As Germany faced the prospect of its first two-year recession since the early 2000s, the legal market grappled with an intricate web of challenges and opportunities in 2023. With the country’s GDP contracting by 0.3%, the impact of increased energy costs, inflation, higher interest rates, and falling industry demand did not go unnoticed. However, despite the economic downturn, the German legal sector remained a robust force within the EU, and independent firms proved once again their ability to adapt to an ever-changing geopolitical and legal landscape marked by adversity.

Germany’s leading independent law firms continued to record revenue growth in 2023, fuelled by volatility across sectors and an increasingly intricate regulatory landscape. ‘Clients are experiencing substantial pressure in today’s market, especially during times of economic uncertainty, which means they are constantly assessing the horizon’, says Luther’s managing partner Elizabeth Lepique. ‘In connection with the energy transition and the decarbonisation of the German economy, the growth in revenue is largely attributable to a growing number of client mandates.’ In a year marked by economic turbulence, Luther emerged as a persistent standout performer, securing energy mandates from prestigious clients such as E.ON and EnBW.

The continued market uncertainty materialised in some sectors more visibly than others, as Lepique reports: ‘Compared to 2022, M&A and banking and finance dropped down, especially in the real estate business, due to inflation and higher interest rates.’ By mid-2023, commercial property deals hit a five-year low and prices, as well as the number of transactions, continued to decline until the end of the year. The M&A landscape remained similarly bleak, with the cumulative transaction value at its lowest since 2015.

Despite this, M&A practices remain a key driver of profit within firms, and Germany continues to lead European tables in this regard. As Alexander Ritvay, co-managing partner at Noerr explains: ‘This is due to the role played by Germany as the strongest economy in Europe and the continued large number of attractive takeover targets in the German market.’ The firm continued to cement its position as one of the leading independent firms in the country with its involvement in a number of high-profile transactions, including Nippon Steel’s $14bn acquisition of US Steel.

Ritvay emphasises that Noerr’s strong M&A and corporate business as well as its restructuring practice play crucial roles in propelling the firm forward. ‘Financial and balance-sheet restructurings are very busy,’ he adds.

The stock markets also saw limited activity in 2023, making the €2.5bn IPO of Thyssenkrupp hydrogen production company Nucera the standout event of the year at the Frankfurt stock exchange. Not surprisingly, energy deals took centre stage, aligning with a combined focus on geopolitical tensions in Ukraine and the Middle East with pressing global issues such as climate change and decarbonisation.

Historically heavily reliant on Russian gas supplies, Germany continued its path towards energy independence and security, investing in import capacities for LNG and reaching a 55% share of electricity generated from renewables in 2023. Adding to the workload created in light of the energy transition, business exits from the Russian market kept German firms occupied. Most notably, Noerr advised Mercedes-Benz on its divestiture from Russia through an acquisition by AVTODOM Group.

Another area of growth is the legal tech market, which was further fuelled in 2023 by the popularity of AI-driven applications such as ChatGPT. The increased accessibility of these systems serves to reduce thresholds for market entry and intensifies competition within the sector, closing the gap between resource-heavy firms and boutiques. ‘Even smaller firms are now making their way into legal tech, and competition increases,’ remarks Lepique.

ChatGPT and other AI technologies are expected to play a pivotal role in reshaping how legal professionals interact with information and clients, and the ability to employ these systems at a similar scale to large international players will be an important factor for independent firms to remain competitive in the years to come. Ritvay agrees, stating that ‘AI is now the hot topic and will have an impact on the business models and services of law firms and their delivery.’

‘The market landscape is constantly shifting. Clients expect law firms to have a forward-looking perspective.’ Elizabeth Lepique, Luther

As Germany continued to weather uncertainties in 2023, the legal market proved its ability to adapt to geopolitical shifts, economic downturns, and technological advancements. On the topic of what might be expected of firms in the year to come, Lepique states: ‘No-one has all the answers, the market landscape is constantly shifting, and clients don’t expect law firms to provide all the answers at once. But what they do expect is that law firms have a forward-looking perspective.’

This is also the stance Noerr is taking in its view of changing client demands, especially in the face of rapid technological developments: ‘It’s a learning curve for everyone now,’ Ritvay says.

How will German independents fare in 2024? As challenges persist, the road ahead for the country’s legal market remains uncertain, but its adaptability of the last few years has proven greater than some might have expected. The combination of legal expertise with technological advancements and a strategic focus on pivotal sectors are sure to position German law firms to navigate increasingly tumultuous waters and emerge resilient in the years to come. LB

Return to the Euro Elite contents.

The post Euro Elite 2024: Germany – Navigating tumultuous waters appeared first on Legal Business.

Drs Friedrich Gebert, Andrea Panzer-Heemeier and Mirjam Boche give an overview of ESG requirements in the German market

I. Country Inside – ESG Innovations and Latest Requirements in Germany

When it comes to new trends and standards for companies, three letters are on everyone’s mind: E, S and G. ESG is increasingly evolving from a marketing buzzword to a core figure that now has a significant impact on the business model of each company. In Germany, ESG requirements are becoming more and more binding and standardised. Therefore, ESG regulations have recently changed significantly. Whether on an environmental, social or governance level, both the EU and especially German lawmakers are getting serious about moving towards a sustainable economy. Through the EU Green Deal, the EU has set itself the goal of transforming the European economy and making it sustainable. To achieve this goal, the EU is using all the instruments at its disposal and is currently initiating major regulatory projects in many areas.

‘The EU has set itself the goal of transforming the European economy and making it sustainable. To achieve this goal, the EU is using all the instruments at its disposal and is currently initiating major regulatory projects in many areas.’

This article outlines the key ESG innovations and recent developments in Germany that companies should have on their radar in 2023. These include whistleblower protection, the European emissions trading and carbon adjustment mechanism, new regulations on forever chemicals, the supply chain management, and new ESG reporting obligations.

1. Emissions trading system and carbon border adjustment mechanism

In Germany and Europe, the use of carbon offsets to meet net zero or carbon neutral commitments is currently primarily regulated by the EU Emissions Trading System (EU ETS). Under the EU ETS, companies in sectors such as power generation and heavy industry must hold permits, called European Union Allowances (EUAs), for each tonne of CO2 they emit. Companies can use carbon offsets, called Certified Emission Reductions (CERs), to meet part of their emissions reduction targets. The EU ETS aims to limit emissions and therefore is based on a ‘cap and trade’ principle in which only a limited number of EUAs is made available. The number of EUAs is reduced over time so that total emissions decrease.

In April 2023, the EU Parliament adopted a reform of its EU ETS. Climate protection regulations keep getting tighter and more industry sectors are included in the regulatory schemes. As key points, the reform includes stricter requirements for installations already subject to the EU ETS (ETS I), the gradual inclusion of maritime transport in ETS I from 2024 and a new emissions trading system (ETS II) for buildings, road transport and additional sectors.

The extension of the EU ETS I to maritime activities means that shipping companies will also be required to surrender several EUAs equal to their total emissions in the previous calendar year by the end of September each year. As a result, shipping companies will be required to monitor and report their emissions, and to purchase and surrender EUAs accordingly. The renewal of ETS I shall apply from January 2024. Therefore, shipping companies are required to be prepared to ensure compliance with the regime and avoid facing severe penalties.

Additionally, a separate emission trading system will be introduced for emissions currently not priced across the entire EU. EU ETS II will include emissions from the building sector as well as from road transport and the usage of fuels in other, as of now not defined, sectors. The EU ETS II will become operational from 2027 onwards, while high energy prices may even postpone the start until 2028. Not all details have been worked out yet, especially as member states are allowed to exempt fuel suppliers from the EU ETS II in case a national carbon price scheme with a price level equivalent or higher than the EU system exists.

German and European lawmakers will also introduce a Carbon Border Adjustment Mechanism (CBAM), which will be fully operational in 2026. As part of the Fitfor55 legislation, the EU Commission has introduced a climate tariff. With the CBAM the EU is imposing its own CO2 price on third countries and therefore de facto extends the EU ETS to the world. Under the CBAM, products imported into the EU will be charged a price that corresponds to the price of the EUAs. Companies wishing to sell in the EU have to buy CBAM allowances from national authorities and thus pay the EU CO2 price, regardless of where in the world they produced. This will make production outside the EU with a lower/no CO2 price less attractive. The price of CBAM allowances will only fall to the extent that the product was already subject to a CO2 price outside the EU. The sectors initially affected are cement, steel, aluminium, fertilisers, and electricity, as well as the first processing stage. The new CO2 border adjustment is a powerful climate policy tool. Importers who do not have enough CBAM allowances will be fined €100 per missing allowance.

2. Whistleblower protection in the EU and in Germany

From 2023 onwards, the new EU Whistleblowing Directive and the German ‘Hinweisgeberschutzgesetz’ will require companies to introduce a new whistleblowing system (WBS). The new law applies to companies with over 250 employees (starting 17 December 2023: over 50 employees). The law requires for whistleblowers to provide information in oral or written form. At the whistleblower’s request, a personal meeting with the whistleblower must also possible. Companies are obliged to always respect the confidentiality of the whistleblower and all third parties mentioned in each reporting. The law sets clear deadlines for processing the information. For example, the whistleblower must receive an acknowledgement of receipt within seven days. After approximately three to four months, feedback on the processing status must be provided. During processing, companies are required to ensure that the information is received and processed by an impartial person or department within the company. The WBS can also be integrated into an existing compliance management system. Legal requirements must be met both during the implementation and operation of the WBS, including data protection and employee participation.

