Lexpert Magazine

48 LEXPERT MAGAZINE | MARCH 2017 | SWISS VEREINS | As clients started to panic, KWM Eu- rope sought a new merger partner — an uphill battle in light of KWM EUME's $70-million debt, the expensive lease on its London premises and the departure of many top lawyers. e search for a new combination, then, came to nought. In De- cember, KWM EUME began negotiations toward a "pre-pack" administration, an in- solvency process that contemplates the sale of KMW EUME to other law firms before an administrator is appointed. At press time, several firms had expressed interest but no buyer had emerged. Would the outcome have been different if KWM was truly a merged firm rather than a verein? As Jomati sees it, the KWM saga demonstrates both the strength, in terms of the ability to put a combination of law firms together quickly, and the weak- ness, in terms of the lack of financial in- tegration, in the verein structure. "A fully integrated firm just has to make things work," he says. "It's sink or swim, and it doesn't have the ability to merely stand back and watch. e firm as a whole has to work it out." To be sure, KWM Asia did step in — albeit very late in the game — and offer to bail Europe out. But as Reeser points out, KWM Asia held all the cards, and it was perhaps no surprise that EUME partners turned down Asia's offer. "In the verein structure, partners in separate arms of the firm are under no expectation or pressure to contribute to the rescue of another arm," he says. "e whole purpose of joining by way of a verein is to avoid responsibility for other's misfortunes or bad management. ere was nothing in it for Europe in the rescue plan." e only interest KWM would have had in preserving EUME was to protect work inbound to China from Europe, the UK and the Middle East. "e sole incentive for Asia was to retain some of the high re- firm's global board who had supported the restructuring initiative. e defections led to the departure of five more partners. In May, the partners of KWM EUME discovered that, since 2005, the firm had spent some $47 million on refurbishing its London premises. e expenditures emp- tied the firm's cash reserves, forcing it to turn to short-term debt for its working cap- ital. According to e American Lawyer, things got so bad that the firm had to delay payment of invoices for office supplies. By the summer of 2015, the firm's overdra stood at about $40 million. In July, the firm's lender, Barclays Bank, got impatient, forcing the firm to provide a debenture over the firm's assets and de- manding that KWM EUME boost its capi- tal. e firm responded with a recapital- ization plan, agreed to unanimously, that would have seen partners inject more than $22 million into the firm. But the plan col- lapsed in October when four senior part- ners, including managing partner Rob Day and Michael Halford, head of the presti- gious investment funds practice, resigned. At that point, KWM Asia offered to bail Europe out, on condition that the Euro- pean partners met the capital requirements to which they had previously committed and agreed to stay at the firm for at least one year. But only 16 per cent of the 130 European partners voted in favour. By De- cember, 40 more partners had resigned. ferral partners in Europe so that they didn't scatter to organizations that have their own referral relationships," Reeser says. Failed law firms, according to Jomati, have experienced a "weakening" of the "glue," as he calls it. "Every firm has some- thing that make the partners stay together, work well together and give clients the right experience," he says. "at some- thing, whatever it is, is the glue that keeps people committed and encourages them to go the extra mile." e glue may weaken for a number of reasons, including generational change, the nature of the business, the mix of partners, the mix of homegrowns and laterals, remu- neration issues or changes in leadership. "Whatever that glue element is, it is the key," Jomati says. On this analysis, there is a cogent argu- ment to be made that because failure has no direct monetary impact on a verein's successful arms, due diligence and cohe- sive management may not be as focused as they might be in a fully integrated firm. "One of the features of Swiss vereins is that each firm in each jurisdiction more or less runs itself with its own structure," says Sean Larkan, an Australia-based principal with Edge, an international legal consul- tancy. "is makes it even more imperative to ensure one is bringing the right calibre people and firm on to the bus and to ensure there are no lurking issues which have not been fully identified." Berwin's underfunded capital, for ex- ample, was clearly of less concern to KWM than it was to Proskauer Rose, which as noted earlier, had previously explored a merger with Berwin. A full merger would surely have provoked more detailed exami- nation of the high cost of the London lease and the immense sums spent in refurbish- ing the London premises. It's also likely that a remuneration system that rewarded cross-referrals and benefitted the firm as a whole would have been more likely to de- velop. A truly merged firm might have had a greater interest in transferring Berwin's practice strengths to Asia and Australia and adapting its strategy to include Euro- pean sensibilities. Finally, cultural toler- ance and alignment, as opposed to hege- mony, might have been in greater evidence. "e advantages of a Swiss verein, which is to say the independence of the member TONY WILLIAMS > JOMATI CONSULTANTS LLP "In the verein structure, partners in separate arms of the firm are under no expectation or pressure to contribute to the rescue of another arm. The whole purpose of joining by way of a verein is to avoid responsibility for others' misfortunes or bad management."

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