Time for change

With some of the cornerstones of Swiss identity – banking and secrecy – under threat, the country’s law firms are caught up in the maelstrom. LB uncovers how Switzerland’s conservative legal community has been responding to the upheaval.

Switzerland recently encountered its most significant period of economic turmoil, and its lawyers are right on the front line. Although the consequences of the financial backlash were largely kept at bay through government intervention, hitherto unknown banking and investor losses were recorded.Defining the rot was UBS, a bank more known for its conservatism than recklessness in the past. Yet UBS turned out to be the shock victim of the credit crunch, incurring huge net losses and writedowns, owed largely to its exposure to the sub-prime industry.

To counter the worst effects of the crisis, UBS made a series of job cuts and was recapitalised several times over. Zürich law firm Niederer Kraft & Frey (NKF) acted for the Swiss Confederation in November 2008 when it made a CHF6bn capital injection into UBS in the form of mandatory convertible notes, and in August 2009 when the notes were converted. Many were left shocked as to why UBS was so exposed to a market that was not primary for it.

‘UBS’s problems did not emanate from Switzerland, but were US-driven,’ says Martin Hess, managing partner at Zürich law firm Wenger & Vieli. ‘It should never have entered a market it did not fully understand.’

Under pressure

This stuttering of a Swiss institution came at a time when Switzerland’s famous banking secrecy was under relentless fire from the outside world. Recently, Switzerland found itself on the Organisation for Economic Co-operation and Development’s (OECD’s) grey list of countries that had failed to enter into at least 12 tax information exchange agreements (TIEAs), but agreed to revise its tax treaties. Eventually, it made it onto the OECD white list for countries that have substantially implemented the international agreed tax standard. This in itself is a radical change, as these treaty jurisdictions can now request Swiss banks to deliver information on citizens who are suspected of tax evasion and who hold Swiss accounts.

The international pressure had been building up over the past couple of years, especially from the US authorities, which demanded that UBS hand over confidential information concerning its US clients suspected of tax avoidance. A headline civil case, pursued with zeal by the US Internal Revenue Service against UBS, called for the handover of data for roughly 4,450 clients. But a double taxation agreement is in place between the US and Switzerland, and so the case settled in August 2009.

On top of all this, Switzerland’s closest neighbours have been on the attack. The French authorities decided to use files containing the details of French citizens with accounts in Switzerland that had been stolen by a former employee of HSBC Private Bank in Geneva. In late 2009, Italy launched dramatic raids on branches of Swiss banks, determined to make the most of its own tax amnesty. And in February 2010, the German Chancellor Angela Merkel controversially indicated that her government was willing to buy stolen secret Swiss bank account data on 1,500 alleged tax evaders from an informant.

Tale of woe

One case linked to all this pain has dominated the Swiss legal community for the past year. In February 2009, Switzerland’s new financial regulator (Finma) bowed to building pressure when it broke the country’s own bank secrecy laws by ordering UBS to release the names of 255 offshore clients to the US authorities. Looking at Finma’s controversial move a year later, Nicolas Piérard, a partner at Geneva-based firm Borel & Barbey, tells LB: ‘It is of course easier to assess what happened retrospectively, but the Finma decision ordering UBS to disclose all that client data last year does look very strange.’ Indeed, the decision raised panic among Swiss private bankers and has already led to the sentencing of some ex-UBS clients. Some clients were moved to withdraw billions of Swiss francs from accounts and exit en masse.

Finma said it had to move quickly because US authorities threatened to indict the bank over the tax issue. It argued that UBS might not outlive such an indictment, and that Swiss banking law allowed it emergency powers where a bank feared serious liquidity problems. Plus, UBS itself had already admitted to assisting tax fraud through hidden offshore accounts and agreed to pay a $780m fine. The Swiss government backed the Finma move, declaring that UBS had no choice but to settle the case to avoid criminal charges that could have threatened its existence and undermined Switzerland’s economy. ‘The impression is that the Swiss government passed on this political hot potato to the financial regulator,’ Piérard adds.

‘Baker & McKenzie has been here so long that nobody thinks of it as a foreign firm anymore. But we don’t think of it as Swiss either.’
Mathis Berger, Nater Dallafior Rechtsanwälte

In any event, the Finma decision was challenged. In January 2010, the Swiss Federal Administrative Court ruled that Switzerland’s top financial regulator acted in an unlawful manner when it forced UBS to release client data to the US authorities. The court accepted that Finma was in a difficult position because of the threat of charges against UBS, but found that it exceeded its authority by unilaterally ordering the passing on of data without requesting official assistance from the government. Finma’s decision to order UBS to hand over the data was said to be incorrectly based on Articles 25 and 26 of Switzerland’s banking law, which permit bank secrecy to be lifted when a bank’s insolvency is threatened.