3. Forever chemicals

Another environmental issue relates to a chemical topic that will become increasingly important in the next years and will cause significant disruption in the affected industries: forever chemicals such as Perfluoroalkyl and Polyfluoroalkyl Substances (PFAS). PFAS have been a topic of increasing concern in Germany due to their persistence, bioaccumulation, and potential health and environmental impacts. In recent years, German authorities have taken various measures to address PFAS contamination and exposure. For example, the German Environment Agency (Umweltbundesamt) has published a report recommending stricter regulations on PFAS, including a ban on non-essential uses of PFAS and tighter controls on industrial releases of the chemicals. In addition, the German Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (Bundesministerium für Umwelt, Naturschutz, nuklerare Sicherheit und Verbraucherschutz) has launched a national action plan to reduce PFAS contamination, which includes measures such as monitoring and testing of drinking water, soil, and food, as well as research on alternative chemicals
and technologies.

Most recently in January 2023, Germany submitted a request to the EU’s chemicals agency, ECHA, to ban PFAS forever.

‘There has been a great deal of uncertainty about the rules governing ESG reporting and the various international standards and certificates in place. The risk of greenwashing is considered to be high.’

4. Supply chain management

The focus of national and European legislation in recent years has also been more and more on human rights standards along the supply chain. The German ‘Lieferkettensorgfaltspflichtengesetz’ (LkSG) now requires companies with over 3,000 employees (starting 2024: over 1,000 employees) to take measures to prevent human rights violations and environmental harm in their supply chains, for example child or forced labour. This includes conducting regular due diligence assessments of their suppliers and taking appropriate remedial actions where necessary. Companies are also required to establish complaint mechanisms for employees and other stakeholders to report potential violations of human rights or environmental standards in their supply chains. Failure to comply with the LkSG can result in fines and reputational damage for the companies.

On the European level, a new supply chain law is in the making as well, the European Corporate Sustainability Due Diligence Directive (CSDDD). The Commission’s proposal sets out stricter due diligence requirements for companies in the EU. Companies will soon have to ensure that child labour, slavery, labour exploitation, pollution, environmental degradation, and biodiversity loss do not occur in their supply chain. In addition, certain companies will have to establish a plan to ensure that their business strategy is compatible with limiting global warming to 1.5°C in accordance with the Paris Climate Agreement. While the Commission’s proposal applied to companies with 500 or more employees, the European Parliament tightened the proposal again on 1 June 2023. The scope of application now will start at 250 employees. The EU trialogue procedure is underway, a precise timetable has not yet been set, but companies with business in Germany and the EU should closely monitor the CSDDD development.

5. ESG reporting obligations

In 2023, ESG reporting obligations are on the radar of most companies. There are various ESG reporting requirements in place to monitor compliance with ESG regulations and to help companies to further promote themselves. However, there has been a great deal of uncertainty about the rules governing ESG reporting and the various international standards and certificates in place. The risk of greenwashing is considered to be high. Some ESG reporting requirements have been in place since 2017, notably through the Non-Financial Reporting Directive (NFRD). But now, in January 2023, the game changing Corporate Sustainability Reporting Directive (CSRD) entered into force. This new directive modernises and strengthens the rules about the social and environmental information that companies are obliged to report. A broader range of companies are now required to report on sustainability – around 50,000 companies in total. The new rules will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. The directive will also create a culture of transparency about the impact of companies on people and the environment. Finally, reporting costs will be reduced for companies over the medium to long term by harmonising the information to be provided. Companies will have to apply the new rules for the first time for the financial year 2024. Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The Commission is expected to adopt the first set of standards by mid-2023.

‘Regulators, customers, employees and investors all increasingly expect credible ESG programmes with measurable objectives.’

The EU has also established the Sustainable Finance Disclosure Regulation (SFDR), which requires financial market participants to disclose information on the sustainability of their investments. This regulation aims to prevent greenwashing in the financial sector by ensuring that investors have access to reliable and comparable information on the environmental and social impacts of investment products. In Germany, in addition to implementing the European reporting directives companies must also comply with the ESG reporting requirements of the LkSG. The LkSG requires companies to report on how they identify human rights risks and environmental issues as well as how they intend to minimise these risks and comply with their due diligence obligations.

II. ESG the ARQIS way: Make Business Positive

Regulators, customers, employees and investors all increasingly expect credible ESG programmes with measurable objectives. Companies that fully exploit the potential associated with sustainability commit to a lasting sustainability management. A targeted transformation process has to be embraced by all company departments and divisions. Sustainability must be accepted as an essential corporate value, integrated in the operational strategy and managed by way of clear communication.

At ARQIS, these ESG topics are not just another label for legal advice already conventionally provided. Our integrated consulting concept covers all the relevant fields of law, offering structured advice on all important aspects of sustainability and ESG. We truly believe that value-driven management and leadership is the key to sustainable success and implement these principles in our own corporate culture. For example, ARQIS is ‘NetZero’ since 2020. We obtained a very detailed picture of our own carbon footprint. We are certified as a climate-neutral company. However, we are aware that we have to focus on the continuous reduction of our carbon footprint going forward. The ARQIS GreenTeam brings together many of our law firm’s employees, who have been tasked with designing and developing minor and major improvements that will continuously reduce our footprint. ARQIS continues to profile itself as a diverse and ‘people and purpose centric law firm’. Well-known clients such as Volkswagen, Delivery Hero, Omnes, Sunfire and state-owned energy companies including large municipal utilities rely on us when it comes to legal and ESG issues.

‘We are certified as a climate-neutral company. However, we are aware that we have to focus on the continuous reduction of our carbon footprint going forward.’

We have special expertise in:

• Circular economy. A European circular economy is a huge opportunity for the economy, the environment, and the climate. At the same time, it is an immense challenge for the industry. We help you meet the new legal requirements, such as for packaging or the fashion industry.
• Hydrogen economy. The energy and transport revolution will not succeed without hydrogen. Green hydrogen is expected to replace coal, oil and gas in the future. We have been supporting our clients across the hydrogen value chain since the start of the hydrogen revolution.
• Energy and transport transition. The energy and transport transition will change everything. The risk of ESG-related litigation is increasing. We keep an eye on upcoming and existing obligations and create solutions tailored to your business.
• Decarbonisation. The regulatory requirements for decarbonisation are enormous. The legislator has set national climate protection. We can help you prepare for, comply with and implement these new regulatory requirements.
• Company reports. From a regulatory perspective, corporate reporting already plays an important role in the context of ESG. It is not only necessary to report on how sustainability risks affect the company, but also how the company’s activities affect sustainability issues.
• ESG supply chain management. The German LkSG requires companies to comply with human rights and environmental standards in their supply chain. We help companies to meet this new set of regulations.
• Remuneration. Advising on and designing remuneration models is a key focus of our HR.law team.
• Diversity/anti-discrimination. Making diversity and inclusion a reality at all stages of working life is a focus of our consultancy.
• Workplace and corporate co-determination. Our team has many years of experience and extensive expertise in both workplace and corporate co-determination.
• Data protection. The increasing importance of digital work and the associated collection and processing of data, including increasingly stringent requirements and sanctions, is reason enough for us to have a dedicated team to advise on all aspects of digital data.
• Whistleblower protection and risk management. The imminent introduction of the obligation to implement a whistleblowing system creates a need for action for most companies.
• M&A transactions. We understand the importance of ESG matters for potential investors, in particular in the private equity sector, and specifically address these in our M&A-related advice.
• Manager liability and corporate governance. Management liability and corporate governance challenges are key areas of our expertise. In particular, we are familiar with the specific requirements of listed companies and assist our clients in observing capital market related compliance requirements such as insider regulations.
• Compliance and risk management. We support you with the conceptual design and effective implementation of a comprehensive and ESG integrated compliance management system.

The post Sponsored briefing: ESG in Germany appeared first on Legal Business.

The German legal market has again proven its ability to thrive in the face of challenge, as law firms continued their trajectory of growth in 2022. With the largest firms reporting a 7% increase in profit after a tumultuous year, German independents are demonstrating renewed confidence in their own resilience.

After the uncertainty of Covid-19 brought major moves to a halt, the legal market is finding itself back in motion, with spin-offs and mergers becoming a more regular occurrence, though major consolidations have failed to materialise in 2022. However, many firms report difficulties in finding junior lawyers to join their ranks across practice areas. Paired with shifting client expectations that demand a more holistic approach and, as Gleiss Lutz co-managing partners Michael Arnold and Alexander Schwarz put it, ‘a demand for more integrated services rendered by law firms to clients’, firms face an increased need to demonstrate adaptability. ‘This need will also change the search profile for law firm staff in the future. In addition to traditional lawyers, the need for new professional fields is growing strongly. Summarised in one expression: “the future-ready lawyer”,’ says Elisabeth Lepique, one of the managing partners at Luther.

2022 challenged firm’s abilities to react quickly and efficiently, as fast-evolving crises dominated the legal landscape, from the Ukraine war to energy woes and persistent supply-chain issues. According to Lepique: ‘Securing supply chains, safeguarding energy supplies, and accelerating the transformation of companies to ESG-compliant supply structures were key areas of demand.’

With supply chains being strained and a constant source of mandates from the previous years, law firms also found themselves tasked with preparing clients for new legislation. Notably one of the biggest sources of interest was the Supply Chain Due Diligence Act, which came into force in January 2023 for companies with at least 3,000 employees and aims at enforcing social and environmental standards along the whole supply chain. With its scope being extended to companies with at least 1,000 employees at the beginning of 2024, trade and distribution law will no doubt remain busy.

The new law forms part of an overarching trend that continued to accelerate in 2022. Penetrating virtually every practice area, ESG expertise has become a requirement rather than an add-on for full-service firms. Hengeler Mueller, one of the leading German independents, has found itself embroiled in one of the first high-profile ESG compliance matters in the market, advising Deutsche Bank subsidiary DWS in its ‘greenwashing’ scandal.

‘Increasingly, distressed M&A is becoming more relevant; in contrast to 2021, real estate M&A was rather moderate.’ Elisabeth Lepique, Luther

In light of the Ukraine war, foreign trade law became the centre of attention at the beginning of the year. Practice groups faced a massive need for advice, including the winding-up of many companies’ businesses in Russia and an ever-changing sanctions landscape. In July 2022, for example, the seventh package of sanctions by the EU was passed within the space of five months. Schwarz and Arnold expect that ‘this demand for foreign trade law expertise will continue for the time being’.

