Dealing with no deal

Simon Davis has had quite a start to his one-year term as the 175th president of the Law Society of England and Wales. Taking office just a few weeks before Boris Johnson was appointed prime minister in July, the Clifford Chance (CC) litigation partner faced the reality of a nation that was heading for a cliff-edge exit from the EU, with major potential disruption for its legal industry.

With the new Conservative government promising to deliver Brexit on 31 October – ‘do or die’ – and the path to a withdrawal agreement with the bloc getting narrower by the day, the prospect of a disorderly exit has rapidly become a realistic possibility.

Assessing the impact of a no-deal exit on the profession is challenging. A recent Law Society report predicted the UK legal services sector would lose £3.5bn of its value, around 10% of the market, with the loss of up to 10,000 jobs. However, partners at major firms are generally sceptical that the immediate impact would be that dramatic, though few dispute that it will hurt the industry.

At stake for the legal profession is the principle of mutual recognition – by which EU, European Economic Area countries and Switzerland retain control over their domestic regulation on the provision of legal services while recognising those of the other member states. Leaving without a deal means UK solicitors would be treated as a third country.

‘If we do not reach a deal we will have to talk about issues around legal and other professional services with 31 different jurisdictions,’ Davis tells The In-House Lawyer. ‘This is not to say that individual arrangements will not happen, but it is the uncertainty factor that it’s so hard to put a price on.’

One of the most pressing issues for UK firms with European operations is that the UK LLP structure may no longer be accepted in EU jurisdictions. ‘UK law firms have historically used the UK LLP for many reasons, not least because it is extremely attractive in limiting members’ liability,’ says CM Murray partner Zulon Begum. ‘Because we are in the EU, [the UK LLP structure] is recognised by all EU countries. Once we leave the EU we’ll have to look at each country.’

While firms operating separate profit pools across the continent, such as CMS, would not be impacted, those with a single partnership could be forced to restructure continental European LLPs.

But potential issues go well beyond partnership structures. The EU legal services framework allows English-qualified solicitors to advise clients on domestic law in any member country, ensures their communications with clients remain confidential thanks to EU legal professional privilege and allows them to represent clients in EU courts. Unless an agreement covering the legal services sector is negotiated with the EU – a remote possibility in the event of a chaotic withdrawal – all this is set to be lost.

“We’ve always worked on the basis there was a possibility of no deal. Our preparations have not simply started since Theresa May left.”
Lee Ranson, Eversheds Sutherland

The fly-in fly-out approach, which sees UK solicitors travel to any European jurisdiction to advise clients, would come to an end. The damage for competition lawyers, who frequently work with EU competition law and agencies, is obvious, but intellectual property practices will lose out too: trade marks registered in the UK will no longer have EU-wide recognition, forcing clients to register their trade mark separately with the EU, and English-qualified solicitors will no longer be able to represent them in European courts should their trade mark protection be challenged.

How are the top 12 firms in the UK preparing for such a scenario? Eversheds Sutherland co-chief executive Lee Ranson says: ‘We have always worked on the basis that there was a possibility of no deal. Our preparations have not simply started since [Johnson’s predecessor] Theresa May left.’

‘The uncertainty around all the solutions has meant we always had to assume no deal and no transition period,’ agrees Herbert Smith Freehills (HSF) corporate partner Stephen Rayfield.

For many, the most pressing initial concern involves France, whose regulations bar direct ownership of French firms by non-EU lawyers. In summer 2018, a group of around 50 international firms led by CC and White & Case started lobbying the French government for a solution. ‘When we heard the first rumours about the position that could be taken about the future of Paris branches of UK LLPs, we managed to get the firms in Paris all together, commissioned a few studies and started contacting the relevant people in the French government,’ says CC Paris head Yves Wehrli.

In February this year, the French government published an ordinance allowing for grandfathering of existing LLPs in the event of a no-deal Brexit, meaning no restructuring is needed for UK firms already in Paris, although those opening in future will not be able to use the LLP structure. ‘That was an absolute victory for us,’ argues Wehrli.

The situation is more complex in continental Europe’s largest legal market, Germany. Current German corporate law allows for the use of a UK LLP after Brexit only under the condition that it operates as a branch of a firm managed out of London. In other words, UK LLP structures can continue to operate, but German LLPs will no longer be recognised as LLPs but treated like civil law partnerships (with personal liability of every partner).

While this meant most of the UK top 12 firms concluded that no change is needed, CC, HSF and Eversheds will have to change their partnership structure by the end of October. The trio operate in the country as locally-managed, profit-sharing German LLPs for tax reasons.

There are two options for them: absorbing the German LLP into the UK partnership; or switching to a German partnership with a different liability provision. The closest structure to a UK LLP Germany offers is the German law partnership with limited professional liability (Partnerschaftsgesellschaft mit beschränkter Berufshaftung – PartGmbB).

