It was a humiliating moment. FreshfieldsBruckhaus Deringer, which so rarely puts a foot wrong in M&A, was caught in the crossfire between two of the UKs largest retail icons when it was thrown off Philip Greens bid for Marks & Spencer (M&S) because of conflicts.
It is hard to understate the enormity of this: few City takeover battles make it onto the front page of the newspapers, let alone television. But maverick retail entrepreneur Philip Greens bid for M&S, that most middle-class of UK institutions, caught everyones imagination. And no wonder big personalities, big money and big issues all conjoined.
But the M&S bid has not all been about colourful war stories although they are there aplenty. M&S has thrown up some crucial issues on law firm conflicts just as the Law Society, the solicitors regulatory body, is set to publish its new thinking on the matter. It could not have been more timely.
Lawyer 2Bs sister title The Lawyer was there, following the action on the summers hottest business story.
On Thursday 3 June at 3.35pm, Freshfields corporate finance head Barry OBrien left Court 70 of the Royal Courts of Justice to stand outside with the media. It was an attempt to demonstrate how seriously the firm takes conflicts of interest.
The court had gone into private session to debate M&Ss contract with Per Una designer George Davies. The contract had become a central element to the embattled retailers objection to Freshfields instruction to act for Greens consortium on its takeover bid.
By 5pm, all was lost. The Court of Appeal rejected Freshfields pleas, leaving the magic circle firm embarrassed, out of pocket and out in the cold on the biggest takeover bid to hit the UK this year.
A month earlier it had all seemed so promising. Over coffee at the Starbucks across from Freshfields Fleet Street offices, OBrien listened as Arcadias chairman Lord Grabiner QC offered the firm the mandate to act on Greens bid for M&S.
Freshfieldsconflict-checking machine whirred into action, revealing that the firm had advised M&S on the original Davies contract, its subsequent restructuring and a number of litigation matters. The following day, 5 May, Freshfields management, led by chief executive Hugh Crisp, concluded that the Davies contract was not material to the bid, that there was no risk of conflict and that it could accept the instruction. Yet just 14 days later, OBrien became aware that the Davies contract would form one of the key questions that Green demanded an answer to from M&S before he would proceed with a bid. On that day, Chinese walls were set up around the Davies contract within the firm.
Any concerns over this development were allayed in the short term. That was until M&S head of legal Robert Ivens got wind of the fact that Freshfields was acting for Green.
On 29 May, everything began to change. Ivens managed to confirm with M&S relationship partner Alistair Crawford that the firm was engaged on the bid.
Enter Slaughter and May. Litigation partner Sarah Lee, with One Essex Courts Kenneth MacLean, struck the first blow on 1 June when they applied to the Chancery Division of the High Court for an injunction restraining Freshfields from acting. The next day, Herbert Smith lawyer-turned-judge Mr Justice Collins granted the injunction.
Im satisfied that theres a real or serious risk of conflict, he ruled.
Far from being vestigial, as was argued by Freshfields counsel Michael Brindle QC of Fountain Court Chambers, Judge Collins found that the Davies contract was integral to M&S, as it could form part of the bid tactics for the consortium. It did not stop there. I cannot see, even with a firm the size of Freshfields, that effective information barriers can be put in place, said Judge Collins.
The silk sought leave to appeal. The injunction was stayed until 10.30am the following day, leaving Freshfields with just a few hours to launch its fightback. At 2pm on 3 June, the battle began.
The courts mid-term break limited the number of judges available to consider the leave to appeal. Two, instead of the customary three, were found: Lord Justice Kay and Lord Justice Pill, two vacation duty judges.
The hearing started badly. Kay LJ insisted on calling Brindle Brodie, although the QC, who had forsaken his own holiday to take up Freshfields baton, managed to maintain his characteristic affability throughout.
Brindle repeated the point first made to Judge Collins, that the conflict was theoretical rather than real. He added that Chinese walls would be adequate and that the undertakings offered by Freshfields would be enough to protect confidential M&S information from leaking to the Green camp. But, as Pill LJ would later remark, the horse may well have bolted.
As OBrien staunchly defended his firm to the milling journalists, events were superseding them away from the court. Earlier that day, at just past 12pm, Green had told The Lawyer he would instruct new lawyers within the hour.
Merrill Lynch, one of Greens financial advisers, was already doing the rounds searching for a replacement, and Ashurst would eventually win out. That afternoon, though, Brindle battled on, fighting not just for leave, but also appealing at the same time.