Gleiss Lutz’s transactional practice experienced a particularly strong year, with highlights including advising Deutsche Telekom on the sale of the majority stake in its tower business to a consortium consisting of Brookfield and DigitalBridge for €17.5bn. The firm was also the first German independent to open an office in the metaverse, a move that aids in its objective to provide ‘practical advice on the numerous interdisciplinary issues that arise through digitalisation in general, and through the advent of technologies such as the metaverse in particular’, according to Arnold and Schwarz. Lepique corroborates this need for firms to adapt to the demands of an increasingly digital market: ‘Law firms investing in the digitalisation of their own workflows have a significant advantage in making their work easier and faster for the benefit of their clients.’

Despite volatile markets, fuelled by supply chain distress, higher interest rates and inflation rates at a 40-year high, the deal market demonstrated surprising resilience. After a slump in activity at the beginning of the Ukraine war, the overall number of deals in the M&A market remained at a similar level to the previous year, although deal values remained significantly lower. ‘Increasingly, distressed M&A is becoming more relevant; in contrast to 2021, real estate M&A was rather moderate,’ says Lepique. In the private equity sphere, investments continued to soar, particularly within the IT, technology, and healthcare sectors.

Characterised by a heavy reliance on Russian oil and gas, Germany’s energy crisis has kept practice groups working to capacity to secure the future of the country’s energy supply, which culminated in the government’s move to place Gazprom Germania into long-term administration in summer 2022 alongside a €10bn loan. Luther remains an active player in this field, having advised energy supplier EnBW on its plans for a LNG terminal aimed at diversifying the country’s energy portfolio.

As the German economy moves from crisis to crisis, predictions for the future of the legal market prove difficult. The general mood of independent law firms appears to be cautious, but positive. Arnold and Schwarz conclude: ‘Overall, the world seems to have become even more fast-paced, with higher demands on the immediate availability of our lawyers to solve increasingly complex client problems, fast.’ No matter how the next year will pan out, 2022 has shown that the German market is likely to continue thriving in the face of challenges. LB

Return to the Euro Elite contents

The post Euro Elite 2023: Germany – The centre holds appeared first on Legal Business.

At the beginning of the Covid pandemic, German law firms found themselves wary of what the future might hold and prepared for the worst. Two years on, most say their fears were unwarranted – several firms have reported the last financial year to be their strongest to date. ‘The pandemic has shown the enormous resilience of the independent law firm model,’ says Alexander Ritvay, co-managing partner at Noerr. ‘The legal market in Germany recorded a 6% revenue increase in 2020 [to €253m]. We outperformed the market, as we increased our top line by 10%. The ongoing year is also looking quite strong.’

This optimism can, in part, be attributed to the fact that the predicted big slump in commercial and corporate mandates never arrived. M&A, private equity and restructuring are identified as current key drivers of activity in the legal market. ‘With the low interest rates and the liquidity that’s in the market, we believe that transactional activity – both domestic and foreign – will continue and probably increase in the forthcoming 12 months,’ says Ritvay. ‘This is likely because there is also significant reorganisation as well as restructuring going on in many industries.’

This activity can be seen from some of the major mandates handled by German independents in the past year, such as Noerr advising on global disposals for the insolvent DAX30 group Wirecard; Hengeler Mueller acting for Lufthansa on its €2.16bn capital increase; and Gleiss Lutz representing Deutsche Post DHL Group on its agreement to acquire J.F. Hillebrand Group and its subsidiaries for around €1.5bn.

Germany’s economy is also on the road to recovery. GDP was expected to grow by 2.6% in 2021 after it took a 5% dip the previous year. While private consumption is mostly responsible for this rebound, manufacturers are struggling in light of global supply shortages, with producers unable to adapt to increased demands after 2020 saw a halt in consumer spending. However, this has not yet stopped the upwards trajectory of economic growth.

‘Clients will continue to be cost sensitive, depending on how they fared during the pandemic.’
Michael Arnold and Alexander Schwarz (L-R), Gleiss Lutz

It also comes as no surprise that firms have acknowledged an increase in clients’ readiness to take matters to court instead of settling out of court. The insurance sector was especially affected by this trend, as insolvencies and shutdowns caused a wave of disputes to find their way onto the desks of litigators. The high demand not only kept firms busy in terms of workload, but also helped expand their reach.

The pandemic has proved that the German legal market is characterised by resilience and adaptability. As many of the leading independents have reported a record year, their model seems to be well-equipped for providing specific solutions in a fast-changing environment. Gleiss Lutz and GSK Stockmann, for example, saw their revenues grow 5% and 6% to €227.5m and €89.4m respectively.

Luther recorded a 6% dip in revenues to €176m, but such movement was anticipated. Says co-managing partners Elisabeth Lepique and Markus Sengpiel: ‘This is due to a managed process: the slight reduction in revenue is cushioned by the planned adjustments to personnel levels. The headcount of professionals was reduced by 80. At the same time, revenue per professional increased significantly.’

Luther also entered uncharted waters by joining forces with French counterpart Fidal, forming the international organisation unyer, which promises to have ‘a global reach, one exclusive member per country, and [providing] much more than legal services’. The announcement came in May 2021 and while it may be too early to judge the result, the move demonstrates one of the ways in which the German players are keen on expanding their reach on a global level.

Cost efficiency might also be an advantage for the leading independents. Crises cause people to be more circumspect in how they spend their money, and companies are no different. Clients are reportedly more cautious with the amount they are spending on legal services. Michael Arnold and Alexander Schwarz, co-managing partners at Gleiss Lutz, say they expect ‘clients will continue to be cost sensitive, depending on how they fared during the pandemic’. Locally-sensitive, competitive pricing is another example of how independent firms gain an edge over their multinational competitors.

While the competition that independent German firms face from international firms gaining footing in the domestic German market is not a new challenge, Arnold and Schwarz identify the expanding legal branches of large auditing and consulting firms as potentially threatening for a host of national players. The impact of this, however, remains to be seen and there has been no indication so far that the pandemic has sped up such processes.

As it stands, German independents have largely profited from the past year and a half. Firms generally expect a stable market for 2022, but the pandemic has shown that economic upheavals can be abrupt and unpredictable. LB

Return to Euro Elite contents

The post Euro Elite Germany: Bouncing back appeared first on Legal Business.

At the beginning of the Covid-19 pandemic, German law firms found themselves wary of what the future might hold and prepared for the worst. However, 18 months later, most say their fears were unwarranted and several have reported 2021 to be their financially strongest to date. The success of the leading German independents amid a global crisis raises the question of how they have adapted to a pandemic-driven environment, and whether hierarchies in the market have shifted at all as a consequence.

Germany’s economy is currently on the road to recovery. According to the government, the GDP is expected to grow by 2.6% in 2021 after it took a 5% dip the previous year. While private consumption is mostly responsible for this rebound, manufacturers are struggling in light of global supply shortages, with producers unable to adapt to increased demands after 2020 saw a halt in consumer spending. However, this has not yet stopped the upwards trajectory of economic growth.

Overall, the economy has proven adaptable, and its law firms with it. ‘The pandemic has shown the enormous resilience of the independent law firm model,’ says Alexander Ritvay, co-managing partner at Noerr. At Oppenhoff, senior partner Myriam Baars-Schilling has a similarly positive attitude, reporting that ‘the impact of the pandemic on our firm was definitely better than anticipated’.

‘The pandemic has shown the enormous resilience of the independent law firm model.’
Alexander Ritvay, Noerr

This optimism can, in part, be attributed to the fact that the big slump in commercial and corporate mandates never arrived. After a short period of uncertainty at the beginning of the pandemic, work recovered beyond the expectations of most firms. Now M&A, private equity, restructurings, and employment are identified as current key drivers of activity in the legal market.

Mark Wilhelm, founding partner of litigation boutique Wilhelm Rechtsanwälte, describes how ‘clients and the markets in general were paralysed for some weeks in which all companies needed to adjust their services to the new pandemic situation. However, we were surprised to see how fast business as usual took over again’.

Exceeding hopes of a quick recovery, Baars-Schilling speaks of ‘a huge appetite for M&A’ that has been keeping firms busy non-stop since summer 2020. This is expected to last. ‘With the low interest rates and the liquidity that’s in the market, we believe that transactional activity – both domestic and foreign – will continue and probably increase in the forthcoming 12 months’, says Ritvay.

Drivers of business

Law firms have felt the pressure to adapt amid uncertain times, and new solutions to single out the best market approach are frequently being rolled out. Oppenhoff reacted quickly in early 2020, establishing its own Corona task force – a multidisciplinary team equipped to face the numerous legal challenges of the pandemic. According to Baars-Schilling, the effort has paid off: ‘We strengthened relationships with existing clients and won a significant number of new clients.’

Luther has also entered uncharted waters by joining forces with French counterpart Fidal, forming the international organisation unyer that promises to have ‘a global reach, one exclusive member per country, and [providing] much more than legal services’. The announcement came in May 2021 and while it may be too early to judge the result, the move demonstrates one of the ways in which the German players are keen on expanding their reach on a global level.

Cost efficiency might also be an advantage for the leading independents. As we have seen in the past year, crises cause people to be more reserved in how they spend their money, and companies are no different. Clients are reportedly more cautious with the amount they are spending on legal services. Michael Arnold and Alexander Schwarz, co-managing partners at Gleiss Lutz, say they expect ‘clients will continue to be cost sensitive, depending on how they fared during the pandemic’. Locally-sensitive, competitive pricing is another example of how independent firms gain an edge over their multinational competitors.

