Switzerland is changing. Among the country’s traditionally-minded law firms, conservatism is in decline, fuelled by a greater appetite for domestic mergers, increased lawyer mobility between firms and a belated focus on alternative legal service provision. Accordingly, Swiss lawyers are much like the swans on Lake Geneva: smooth and serene on the surface, all the while paddling furiously underneath. An energetic response to the fresh demands of an evolving legal services landscape is paying dividends for some.
The wider economy presents a mixed picture, as Urs Klöti, managing partner of Pestalozzi, outlines: ‘Challenging times remain. The Swiss franc is still very strong, which means that export services are extremely expensive compared with previously. That’s an issue for bigger law firms, because many of our invoice payers are non-Swiss counterparts: in relative terms, we’re certainly more expensive than two or three years ago. We often hear it when we talk about fees.’
At the country’s largest law firm, Lenz & Staehelin, managing partner Guy Vermeil describes 2016 as ‘pretty surprising, very busy, and better than expected: I was pessimistic last January’. He identifies tax and banking as the firm’s two busiest practice areas this year. Lenz & Staehelin celebrates its centenary in September and will soon be moving to larger purpose-built offices in Zürich.
Niederer Kraft & Frey (NKF) managing partner Philippe Weber is also enthusiastic: ‘2016 was really strong – we had a 15% increase in turnover and profitability was up. It was a good year for quite a few firms.’ Standout areas for NKF included M&A, capital markets and litigation, while he adds that white-collar crime work has been a very active area for several firms in Switzerland, particularly for banks, while NKF has been very busy acting for FIFA, which has been the focus of significant media attention worldwide. Meanwhile, Walder Wyss also saw revenues climb by around 15%, as partner Hans Rudolf Trüeb confirms: ‘We had a very good year, the best in our history.’
‘The Swiss franc is still very strong. In relative terms we’re certainly more expensive than two or three years ago.’
Urs Klöti, Pestalozzi
Collective success was mirrored by Switzerland’s overall trade surplus, which reached $37.6bn last year – an all-time high. Nearly half of that surplus derived from the US and is potentially vulnerable to rising protectionist sentiment in Washington. Meanwhile, Swiss bilateral trade with China – underpinned by a free trade agreement – was $25.42bn for the first nine months of 2016, up 9% year on year. In January, Chinese President Xi Jinping paid a state visit to Switzerland before attending the annual meeting of the World Economic Forum in Davos, where he cast himself as the unlikely champion of globalisation and free trade.
Against this background, it is appropriate that the largest deal in Switzerland last year was China National Chemical Corporation (ChemChina)’s $44bn takeover of the Swiss group Syngenta. ChemChina turned to Homburger for Swiss law advice while Bär & Karrer represented Syngenta. And in the largest Swiss deal so far in 2017 – and the biggest European pharma deal since 2004 – Johnson & Johnson has agreed to buy pharma and biotech giant Actelion for $30bn. NKF is taking the lead role for Actelion, while Johnson & Johnson has instructed Homburger.
This US-Swiss tie-up followed hard on the heels of a deal in the opposite direction. Announced in December 2016, Switzerland’s Lonza Group, a supplier to the pharma and biotech sectors, agreed to buy US capsule manufacturer Capsugel from Kohlberg Kravis Roberts (KKR) in a $5.5bn deal. Legal advisers were the familiar pairing of Bär & Karrer, which is acting for Lonza, and Homburger, which is advising the banks. In another December deal, Fairfax Financial Holdings, the Canadian insurance and investment group, agreed to buy the Swiss-based Allied World Assurance for $4.9bn: Homburger was again retained, this time by Fairfax, while Allied World turned to Baker & McKenzie and Walder Wyss.
‘This consolidation trend is going through all sectors,’ says Daniel Daeniker, managing partner at Homburger. ‘The Syngenta takeover by ChemChina is an example. After that deal, I had thought that the M&A boom would come to an end in summer 2016; it didn’t. I expect another busy year in 2017 with extremely large transactions. We just announced the $30bn acquisition of Actelion, where our firm represented Johnson & Johnson. But there eventually will be a slowdown – with the writing on the wall in terms of Brexit, the Trump administration and restrictions on free trade.’
At Bär & Karrer, managing partner Daniel Hochstrasser agrees that last year was strong in transactional terms ‘unless you consider the sale of a major Swiss corporation to a Chinese buyer to be something negative – some people do.’
Riding the Swiss regulation wave
Federal Corporate Tax Reform III (CTR III) may not sound significant, but for Switzerland this potential new legislation would have been invaluable. Existing special tax regimes that apply to international companies were to be replaced by new internationally-accepted tax measures – initially on a federal basis and later at a cantonal level. But it was reflected by a referendum.
