” for foreign investment in future projects. China’s investment in Hinkley was dependent on it being allowed to lead the development of its own nuclear power plant in Britain. EDF’s website says that its agreement with CGN also covers the development of two additional U.K. nuclear plants.
A number of other U.K. law firms have been involved in the Hinkley saga. Herbert Smith Freehills has been acting for longstanding client EDF on the project since 2006 and the company also brought in Clifford Chance to advise on its successful application for European Union subsidies. London-based Ashurst acted for CGNPG , while Pinsent Masons—a national midmarket firm known for its strength in energy and infrastructure work—advised local authorities on planning issues.
I’d just like to wish all of our American readers a very happy Thanksgiving. Continental Breakfast will return on November 28. Have a great weekend.