German corporate counsel may be lagging behind their British and US counterparts still in terms of flexing their muscles, but indications are that this is soon to change.
Over the last year, in-house lawyers working in the largest economy in Europe have found themselves at the centre of a massive storm. Buffeted on one side by a wave of change in the legal marketplace created by the advance of the Anglo-Saxons, German companies face record levels of M&A activity and corporate restructuring.
M&A activity is expected to be boosted further by a new tax regime that was introduced at on 1 January this year, which will see capital gains tax exemptions for German companies that are selling shares in domestic or foreign companies.
Although this has created a period of instability for in-house lawyers, the changes have also had their benefits.
Corporate restructuring has led to a need for more in-house lawyers as companies have set up subsidiaries that require their own in-house teams. Three years ago the number of German in-house lawyers stood at 6,000. It is now estimated at 10,000.
With the invasion of the UK and US law firms comes fierce competition for high-quality local lawyers and this has had an impact on the in-house sector.
Historically, German in-house counsel have suffered from an image problem – perceived as second-class lawyers, much the same as their UK counterparts were until 10 years ago. Lawyers who worked for corporations tended to move in-house immediately after qualifying and were perceived as being less academically sound than the lawyers that worked in private practice. This meant that, until recently, there was very little movement of lawyers between private practice and in-house.
But, this is changing, according to Nick Shilton, a consultant at City recruiters TMP QD, who moved to Germany in February 1999 when QD Legal became the first recruitment consultant to place legal consultants on the ground in Germany with the opening of its Frankfurt office.
At the beginning of December 2000 QD opened a second German office in Munich and is planning a third in Duesseldorf next year in an attempt to tap into the growing demand from international firms for competent local lawyers.
“The perception in some sections of the market is that in-house is behind private practice from a qualitative point of view,” Shilton says, “but you now find some very talented people going in-house – people who would be snapped up by the law firms.”
As UK and US firms move in they bring with them US/UK salaries and German firms are responding in turn. In June last year, Hengeler Mueller Weitzel Wirtz raised its basic rate of pay to dm140,000 (£44,789), matching Freshfields Bruckhaus Deringer, which increased its basic pay to the same level at the beginning of the year. All merged German and Anglo-German firms have either matched the rate or are in the process of matching it.
Traditionally in-house lawyers in Germany have not been paid as much as those in private practice. But as recruiters move their sights to the in-house market in their search for top quality local advisers, all predictions are that this is set to change.
“The in-house market is extremely buoyant at the moment,” says Naveed Ahmed of international recruitment consultants Laurence Simon. “For the first time, general counsel find themselves having to substantially increase the salaries of their in-house lawyers to fend off US law firms, which are willing to pay top dollar to attract staff.”
European and US investment banks and telecoms/technology companies are also joining in the battle for the talented players. The banking sector has historically rewarded its lawyers competitively, but Ahmed says the past year has seen some banks slowly redefine the way they pay their in-house lawyers and come up with innovative remuneration packages to attract new talent and hold on to the existing team.
If companies want to retain the top in-house talent they are well advised to bring them on to the management board. But German in-house lawyers complain that they still lag behind the US and UK counterparts in the management stakes.
“There is a different concept here of lawyers,” said one in-houser. “They are still treated as a separate entity from the business. It is disappointing that general counsel rarely make it on to the board.”
But this is also set to change, as the US model of the lawyer/businessman infiltrates German corporations and good in-house lawyers become a valued commodity.
The clients’ view of the global law firms
“I have no problems with the US and UK firms moving into the German market because the need for internationalisation is coming from the clients,” says Rainer Krug, general counsel to Infraserve.
His words will be music to the ears of the Anglo-Saxon firms that have made no secret of their aim to dominate the German legal market.
And for international deals, the market these firms are targeting, all the signs are that their efforts are paying off as they dominate the table of advisers to the top 10 German deals in the past year (see table).
But not all is rosy in the garden for the global players.
A top in-house lawyer at a major German investment bank was more circumspect when it came to the question of the global players.
“We have a strong presence internationally, we do not need one contact partner globally,” he says. “As far as the usefulness of mergers is concerned, we feel they are more useful for the clients who need help in selecting law firms to do work outside the jurisdiction because they do not have an international structure.
“We have one preference – to get the best service we can find – and we do that by instructing the best law firm in the jurisdiction,” he says.
The bank in question instructs a top German firm as its primary adviser in Germany. Although it uses Clifford Chance in the UK, he says this would not mean they would use the firm in Germany.
This is serious stuff for the US and UK firms that have staked their strategy on international clients’ need for international law firms.
At the beginning of last year, Clifford Chance identified a list of top 10 international clients it aimed to advise – the bank in this example is one of them.
German in-house lawyers are generally conservative by nature, they tend to choose the best lawyer for the job rather than the best law firm and they value long-lasting relationships.
Moreover, in the sought-after banking sector, relationships with legal advisers are often developed by personal relationships between the external lawyers and the bankers, rather than by the in-house team.
Freshfields Bruckhaus Deringer dominates M&A work, but this may have less to do with the fact that it is an international firm and more to do with the fact that Bruckhaus has always been very strong in M&A.
“There are a number of firms that have always done the major international transactional work in Germany – Bruckhaus is one of these,” says one German banking lawyer. “Freshfields is very strong in the M&A table, but Bruckhaus has always been strong – it was a global player before the merger.”
Oleg de Lousanoff, a partner with Hengeler Mueller Weitzel Wirtz, which is part of the Slaughter and May best friends network but has so far resisted a merger, says that just because the global firms have moved in, it does not mean clients will be attracted to them.
“We are regularly told by clients that they have just had a visit from our friends in London, who want to convince them to let them do their work in Germany – but their response is that we are German,” he says. “They try very hard, they are very aggressive and try to entice our clients away from us, but the sophisticated generation of in-house counsel does not see the value in the network.”
That may be the case, but Hengeler Mueller is becoming an increasingly lone voice in the German marketplace. Of the top 10 German firms, five have been absorbed and four have set up formal alliances.
The global players know that if they want to attract the local clients it is not enough to say that they provide an international presence. They will also have to prove that they have the best local talent either through a merger with a top German firm or by luring the top German lawyers into their fold.
That is why they are throwing everything at bringing on board the top local lawyers, either through mergers or lateral hires from firms such as Hengeler Mueller.
It remains to be seen if the strategy will work and, crucially, if the clients will follow them.