Since 2007, the Swiss government had been under pressure from the EU and the Organisation for Economic Co-operation and Development to implement corporate tax reform. However, on 12 February, Swiss voters rejected CTR III by a majority of 59% to 41% in a referendum that would have enabled an overhaul of the corporate tax code to help attract and retain international companies.
‘It was probably the most important ballot this decade because we must adapt our tax laws – and it is vital to maintain our international competitiveness,’ says Hans Rudolf Trüeb, partner at Walder Wyss. Guy Vermeil, managing partner at Lenz & Staehelin, suggests that without CTR III, ‘there’s no doubt that some large international companies may leave Switzerland’.
The stakes were particularly high in Geneva, which has a corporate tax rate of 24%, the highest in Switzerland: this would have reduced to 13.5%. ‘For Geneva, it is particularly significant,’ says Nicolas Killen, managing partner at Borel & Barbey, ‘because these multinationals, although only representing 4% of the companies based there, employ more than 27% of the workforce.’
CTR III had already passed through parliament last June, but under Switzerland’s direct democracy, a referendum vote was still needed. The result may harm the country’s position as a pre-eminent business centre, with fears that damaging uncertainty will now prevail over future corporate tax bills.
‘Without tax reform there’s no doubt that some large international companies may leave Switzerland.’
Guy Vermeil, Lenz & Staehelin
‘More legislation creates more work,’ says Daniel Hochstrasser, managing partner at Bär & Karrer. ‘That was particularly the case with regard to CTR III: there would have been a need for advisory work because corporations would have to adapt their tax planning to the new regime.’
Other financial market laws continue to be subject to a protracted overhaul. Last January, the Financial Market Infrastructure Act (FMIA, or FinfraG) brought existing Swiss regulation of financial market infrastructure in line with international standards, notably in derivatives trading: the equivalent to Dodd-Frank in the US and the European Market Infrastructure Regulation in the EU.
In January 2017, the Federal Act on International Automatic Exchange of Information on Tax Matters (AIAG) came into force, requiring all financial market participants to conduct a planning and need analysis. The automatic international information exchange in tax matters (AIA) also became effective in January. The first data will be exchanged in September 2018 for the year 2017. ‘It’s pretty much the end of any foreigner having an account here that is not declared,’ says Benjamin Borsodi, managing partner at Schellenberg Wittmer.
Meanwhile, January 2018 will see further parallel legislation become effective: a new Swiss Financial Services Act (FIDLEG) will introduce a variety of MiFID II standards into Swiss financial market regulation, and a Financial Institutions Act (FINIG) will govern the supervisory and regulatory regime, including asset management services to third parties.
All this will provide much work. ‘There are many regulatory requests from clients about the impact of proposed legislation,’ confirms Vermeil. Although fully supportive of CTR III, Daniel Daeniker, managing partner at Homburger, believes that: ‘The general trend in Switzerland has become regulation-unfriendly and it will take a very long time until this turns off.’ But, he adds: ‘The overzealous government is now retreating a little; so I wouldn’t expect a gigantic wave of further new regulation.’
Dispute resolution remains strong in Switzerland for specialist players: Lalive managing partner Marc Veit points to ‘a very high number, 160 commercial and investment arbitrations’, in which his firm is involved. Hochstrasser, however, does not see any uptick in dispute resolution: ‘I have the impression that clients try to avoid costly litigation by concluding smart settlements and that there is no general increase of litigation or arbitration,’ he says.
Metamorphosis
While leading Swiss corporate law firms have benefited from a buoyant deals market over the last couple of years, the legal services market has seen recent merger activity of its own. BianchiSchwald was founded in January 2017, the result of the tie-up between BCCC and the corporate, intellectual property and litigation teams from Staiger, Schwald & Partner, together with its Berne office. Managing partner of the new firm, Manuel Bianchi says: ‘We made a strategic decision at BCCC five years ago to become national because it’s part of the trend in Switzerland, dictated by client needs and the market. We also needed to have the right size on the balance sheet to afford further investment. Our international partner, Bird & Bird, was also keen to have some support in Zürich.’
BianchiSchwald, which now has 50 lawyers across its four offices, follows the prominent merger between Kellerhals and Carrard in September 2015 and the combination of Meyerlustenberger Lachenal in 2012. A further example of French-speaking firms in Geneva and German-speaking firms in Zürich joining forces (see box, ‘A tale of two cities’, below), this trend has longer-term origins, as Benjamin Borsodi, managing partner of Schellenberg Wittmer outlines: ‘Regarding the newly-created BianchiSchwald, I believe that we will see an increasing number of firms merging with offices in Zürich and Geneva, which reminds me of what we did with Schellenberg Wittmer in 2000.’