The pandemic has sped up digitalisation processes all around the world, and Germany is no exception. As Baars-Schilling puts it: ‘Digitalisation projects are still at the top of the priority lists of many of our clients.’ Not only do clients push digitalisation within their own structures but they also demand firms to develop and use innovative solutions that are flexible and integrated. Legal tech applications are in high demand as ever, and firms are keen on developing case management platforms, automated systems, and the like. Luther’s co-managing partners Elisabeth Lepique and Markus Sengpiel attest to this development, saying: ‘Clients increasingly expect holistic and technology-based project management due to highly complex issues. This means an increase of flexible and tech-based working in exchange with our clients.

‘Digitalisation projects are still at the top of the priority lists of many of our clients.’
Myriam Baars-Schilling, Oppenhoff

At Gleiss Lutz, Arnold and Schwarz also speak of ‘an increased demand for efficient solutions, especially for simpler and more repetitive tasks that can be handled by legal tech tools’. It seems that more than ever, staying on top of the digital game is crucial for firms to keep their market share. With the processes of digitalisation gaining increasing momentum, Ritvay expands on this idea, stating: ‘It will be interesting to see how artificial intelligence will find its use in the top market segment in order to improve both quality and efficiency.’ In this context, firms with full-service approaches will benefit from being able to offer interdisciplinary advice.

Small and perfectly formed

With larger firms reporting strong financial gains in the last year, how have smaller boutiques fared since the beginning of the pandemic? ‘For domestic firms that lack high-end specialisation in certain fields, the market entry of major international firms in Germany with all their marketing power is a huge challenge,’ says Wilhelm.

‘Clients increasingly expect holistic and technology-based project management due to highly complex issues. This means an increase of flexible and tech-based working in exchange with our clients.’
Elisabeth Lepique and Markus Sengpiel, Luther

However, contrary to expectations, clients do not appear to exclusively rely on larger advisory teams in the face of crisis. At Oppenhoff, Baars-Schilling reports: ‘We still see a lot of carve-outs from large firms, and boutique firms are starting to benefit from clients’ desire to give their work in a more selective way to a larger number of firms.’

With cost efficiency being a driving factor, clients are more likely to turn to boutiques when a full-service approach is not a prerequisite. Thus, specialised firms remain in high demand and Wilhelm is confident in the strengths that smaller teams have to offer: ‘Boutiques will assert themselves on the market.’

It comes as no surprise that firms have noticed an increase in clients’ readiness to take matters to court instead of settling out of court. Fuelled further by the Wirecard and Cum-Ex scandals, disputes make up a significant part of work being conducted in the German legal market. The insurance sector was especially affected by this trend, as insolvencies and shutdowns caused a wave of disputes to find their way onto the desks of litigators. Firms specialising in insurance disputes have profited heavily from this development, as cases over business interruption insurance rocketed during the pandemic.

The high demand not only kept these firms busy in terms of workload, but also helped them expand their reach. ‘We had a lot of media attention on our work for restaurants, shops, and hotels that had to close during the first lockdown. We were able to promote ourselves as a leading policyholder firm in Germany – which then attracted several new clients from other industries as well,’ says Wilhelm.

With international reach being an increasingly important factor for firms, and one that boutiques are traditionally not as well equipped with as larger competitors, this visibility might provide them with the edge needed in order to carve out a larger share of the market. The growth of Wilhelm Rechtsanwälte during the pandemic appears to reassure clients that highly specialised boutiques have the capability to challenge international powerhouses, as opposed to losing out because of the pandemic.

While the competition that independent German firms and boutiques face from international firms gaining footing in the domestic German market is not a new challenge, Arnold and Schwarz identify the expanding legal branches of large auditing and consulting firms as potentially threatening for a host of national players. The impact of this, however, remains to be seen and there has been no indication so far that the pandemic has sped up such processes.

Do the right thing

Another key area that has gained momentum since the arrival of Covid-19 is the demand for ESG-related work. Whether that be green shipping or the issue of the first green bonds in Germany last year, the sustainability boom has now reached every corner of the market. According to Ritvay, this is in part because ‘compliance and litigation risks are materialising and because ESG compliance even impacts the ability to raise capital’. Having a stronger power over economic developments than ever before, issues of sustainability, ethics and human rights are shaping the way independent firms operate. Similarly to digitalisation, they not only impact client work itself, but also how firms present themselves and how they do business behind closed doors.

‘For domestic firms that lack high-end specialisation in certain fields, the market entry of major international firms in Germany with all their marketing power is a huge challenge.’
Mark Wilhelm, Wilhelm Rechtsanwälte

Changes in legislation are pushing this demand even further. The supply chain act, set to take effect in 2023 and aimed at holding companies accountable for ethical working conditions along the whole of their supply chains, is already keeping German firms busy. This is just one of the examples of how ESG will only further occupy companies in the future, and law firms along with it. Even now, it is becoming increasingly clear that such issues will require the more holistic approach mentioned by Lepique and Sengpiel. This is seconded by Schwarz and Arnold, who say they ‘expect an increased demand for legal advice on complex questions that require more than one area of expertise as many developments in the market touch various areas of the law and therefore need to be addressed with a multi-disciplinary approach’.

The pandemic has proven that the German legal market is characterised by resilience and adaptability. As many of the leading independents have reported a record year, their model seems to be well equipped for providing specific solutions in a fast-changing environment. For Ritvay, this is precisely what gives them an edge over their competitors: ‘We co-operate with the best firms in each jurisdiction with an unmatched depth in their markets and we are able to tailor the team exactly to client needs.’ Noerr has a solid track record of revenue growth over the last decade, having more than doubled its turnover over that period. Its most recent financial performance was particularly strong, increasing turnover by 8% to €271.6m, while revenue per lawyer rose 5% to €553,000.

Projections speak of up to 4.1% of GDP growth in Germany in 2022. If the problems surrounding delivery bottlenecks manage to wane, the economy might see lasting recovery effects. Given the recent federal election, changes are difficult to anticipate, say Arnold and Schwarz: ‘It remains to be seen which consequences the new coalition government will bring and obviously, the economy as a whole is awaiting the results of the coalition negotiations.’

Firms generally expect a stable market for the next year, but the pandemic has shown that economic upheavals can be abrupt and unpredictable. As it stands, German independents and boutiques have largely profited from the last year and a half. With currently no end in sight for the pandemic, their growth is set to continue. LB

The post Germany focus: Age of independence appeared first on Legal Business.

Over the last 15 years, the German legal profession has obtained the dubious honour of being one of the most fractious major markets in the world. Today, both domestic and international law firms are still trying to come to terms with the inimitable characteristics of the economy and legal market. For many, the correct strategy is still a mystery.

The principal challenges centre on breadth of service, geographic coverage and the traditional point of tension: leverage. Germans still love to have just one or two associates to every partner.

In addition, big firms have multiple offices throughout Germany to account for the de-centralised nature of the national economy. It requires commitment and tight management, a concept that German lawyers have been resistant to in comparison to UK and US advisers.

Further still, Germany’s huge number of prominent Mittelstand – the private, often family-founded companies that remain the backbone of Europe’s largest economy – typically have small or non-existent legal departments. Unlike bluechip clients in many countries, they often want a broader, more generalist service than the corporate finance machines forged in London or New York.

Still, the country has come a huge distance in 25 years. The reunification of Germany in 1990 following the fall of the Berlin Wall, came at a time when the legal market was in the midst of de-regulation. Until that point, firms were prevented from having offices in more than one city. But just as the Germans shook off the regulatory shackles, they faced the globalisation phenomenon. Big UK and US firms moved in through mergers or by luring high-profile talent and the German legal market faced yet more tumultuous change. It has not created the most benign of atmospheres and still firms are dealing with the fallout.

Markus Hartung is the former managing partner of Linklaters in Germany and is now director of the Bucerius Center on the Legal Profession, which provides consultancy services to law firms. He says that firms in Germany are still trying to catch up with other established legal markets: ‘We had to accept that as a consequence of the regulation of German law firms until 1989, it prohibited us from growing and going international. We were very much behind. Now the discussion is around whether to adopt alternative business structures (ABSs) and we find the same argument. If we do not allow ABSs and alternative financing and measures for law firms, then other jurisdictions will eat our lunch.’

Hartung says that ABSs are unlikely to be adopted in the near future, because firms are still battling on a number of fronts, not least the issue of optimum size and geographic spread.

Take Anglo-German heavyweight Freshfields Bruckhaus Deringer. The global firm has three offices in China and two offices in the US, but is present in six cities in Germany.

Even so, the German practice is considerably slimmer than it was in 2000 after the merger between top-tier German practice Bruckhaus Westrick Heller Löber and Freshfields. Then it had 180 partners but now, according to Hamburg-based regional managing partner for Germany and Austria Klaus-Stefan Hohenstatt, it has just 135 partners in the two jurisdictions. Growth has remained off the menu for most major Anglo-German mergers. Firms such as Clifford Chance (CC) and Linklaters have cut their numbers substantially and closed offices such as those in Berlin and Cologne. Anglo-German relations have often been tense.

Geographic conundrum

Much of the friction lies in the singular nature of Germany’s economy. It has no dominant commercial and financial centre in the same way that London and Paris are for the UK and France respectively. Frankfurt is the recognised financial hub, but other than Commerzbank, Deutsche Bank and Deutsche Börse, there are no other DAX 30 members headquartered in the city (see DAX 30 headquarters box, page 90).

Many are located in more provincial cities and towns. Volkswagen, for instance, is headquartered in Wolfsburg, a city that sits between Berlin and Hanover, and has just over 123,000 residents.

As yet, no elite firm in Germany has successfully operated with less than three offices. Freshfields has six offices, one for each city where it is present, while Germany’s largest firm, CMS Hasche Sigle, is present in nine cities.

This takes some dedication, but one could argue that it is still not enough.

Native practice Luther has 11 German offices and managing partner Hans-Georg Hahn says that the value of many provincial offices should not be underestimated. He is located in Hanover, a city with just over half a million residents and few major law firms. Yet it retains an international business environment. ‘The city is not the centre of the world. It’s only a small office, but here we worked for clients in 24 jurisdictions last year,’ he remarks.