Eversheds is in the process of transferring its business and assets into the new legal entity by the end of October. CC has obtained tax clearance to move to a PartGmbB structure too but will wait until the 11th hour to switch: an appointment booked with the notary for 28 October to register the new entity will be cancelled if the UK and the EU reach a last-minute agreement.

HSF, meanwhile, has obtained tax clearance to absorb its German partnership into the UK LLP but at the time of writing was yet to take a final decision on the matter.

The other large EU jurisdictions pose fewer challenges. ‘Fortunately, in terms of basic structure, very little will need changing even in a hard Brexit scenario,’ says HSF’s Rayfield. ‘That’s partly because the law societies of those jurisdictions have taken a fairly proactive approach. They have taken the view that firms that are already there should be able to stay there without changing their structure or by introducing some arrangements. If Brexit occurs, countries are free to decide their own domestic rules, so any of these jurisdictions could change their rules in the future. But they have decided that’s not in their interest at the moment.’

But even if the structural issues are out of the way, the limitations affecting individual UK-qualified lawyers’ ability to practise in the EU remain. The most popular solution firms have adopted on this front is to get large numbers of solicitors registered with the Irish Bar (see box).

Large firms also cite their European footprint as mitigation. ‘We have such a strong international network that most of the work is being handled by local lawyers,’ says Linklaters Germany head Andreas Steck. ‘We don’t have English-qualified partners doing business in Germany on a stand-alone basis.’

The only exception on this front among the top 12 is Slaughter and May, whose only EU presence is a small four-partner outpost in Brussels. But partner David Wittmann is sanguine that the firm’s 100 lawyers registered in Ireland (20 of them with practising certificates), together with its Brussels branch, whose partners are entirely EU nationals, and its network of European ‘best friend’ firms, will be enough to allow the firm to carry on as usual.

Overall, the UK top 12 firms are confident they have contingency plans to ensure their business carries on without major initial disruption beyond October. The main caveat is that none of the above solutions offers the same advantages as the current framework. If the UK crashes out of the EU without any arrangement covering the legal sector, negotiations with domestic Bars in the EU would continue for many years to come.

Says Davis: ‘What I would like to see is a process of reciprocation, and to the extent the UK remains a very open jurisdiction to those who want to practise here, I would hope decision makers will stand back and say: “What’s in the best interest of clients across Europe?” It’s not in their best interest to say you cannot use this kind of lawyer or law firm.’ 

Marco Cillario and Nathalie Tidman

The Irish question

The UK’s largest firms see registering their lawyers with the Irish Bar as an important means of mitigating a potential no-deal scenario. The Law Society of Ireland’s data shows that more than 2,000 lawyers were last year admitted to the Irish roll in a bid to continue practising EU law and be able to stand before the European Court of Justice after 31 October. Eversheds Sutherland led the pack, last year seeing 132 solicitors admitted while Norton Rose Fulbright brought up the rear with 13 admitted. Other firms with 100 solicitors or more on the roll are: Freshfields Bruckhaus Deringer (131); Allen & Overy (110); and Slaughter and May (100). Linklaters and Clifford Chance had 53 and 28 respectively in the latest figures.

Although there is obviously a cost implication, Paul McGarry, chair of the EU Bar Association of Ireland, says the process is uncomplicated for solicitors and barristers: ‘It’s relatively straightforward to become a member. Based on the application of European directives, you need to be qualified for more than three years as an English barrister to be admitted to the King’s Inn. Then you have two transfer tests. You can then apply to be called to the Irish Bar.’

Approaches have been varied, with some firms applying for Irish practising certificates for a large number of their lawyers, whereas others have been more focused. Says Angela Pearson, GC of Ashurst and head of its Brexit committee: ‘We’ve taken a more targeted approach. We got practising certificates for competition and regulatory partners. It’s too close to call whether that will be enough, but it’s better to have it than not.’

Pearson’s last remark speaks of the uncertainty wrought by the Law Society of Ireland potentially throwing a spanner in the works by insisting those on the roll should be based in Ireland. The move sparked a heated debate between the Law Societies of England and Ireland and, following a backlash from UK firms, a High Court case reversed the condition in May.

Even so, the Law Society of Ireland’s guidelines on the rights of Ireland-qualified lawyers to practise overseas have done little to allay fears and the issue is still unresolved. That said, it is understood that the two law societies continue to thrash out the issues towards a position of clarity.

While most are sanguine of an agreement being reached, in practice there could be challenges ahead. Says McGarry: ‘In a complaint scenario, the European Commission tends to side with the party seeking to exercise a right to practise cross-border, but it might not be the same after Brexit. There is a perception that the Commission might have less sympathy for a UK lawyer exercising rights [even if they requalify as an Irish lawyer]. It could be viewed as a European right. That is an issue that will remain to be worked out between the UK and the EU.’