Vermeil believes it is a ‘smart move’, adding: ‘BCCC has been looking at that for a few years. I know most of the partners there very well because they were previously associates at Lenz & Staehelin. It makes a lot of sense: it is a very good firm and it managed to move very smartly and to gain exposure.’
‘There eventually will be a slowdown – with the writing on the wall in terms of Brexit, the Trump administration and restrictions on free trade.’
Daniel Daeniker, Homburger
However, another observer is more sceptical: ‘If you have a confidential discussion, even with the very best firms that have merged, they tell you that other than the joint letterhead and some form of profit sharing, they aren’t really the seamless one firm in two locations, they are just two separate law firms with the same name.’
While the BianchiSchwald merger has dominated headlines in Switzerland recently, lateral hiring also picked up in 2016, with teams and prominent lawyers moving between firms. ‘There is an increasing trend for partners or groups of partners to switch from one firm to another, although it is not always crystal clear what the reasons are behind such moves, and whether those moving will really have a better environment in their new firm,’ says Hochstrasser.
Vischer partner Benedict Christ picks up the point: ‘A few years ago lateral moves were something that did not happen here, it was very unusual; now, we see it more and it will probably become even more frequent. It’s related to the legal market not growing: law firms have to find a way to differentiate themselves from their competitors.’
In October, Baker McKenzie took a ten-lawyer team, including five corporate partners, from Froriep in Zürich – Beat Barthold, Alessandro Celli, Pascal Richard, Ansgar Schott and Boris Wenger – increasing its Swiss lawyer headcount to 130 across two offices. Lawyers have also been making their way from Froriep to Walder Wyss, which has expanded dramatically in recent years, taking its offering to 160 lawyers across five offices and making it one of one largest Swiss firms.
Trüeb says: ‘Froriep lost a Geneva team to us last year and then their IP partner, Roger Staub, came to us with four lawyers at the start of January. We’ve been in constant contact with Froriep, but somehow it appears they had different ideas among the partners about how to further develop their business: unfortunately, they couldn’t come to terms.’
Correspondingly, international firms have been developing a Swiss footprint or expanding an existing one. ‘In Geneva, we’ve seen more foreign firms setting up,’ says Nicolas Killen, managing partner at Borel & Barbey. He points to White & Case, which expanded its Geneva arbitration practice in 2015 and this January hired Jasper Wauters from King & Spalding in Geneva as a local partner in its international trade practice.
Two more US firms opened up for business last May. Curtis, Mallet-Prevost, Colt & Mosle launched a Geneva arm, headed by tax partner, Marco Blanco. Simultaneously, Quinn Emanuel Urquhart & Sullivan opened a Zürich branch, led by partner Thomas Werlen, a former group general counsel of Novartis and Allen & Overy partner. Quinn Emanuel’s work for Swiss clients includes representing FIFA in its corruption investigations.
In June 2016, Charles Russell Speechlys appointed three Swiss-qualified partners to its Geneva office: corporate partner Olivier Cavadini joined from Python, while dispute resolution partner Bruno Ledrappier and private client partner Grégoire Uldry joined from Borel & Barbey. The firm plans further hires in both its Geneva and Zürich offices.
A tale of two cities: Geneva versus Zürich
Switzerland’s two largest cities are renowned for their quality of life. Zürich and Geneva are comparatively small next to other European hubs: Zürich’s population of just 400,000 is almost twice that of Geneva, although their wider conurbations are roughly three times those figures. At €550-700, hourly rates of Zürich lawyers are generally higher than their Geneva counterparts, where €500-600 is the norm. Rates have held up surprisingly well, according to managing partners.
Home to the main Swiss stock exchange, German-speaking Zürich dominates in capital markets and financial services, while private banking and watch-making are the traditional focus of service-led francophone Geneva, a much-favoured arbitration centre, where more than 20,000 organisations have their international headquarters. The handful of international law firms in Switzerland, primarily doing arbitration or private client work, are mostly in Geneva.
All the largest Swiss firms have an office in both cities, except for Zürich-based Homburger, where managing partner Daniel Daeniker says the continued decision not to be in Geneva makes no apparent difference: even though Switzerland’s biggest company, Nestlé, is headquartered by Lake Geneva, Homburger remains its corporate counsel of choice.