Hanover may be far from being Germany’s primary legal centre, but neither are firms able to simply base themselves in the geographically central city of Frankfurt, for instance.

Leading German independent Noerr has a longstanding presence in Munich, and Berlin partner Alexander Ritvay says that the firm has witnessed a major onslaught of international firms moving into the city in the 2000s as well as leading German firms such as Hengeler Mueller and Gleiss Lutz. Munich is home to a number of DAX 30 corporates such as Allianz, Siemens, BMW and Linde, as well as a series of prominent private equity houses. ‘There is still a pretty strong decentralised or federal element here and it makes sense to be on the ground in different locations, unless you focus on, say, capital markets, for which Frankfurt is the main place of action,’ Ritvay argues.

Düsseldorf is another city that has attracted major legal players, but increasingly at the expense of its rival neighbour Cologne. Linklaters ditched its Cologne branch and launched an office further up the Rhine in Düsseldorf in 2007. The firm audaciously hired eminent Düsseldorf partners Ralph Wollburg and Achim Kirchfeld from Freshfields and relocated a team of 12 partners from Cologne.

From a business perspective, Düsseldorf has clearly taken the lead. Christoph Küppers, Hogan Lovells’ regional managing partner for continental Europe, is a Cologne resident but undertakes a four-hour round trip to Hogan Lovells’ Düsseldorf arm by car on most days – he arranges conference calls while in the car to optimise his working day. He says that while his heart remains in Cologne, his professional mind is very much located in Düsseldorf.

‘Cologne is a multicultural and inspiring environment where you feel very fortunate to be living there but there has been a decline in advisory business there, which started with the accounting firms growing their operations in Düsseldorf rather than in Cologne. Düsseldorf has transformed itself from a coal and steel industrial location complementary to the Rhine-Ruhr area factories into a significant advisory and business centre in its own right,’ he explains.

Despite this, Freshfields retains a sizeable Cologne office. Hohenstatt admits that there is no compelling reason on paper to maintain a Cologne branch, but the firm’s office survives due to its impressive results. ‘We have six offices in Germany. I wouldn’t say that it is an absolute must to have so many offices in order to be successful here, but at the same time with the depth of client relationships in Germany and with the decentralised structure of Germany’s economy, it would be a mistake to reduce the number of offices as a matter of principle. Being just in Frankfurt is not enough. In order to serve bluechip clients, Düsseldorf is absolutely key, and Berlin is the ideal place for our regulatory business. Our Munich, Hamburg and Cologne offices are – apart from their attractive client structure – hugely important places for recruitment,’ he remarks.

Even so, Berlin, for many, has not lived up to expectations. On the reunification of Germany in 1990, Berlin once again became its capital and there was much conjecture as to its future significance as a commercial and legal centre. Despite being Germany’s largest city by some distance with nearly 3.5 million residents, it is not home to major corporate and financial activity. None of the DAX 30 are based there.

CC chose to close its Berlin office in 2004 and Hogan Lovells is ambivalent about whether to re-establish a presence there following the exodus this year of its Berlin team to launch Morrison & Foerster (MoFo)’s first office in Germany. While that team is understood to have been profitable, Küppers says that Berlin represented less than 10% of German revenues.

Herbert Smith Freehills (HSF), which launched new offices in Berlin and Frankfurt earlier this year after ending its alliance with Gleiss Lutz in 2011, is still convinced by the importance of the German capital. Patrick Mitchell, HSF’s joint global head of corporate, comments: ‘Frankfurt is clearly the most important market for lawyers but at the same time it is the most competitive one. Berlin is a very attractive market for talent, as well as regulated industry and government affairs work.’ Berlin is of course home to the German parliament, the Bundestag, but it also has a thriving start-up and emerging company sector with close links to Silicon Valley and other key growth company centres.

It explains MoFo’s interest. The US technology-focused firm’s only European offices until the launch of Berlin, were London and Brussels. In contrast it has put considerably more time and resources into building out its Asia presence. MoFo chair Larren Nashelsky says that the firm deliberately bided its time: ‘There was a real frenzy going into Germany in the past. We watched it closely and thought long and hard, but the market was too frothy and there were deals being done that didn’t make sense to us. This opportunity is indicative of a firm that has a strategy and knows what it wants and is able to move quickly when an opportunity presents itself.’

Following the launch of the Berlin office, he is not so sure that firms still need to have multiple German offices to be credible. He says: ‘I sense that is changing in Germany. It was that way and clearly there are still practices that are dominant in certain cities in Germany, but I get the sense that is slowly changing due to sheer business economics and at a more macro level, the world is getting smaller.’

Christoph Wagner, who is the biggest name to join MoFo in Berlin, is not convinced that location plays such a significant role as it used to. ‘If you look from New York or London and you want to invest into a particular region, you want the best team to do the job. It is not necessarily a team where the target is based. It is certainly not the case for high-profile work,’ he says. By way of illustration, Wagner highlighted his previous representation of News Corp on its acquisition of Munich-based Premiere.

The Legal 500 recommended firms

Following the Mittelstand

Even with DAX 30 companies spread across Germany, this does not take into account the much-celebrated Mittelstand segment of the economy, a sector that often operates from even more provincial locations.

Though often referred to as small-to-medium sized companies, many are considerably larger with revenues of billions of euros. Companies such as Bosch – the private industrial conglomerate – are credited with making Germany’s economy such a powerful force in the world. Bosch is headquartered in Stuttgart, where the family-owned Porsche is also located.

Hahn says Luther’s largest Mittelstand client has a turnover of over €6bn and that the value of these businesses should not be underestimated: ‘Many Mittelstand companies have balance sheets that exceed €1bn and their businesses are international. It shows the strength of the German economy as an export world champion.’

The Mittelstand represent such an attractive segment for the legal market because, while they may be substantial and often international businesses, they typically have small or non-existent in-house legal departments.

This flourishing segment of the economy has been vital to native German firms that may not be the first port-of-call for the major publicly listed brands. Christian Pothe, the managing director of Buse Heberer Fromm, a firm with six German offices, says that Mittelstand companies like to have their legal advisers on the doorstep. ‘I believe that about 80% of our turnover comes from Mittelstand companies. They need a sounding board to discuss matters even if they are not legally related. This is often connected to the companies being family-owned and under a different structure,’ he remarks.

Mathias Schröder, a Munich partner at Heuking Kühn Lüer Wojtek, the 12th largest firm in Germany by revenues according to legal publisher Juve, says that the Mittelstand is the ‘backbone’ of its business. As a result, the firm has seven offices throughout Germany, including Chemnitz, a city of under 250,000 residents in former East Germany.

These sentiments are not just held by domestic firms. Major international firms are also aware that there is life beyond the DAX 30. Freshfields’ Hohenstatt says: ‘This is a very interesting playing field because they don’t have huge internal law departments. They like to have trusted legal advisers and value long-term relationships with law firms.’

German M&A – three-year view by value

Native growth

The success of the Mittelstand in driving the German economy forward after the global financial crisis has enabled native firms to adopt a relatively bullish strategy. Leading German practice Noerr achieved revenue growth in Germany of 6.8% in 2012 with a total turnover of €135m. Global revenues have grown by 50% since 2007. ‘We are gaining market share,’ Ritvay claims, also suggesting that even big publicly-listed German corporates are starting to instruct domestic firms on a more regular basis.

He admits that bluechip German clients were attracted by the arrival of international firms in 2000 and thereafter, but argues that this love affair is starting to lose its passion, or at least its exclusivity. ‘There are big DAX 30 companies for which we are now on their international panel and doing international transactions. Five or six years ago, they would have always turned to an international law firm,’ he says.

Hartung observes that local independent firms have made advances thanks to the huge restructuring initiatives that the big international firms have conducted in Germany. ‘If you go back ten or 13 years and look at the big mergers involving Clifford Chance, Freshfields and Linklaters; they started with a large German full-service oriented practice and have later refocused themselves,’ he explains. ‘The second and third-tier firms are now growing because of the clients and business that was left behind.’

Cologne-based Oppenhoff & Partner, which split from Linklaters in 2008, reflects this trend. Michael Oppenhoff, the senior partner, says that international firms have narrowed their sights on transactional work and either terminated other practice areas or made them mere support functions. ‘This is quite contrary to what we were used to in the Cologne office where we have always had a broad offering in all major areas,’ he explains. Oppenhoff adds that with many German clients not having large in-house legal departments, they prefer to work with a firm that can handle all their legal requirements.

This is, of course, an interesting divergence from the UK, where in-house legal departments have grown dramatically over the last 15 years and consequently started to undertake large amounts of work which was once sent to law firms.

Luther’s Hahn says: ‘Nearly one third of our clients are asking for services from three, four, five or six service lines. It shows a need for our kind of service offering.’

Hartung expects these second and third tier firms to continue their growth over the next two or three years, but warns that they will eventually be compelled to think seriously about their internal structures and processes, because ‘price pressure will not go away’.

German M&A – three-year view by deal count

Unique characteristics

Pressures have been commonplace over the last 25 years. After the de-regulation of the legal market in 1989, German firms worked hard to nationalise and internationalise in the 1990s and 2000s, but there have been many reverses.

Despite being a mature and major element of Germany’s globally-potent economy, the legal profession is still out of step with the larger and more internationally-minded US and UK markets.

More than a decade since Anglo-Saxon firms swept into the market and arguably became the dominant force in corporate law, there remains huge resistance to the shifts in the profession seen in London and New York.

Many firms, including pre-eminent domestic practice Hengeler Mueller, still operate a low ratio of associates to each partner. For many it remains one to one, because German clients prefer partner attention and aren’t used to their mandates being delegated to huge armies of associates that rack up hours of billable time. ‘There are fewer associates per partner in the German tradition and the clients like this,’ comments Marcus Baum, a partner at Stuttgart practice Kuhn Carl Norden Baum.