‘The Finma case is extremely interesting,’ says Vincent Jeanneret, managing partner at Geneva law firm Schellenberg Wittmer. ‘Finma referred to a banking law provision dealing with insolvency to order the transfer of client data to the US authorities. But only the Swiss government and parliament have the constitutional powers to issue a non-statute-based decision, and only if it serves the utmost interests of the country.’

Ex-NKF lawyer Andreas Rüd, a name partner at Zürich law firm Rüd Winkler, led the case against the Finma ruling on behalf of three former UBS clients. Responding to the ruling, Finma said that the Federal Administrative Court had focused only on the legality of whether the regulator was authorised to compel the bank to reveal the client names and whether its order should have come following specific approval from the Swiss government.

‘Switzerland’s legal community has had reservations about the differentiation between tax fraud and evasion for some time.’
Balz Hösly, MME Partners

Nonetheless, Finma is keen to appeal to the Federal Supreme Court, Switzerland’s highest tribunal. But Rüd tells LB that it is unclear whether the Federal Court will hear Finma’s appeal. ‘If it does, it will hardly overrule the Federal Administrative Court,’ he says. ‘The president of the Federal Court was recently quoted as saying that this decision was much harder than the one concerning Switzerland’s treaty with the US, as it was obvious that the Finma order authorising the disclosure was illegal.’

Many see all this as a smokescreen, regarding the case as a political, rather than legal, tussle between the country’s right-wing forces determined to protect the tradition of banking secrecy at all costs and the more liberal elements prepared to accommodate the demands of the international community. ‘UBS, the Swiss Federal Council and Finma must collaborate to address this issue,’ says Mathis Berger, a partner at Zürich law firm Nater Dallafior Rechtsanwälte. ‘But nobody knows how such a collaboration will work in practice. A political solution needs to be found, and Switzerland will have to change its laws to deal with the international pressure.’

Payback

A number of Swiss lawyers have been acting on behalf of US customers since Finma’s controversial disclosure order last year. Should Finma’s appeal be allowed and should Switzerland’s Supreme Court back the lower court’s decision, ex-UBS clients might consider compensation claims against either Finma or UBS, although how those clients already prosecuted for criminal charges in the US could be compensated is another question.

‘Technically, both the directors of Finma and the members of the Swiss government could face civil and criminal actions and be held liable for any prejudicial action taken against those UBS clients because of the disclosure,’ explains Thierry Amy, a partner at Geneva-based firm BCCC Attorneys-at-Law. ‘But suing civil servants is complicated, and very specific criteria need to be met.’

Nonetheless, if the Supreme Court upholds the Federal Administrative Tribunal’s decision, many believe that it would be difficult for Finma to avoid liability.

And there are those who think that the Finma ruling may now force the Swiss government to renegotiate its agreement with the US authorities to review those 4,450 names of US clients suspected of having been involved in large-scale tax evasion or fraud. This controversial decision is already the subject of multiple appeals, and the finance commission of the Swiss parliament’s lower house recently agreed to set up a special investigative commission to review decisions made by Swiss authorities concerning UBS. Until this impasse is resolved, Switzerland will not transfer UBS files.

On the bright side, many Swiss lawyers believe that the Finma case, together with the decision of the Swiss Federal Administrative Tribunal to admit the appeal of a US taxpayer, shows how well the separation of powers in Switzerland works and demonstrates how truly independent the Swiss Federal Administrative Court is. At Geneva-based law firm FBT, corporate group head Christophe Wilhelm agrees, believing that the recent two decisions by the Federal Administrative Court are by far the most significant court decisions pronounced in Switzerland in recent years. ‘They were reported worldwide and give credit to a rather new judicial body, while confirming that Switzerland’s legal system should be observed by the political authorities when negotiating abroad,’ he says.

Wake-up time

Notwithstanding the furore surrounding the Finma case, the long-term big picture is what really counts; and moreover, where Switzerland intends to sit globally. Many forces at home and abroad are convinced that Switzerland must accept the harsh realities of a new age where the same rules apply to all financial centres without exception. Secrecy as it was once known simply no longer exists, and the subtle but crucial distinction between banking privacy and secrecy must be accepted and implemented in practice. As for tax, Switzerland is already coming to terms with the notion that it must now treat any transfer of funds which is considered as illegal or fraudulent abroad as an unethical and unauthorised act under Swiss law.

‘Switzerland cannot afford to protect this kind of activity,’ Amy says. It’s not as if Swiss secrecy laws were designed to protect criminal activity.

‘In fact,’ says Balz Hösly, a corporate partner at Zürich law firm MME Partners, ‘Switzerland’s legal community has had its reservations about the differentiation between tax fraud and evasion for some time.’

Looking at the federal government’s recent policy concerning exchange of tax information and its implementation through a number of treaties, Walter Boss, an international tax and corporate law partner at Zürich law firm Poledna Boss Kurer (PBK), believes that banking secrecy, as we have known it, has come to an end. ‘Exchange of information is now also granted in cases of tax evasion, not just for tax fraud,’ he says.