At Switzerland’s largest firm, Lenz & Staehelin, managing partner Guy Vermeil says: ‘International clients, often US-based companies, call either Geneva or Zürich – they call a partner, they call a firm, and very often they don’t even know where the lawyers are based. Whereas for local clients, proximity is still important.’
Marc Veit, partner of dispute resolution specialists Lalive, adds: ‘Typical clients in our Zürich office are corporate, as it’s the centre of our investigations practice, whereas the litigation and white-collar practice in Geneva advises more private clients.’
Recently, the two cities’ fortunes have not run in parallel, with Geneva hit hard by the global regulatory clampdown on private banking. ‘Geneva is certainly struggling in the banking field because they are more affected by regulation changes,’ says managing partner at Bär & Karrer, Daniel Hochstrasser. Urs Klöti, managing partner at Pestalozzi concurs: ‘Banks in Geneva have been heavily affected; many are in the process of changing their business model.’
At Geneva-based Borel & Barbey, managing partner Nicolas Killen notes: ‘There have been some private bank consolidations. This will continue. New laws affecting third-party asset managers will also produce more consolidation – numbers will shrink further, by at least 10%, both for banks and asset managers.’
The primary catalyst for this reduction has been the Swiss government’s continued dismantling of its bank secrecy laws. Simultaneously, new legislation has been introduced to increase transparency and improve compliance, not least with The US Foreign Account Tax Compliance Act (FATCA), which requires Swiss financial institutions to report requested information directly to the US tax authorities. Consequently, private banks have seen account holders either repatriate their assets or move them elsewhere.
The unexpected removal of the currency peg against the euro in 2015 continues to play out. ‘The strong Swiss franc is killing the retail sector, but industry and finance are keeping up well,’ says Daeniker. Managing partner at BianchiSchwald, Manuel Bianchi adds: ‘There have been hard times in Geneva, especially in the luxury sector. It started when we lost the fixed exchange rate with the euro. It’s also due to the slowdown on the Asian market; in China the anti-bribery campaign had a terrible impact on the sale of luxury watches and, as a result, on the watch-making industry. Many listed companies are in Zürich, so from a legal market perspective, business is different.’
But the Geneva office of Walder Wyss, which opened in January 2016 with the acquisition of seven lawyers from Froriep, will see some growth this year according to partner Hans Rudolf Trüeb. He describes Geneva as ‘a promising market for corporate law with a lot of international companies headquartered there, and it’s great for arbitration work’.
The transactional market, centred on Zürich, has been largely unaffected by Geneva’s woes and large Swiss firms have thrived for two reasons, according to Daeniker: ‘First, we have very strong industry: pharmaceuticals in Basel and bricks and mortar in the east of Switzerland. Second, our financial services practice has always been more focused towards commercial lending, investment banking and private equity, as opposed to private wealth management, which is more prevalent in Geneva.’
Hochstrasser concludes: ‘Zürich is the true heavyweight in the Swiss economy. That’s not going to change.’
Hires aside, another recent development that underlines the evolution the Swiss legal market is experiencing is a shift towards providing alternative legal services. October 2016 saw the launch of FlexLaw by Schellenberg Wittmer – the first ‘efficient and flexible legal support services’ offered by a Swiss firm in areas that are ‘resource-intensive and cost-sensitive’.
‘We’ve created a separate entity,’ says Borsodi, who says the idea began when the firm was conducting large investigations into Swiss banks as part of the US Department of Justice (DoJ) programme. ‘We needed to assemble a team of Swiss-qualified lawyers whom we can’t employ all the time, and we needed flexible rates.’
FlexLaw can provide up to 80 lawyers who can be mobilised very quickly, according to Borsodi. He adds that FlexLaw is not outsourcing because the service belongs to the firm and that ‘preferable rates’ are key to the project. ‘We employ people short term, trained and monitored by our firm, always under the supervision of senior lawyers,’ he says.
‘We made a strategic decision at BCCC five years ago to become national because it’s part of the trend in Switzerland, dictated by client needs and the market.’
Manuel Bianchi, BianchiSchwald
Although according to Daeniker the legal tech and low-cost provider phenomenon has not reached anything like the levels of sophistication seen in other parts of Europe, Homburger also provides a similar offering, pulling together project staff within 48 hours, for example, if a bank needs people for an investigation. In investigations, he notes, volume work is now delivered at less than half the cost of five years ago in Switzerland.
‘We always have a partner who takes them under his wing and makes sure that the quality is right. Our clients expect us to deliver the same service at a lower price. Depending on the client, you try to accommodate.’