Mergers with international firms have also proven fraught, partly due to cultural distance but also because of the abiding gulf in profitability expectations. Küppers says that Lovells’ merger with German firm Boesebeck Droste in 2000 did not create hostility because the two firms were not poles apart when it came to leverage and profitability. ‘The profitability for Lovells Germany was often about the same as that for Lovells London,’ he remarks.

But this experience was largely an exception; even Freshfields and Bruckhaus, by far the most potent and even handed of the Anglo-German mergers, was not easy to bed down in the early years – a legacy that contributed to the large-scale partnership restructuring the firm undertook in 2006. CC, Linklaters and legacy Norton Rose all had considerably more upheaval in their German arms. Even New York’s Shearman & Sterling – which had huge, market-shaking success in securing high-end corporate work in the late 1990s and early 2000s, saw its practice later caught in discord. Attempting to deal with this, Shearman in April announced a wholesale shake-up of its practice with the closure of its Düsseldorf and Cologne offices to consolidate its German business in Frankfurt. At the time, senior partner Creighton Condon commented: ‘This concentration in Frankfurt will enable us to respond to a significantly altered market in Germany.’ The move has been picked up on as a sign of weakness by peers and a number of firms took the opportunity to recruit senior Shearman partners – including Latham & Watkins, which recruited three partners to launch in Düsseldorf. Shearman itself has been bullish, arguing that the move has given it a chance to relaunch its practice.

Whichever view proves correct, Shearman’s struggles are a reminder of how difficult to manage even successful practices can be given German lawyers’ cultural resistance to the more corporatised business model common in foreign firms.

But Ritvay concludes that despite the awkward environment that was created by the arrival of the international firms and their expectations over strategy and structure, they have still made a huge impression on the market. ‘The UK firms that were really successful in Germany were those that merged with leading German firms. It brought the German practice a lot of resource and resolve, even rigour, and management skills that were unknown in Germany. It meant that there was intense competition and many independent German firms fell behind and there are only a handful of them now in the top segment on a national and international level.’

Big global players

While major international firms have turned their eyes and focus to other markets, including key emerging economies, they have remained acutely aware of Germany’s position as a global economic leader and big exporter. It remains the largest market outside the UK for most leading City firms and while the much touted Asian region has proved hard to operate in profitably, the diversified German economy has proved a more than respectable performer for legal advisers since the banking crisis of 2008.

Hohenstatt says that German clients account for a significant share of Freshfields’ global client base: ‘Nearly a third of our biggest clients are German industrials, banks and service firms. The number of lawyers we have here mirrors the importance of the clients in the region.’

Linklaters too has been working hard on developing its bluechip client base in Germany. This year, it also represented Vodafone on its €7.7bn takeover of Kabel Deutschland.

It is this kind of activity that continues to attract firms to Germany, despite the current fashion for building and investing in emerging markets such as Asia and Latin America, and resource-rich jurisdictions like Australia, South Africa and Canada.

HSF has grown enormously in the Asia-Pacific region, but still feels compelled to develop its standing in Germany, a desire that led to the high-profile end of its alliance with Gleiss Lutz in 2011, as the German firm was not ready to move to a merger. Mitchell comments: ‘Germany is absolutely a key legal services market that we had to be in under our own name. The firm had its eye on the significant prize of being top of the tree in Asia-Pacific, the second biggest market for legal services, and the Herbert Smith merger with Freehills facilitated this. But Germany remains Europe’s strongest and biggest economy. It is an attractive destination for Asian investors and we have had a generation of investments in Asia from Germany. The trade winds continue to blow very strongly between Germany and Asia-Pacific.’

Gleiss Lutz managing partner Rainer Loges comments on his firm’s commitment to independence: ‘Ten or twelve years ago, many predicted that independent firms would not remain at the top of the market. But they do. We benefited from the alliance with Herbert Smith and Stibbe in a certain way, but when you are working with other international firms it is easier to operate as a fully independent firm.’

Ritvay still expects many more foreign firms to enter the market. He says that Noerr receives numerous merger offers every year, but prefers to stay autonomous. Wagner also indicates that he and his team obtained five serious offers from other firms, before deciding to join MoFo.

National Coverage: Germany’s Top Ten Firms by Turnover

Keeping lean

The days of the giant mergers that occurred circa 2000 look unlikely to return. Major City firms have either secured large German practices or have shifted their focus elsewhere. As the dust has settled, Germany’s largest and most successful firms such as Hengeler Mueller, Gleiss Lutz and Noerr have become more confident of a lasting place in the market and remain avowedly independent.

International firms are still striving to find the right operating model in Germany. For firms like CC, Freshfields and Linklaters, the reshaping of their German operations is something that they will not wish to repeat.

Carl-Peter Feick, Linklaters’ German senior partner, says that the firm is sticking with its current strategy. ‘We reviewed our strategy many years ago. After the merger [with Oppenhoff & Rädler in 2000], we were a much larger firm at the time, but we wanted to move upmarket and that has not been easy and meant that we had to take tough and difficult decisions. We had to let some partners go and not make up everyone that we wanted to,’ he explains. ‘In the last three to five years, a number of firms grew much faster than we did. There were firms that were prepared to pick up a whole range of matters and we resisted that temptation.’

Hengeler Mueller is also content with its emphasis on transactions, though it is happy to have developed a much more substantive dispute resolution practice since the global financial crisis. ‘We have remained calm and concentrated on our strengths. We are ahead of the market on quality of advice, on new structures and combining structures, which many other firms are unable to do because of the narrow scope of each individual lawyer,’ Hengeler’s co-managing partner Matthias Hentzen asserts. ‘Compliance and litigation has increased substantially and transactions have become more work intensive. In the boom times, there was very little time spent on transactions. It was like cutting bread. Nowadays the purchaser puts much more effort into preparations, analysis and optimisation. People have also become more alert to the opportunities in litigation. People are not afraid of being in a dispute situation. German litigation is still not as work-intensive as in the US with full-trial discovery, but it has become quite normal.’

The realisation of dispute resolution becoming a key growth sector led New York’s Cleary Gottlieb Steen & Hamilton, a conservative firm when it comes to lateral hires, to recruit litigation partner Richard Kreindler from Shearman in 2013.

Freshfields though, is standing by its traditional broad sector and practice area approach. Hohenstatt says that the firm is pursuing a more refined ‘premium full-service’ strategy targeted at bluechip clients. The firm has all but jettisoned the standalone work that departments such as tax and employment previously handled, and these departments are much more aligned with the firm’s more focused domestic and international strategy. Hohenstatt also says that Freshfields is feeling the positive effects of the upturn in dispute resolution: ‘The dispute resolution practice has covered a lot of the revenues that couldn’t be made by the transactional business since the financial crisis. Internal investigations is where we have made a lot of ground. And then there is the restructuring field where we have been involved in some of the biggest cases.’

Hohenstatt is sanguine about the challenges that the firm has faced over the last 13 years, but says that the pain has been necessary to achieve profitability targets: ‘We are not back to the revenue levels of 2006 and 2007, but we are also a bit smaller.’

For German lawyers, a kind of equilibrium has been achieved, after the convulsions of the early 2000s and post-Lehman turmoil. Yet the German market has become an increasingly competitive and dynamic jurisdiction. The dust hasn’t quite settled yet. LB

Big Country: The DAX 30’s Dispersed Headquarters

The post How the dust settles – Germany’s profession is forever changed but singular still appeared first on Legal Business.

Germany’s hidden champions are keeping its law firms in the pink. While European law firms continue to feel the effects of the prolonged hangover caused by the eurozone crisis and general economic malaise, a number of German domestic law firms are seeing work pour in from German family-owned, small-to-medium sized businesses, the so-called Mittelstand.

What sets these clients apart is that they are less affected by the eurozone crisis than publicly listed companies. Many are internationally oriented, which allows them to identify growth potential in markets that are untouched by the debt crisis.

Many are non-listed, family-owned businesses, so the disrupted capital and debt markets haven’t hit them as hard. Their conservative approach in avoiding bank lending has protected their balance sheets from the heavy debt that many companies find themselves burdened with.

‘The Mittelstand is less dependent on banks,’ says Arno Maier-Bridou, partner at legal and accounting firm Grützmacher Gravert Viegener (GGV). ‘A typical company has more equity than a company listed on the stock exchange. They have a long-term business strategy as they are owned by individuals, and for the owner it is less important if they get a dividend tomorrow or a day later, whereas public companies have to keep their shareholders happy.’

Other managing partners from rival domestic firms hold similar views. GÖRG Partnerschaft von Rechtsanwälten partner Wolfgang König says many Mittelstand companies stick to using traditional business models primarily because the owner is also the shareholder.

‘The Mittelstand has always been active in Germany,’ he says. ‘They are led by their owners, so they focus very much on profitability. They are very flexible and make decisions fast. From a lawyer’s perspective, this is great. Mittelstand companies normally present a proposal and we, as a smaller firm, are able to present the decision very quickly.’

But Isabell Conrad, partner at IT boutique firm SSW Schneider Schiffer Weihermüller, says that while these clients may have weathered the economic downturn successfully, it is the business model of the small and mid-sized law firms themselves that has helped them to be more resilient than larger firms amid the debt crisis.

She says unlike the top firms in Germany, smaller firms don’t have the burden of dealing with bulky industrial clients that are heavily underfunded and experiencing a slowdown in transactions.

Export nation

The definition of Mittelstand is broad, covering a range of companies with up to 1,000 employees and a turnover of up to E500m. Export plays a very important role in Germany and a typical Mittelstand company may export 20-50% of its product. In addition, the debt crisis has reduced the real cost of these goods and services when they are paid for in foreign currencies like the US dollar and UK sterling.

‘The Mittelstand has always been active in Germany.
They are led by their owners, so they focus very much
on profitability.’
Wolfgang König, GÖRG

‘Some Mittelstand companies with 500 employees can easily have an export rate of over 50% to other European and Asian countries,’ says Maier-Bridou. ‘Law firms benefit from this as we advise them on their export transactions.’