Indeed, the distinction between tax fraud and evasion has now been removed for resident taxpayers of relevant treaty countries. Others think that the erosion process has been gradual. ‘I believe banking secrecy as we have known it for the last 50 years is dead,’ says Edmond Tavernier, name partner at eight-partner Geneva firm Tavernier Tschanz. But he does not think these changes signal the end of the world.

‘Secrecy used to be a quasi-absolute in Switzerland, but we will now adjust to the rest of the world,’ he says. Some even consider that transparency will mark the new order. ‘Because of credit cards, e-mails and mobile phones, the state already knows everything there is to know about its citizens and their whereabouts,’ Tavernier adds.

Play on

Not everybody is prepared to roll over. Respecting the freedom and privacy of individuals is very much embedded within Swiss culture. Heinz Schärer, managing partner at Homburger, argues that Swiss banking secrecy has not disappeared and will remain in some form. Many Swiss lawyers maintain that protection of client data still exists. They point out that you can still be prosecuted for violating Switzerland’s secrecy rules, and that the state’s options for nosing around the financial assets and data of citizens remain very restricted.

BCCC’s Amy agrees that banking secrecy is otherwise still intact. ‘Without specific evidence or founded suspicion for tax fraud or evasion, national and international tax authorities do not have access to the data of customers of Swiss banks,’ he says.

Yet the chipping away is likely to continue. Most governments are in need of revenue right now, and the EU is expected to maintain its pressure on Switzerland. Internationally, tension is also expected to build over the taxation of corporations that still benefit from the status of holding companies for their international headquarters located in Switzerland. Ultimately, the bets are on Switzerland either giving in and relinquishing its special status, or else unifying its own taxation rules by offering more or less equally competitive terms to its domestic companies. ‘Either option is likely to impact on the country’s tax income levels,’ says Alexander Troller, a partner at Geneva law firm Lalive.

So if the outside world does have its way, how exactly will Switzerland’s banking community adapt to these painful new realities? FBT’s banking and finance head Frédérique Bensahel believes that the Swiss banking industry is facing huge worldwide competition, and that its major competitors have a vested interest in exaggerating the significance of the Swiss banking industry crisis. ‘But major Swiss banks such as UBS and Credit Suisse have already anticipated this and are ready to play by new rules in order to retain their access to the world’s major financial markets,’ she says.

Most lawyers seem to agree that any reluctant acquiescence on Switzerland’s part must not be allowed to jeopardise the future of the country’s globally trusted and high-performance financial industry, notwithstanding the obvious loss of its essential edge. Already the impasse is causing confusion for bank clients and burdening relations with their bankers. Unsurprisingly, clients are eager to hear that their banks will keep data confidential and will resist unjustified requests. ‘It’s a total mess for the banks,’ Amy says. ‘They just don’t know what to tell their clients anymore.’

Aftershock

Irrespective of the Finma case’s final outcome, Rüd believes the whole affair was an enormous disaster for Switzerland as a financial centre. This is not only because a favourable tax regime has been given away for nothing in return, but that the core values of private banking, such as trust, reliability and stability, have also suffered from the actions of a bank trying to get rid of its long-time customers and a government trying to circumvent the laws. ‘Whether this damage can be mitigated by a judgment remains to be seen,’ Rüd says.

Many agree that the Swiss banking community’s image has been tarnished, but firmly lay the blame at UBS’s door for Switzerland’s current reputation issue. A number of clients feel dejected by the bank’s problems in the US, its handling of the scandal and the feelings of mistrust the whole affair has generated. The evidence for this lies in the management funds that clients have so far withdrawn and continue to withdraw. Many believe that the UBS affair posed a systemic risk for the banking industry overall and that the consequences need to be looked at very carefully.

Some expect such consequences to include a wave of consolidations within the banking sector. Because banks have had to adjust to rather steep reductions in their margins, they are likely to reduce staff and costs while seeking to increase productivity by increasing skill levels.

However, not everybody is convinced. ‘We are quite sure that no major consolidation within the Swiss banking system will occur over the coming months, as the financial situation of the major Swiss banks is solid,’ Bensahel says.

Bouncing back

Aside from UBS, and to a lesser extent Credit Suisse, Swiss banks came out of the crisis relatively unscathed. On a positive note, certain small banks have actually benefited from this furore, with some clients voting with their feet and moving accounts from larger banks to the smaller or cantonal banks that they now regard as more trustworthy. In any event, the world of Swiss bankers is likely to change. In the future, they will struggle to charge the same margins as before and will have to compete with financial institutions based abroad that are keen to repatriate the funds of their own citizens; funds that used to sit in Swiss accounts.

