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After the Gold Rush: What Causes and Comes After an International Law Firm’s Departure from a CEE Market

After the Gold Rush: What Causes and Comes After an International Law Firm’s Departure from a CEE Market

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In the first decade after the fall of the Berlin Wall in 1989, an enormous number of international investors descended upon the countries of Central and Eastern Europe – initially, and particularly, Romania and the so-called “Visegrad Group” of Poland, the Czech Republic, Slovakia, and Hungary – to take advantage of the privatizations occurring across the region and, in the early years, manifold new and giant deals related to the region’s rapid modernization and integration. Inevitably, many of the larger London-based international law firms opened up offices in the region to provide their clients with on-the-ground assistance.

Ultimately, however, as the flood of privatizations and big-ticket deals slowed first to a stream, then to a trickle, many of those international firms found the financial cases for local presence less compelling. How several of the Magic Circle firms that came to CEE narrowed their footprint, and how they structured the relationships with the offices they left behind, is the story.

Willkommen, Bienvenue, Welcome

In the 1990s, the business case for English firms considering opening offices in Central and Eastern Europe was straightforward. As Lakatos, Koves & Partners’ Partner Richard Lock, who came to Hungary as a secondee from Clifford Chance in 1992, remembers it, “the UK firms were well-acquainted with the privatization process, based on the UK’s 1980s experience of privatization. They believed they had something to offer the market, and that newly opening market had much to offer in return.”

Although the firm had opened its first office in the region in Moscow in 1991, Clifford Chance’s connection to Hungary came via the International Bar Association. “Clifford Chance’s contact in Hungary was Peter Koves,” Lock recalls. “He saw the trend of foreign firms coming to the country, and wanted to be part of it. He was active with the International Bar Association, and the IBA had engaged with young lawyers across Central Europe in the late ‘80s. That is how Peter met Clifford Chance – and how many contacts between lawyers in Central Europe and the international firms were made.” In June of 1992, Lock recalls, “I was seconded to Peter Koves’s office, Koves & Partners, to put a toe in the water and see how it would work. At the end of my first year here, in July 1993, Clifford Chance formally opened an office – Koves Clifford Chance.” Clifford Chance had opened its Warsaw office in 1992, and eventually opened other CEE offices in Bucharest, Kyiv, and Istanbul as well.

Linklaters established a sizeable CEE presence in the 1990s as well, initially by taking over the operations of another international operation. According to Michael Guiney – now the Head of Business Development at Kinstellar, formerly the Head of UK Marketing and Global Head of Client Communications at Linklaters – “a group of Canadian lawyers came to Central Europe and set up a regional law firm in Prague in 1992 operating under the name Burns Schwartz, and its branches in Bratislava and Bucharest in 1993.” According to Guiney, “Burns Schwartz was integrated into Linklaters in 2000, [and] Linklaters’ Budapest office was established that same year.”

That year – 2000 – was significant for Freshfields in CEE as well. It marked the firm’s formal arrival established its formal presence in thin the region, as a result of its merger with Bruckhaus Westrick Heller Lober, giving it the former Heller Lober Bahn & Partner headquarters in Vienna, as well as that firm’s offices in Hungary and Slovakia (which had operated under the Heller Lober brand since 1989), and the Czech Republic (which had been with Heller Lober since 1990). According to Freshfields Bruckhaus Deringer Partner Natascha Doll, the firm’s Co-Head for the CEE/CIS region, “even though Heller Lober was independent, they are a part of our family now. So, we consider the founding of the offices in Central Europe as a part of our joint history.”

Auf Wiedersehen, A Bientot, Toodle-Oo

International firms wanting to open offices in CEE markets are inevitably welcomed with open arms. The experience when they decide to withdraw is often less happy, even though that disappointment is often expressed (in public, at least) diplomatically. Natascha Doll insists that, for Freshfields Bruckhaus Deringer there was a meeting of the minds between the English home office and the Hungarian lawyers on the ground in Budapest when it came time to go their separate ways in 2007. “It was very much a mutual path that we went down,” she says. “Over the years, the world had become a different place, and our clients developed other interests. Some of our offices successfully established relationships with local clients and advised them on the matters of local law. Freshfields’ clients were looking for more sizeable deals, and we decided that going our separate ways was a win-win situation for both parties.”