Undertakings by OBrien were unfurled and additional bricks were added to the Chinese walls. A note was passed to Brindle, stating that all members of Freshfields Green team had confirmed that they had not received any confidential M&S information to date. But the judges were unrelenting.
JudgeCollinsexperienceof matters such as this is unequalled among the judges of the higher courts. Its not arguable this court would reach a different conclusion than that reached by him, said Kay LJ.
Then came the killer blow. Kay LJ added: Theres a clear potential conflict of interest in Freshfields acting for those concerned with the bid at the time it was instructed to act for M&S on the Davies contract. Pill LJ concurred.
Freshfields, despite the defeat, remains resolutely defiant. Crisp said: Any lawyer, here or at any other firm, knows that breaching confidentiality spells the end of their career.
And as far as Pill LJ and his stable doors go, OBrien retorts: The judge may believe the door may be open, but the horse is firmly in the stable.
So how did Freshfields misjudge the situation? There is no suggestion that the firm would do anything to compromise client confidentiality far from it. But it made a commercial misjudgement which was penalised by the courts. City opinion has it that Freshfields should immediately have recognised that the Davies contract, whose womens wear line Per Una accounts for millions of pounds in revenues every year, was inextricably linked to M&Ss future strategy.
What is more, Freshfields should have guessed that Slaughters would have something up its sleeve. As The Lawyer revealed the following week (14 June 2004), the highly unusual injunction was the second time in over a year that Slaughters had pulled the tactic on Freshfields. It had already been threatened when entrepreneur Hugh Osmond made his bid for leisure giant Six Continents and when Freshfields was acting both for Osmonds lending banks, Credit Suisse First Boston and Lehman Brothers, and the Hilton Group which was also considering a bid. For Freshfields to have been so outsmarted tactically by one of its biggest M&A rivals must have been galling.
Complicating all of this are the tricky Law Society rules on conflicts, which even conflicts experts agree are opaque at best. A week after Freshfields was thrown off M&S, Law Society president Peter Williamson gave a strong hint that conflicts rules would be clarified in favour of City practice, where client consent rules the day. Solicitors will be able to act with consent in specified circumstances where minor conflict exists between two or more clients, and firms will also be able to act for two or more clients who are bidding for the same outcome, such as in a private auction, he stated.
The M&S story brought the issue of law firm conflicts to the top of the news agenda, but Freshfields is by no means the worst offender. The conflict systems of all the top City firms have been under the spotlight for some time now. Joanne Harris looks at how they operate
Allen & Overy
New York managing partner Mark Welling oversees Allen & Overy’s (A&O) conflicts checking procedure. He heads a global business acceptance unit made up of lawyers spread across the firm.
On receiving new instructions, an A&O lawyer sends an email alert to the entire partnership. This asks for any objections to the new client being taken on and acts rather like the publication of banns before marriage.
Should any issues be brought up, the matter is referred to Welling and the acceptance unit. The unit examines the case and discusses it with the relevant partners. The client is also consulted, even if the firm does not see a conflict of interest occurring, and it will back down if the client is unhappy.
In guarding against conflicts, A&O looks at the rules for all jurisdictions concerned. The firm turns away a large number of matters due to conflicts of interest every week.
Clifford Chance set up its current conflicts checking system in January 2000 as a response to the firm’s mergers that year in Germany and the US.
When a lawyer gets a call from a prospective client, they fill in an electronic ‘new matter’ form. This is sent to one of four clearance centres – the largest of these, headed by Angela Robertson, is in London, while others are in New York, Hong Kong and Frankfurt, employing 50 legally trained staff globally.
These specialists check whether the job would create an immediate or future conflict of interest. They also look for money laundering issues, political sanctions in effect in concerned jurisdictions, the effect on the firm’s reputation and any credit risk.
If the databases throw up an issue, the case is discussed with the referring partner and any other concerned partners. If necessary, the clearance centre head and executive partner Chris Perrin will be brought in.
The firm takes into account conflicts rules for the jurisdiction where the work is to be done, where the client is based, and where the referring lawyer is qualified.
Slaughter and May
Slaughter and May’s controls against conflicts of interest have been in place for “years and years”, according to practice partner David Frank.
When instructions are received, the partner concerned inputs information on the case into a computerised database. An automatic search is then carried out to check for potential conflicts. In addition, Slaughters’ central information services team carries out a search on a physical checklist.