‘We live in a new paradigm,’ Amy says. ‘The working conditions for Swiss banks will never be the same again.’ Because Switzerland is clearly losing an obvious and crucial aspect to its competitive edge, many believe that Swiss banks will need to reposition themselves for the future and accept that their private banking model has changed. Specific examples are likely to include some of the larger banks no longer being able to deal with private client accounts from certain jurisdictions because of the regulatory pressure. ‘But smaller, private banks will not be affected,’ says Peter Merz, managing partner at Zürich-based law firm Froriep Renggli.

Some Swiss lawyers maintain that as far as Switzerland’s reputation as a reliable legal system and business environment is concerned, its banking reputation will be sustained by qualitative aspects and not by UBS’s recent troubles. Hösly believes that Switzerland’s private banking sector is still way ahead in terms of its offering compared to other overseas financial centres. Certainly, the country does remain a very attractive environment for clients to deposit their accounts in, and wealthy private clients are still likely to keep a portion of their fortunes in Switzerland, often because of the lump-sum tax treatment available. ‘The world has changed,’ Troller says, ‘and there will be more competition, but the Swiss banking sector continues to stand out by offering excellent asset management and cutting-edge banking services.’

Clients are also reluctant to change their habits, so not every Swiss bank is expecting an overnight exodus of deposits. In fact, Switzerland’s private banks recently declared that the amounts of assets under management for past year increased significantly, despite the changes to the banking secrecy regulations. ‘This may well be considered as proof that political and financial stability, coupled with excellent service, are much more important than bank secrecy,’ says PBK’s Boss.

As for UBS’s long-term prospects, it is already recovering. Some lawyers report that all the probing may actually have done the bank some good, that its hard landing has made it think carefully about its strengths and weaknesses, and how it can stay modest while becoming ambitious again. ‘This legendary banking institution was once seen as almost untouchable, and a little too proud,’ says one Swiss managing partner. ‘We knew not to try to renegotiate terms when they were on the other side.’ Others add that because its legendary rival Credit Suisse is perceived to be faring better right now, UBS has become much nicer to deal with.

As problems dogged the banks, so Switzerland’s law firms steeled themselves for a prolonged period of fiscal turbulence. ‘At the start of 2009, we were psychologically prepared to face difficult decisions,’ says Schellenberg Wittmer’s Jeanneret. Indeed, most Swiss managing partners expected the crisis to become deeper and more drawn out, and braced themselves for what they thought would be a very difficult year, before it proved to be just the opposite. Some Swiss law firms have reported their best year ever in terms of revenue and profit.

This is not to say that certain practice areas did not suffer. In capital markets, 2009 saw some convertible offerings and private placements, but IPOs were generally non-existent. At law firm Umbricht, name partner Georg Umbricht noticed some companies putting certain projects on hold for a few months while they focused more on litigation and international arbitration. And there has been virtually no private equity acquisition work for over a year. ‘Private equity firms were primarily busy with keeping existing investments on track,’ explains Philippe Weber, a partner at NKF. ‘In the absence of bank financing, new deals were extremely rare.’

KPMG Switzerland’s asset management business was focused on specific issues arising from the financial crisis. ‘Many investment fund suppliers were confronted with numerous fund unit cancellations, often amounting to more than half of the fund’s assets,’ says legal partner Armin Kühne. In such an environment, KPMG found itself extremely busy with dissolutions and mergers of investment funds, as well as with deferred repayments for the units of respective investment funds.

Throughout the first half of 2009, M&A remained at a lower level of activity in Switzerland compared to the previous year. MME Partners noticed that its M&A projects became smaller as the crisis took hold, and tended to be much more strategically, rather than financially, motivated. Although M&A and leveraged financing decreased, and fewer public takeovers occurred, significant M&A deals have, nonetheless, taken place. In January 2010, Lenz & Staehelin acted for Switzerland-based biopharmaceutical group Mepha on its E422.6m sale to a US buyer, while in 2009 Homburger advised research-focused healthcare group Roche on the financing of its Genentech acquisition. ‘When an AAA investment grade company comes onto the market, it is immediately snapped up,’ Schärer says.

In another headline deal, Swiss drugmaker Novartis acquired a 25% stake in Alcon last year, and is exercising its option to buy an additional 52% from Nestlé for $28.1bn, increasing its stake in the US eyecare company to 77%. Homburger advised Nestlé on Swiss law.

‘UBS’s problems did not emanate from Switzerland, but were US-driven. It shouldn’t have entered a market it did not understand.’
Martin Hess, Wenger & Vieli

Life sciences and pharmaceuticals work has generally bucked the trend. ‘People still need pills,’ reminds Wenger & Vieli’s Hess. CMS von Erlach Henrici, BCCC and Tavernier Tschanz have also seen a range of biotechnology deals. Because of the presence of the engineering school EPFL in Lausanne, a number of new start-ups and biotechnology companies have chosen to operate in the region between Geneva and Lausanne. This has therefore become an active sector for a number of Swiss law firms. Tavernier Tschanz’s M&A, tax and competition teams also advised Edipresse Group, the largest media company in French-speaking Switzerland, on the sale of its activities in the country to Tamedia, the largest media company in German-speaking Switzerland. Meanwhile, at Zürich law firm Vischer, partner Rolf Auf der Maur has noticed a constant increase in regulatory work within the energy sector, as well as in competition law.