Jozsef Bulcsu, Partner at Oppenheim, the firm formed from Freshfields Bruckhaus Deringer’s former Budapest office, agrees. “At the beginning of the nineties, there was an influx of large Western law firms. They were following their clients, which came to Hungary riding the wave of privatizations. The first and second waves provided a lot of financial incentives. Once those subsided, it was not really financially interesting for some of the large international firms to maintain their offices in Hungary.” Bulcsu knows the deal. “It is usually the case that big law firms have very tough and rational financial criteria for each of their offices. If those are not met, then they reevaluate the need for that office.”

Still, Bulcsu insists that the decision by Freshfields to withdraw from Budapest was not unwelcome. On the contrary, he says: “Even though Freshfields’ departure was by mutual agreement, Oppenheim also agreed to the split because we saw that Freshfields was focused more on the international plan.” Although the opportunities to expand the Budapest partnership were limited before the split, that changed once the international firm withdrew. “We had eight senior lawyers, at that time, who all became partners of Oppenheim along with Ms. Ulrike Rein, a Freshfields’ partner.”

In Bulcsu’s opinion, over time, especially as the domestic competition became stronger, the appeal of the international firms – where opportunities for advancement were limited – started to fade somewhat. He points again to the rapid expansion of Oppenheim’s partnership following the international firm’s withdrawal. “There are similar examples in other international firms,” he says, “and I believe that, in the long run, those [international] firms found that it was more and more difficult to retain the talent.”

Again and again, the dearth of partnership opportunities is a familiar refrain. “When you take a look at most international firms that remain in Budapest, very few partners have made equity in recent years – it is hard to satisfy the profitability expectations of the big international firms in such a market and the leading and most dynamic lawyers want more than local or salaried partner status,” Richard Lock explains. As a result, he says, at Clifford Chance, “the idea of the spin-off emerged naturally from the tension between our wish to develop our practice and retain and offer partnership to our best lawyers, and the limited opportunity to make new partners in the international firms. So, after difficult discussions with London, the idea of a spin-off arose.” According to Lock, who stayed in Budapest as a Founding Partner of the resulting Lakatos, Koves & Partners when Clifford Chance left in 2009, “it was an amicable split. Our relationship with Clifford Chance now is as good as or better than it was while we were a part of the firm.”

A similar financial cost/benefit analysis led to Clifford Chance’s decision to spin off its Kyiv office into Redcliffe Partners and withdraw from Ukraine in 2015, though the circumstances were slightly different. According to Olexiy Soshenko, the Managing Partner at Redcliffe Partners, “when Clifford Chance decided to leave Ukraine, they were concerned with the significant slow-down of the economy resulting from the turmoil in the East of the country. Traditionally Clifford Chance has been focusing on bigger markets, such as Asia, Africa and North America. That is when Dmytro Fedoruk and I decided to take over the office and turn it into Redcliffe Partners.”

According to a statement released by Clifford Chance announcing its 2015 separation from Redcliffe Partners, “the new set-up supports the strategic aims of both parties. It provides Redcliffe Partners with greater flexibility for investment in developing a practice aligned with the opportunities and realities of the Ukrainian market, as Clifford Chance looks to focus on its global strategic priorities.”

Relationships That Remain

Of course, while they were quick to take advantage of the increased partnership opportunities, the local firms that remained when the international firms left did not refuse to take advantage of the benefits deriving from their shared history and close association with their former partners. Inevitably, agreements – either formal or informal – were put in place between the firms and their former offices to continue some form of cooperation in the future.

The specific nature of that ongoing relationship varies, of course, but it appears none of the English firms have extended an exclusivity guarantee – at least one they choose to make public. According to Freshfields’ Natascha Doll, “we have a very strong bond with our former offices, and we continue to work together. However, we don’t have any kind of exclusivity arrangement with any of them.” Instead, Freshfields created a “Stronger Together” program, in which the firm cooperates other independent firms, not limited to their former offices, in those jurisdictions where the firm has no formal presence. “We have a dedicated CEE and CIS practice, and through the program we cover the entire region from the Baltics to the Balkans,” Doll says. “Sebastian Lawson and I coordinate our relationship with the firms in our network.” Of course, personal relationships are key. “We know lawyers from our partner firms on an individual basis and we trust them. We have also been exchanging knowledge and experience through secondments. That has enabled us to work on very complex cases together.”

