We have gone through turbulent times. To say that the world has changed in the past year and a half would be an understatement. Revered institutions have fallen like houses of cards and once untouchable reputations have been severely damaged by economic upheaval. Although there are some indications that life as we knew it has resumed, the way that lawyers do business has changed. This article discusses some of the changes that have occurred, and the lessons that lawyers can and should take away from the recession.
The most important changes have occurred in the financial services industry, where a growing mistrust of financial institutions has led to a scarcity of credit and a general decline of the financial services industry. The decline in the fortunes of investors, such as private equity houses and hedge funds, has had an enormous impact on the economic climate. 2009 was not a good year for mergers and acquisitions (M&A), to say the least. The worldwide deal value of M&A transactions shrunk by 56% to $600bn in the first 11 months of 2009. By comparison, the deal value of transactions in states belonging to the Organisation for Economic Co-operation and Development (OECD) was $1,000bn in the first 11 months of 2008. The leveraging of deals and the cottage industry that surrounds leveraging were in decline for most of 2009. Securitisation, and structured and leveraged finance practices, have largely disappeared. Law firms that focused on advising clients primarily involved in these type of deals have encountered difficult times, as have the majority of firms dealing with the financial services industry. During this period, law firms started shedding jobs for the first time since the internet bubble burst in 2001. The kinds of deals being undertaken has also changed and clients have started to look for different ways to finance their transactions and operations. Alternative financing, high-yield bonds and claims emissions have become more commonplace. Furthermore, clients have begun to seek greater security and certainty, relying more on due diligence and expert advice from trusted advisers.
Cost of legal advice
Interestingly, in spite of the greater emphasis on due diligence, another effect of the recession has been to reduce the amount that companies are spending on legal advice. This is also the result of a decline in leveraged deals. Prior to the economic crisis, the cost of advice was regularly charged to the target and included in the financing that was obtained for the transaction. This made such costs less visible and blunted their direct impact on companies’ budgets. Clients are now more likely to foot legal bills themselves and this has made them more sensitive to the cost of advice. Many larger law firms have had to review their business models as a result of this increased scrutiny of legal spend. Instead of employing large legal teams with many junior lawyers, thereby creating optimal leverage for law firms but meaning that relatively little expertise was on offer (the old model), clients frequently started to prefer smaller, dedicated teams with an in-depth knowledge of the industry. It is now more common for clients to involve only very senior counsel in the early stages of a transaction as a way to cut costs, engaging full teams when there is greater certainty of the transaction’s success. Another effect of the economic crisis is that clients are now more likely to fall back on trusted names, seeking a reliable quality of service in an uncertain environment. This has become all the more important as the recession has emphasised the need to view every transaction in the context of bankruptcy and directors’ liability issues. Clients are increasingly aware that the careful structuring and documentation of their actions is an essential step in avoiding legal liability.
Changing advice culture
It is clear that these changes in the way in which clients seek legal advice presents law firms with many challenges. This is partly true because change is always difficult and corporate cultures are not easily remodelled. Circumstances are made even more difficult by the realisation that the economy may not quickly improve. Law firms had a very good couple of years immediately before the recession began and it is only natural that they wish to stick to the way in which they operated during those years. However, lawyers really do have to change the way that they do business. As it becomes increasingly necessary for lawyers to be more involved in, and more knowledgeable of, clients’ businesses, their traditional role of providing neutral advice becomes a thing of the past. Lawyers are increasingly likely to act as strategic (albeit legal) consultants rather than just advisers on technical points of law. This calls for a paradigm shift in and reinterpretation of what it means to be a corporate lawyer. Change on such a scale is difficult for any profession and is especially challenging for one as conservative as legal practice.
These developments give rise to new opportunities and lawyers would do well to heed the American saying ‘never waste a good crisis’. It is likely that firms seizing these opportunities will emerge as stronger and better advisers to their clients. To achieve this goal, several lessons should be learnt from the recession.
Lawyers need to get involved in client’s businesses. They must combine their legal knowledge with efforts to learn as much as they can about the business and economic issues affecting their clients. As clients are looking for greater efficiency and better protection, lawyers need to have a thorough understanding of the risks that may be involved in doing so. Lawyers cannot be expected to know everything, but a counsel advising a pharmaceutical client, for example, would benefit from an understanding of not only patent law and product liability but also research and development budgets, and the wider pharmaceutical market. It is possible that, in the long run, a thorough knowledge of clients’ businesses may become even more important than the traditional legal skills of clear drafting and knowledge of the law. In an economic climate in which contracts are increasingly becoming standardised commodities, the choice of law becomes less and less important. Law firms that do not develop commercial knowledge may soon find themselves relegated to working on the localisation of standard contracts.
Lawyers need to engage in some careful creative thinking of their own. The economic crisis has highlighted that standard market practice is not always good practice. Lawyers should avoid relying too readily on precedents established in a buoyant economy, and persist in asking themselves and clients if the structure chosen for a deal is the one most likely to achieve success. It should be remembered that every transaction is different and a structure that worked for one deal is not guaranteed to work for another. Lawyers should use their deal experience to help clients get the best result they can achieve. The recession has shown that lawyers’ input on decisions traditionally made by investment bankers may be in the interest of clients. As parties that have not been implicated in causing the recession, they are well placed to do so.
Lawyers should view the economic crisis as a reminder that life is uncertain. Clients cannot be protected against all threats to their business and lawyers should never create the impression that such a position is possible. Lawyers should point out the pertinent dangers of transactions to clients. By making sure that all relevant legal procedures are followed and necessary checks are done, lawyers can ensure that contingent liabilities are limited as much as possible when things do not go to plan.
As the legal profession changes, the adage plus ça change plus c’est la même chose remains true. Legal practice has always been open to change but the care of clients’ businesses has always been the main concern among lawyers. As businesses adjust to the recession, lawyers need to think about how the lessons of the economic crisis can improve the standard of care they provide even further.