Many expected the gap in M&A work to last for longer than it did, but since mid-2009, transactional work has reportedly returned. CMS insists that it remained strong in small- and mid-cap deals throughout the downturn. At Zürich-based law firm Pestalozzi, managing partner Robert Furter noted its general corporate workflow continuing as usual. Another managing partner tells LB how he was quite content to work on aborted company acquisitions throughout 2009. ‘In times like these, we can benefit from the traditional law firm business model of being able to charge by the hour,’ he says. ‘We get paid anyway. Investment banks, on the other hand, make larger fortunes than law firms during boom times, but they were heavily punished during the crisis.’

‘Finma’s decision looks very strange. The impression is that the Swiss government passed on this political hot potato.’
Nicolas Piérard, Borel & Barbey

Investment funds in Switzerland also mastered the financial crisis well when compared to other financial products. Significant inflows of assets were recorded as early as the second half of 2009. And in the past few months, Kühne has been pleased to notice fund providers launching new products, while increasingly using new fund structures under the 2006 Swiss Collective Investment Schemes Act to implement innovative product ideas.

Even real estate prices have remained stable. Fortunately, the banks did not press clients defaulting on commercial real estate debts in 2009, in order to avoid a worsening of the situation. Moreover, the large institutional clients still have money and continue to make acquisitions without the need for high leverage. ‘In 2009, real estate projects went full-steam ahead,’ Hess says.

Although mid-market real estate is unlikely to be significantly affected, fewer overall transactions are expected in 2010, with many expecting a readjustment of commercial real estate prices towards the end of the year. Fewer ex-pats are going to Switzerland because of budgetary constraints or simple fear of change in a time of financial distress. ‘I expect the real estate market for commercial properties in Geneva and Zürich to weaken this year,’ Tavernier says. ‘But, fortunately, it is unlikely to collapse,’ he adds.

Unsurprisingly, recapitalisations have been buoyant, with many firms looking to convert their transactional groups into restructuring teams. Jeanneret saw enquiries from foreign clients concerned about how to structure certain assets that are not tax transparent, and who would like to become tax compliant. And aside from litigation, UBS’s troubles also fed the lawyers with a variety of tax and corporate structuring instructions. Umbricht has recently seen tax self-declarations from German, Austrian, US and British clients, which it has handled alongside tax specialists from their own jurisdictions.

Ready for battle

The crisis generated a great deal of litigation and arbitration work, examples include shareholders pitting themselves against company board members, not to mention clashes between banks and increasingly aggressive clients over the management of assets, frequently concerning large Madoff-related losses. ‘Clients are more prepared to litigate during a downturn,’ says Patrick Sommer, managing partner at CMS von Erlach Henrici. Nater Dallafior’s Berger agrees: ‘Competition between clients is tougher during a crisis. They chase the same deals and sue each other more readily.’ This has especially been the case in IP, with clients increasingly determined to enforce patent and trade mark rights.

High-profile disputes include the aforementioned Alcon deal, with Alcon’s minority shareholders claiming that the offer of only $153 per share for their 23% stake makes a mockery of the tenet that all shareholders should be treated equally. Swiss drugmaker Novartis argues that the price is fair, but this minority shareholder rebellion threatens to scupper the $50bn takeover, as it cannot proceed unless the directors’ consent is obtained. Taking the matter to the US courts may be the only viable solution.

The insolvency of Lehman Brothers’ Swiss subsidiary has also generated a wealth of legal activity. NKF acts for the administrators and Weber is a member of the creditors committee of the estate of Lehman Brothers Finance. Swissair’s headline insolvency similarly continues to fuel rumours as to how it will actually end, and how the ongoing issue of directors’ liabilities will eventually be dealt with.

It will come as no surprise that the downturn provoked a series of arbitration cases. In 2009, Lalive acted on a huge contract-based international arbitration victory involving a gas pricing dispute, which eventually led to a $760m award. And Geneva law firm Python & Peter recently handled an important multimillion-Swiss franc construction case before a three-member arbitration panel that has endured for the past three years, and is expected to conclude in 2010. Partners Sébastien Besson and Thomas Legler head the team.

‘There’s no need to go to an international law firm. It’s a small market and Swiss lawyers render high levels of service.’
Mathis Berger, Nater Dallafior Rechtsanwälte

Switzerland’s solid reputation as an international arbitration venue means clients frequently write Switzerland into their international commercial contracts when considering where they would like the arbitration to be held in the event of a dispute. ‘This is because the conduct of arbitration in Switzerland is recognised all over the world for its reliability and efficiency,’ says Borel & Barbey’s Piérard. Small-to-medium arbitration cases can be concluded, on average, in a maximum of two years. Plus, one advantage of Swiss arbitration is that, unlike in other jurisdictions, it is very rare for the awards of arbitration panels to be set aside by the Federal Tribunal.

