Global giant raises capital and shakes up corporate as HSF moves through merger integration
The merger between Herbert Smith and Freehills continues to give rise to growing pains as last month saw the UK half of the firm issue a multimillion pound cash call to its equity partners in preparation for financial integration.
The cash call was issued in a memo sent earlier this year to all equity partners. It is understood that they have been asked to contribute £2,000 per equity point. Herbert Smith’s lockstep ladder runs from 43 to 100, meaning those at the top of equity, around 65 individuals, are liable to pay around £200,000 each.
The cash call only applies to equity partners at Herbert Smith, bringing the firm in line with Freehills’ capitalisation levels. Salaried partners and fixed-share partners will not have to pay into the cash pot.
Herbert Smith Freehills (HSF) confirmed that the cash call was contained within the merger memorandum but would not confirm the amount – thought to be around £20m. The merger went live in October 2012.
Partners at the firm say that, unlike cash calls made by firms in financial crisis, the capital raising exercise is to bring Herbert Smith in line with Freehills. According to two former partners, the UK firm has until now made modest capital demands of its equity partners, in contrast with the growing trend among law firms to make capital calls instead of taking on bank debt. At the end of 2011/12 Herbert Smith had around £50m net debt – up from £41m the previous year – amounting to around 10% of its annual turnover of £480m for that period.
The call comes as insiders say the merger continues to raise a number of cultural hurdles, including combining Freehills’ merit-driven pay model with Herbert Smith’s pure lockstep. A partner at the firm said: ‘The remuneration system at Freehills is based on immediate performance. What we will end up with will be a compromise between a full lockstep and a managed lockstep.’
The combined firm is also bedding down a number of management changes and departmental restructurings, with one current management figure conceding to Legal Business that the current mood internally was unsettled.
Earlier last month, Mike Ferraro, global head of corporate at the firm, restructured the corporate practice from eight groups to four – focusing on energy and resources, tax, TMT and equity capital markets.
Ferraro, former chief legal counsel at mining giant BHP Billiton who was also instrumental in restructuring Freehills before its merger, commented: ‘In any change program there will be dissenters. It’s the majority view that matters, and the challenge for leaders is to bring everyone along, including dissenters, for long enough to show that the change is not so bad and in fact is for the better.’
There have been a number of high-profile partner departures from the firm, including co-head of global arbitration Charles Kaplan to Orrick, Herrington & Sutcliffe in May, and veteran litigator Ted Greeno to Quinn Emanuel Urquhart & Sullivan in March. However, according to one partner at the firm, there is now a confidence internally that the merger-related departures are over.