Brexit woes
Although Switzerland is not an EU member state and was consequently widely referred to as an example for those in favour of removing the UK from Europe, Brexit nonetheless provokes a downbeat response from Swiss lawyers. ‘Switzerland has profited immensely from the single market and the creation of the euro, so anything that reverses the trend is an issue for us,’ says Daeniker.
‘Initially, some had great hopes that whatever the UK could negotiate on the free provision of services within the European Union, Switzerland would be able to piggyback and say: “We’d like the same,”‘ says Killen. ‘People thought that Switzerland might be able to surf the wave because our government hasn’t gotten anywhere in obtaining passporting rights for Swiss financial institutions to operate freely within the EU.’
‘A few years ago lateral moves were something that did not happen here; now we see it more and it will probably become even more frequent.’
Benedict Christ, Vischer
Weber develops the point: ‘Some argued that Brexit would help Switzerland because it would have a new ally. That’s not my view. I believe that the Brits will look out for themselves – as they should – but they will certainly not do any favours for those of us in similar situations. The EU may become less willing to make concessions to Switzerland because that may adversely impact the EU’s Brexit negotiation position vis-à-vis the UK.’
While Switzerland has never been part of the EU, it is a member of the European Free Trade Association. Through a series of bilateral agreements, it is also part of the single market, affording Swiss nationals the right to live and work anywhere in the EU.
‘Whenever there is important legislation implemented in Europe, Switzerland tends to mirror what is being done at EU level. We’ve learnt to live with it,’ says Borsodi.
That was until February 2014, when 50.3% of Swiss voters favoured introducing controls against ‘mass immigration’ from the EU. However, the result of this referendum – to limit free movement of foreign citizens to Switzerland – undermines one of the Four Freedoms enshrined in the bilateral agreements.
‘We’re very curious as to how the UK will sort out its relationship with the EU because we are struggling given the immigration vote – maybe a silly vote, but an outcry: you have to listen to the people,’ says Trüeb. ‘How the UK handles Brexit will definitely be a blueprint for our future relationship with the EU.’
‘In commodities, we’re in second place after London for trading houses. Some might relocate here, rather than going to Frankfurt or Paris.’
Benjamin Borsodi, Schellenberg Wittmer
Last December, lawmakers proposed a draft deal giving job preferences to Swiss nationals over EU nationals as a solution to balance the referendum result with its treaty obligations. Daeniker feels ‘pretty sure that the UK parliament will also be smart enough to negotiate a way out that still preserves some kind of free trade and free movement.’
But what will Brexit mean in business terms for Switzerland? Borsodi sees opportunities. ‘Geneva might benefit,’ he suggests. ‘In commodities, we’re in second place after London for trading houses. Some might relocate here, rather than going to Frankfurt or Paris.’
Meanwhile, Vermeil argues if Brexit has a negative impact on neighbouring countries to Switzerland, in particular Germany and France, it will affect its economy.
Hochstrasser identifies ‘isolated cases where entities have considered a move to Switzerland and we have advised them, but it’s certainly not something where we can say: “Well, ever since the Brexit vote there’ve been clients running to our doors who want to escape from the UK”‘.
Either way, Bianchi does not foresee any Swiss upside and argues any companies fleeing the UK will move to France or Germany rather than Switzerland. Weber adds: ‘People hoped that Switzerland might become more attractive for large corporates, but I doubt it. For those in the UK, why should they come here? Switzerland is not in the EU and hasn’t become more attractive because of Brexit.’
In turn, might a post-Brexit UK, possibly rebranded as a low corporate tax centre, prove detrimental to Switzerland?
‘It’s not just about tax,’ says Christ. ‘Switzerland is located at the centre of Europe, so that helps. It also has a very skilled workforce, liberal employment laws, so there are additional factors that help to attract business.’ Add to that Switzerland’s high ranking within Europe for economic freedom, and Switzerland may emerge largely unscathed by Brexit – just so long as its immediate neighbours do.
‘Some argued Brexit would help because Switzerland would have a new ally. That’s not my view. The Brits will look out for themselves.’
Philippe Weber, Niederer Kraft & Frey
Looking ahead, Vermeil is as circumspect as he was a year ago: ‘In 2016 we had a slight slowdown. I believe that will continue in 2017. We need to monitor our costs very carefully. We have to be very careful in hiring new people, except in some specific areas. 2017 will not be as good as 2016.’
Citing his bellwether practices as investigations, tax and corporate, Hochstrasser is almost as cautious: ‘As always, when you come out of a good year, you are sceptical whether you can repeat it. That is our feeling: after having had two very good years in a challenging environment, we are cautiously optimistic we can do as well in 2017.’
It seems that for the calm on the surface in Switzerland, the frantic paddling under the water looks set to continue. LB