The niche offices of international firms like Hogan & Hartson and Winston & Strawn also benefit from the presence of the World Trade Organization (WTO) in Geneva. Plus, with FIFA, the International Federation of Football Associations, domiciled in Zürich, a raft of sports-related arbitration finds its way to Lausanne’s Court of Arbitration for Sport (CAS). Appeals against CAS decisions are heard by the Swiss Federal Supreme Court.

But arbitrating in Switzerland is not for every litigant. Some believe that arbitration has inherited most of the procedural defects present when conducting cases before ordinary courts. And although ordinary court proceedings can be expensive when passing through all three appeal levels, arbitration procedures have also become lengthy and costly. Some believe that this is why arbitration specialists are now devising alternative solutions for the settlement of commercial disputes. Moreover, in the current economic climate, many companies have been feeling especially inclined to settle, to avoid the cost and uncertainty of lengthy arbitration procedures.

Don’t panic

In spite of tough market conditions, many Swiss law firms tell LB they hardly felt the recession. Because neither private client work nor sensitive areas such as derivatives were priorities for many Swiss law firms, they remained largely unaffected by reductions in these types of work. The legal market is conservative, and this has been to its advantage. Strong areas such as litigation and restructuring compensated full-service business law firms with reasonable cost structures.

Small firms such as NKF have benefited from all the extra litigation work flying around; the advantage of being a boutique at times like these is that it can point to true independence. ‘We have no problems acting for or against banks or corporations,’ Berger says. ‘This is because we are not hindered by a large corporate team objecting to us going after the same clients because it is worried about conflicts.’ Rüd Winkler is another example. Most large Swiss law firms act for financial institutions, so the cases brought by US individuals against the Finma decision went to niche plaintiff firms such as Rüd Winkler.

Unlike in many other countries, where law firms were shedding up to 25% of their fee-earners, Swiss law firms never stopped recruiting during the crisis. There may have been a time towards the beginning of 2009 when managing partners were more cautious about taking on new lawyers, but most Swiss law practices have in fact continued to expand modestly. ‘We’ve continued to grow and invest in rising talent,’ Lalive’s Troller says. Its staff expanded throughout 2009 to include 13 new attorneys. Pestalozzi’s Furter also tells LB that lawyers leaving Swiss firms were replaced and Swiss firms were not compelled to resort to layoffs.

As for Froriep Renggli, it hired senior associate Sabina Schellenberg from Ernst & Young, as well as four litigators. Meanwhile, Wenger & Vieli took on certified tax expert Barbara Brauchli Rohrer from PricewaterhouseCoopers, where she was previously in charge of M&A tax. NKF has been hiring at senior associate level, and Weber reminds LB that none of the top-tier Swiss law firms tend to make lateral hires at partner level.

The ongoing recruitment is explained by the traditionally conservative approach Swiss law firms have towards hiring. They are more cautious than their foreign counterparts and tend not to hire aggressively. Even in boom times, most Swiss law firms have never been over-leveraged. But hire they do, albeit at more modest levels, and when they do, they are up against a notoriously competitive market. ‘In Switzerland, you always have to compete hard to get hold of talent, but the advantage of this is that everybody works at full throttle,’ Sommer says.

Finding a niche

Because Switzerland’s legal market remains famously stable, it is almost impenetrable to the international law firm. This status quo is unlikely to change any time soon. ‘There is no need to go to an international law firm,’ says Nater Dallafior’s Berger. ‘It’s a small market, and Swiss lawyers are already rendering high levels of service to international standards.’ In fact, because Switzerland’s economy is so highly internationalised, the country has for some time been a competitive market for commercial law firms. Switzerland’s, and particularly Zürich’s, commercial law firms are already offering their services with internationally-minded, and often internationally-educated, lawyers. And because these firms also have well-established and strong international networks of corresponding firms all over the world, the opportunities for an international law firm to establish itself in Switzerland are limited. ‘International law firms could not, and cannot, enter the Swiss legal market with a real competitive advantage,’ says MME Partners’ Hösly.

There are also cultural reasons. Many people believe that the Swiss, particularly the lawyers, are independently minded by nature. ‘Swiss lawyers often show a certain reluctance to comply with the uniformity and bureaucracy that international law firms generally implement into their networks, and they are only willing to join them for a premium,’ Hösly says. Let’s not forget that Swiss law firms themselves struggle to entice the best lawyers from their rivals, so what chance do the international firms have of building credible, full-service practices made up of the best local practitioners?