He says Mittelstand companies with this export rate are typically found in the mechanical engineering industry, for example machine building. Germany is an export nation, encompassing not only its huge automotive, procurement and production industry but the Mittelstand as well. These domestic SMEs often produce for regional or national buyers, so are unaffected by foreign exchange rates.

Stefan Kridlo, partner at SKW Schwarz Rechtsanwälte, says: ‘German business strategy is innovative and focuses on good quality. Germany is all about production and delivery; it’s not service-based. The automotive and machinery sector is huge. The smaller companies here deliver to the larger companies abroad, so the market is always afloat.’

According to Maier-Bridou, the Mittelstand went through a slowdown around five to ten years ago, which caused many small companies to fold or lose some of their workforce. Back then, SMEs generally were influenced by the boom market to increase their borrowings. However, it was the Mittelstand’s resistance to such excessive lending practices that has shaped its strong position in the German market today.

The right fit

Small to mid-sized German law firms generally prefer the Mittelstand clients and vice versa. Ines Zenke, partner at Becker Büttner Held, says Mittelstand clients do not want to be treated as second class and fear that larger companies will get preferential treatment from larger law firms, especially because they have bigger accounts.

‘There is the problem of conflicts,’ she says. ‘The big law firm can’t advise both parties at once and with a dedicated smaller law firm there is never a problem should a legal dispute arise with a bigger player, for example.’

Becker Büttner Held is hardly small. Of its 500 employees, 28 are partners and 208 are associates, making it Berlin’s largest law firm. But the Mittelstand is extremely important as a source of work, bringing in the majority of high-value deals for the firm.

In addition, Mittelstand companies rarely employ in-house lawyers, so it is Germany’s small to mid-sized firms that become the outsourced legal department. This creates a unique lawyer-client relationship, adds Zenke.

Mittelstand management tends to be extremely loyal to its employees and it’s the same when it comes to relationships with law firms. Many domestic firms have held the same Mittelstand clients for over 30 years. This stable relationship allows the client to approach the firm in a more relaxed manner and the result is flexibility on both sides.

‘Clients are accustomed to dealing with only a few faces and don’t like the specialist focus of larger firms,’ says Kuhn Carl Norden Baum (KCNB) partner Marcus Baum. ‘All my clients are different and I advise them accordingly; where one client may be more cautious, another may be more of a risk taker.’

Kridlo at SKW has a similar view. He says a personal, close and unique relationship with each individual client is very important, because firms are not only advising the company, but also have to consider the owner, the shareholders and the successors. This means the dynamics are totally different when compared to dealing with major corporates.

The Mittelstand likes to work with lawyers that are not excessively specialised but have all-round experience. In fact, many of these owners prefer to seek out smaller boutique firms, as they tend to focus on niche areas but are able to offer all-round advice. With one prime contact per client case, work is seldom delegated, ensuring a faster and more efficient service.

Another huge selling point is lower billing rates. Many Mittelstand clients feel that because their annual turnover (and consequently their annual legal spend) is dwarfed by listed companies, they would not be treated as a priority at the larger firms.

‘A good medium-sized client for us is probably a small client to a very large law firm, and they get treated accordingly,’ says Maier-Bridou.

For Conrad at SSW, another common problem with larger companies is they fail to pay their fees on time whereas the Mittelstand is renowned for its punctuality.

‘In the international and industrial sector, there are regulations and huge compliance issues which they have to leave time for. The Mittelstand generally complies with the payment requests. This makes doing business much easier and more enjoyable,’ says Conrad.

Relying on the Mittelstand

There are numerous examples of German small and mid-sized firms that largely depend on the Mittelstand as a primary source of work. For example, almost all of GGV’s work flows in from the Mittelstand as the firm does not deal with any companies listed on the stock exchange. Maier-Bridou says he prefers to work directly with owners, which is possible in smaller enterprises but not in major corporates with large legal departments.

‘We advise individuals who have no legal training. We try to avoid legal jargon and legalese. A typical Mittelstand owner does not want to read 50 pages of legal jargon. Simplicity is our selling point,’ he says.

‘Clients are accustomed to dealing with only a few
faces and don’t like the specialist focus of larger firms.’
Marcus Baum, KCNB

Baum at KCNB says his firm is well suited for the Mittelstand. It is a small firm with seven lawyers and a turnover that hit almost E3.5m for the 2011/12 financial year. KCNB’s Mittelstand M&A practice is thriving: the firm’s domestic clients are currently acquiring businesses not only in other European countries – namely Italy, France, Sweden and the UK – but also hitting the upcoming ‘Chindia’ region.

On the other hand a firm like SKW has a larger headcount with a total of 60 lawyers, of which 26 are partners. Around 80% of SKW’s workload comes from the Mittelstand while a firm like GÖRG takes in around half of its workload from a similar client base.

Wolfgang König at GÖRG reports his firm’s mid-cap deals currently involve smaller-sized businesses being acquired by larger companies, especially within the automotive industry.

Maier-Bridou says one of the reasons M&A is more active within medium-sized companies is because Germany has a low birth rate and so many family-owned businesses, including those with up to 1,000 employees, don’t have heirs. Therefore owners will often try to release equity from the business by selling parts of it to competitors, many of which are foreign.

While small to medium-sized firms have the advantage of retaining the Mittelstand as clients, larger firms are also tapping into this market. However, the returns are less than spectacular. That said, while smaller law firms generally generate less profit per partner than the giant firms, they are less exposed to risks and can therefore generate more stable revenues.

‘Larger firms can achieve significant growth year-on-year but also have to be prepared for revenues to fall in much the same way. We don’t have that concern. Medium-sized firms are less exposed to risk than larger firms,’ says Maier-Bridou.

It seems the downturn is forcing larger firms to pay more attention to the more pedestrian revenues from mid-sized companies in Germany and the rivalry between them and the mid-market law firms is apparent.

Otto Haberstock, partner at P+P Pöllath + Partners, says business has slowed down in the large cap M&A and banking field so larger firms are looking towards the Mittelstand for work, but they need to adapt their business models. ‘Our business model serves the Mittelstand well and I think larger firms will have to adjust if they are serious about targeting this market,’ he says. ‘All of our partners here, including our most senior partners, are involved in daily business, so they remain available to the client all through a transaction.’

Conrad at SSW says competition has grown between IT boutiques and larger firms. Given the current economic situation, the industrial sector especially is seeking premium advice from the larger law firms. She doesn’t think smaller firms should be worried, but they may need to become more efficient.

‘The fees are a big selling point. This is our advantage but then we need to be careful when it comes to internal management and professionalism. In order to compete with larger firms, smaller firms need to build their networks with other boutiques as their resources and advice are limited,’ she says.

Wolfgang König is not unduly worried either about the competition, as Mittelstand companies and their respective law firms have long-term fixed arrangements. But with the financial downturn seriously affecting workload within the banking sector, international firms have spent more marketing efforts on the Mittelstand.

Zenke at Becker says larger firms are actively pursuing Mittelstand companies as clients and although they would not be interested in a local bakery, technically, a big bakery chain with a multinational focus might be considered as a Mittelstand company.

One example of direct competition comes from Hogan Lovells, which advises a Mittelstand company called First Sensor, a producer of hi-tech sensor solutions in Germany. The firm advised First Sensor last year when it acquired AUGUSTA Technologie’s entire Sensortechnics Group. The acquisition doubled the company’s turnover from E50m to E100m. Hogan Lovells also advises other Mittelstand companies on labour law, IP licensing, M&A, enterprise content management and financing.

Leading domestic firm Hengeler Mueller ranked second in mergermarket’s tables behind Freshfields Bruckhaus Deringer for M&A deals by value in Germany last year, with 42 transactions with a combined value of E31.6m. Recent key deals involving listed clients included the takeover of Porsche by Volkswagen, where Hengeler advised Porsche, and the complex acquisition of Open Grid by E.ON on which Hengeler advised E.ON. Nonetheless, co-managing partner Daniela Favoccia is clear to emphasise that work for the Mittelstand is vital to the firm.

‘More and more Mittelstand clients come to us with their complex work in the areas of transactions, financing or litigation,’ she says. ‘A lot of these deals are dealt with on an international level and our clients have realised how important it is to not only offer high-end technology solutions to their customers, but they themselves have to ensure they obtain high-end advice for their critical situations.’

Hengeler Mueller has recently advised a series of Mittelstand companies, predominantly in M&A transactions. The firm recently acted for Viessmann Heiztechnik in its acquisition of Viessmann Kältetechnik and ITT Corporation on its acquisition of Joh Heinr Bornemann (Bornemann Pumps) – Germany’s leading supplier of pumps for the oil and gas industry.

International relations

Heuking Kühn Lüer Wojtek is a primary Mittelstand adviser that has always had a large chunk of global work. With around 250 lawyers, the firm has seven offices, five in Germany and one each in Brussels and Zurich, with its main clients being mid to large-sized businesses.

Heuking is part of the World Services Group of law firms, a global network that helps facilitate deals abroad with like-minded firms. According to partner Pär Johansson, the growing rate of international deals will increase the demand for these types of network.

Other partners agree. Stephan König at Oppenhoff & Partner says using formal or informal networks allows a firm to deliver quality advice for its clients in other jurisdictions. This way, he says, the firm can choose the lawyers best suited for the relevant piece of work and have practically no conflicts.

KCNB is also working on a partner network basis as China becomes increasingly popular for deals. In a recent example, the firm has been working with Taylor Wessing to advise manufacturing company Eisenmann in its acquisition of Hightec Kunshan and Hightec Shanghai.

However, according to Markus Hartung, a former Linklaters partner in Germany and now director at the Bucerius Center on the Legal Profession – Germany’s first private institution for legal education – whether these global networks of independent firms can advise a client that has a cross-border transaction efficiently remains to be seen. Especially when they are up against firms like Baker & McKenzie and White & Case. He says global firms are at a competitive advantage as they can offer a seamless service, which network-based firms cannot, as they depend on their best friend relationships.

