As lawyers in London fret about the possible longer-term consequences of the United Kingdom’s decision to leave the European Union, their German counterparts are trying their best to appear sympathetic while suppressing delighted smiles.
The longer-term outcome of Brexit is still impossible to predict, but it does seem increasingly likely to have a net benefit to the German economy—and by extension, to law firms practicing in the country.
“Where the uncertainty is paralyzing the U.K., it is actually helping increase activity here,” says Dirk Bliesener, co-managing partner at leading German firm Hengeler Mueller. “It’s very hard to think of a single practice area that isn’t rising.”
Much has been made of the potential shift of business from the U.K. to Germany—particularly in financial services, where the expected loss of so-called passporting rights will have a significant impact on institutions running EU operations out of London. The process has already begun, with Goldman Sachs AG, Morgan Stanley, Standard Chartered PLC, UBS Group AG and Japanese securities brokerage Nomura Holdings Inc. among the financial companies to have expanded their presence in Germany following the referendum last summer.
Lawyers say that while international banks are seeking to minimize any disruption to their business, regulators have made it clear that simply setting up a front office in Germany and continuing to handle everything out of London is not going to cut it. While the involvement of lawyers has so far largely been confined to regulatory and more general advisory work, law firms expect to see increased activity across a broad range of practices once relocation plans are set in motion.
German lawyers are also benefiting from the fact that the uncertainty currently clouding the London market makes Germany’s stable and strong economy an even more appealing investment proposition. “Germany has become a safe haven for foreign investors,” says Clifford Chance regional managing partner Peter Dieners.Lawyers report strong client demand across the board, from real estate to energy and even equity capital markets, which has generally been quiet across the region.
Law firms in Germany are also being kept busy by a continued compliance and investigations boom that was kick-started by the bribery scandal at German engineering giant Siemens AG in the mid-2000s and recently hit the headlines once again with the Volkswagen AG “dieselgate” affair.
A burgeoning fintech industry is attracting investment from a buoyant German private equity market, while M&A is active across a range of sectors, including the traditional core of industrial, machinery and equipment, and infrastructure. Earlier this summer, German gas companies Linde AG and Praxair Inc. agreed to a $73 billion merger that created roles for Cravath, Swaine & Moore; Linklaters; Hengeler and Sullivan & Cromwell.
Chinese investors continue to target German equipment and technology, with state-owned funds such as China Investment Corp. driving big-ticket deals. Chinese companies are also pursuing the Mittelstand—a group of small- to medium-sized and often family-owned enterprises that form a key part of the country’s economy.
The favorable market conditions have brought Germany to the fore of many Big Law agendas.
CMS, Eversheds, Kirkland & Ellis and Sidley Austin are among the firms to have ramped up their German presence over the past 12 months. Latham & Watkins has been particularly aggressive, bringing in a slew of high-profile partners from Allen & Overy, Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters. “We’re not growing for the sake of it. We’re very bullish about Germany,” says Latham’s local managing partner Oliver Felsenstein. “There is uncertainty—we aren’t entirely isolated from what happens in Europe—but the economy is very strong and things are looking good.”
The picture isn’t entirely positive, however.
With competition among law firms in Germany intensifying, it has becoming a buyer’s market.
Firms are facing a double whammy of having to pay more to attract and retain talent while feeling intensified fee pressure from clients, particularly the DAX 30, Germany’s largest listed companies. Law firms’ interactions with these corporate titans are increasingly being run by procurement teams rather than in-house legal departments, with panels and competitive auctions being used to drive down prices. Discounts of up to 30 percent are not uncommon, lawyers say.
The resulting squeeze on profitability is exacerbated by the fact that attorneys are paid more in Germany than anywhere else on the planet, except for the United States.
It is perhaps unsurprising, then, that the U.K. Magic Circle firms have each carried out strategic reviews in Germany over the past 18 months that have resulted in restructuring practices and modifying their lockstep partner compensation systems. These changes have also partly been prompted by a broader profitability drive designed to help finance their expansion in the United States.
“It’s not just about profitability—it’s about being properly aligned with the global strategy,” says Clifford Chance’s Dieners. “We may have been slightly oversized in the past, but now we’re much more robust.”