Staying with the cultural theme, another factor to take into consideration is the strong division within the Swiss legal market between the French-speaking and the German-speaking law factions. Jean-Luc Bochatay, a partner at FBT, believes that Switzerland’s federalism actually tends to favour such regionalism. ‘Moreover, Switzerland is not part of the EU,’ Bochatay says. ‘The only areas that may be of some interest for big foreign law firms are those where Switzerland is recognised as having worldwide renowned expertise, namely in international arbitration, WTO law, wealth planning and private banking.’

Many believe that if global firms such as Clifford Chance or Freshfields Bruckhaus Deringer were to come to Switzerland and merge with local practices, the Swiss counterpart would inevitably lose a lot of referral work. The Swiss legal market depends very much on incoming work, and is not large enough to allow a big Swiss law firm to concentrate on working only with one international law firm. Nor would the local market justify such an investment from the international firm’s point of view, the argument goes.

As for those international firms still present in Switzerland, they are often the result of local firms that have decided to adopt the umbrella brand of a global network. ‘Baker & McKenzie has been here so long that nobody thinks of it as a foreign firm anymore,’ Berger says. ‘At the same time, we don’t really think of it as a Swiss firm either,’ he adds.

Greenberg Traurig is one example of a foreign law firm whose time in Switzerland did not have a happy ending. Back in 2002, the Miami practice launched its Zürich office with international tax lawyer Markus Barmettler and entertainment law expert Andreas Erb. With the office’s strong emphasis on film finance, it was rumoured to have been hit hard during the crisis. Barmettler and Erb have both departed the practice, and Greenberg Traurig’s presence now consists of a strategic alliance with Weber Law Office, an independent Swiss law firm.

When asked whether other international law firms are likely to open offices in Switzerland, Homburger’s Schärer says he would not rule out the possibility of large international, particularly UK, law firms at some point looking at establishing a presence in Switzerland. ‘However, if they really analyse the situation, they will realise that they do not need to open offices in Switzerland to capture the work of clients like Nestlé or Philip Morris,’ he says. ‘Less than 1% of Nestlé’s business is in Switzerland, so they are more likely to instruct international firms for non-Swiss work.’

One of the latest brave arrivals is the offshore law firm Appleby, which opened up in Zürich in December 2008. Zürich managing partner Jonathan Vanderkar tells LB: ‘The types of commercial, banking and investment activities carried out in Switzerland are very compatible with the offshore products and services offered by Appleby.’ The firm has been providing services to Swiss institutional clients for many years, but perceived there to be an opportunity to deepen existing relationships and develop new ones by having a local presence. Explaining why the firm chose Zürich over Geneva, Vanderkar says: ‘We chose to base ourselves in Zürich because of the greater mix and volume of business transacted in Zürich, encompassing multinational corporate activity, asset management, commercial and investment banking, as well as private banking.’ Indeed, the latter is generally considered much broader in Zürich than in Geneva, where the emphasis is more limited to private banking and asset management. The office is also considered to be a very convenient base from which to advise Appleby’s Russian and Middle East clients, many of whom have substantial assets managed in Switzerland.

‘The world has changed, and there will be more competition, but the Swiss banking sector continues to stand out.’
Alexander Troller, Lalive

Although some Swiss lawyers tell LB they are, to date, unaware of Appleby’s presence in Switzerland, the response from Appleby’s own clients has been very positive, particularly because it is the only international offshore firm that has opened an office in Switzerland. Plus, it can sell itself on the basis of its broad offering in multiple offshore jurisdictions. Already the office has grown modestly in staff numbers, having expanded from two to three lawyers during 2009, with a fourth addition expected during the first half of 2010. Reporting on the office’s first year of operations, Vanderkar says that it was the most turbulent year for many businesses in recent memory, but was also marked by a politically motivated and disingenuous attack on offshore activity, not to mention the assault on Switzerland’s banking industry. Nonetheless, Appleby’s Zürich office enjoyed a reasonable deal flow during 2009 and has established relations with a number of new and potential clients. As 2010 progresses, Appleby expects the office’s deal pipeline to flow more freely and to be able to take advantage of its newly enlarged network of Swiss clients.

So when the foreign law firms are brave enough to tackle this different market, what can they do to distinguish themselves from the local competition? Vanderkar believes that the Swiss law firms do not offer detailed advice on offshore matters and are unable to implement offshore structures. That’s where Appleby fits in nicely, he says.

CMS’ Sommer says that clients love his firm’s global reach. ‘They don’t want to chase five “best friend” lawyers in five different jurisdictions,’ he says. ‘I do that for them through our other offices, and they enjoy one single point of contact.’ Apparently, being an international law firm in Switzerland is also a fantastic marketing tool as well as a beacon for recruitment. ‘Young lawyers are very appreciative of the international training and overseas opportunities they will receive here,’ he adds.