However, managing partner at Luther, Markus Sengpiel, says global networks allow firms to have an international presence without them having to raise the capital to expand overseas. In spite of this, Luther has tried a different approach. The firm chose to focus on countries where it could set up shop and used the ‘best friends’ strategy in jurisdictions where it was too expensive to invest.

‘Our business model serves the Mittelstand well
and larger firms will have to adjust if they are serious
about targeting this market.’
Otto Haberstock, P+P

Luther set up a representative office offering only German law advice in London at the beginning of 2012. The move aimed to align the firm with its London clients as well as UK law firms that are interested in the German market.

According to Sengpiel, since the London office launched Luther’s revenues have grown as deals from Luxembourg, Shanghai, Singapore and Brussels have increased. The firm’s German turnover has climbed 8% over the last year with the same headcount. Its prime clients are based in Europe and include private equity houses and multinational companies headquartered in the UK. The firm is planning to open offices in other jurisdictions with a strong focus in Asia, as most of the Mittelstand is active there. Sengpiel says IP, corporate and labour law are particularly buoyant.

‘Asia is becoming increasingly important as a global destination,’ he says. ‘I see the advantage of having our own offices in certain jurisdictions but it’s questionable whether this approach will fit smaller-sized law firms.’

Hartung says if smaller firms want to extend their client reach, they have to start by understanding what the expectations of bigger companies are. Around seven or eight years ago, Mittelstand companies traditionally sought advice from the ‘Deutscher Club’ (German Club), where a range of domestic and international firms participated in roundtables to exchange their views and experience for clients such as the Mittelstand. It was formed in the mid-1990s and comprised firms such as Schönherr (Austria), Pestalozzi (Switzerland), Clifford Chance, Linklaters, Freshfields, CMS Hasche Sigle, and other smaller German firms.

However, when the Mittelstand experienced severe cost pressures a few years ago, Hartung says they slashed their external legal spend and started to professionalise the way they bought legal services.

‘Mittelstand companies are now considering legal outsourcing providers and this new approach – which is something you already see in the US and the UK – is now becoming a trend in Germany,’ he says.

An example of this is legal process outsourcing (LPO) company CORNUUM. A spokesperson at the company says that it is receiving mandates directly from Mittelstand firms, while a growing number of top law firms are also using their offering in servicing Mittelstand clients.

‘This is definitely a trend in Germany that is picking up,’ said the spokesperson, who confirmed firms currently on its roster include Field Fisher Waterhouse Deutschland, Hogan Lovells, Shearman & Sterling, SJ Berwin and White & Case.

But with a series of mid-sized UK firms entering or strengthening their presence in the German market, the question whether small and mid-sized domestic firms in Germany need a stronger global presence to keep in line with the modernising market is relevant.

Osborne Clarke recently opened its third office in Germany. Managing partner Stefan Rizor said the new Hamburg practice forms the gateway to targeted areas such as Scandinavia, Russia and the Baltic region. Other firms that have also expanded significantly in Germany recently include Pinsent Masons, Olswang, Berwin Leighton Paisner and Norton Rose.

Nevertheless, most German small to mid-sized firms seem pretty relaxed with the potential influx of competition and the current market status.

Henning Hartwig, partner at IP boutique BARDEHLE PAGENBERG, says: ‘In the general environment, BARDEHLE PAGENBERG is a mid-sized firm, but as IP specialists with offices in Munich, Düsseldorf, Paris and Barcelona we count among the largest IP firms in Europe. From our point of view it makes more sense to expand by opening offices in other European countries than merging with a firm from the UK where we have long-time, excellent working relations with top experts in the IP field.’

Wolfgang König says: ‘We have numerous discussions with independent law firms in many countries. We have good connections so we are well placed to serve our clients from a global perspective. If a client requests for legal work to be done in another country, in Turkey for example, we have arrangements with other law firms who give us work and vice versa.

‘We don’t think it’s absolutely necessary to expand into London, but of course realise our competitors, such as Luther, are doing this. We are working fine without a London office.’

KCNB is also sceptical about the need to expand globally. Baum says: ‘I’m not so sure about international expansion. I know it’s good to select the right partners to find the right fit and find out whether they are comparable to you as a firm. I think opening up an office in the UK is a big step for a small or medium-sized firm. It has to be a strategic step that takes the time to build up the quality that you wish to serve.’

Consolidation fever

The UK market has experienced a well-documented spate of national and cross-border mergers, initiated by struggling firms trying to move up the ranks and seeking the nebulous ‘critical mass’ to guarantee their survival. However, the same pressure to consolidate is not being felt by the mid-market German law firms. Haberstock says the German market is mature enough to be unaffected by recent arrivals from other markets. He said: ‘I don’t think that one, two or three firms expanding here will really alter the market or start a major wave of mergers. The smart international firms have always approached the market by hiring from local teams so this probably will happen, but I don’t foresee a wave of mergers or market consolidation. We have seen most of that already.’

‘Even if hourly rates reach the level of international
firms, the overall amount of fees is still lower.’
Markus Hartung, Bucerius Center on the Legal Profession

The general consensus is that these firms do not need to raise their game and compete with the German legal elite. While firms are expected to open new offices to accommodate lateral hires of partners and teams, it seems mergers are not on the German cards.

‘There are always changes taking place in law firms, especially smaller firms merging and groups of lawyers leaving firms, but I think the time for big mergers is over,’ says Kridlo at SKW. ‘In the 1990s it was a big issue, especially for British and American firms entering the German market and merging with giant German firms. This led to smaller firms located in one town merging with firms in other towns to leverage their business and become more visible. But at the moment, I think the market is already consolidated. There are spin-offs and the market is always moving but not in terms of mergers.’

Maier-Bridou at GGV thinks German lawyers are more independently minded than UK lawyers, but despite this, the market needs will change and firms will consolidate.

‘We don’t have many large firms, but the tendency is to merge and grow. I think in ten years’ time, the average German law firm will be larger in size,’ he says.

GÖRG itself has confirmed it will do a ‘mini-merger’ in January 2013. The firm has hired seven partners and 15 lawyers from rival firms Brinkmann & Partner and Beck & Hölzle to create an insolvency practice. The firm will also be adding six new insolvency sites in Berlin, northern and eastern Germany and the lower Rhine region.

It seems mergers are taking place in Germany but won’t necessarily hit the headlines, especially if headcount is low. Instead of mergers, German law firms are more interested in opening new offices in other jurisdictions or creating spin-offs. For example, German firm Wendelstein Rechtsanwälte was created in February last year when five Hengeler lawyers broke away to create a boutique specialising in business law.

Another boutique that set up last year was Munich-based Gütt Olk Feldhaus, which was created by two lawyers from Freshfields and one from US firm Milbank, Tweed, Hadley & McCloy, who wanted to establish an entrepreneurial venture themselves after working at a large law firm.

Many partners think this trend will continue. Kridlo says: ‘I think it is more likely that lawyers will team up and open smaller firms such as boutique M&A or IP firms. This model is quite successful in Germany.’

With boutique firms, it is not that the individual fees are necessarily lower, but that the overall cost of legal advice is cheaper, as only one partner will work on each case without a legion of associates, which results in a lower number of hours being billed.

Hartung says: ‘Even if hourly rates reach the level of international firms, the overall amount of fees is still lower, which is very attractive for international companies.’

‘I see the advantage of having our own offices
in certain jurisdictions but it’s questionable whether
this approach will fit smaller law firms.’
Markus Sengpiel, Luther

He says there are lots of spin-off firms where senior associates have left big firms, realising their partner prospects are poor, to form their own highly focused firms. The competitive advantage here is these individuals come from big-name firms and bring with them experience and contacts.

One successful example is Taylor Wessing spin-off firm Glade Michel Wirtz, based in Düsseldorf. The firm hired two partners from Shearman & Sterling’s Düsseldorf and Munich offices in April. Three Taylor Wessing partners founded the corporate and competition boutique in 2007.

Hartung says that general counsel in Germany are seeking these types of outfits for specialist work. For complex high-end work, most German in-house teams still prefer to use large firms where the brand name is important. But because of the difficult market conditions, this type of work is shrinking for international firms. Therefore smaller firms that have understood this dynamic are better off.

Hartung believes it is the traditional Mittelstand firms that face tougher challenges than the smaller boutique firms because their internal organisation is not as modern as it should be.

‘These bigger Mittelstand law firms still have a very traditional mindset and what they have to understand is that entry to other segments of the market requires a better alignment of partners and a more focused strategic thinking, and that does not seem to be their strength,’ says Hartung.

Conrad says there are smaller boutiques in Munich that specialise in IP/IT law but there can be a lack of internal management in these types of firms and the individuality of partners can also lead to conflict. Meanwhile, Sengpiel at Luther thinks boutique firms will struggle in the long term because clients want more from a law firm than just a ‘one-stop shop’.

‘A significant portion of clients are reducing their legal panels so I think it’s more of the case that if firms want to work at a higher level, they will struggle being a boutique firm that offers only a limited portion of services,’ he says. ‘In most cases, these boutiques are formed by senior associates or junior partners from Magic Circle firms, who believe they are better off doing it on their own. I believe this works for the first three to five years but I’m not convinced this would be successful in the long term.’

Sengpiel also believes Germany will see more law firm merger activity in the near future because there are so many firms bringing in turnover of around E20m-30m each. Small domestic law firms in particular will need to consolidate to increase market share, improve their financials and invest in technology.

But with the Mittelstand going from strength to strength, many small and medium-sized German law firms seem content with both their workload and with Germany’s economic health.

While the UK and the US firms continue on the consolidation trail, it may be a long while until Germany will need to follow suit. However, with the likes of UK mid-market firms moving into Germany recently, domestic firms could be challenged sooner than they think. LB

jaishree.kalia@legalease.co.uk