Oppenheim in Budapest is now in that category of “partner firms.” And Jozsef Bulcsu commends Freshfields for its efforts to strengthen those ties. “Apart from working on different cases together,” he says, “Freshfields also organizes regular meetings (although, due to the COVID-19 pandemic, their format has changed from in-person meetings to online gatherings). Most recently, we had a joint seminar on international M&A terms and a roundtable on cartels.” And it’s not only the Freshfields-organized events that foster the relationship, Bulcsu says. “We also attend conferences organized by the IBA, during which Freshfields hosts side-events.”

Similarly, Clifford Chance’s relationship with Redcliffe Partners in Ukraine and Lakatos Koves & Partners in Hungary is based on the principles of a “Best Friends” relationship, although all three emphasize that that relationship is a non-exclusive one. “However,” Redcliffe Partners Olexeiy Soshenko reports, “we are happy to bring them clients, and are grateful when they do so in return.”

Back in 2015, upon the occasion of its spinning-off of Redcliffe Partners in Kyiv, Clifford Chance announced that “the continued working relationship, under a ‘best friends’ arrangement, ensures that multinational, major regional, and local clients will continue to benefit from high-quality legal advice from its established team in Ukraine, and access to a leading global platform.” Indeed, the firm emphasized, “under the ‘best friends’ arrangement, Redcliffe Partners will have access to Clifford Chance resources, including its know-how and training, with a view to ensuring the continued development of the best skills and expertise on the Ukrainian market.”

In that same 2015 statement, Olexiy Soshenko was quoted as saying “we see plenty of opportunities to further expand our capabilities and create rewarding long term career paths for our people,” and as asserting that “the shared platform with Clifford Chance – working jointly on client matters and with access to their resources – means we are well positioned to remain one of the leading law firms in the market.”

Despite this “shared platform,” Redcliffe Partners’ Partner Dmytro Fedoruk insists that Clifford Chance doesn’t get special treatment, and he describes the client referral process between the Magic Circle firm and Redcliffe Partners as an informal one. “Sometimes our clients want multiple firms working on their case,” he says, “and they ask us for suggestions. We compile a list for them and, if we believe their expertise would be useful on the particular case, we suggest Clifford Chance among others.”

But familiarity and personal relationships are undeniably valuable. “We have a good relationship with Clifford Chance,” says Richard Lock of Lakatos, Koves & Partners. “From their point of view, they have access to a team in Budapest that they know and trust. They know they will get a good service from us. We know that, like any important client, they could go elsewhere, and therefore they have to be kept happy. Apart from a couple of cases where there was a conflict of interest, we get their work in Hungary. However, we are an independent firm and we also get work from many other leading firms. I think those other firms see our Clifford Chance past as a sort of quality assurance and, if you are looking for a strong independent legal firm, they take comfort from knowing that other leading international firms trust us.”

Thus, while formal commitments to exclusivity are missing, the reality is obvious. Alex Cook, Office Managing Partner at Clifford Chance in Prague, says: “If I am looking to work with someone in Hungary, I go to Lakatos Koves & Partners. I know Richard Lock very well and he is my go-to person in Budapest. Bucharest Managing Partner Daniel Badea and I are Clifford Chance’s liaison partners for local firms in South East Europe where Clifford Chance does not have an office. On the other hand, Jared Grubb, our current Office Managing Partner in Istanbul, and previously Office Managing Partner of our former Kyiv office, maintains a fairly active relationship with Redcliffe Partners in Kyiv, which has a number of our former lawyers.”

Unlike Freshfields, however, Clifford Chance and its former offices in CEE do not have formal secondment arrangements in place. At least not yet, says Olexiy Soshenko of Redcliffe Partners. “We have not done secondments yet, but that is in our plans.” In the meantime, he says, “a number of our lawyers have taken various courses set up by Clifford Chance.”

Kinstellar’s relationship with Linklaters follows a similar pattern. According to Kinstellar’s Michael Guiney, even though Linklaters is highly respected by Kinstellar, there is no formal agreement for special treatment. “Linklaters is a great firm, and we are proud of our history and origins with it,” he says, “We learned a lot from our time there and their investment in clients, knowhow, training and applied the very best to Kinstellar.” He emphasizes that, “we work with them a lot, but they don’t receive any preferential treatment – we also cooperate closely with other firms who have an interest in the markets we cover.”

Exclusivity, no. Secondments, sometimes. Shared trainings and seminars, often. Benefits arising from past experience and personal relationships, always. Even as the Magic Circle’s presence on the ground in CEE shrinks, its traces continue to extend across the region.

This Article was originally published in Issue 7.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.