Value for money

In difficult times, and with client mandates ever more precious, it is all the more crucial that clients are kept content. And the clients are more than aware of this. Many Swiss law firms say that clients have been demanding extra value for money from their legal advisers. ‘Clients are under budget pressure, and demands for estimates and caps have become much more of a rule,’ says Pestalozzi’s Furter. In response, the law firms have had to step up their game and employ strategies to keep the client relationship in a happy balance, such as by demonstrating that the law firm is open to discussions on flexible fees. Many now consider it par for the course that in any matter stretching beyond routine work, an advance budget must be submitted and receive approval, coupled with more detailed explanations delivered concerning the adequacy of certain legal measures taken. The more transparent and clear the lawyer is, the better for both the client and the law firm.

Yet in practice, Sommer has noted that it is rare for clients to ask the law firm for significant discounts. ‘Nonetheless, we were prepared to show our clients that we were willing to share the pain, not just the gain, if required,’ he adds.

At Nater Dallafior, Berger has noticed clients becoming more price aware. ‘But fortunately, they are not exerting excessive pressure to drop fees,’ he says. ‘Our advantage as a small firm with a lean structure is that we offer competitive rates anyway.’ As for litigation, Froriep Renggli partner Felix Mathis says he has not experienced clients pressuring the firm to lower fees. ‘The dispute values are so high that it is sufficient that we perform well for them,’ he says.

Some believe that the recession hasn’t really altered how clients approach pricing issues. In transactional work, Froriep’s Merz has seen more clients asking for discounts and fixed quotes, but does not believe such a phenomenon is recession-related. ‘This trend has been in existence for the last couple of years,’ Merz says. In any event, certain large Swiss firms seem unperturbed should a handful of clients decide to take low-grade work to less expensive practices and stay with their existing legal advisers for the complex instructions.

‘We only want to work with clients who are happy to pay for the service they are receiving,’ one managing partner tells LB. Other law firms are also getting tougher with their clients. FBT is asking new clients for retainers. ‘This is a good move that compels us to concentrate on reliable clients and be careful about the new ones,’ Wilhelm explains.

New management

But the client relationship is not all about costs. Managing clients has become much more challenging. ‘They require excellent and specialised teams to be made available, but sometimes they have their own internal problems we have to take into consideration,’ says BCCC partner Michel Jaccard. He is referring to company issues such as redundancies and internal conflicts, or second thoughts over strategy. ‘More than once, our main contacts at corporations disappear, and we have to start again with new faces,’ Jaccard says.

So if 2009 was marked by barely noticeable reality checks for Swiss law firms, 2010 may bring some of them further down to earth. Because Switzerland’s economic forecasts are not especially positive, Wenger & Vieli’s Hess believes that some law firms might suffer more this year. In addition, many clients have been disappointed with their experience at large law firms. BCCC’s Jaccard believes that law firms can no longer afford to rely upon a brand name. ‘Clients are making their choices much more carefully,’ he says. Some have been accused of becoming static and of being unable to offer their clients the level of service expected. Such a state of affairs might have been acceptable a few years ago but clients are reportedly more attentive now to quality and personalised service than ever before, with the result that some small and mid-sized firms are reaping the gains.

Market sources have already noticed a certain re-orientation of clients away from the big-name law firms to respected mid-size firms. Two significant reasons would appear to explain these moves. In general, well-positioned, commercially oriented, mid-sized law firms can offer many of the services of the big firms in equal quality, but are running considerably lower overheads, thus providing their services at 10% to 20% less than the large practices. The other reason is that well organised mid-sized firms have a better leverage ratio between partners and associates. At MME Partners, for example, there is virtually no meeting with a client without the responsible partner being present as well. ‘Such a personalised and partner-centred service is highly appreciated by our customers,’ Hösly says.

Not everybody is convinced that the rot has already set in. Merz claims Froriep Renggli has not lost clients to smaller firms, but points out that the firm is especially focused on issues such as responsiveness and attentiveness. To top it all, law firms now have to contend with a new breed of in-house counsel at Swiss corporations. One managing partner tells LB that it used to be the case that all the best lawyers went to law firms and the rest went in-house. But now the quality of in-house counsel, often trained both as lawyers and economists, has improved considerably. As a consequence, they have become much more demanding of their external counsel and much more selective in their choice of law firms. Many believe that this trend will become even stronger in the future. Plus, CEOs are becoming much more involved in transactions and discussions with outside counsels. BCCC’s Amy sees this as a positive development. ‘Getting closer to the people making the decisions has improved the relationship,’ he says. ‘We have repositioned ourselves as business partners of our corporate clients, and this has been wholeheartedly welcomed by boards of directors and management.’

But getting close to your clients is never easy when they have troubles of their own, with UBS being a case in point. Whenever the political and legislative battle over the remnants of Swiss banking secrecy is concluded, Switzerland is determined that its reputation as a reliable and quality business environment endures, notwithstanding increased competition. As for the lawyers, for now at least it’s business as usual. LB