Shattered

‘When I initiated discussions on our culture at partners’ meetings, I could see the faces of many of my former partners light up, not for the reasons I hoped, but from the reflected glow of their BlackBerrys. They saw an excellent opportunity to catch up on more pressing issues, while I, to their minds, embarked on some abstruse philosophical and largely meaningless examination of our corporate soul.’ David Harrel, senior partner of SJ Berwin between 1992 and 2006, writing in Legal Business, 2013

Mid-morning on 22 November and King & Wood Mallesons’ (KWM) Europe and Middle East (EUME) managing partner Tim Bednall is back before the partnership, crammed into the largest meeting area at 10 Queen Street Place. Just seven weeks into his leadership role, Bednall had dire news.

The firm’s European arm, at this point carrying over £35m in debt, has failed to agree a recapitalisation involving financial support from its Chinese and Australian partners. Bednall and regional senior partner Michael Cziesla tell the assembled partners that its latest, frantically-assembled turnaround plan is dead in the water. KWM, after months dominated by internal strife and departures, was reverting to a desperate Plan B and hoping an acquirer could be found in a last ditch sale. After informing partners, the duo repeated the process with fee-earners and again with support staff.

One former partner recalls: ‘It was a very strange mood but a lot of people were relieved because there was clarity. We had to find a merger.’ Another remembers the shock taking hold. ‘At most of these meetings people didn’t say very much [to the floor] but talked among themselves. No real debate. A lot of being talked at.’

The attempt to sustain the business in anything like one piece would never get off the ground. On 17 January, less than two months later, the firm, which in early 2016 had more than 160 partners and 900 staff in Europe, would enter administration. Legacy SJ Berwin was swiftly broken up, with partners heading to more than 20 firms by January 2017. As one former partner puts it: ‘It was a firm with profitable departments built on a foundation of sand. When the tide came in people looked after themselves.’

The firm had already been through a punishing 2016 before the November meeting, marked by job cuts, a partnership restructuring, a prolonged leadership vacuum and 46 partner departures. The background to those issues was the profound misgivings over the November 2013 union of the individualistic SJ Berwin with the larger Chinese/Australian business of KWM, which was looking for a slick corporate operation in Europe.

It was a firm with profitable departments built on a foundation of sand. When the tide came in people looked after themselves.

One senior hand who departed early recalls: ‘People started thinking: “We’ve merged into some conglomerate doing low-grade international M&A and profits are down. I’m going to go work in a firm that values private equity where I can get paid, because I can’t sit here working for free.” You’ve got a run on your best partners, revenue is shrinking and no-one else wants to join because you’re not paying profits. The European business completely lost its focus.’

The result was one of the most lauded cross-border mergers – sealed at the height of expectations that Asia-Pacific clients would transform the global legal services market – ended in Europe’s largest-ever legal insolvency and the demise of a firm that at its peak generated revenues of £215m in 2008.

Cziesla reflects on the realities of a fast-imploding law firm. ‘I am not going to participate in any kind of blaming game. Circumstances like this bring forth the best and the worst in people. I am personally grateful for all those that have kept confidence for so long and worked so very hard in trying to achieve a better outcome until the very end.’

Many are less forgiving, with one former partner commenting on KWM’s management: ‘I would be very surprised if anyone else could achieve the level of cock-up here that led us to this situation.’

Through dozens of interviews with KWM figures past and present, The In-House Lawyer has sifted the claims and acrimony to establish what happened in the firm’s final months.

***

Dry January

The end was not a shock. Or, as the firm entered 2016, it should not have been. ‘The cash projections were not encouraging from January,’ one former partner recalls.

Legacy SJ Berwin was historically poor at collecting fees and chronically undercapitalised. Just over two years into a pioneering global merger, bills still were not being paid on time. According to several accounts, the firm never paid into the global KWM pot for marketing and other business functions of the worldwide partnership, with costs running into the millions of pounds. Its tax reserve was regularly dipped into for working capital while there were growing concerns over a rent review expected in the second half of the year and partners’ profit distributions were often delayed.

In Europe, revenue for 2015/16 came in at £177m, almost £8m down from SJ Berwin’s final year as an independent concern, and 7% below 2014/15 when the firm earned £191m, buoyed by a £10m contingency payout from a cartel case. A former partner claims proposals were made to retain some of this cash rather than distribute it to partners but this plan was rejected by the firm’s board (see box below).

There had already been a stream of departures in 2015 and 2016 also got off to a poor start. EUME managing partner William Boss, who almost immediately proved uncomfortable in senior management, stood down amid internal intrigue after just nine months in the role. Boss was also dismayed to find considerable resistance to his plans to modernise the business.

The firm stalled on replacing Boss and instead put in an interim leadership team, including practice heads William Naunton, Tom Usher and Bednall. Global managing partner and legacy Mallesons Stephen Jaques partner Stuart Fuller had also stepped up alongside EUME senior partner Stephen Kon and fronted Project Anchor in March – a cull of 20 from the partnership alongside 37 support staff that many felt should be have been done years before.

The cull was also expensive as leavers were given six months’ pay and capital was due after their notice period. ‘It was basically a half measure,’ one former KWM partner opines.

Stuart Fuller makes you feel like he’s your best mate and he sold his vision well but lost sight of how to get there… If you are in his bad books he can be quite Machiavellian.

Overall the verdict on Anchor was that it was an overly political process and its handling was poor. At the same time, a 2020 strategy – overseen by then European board member Maxence Bloch and based on KWM building in five key areas: corporate and M&A; capital markets; energy, resources and infrastructure; private equity and funds; and regulatory to challenge the global elite in terms of profitability – was equally unpopular and deemed unrealistic. ‘The 2020 strategy was ridiculous; Skadden and Latham got mentioned a lot,’ recalls another ex-partner.

The chances of using the restructuring to reboot the firm were dealt a severe blow within days when Goodwin Procter on 4 April announced that it was hiring a six-partner Paris private equity team. The group included some of KWM’s top Continental lawyers – among them Bloch – and would transfer at least £8m of business.

Exacerbating tensions in May, with staff on redundancy notice, Fuller launched a ‘rebrand day’ with colourful posters – including cheery motivational slogans such as: ‘Rockstars wanted’, ‘The power of together’ and ‘Building great things together’ – and a plastic red carpet. ‘It was like we were kindergarteners,’ a former partner says, adding that the use of Australian idioms in communications further rubbed partners up the wrong way.

Another senior hand recalls: ‘In the middle of redundancy, they were doing smoothie giveaways, health days, a complete rebrand of the building, etc. It was bonkers.’

Fuller was spending half his time in Europe at this point. But while Fuller, who had personally advocated for the union with SJ Berwin, was a fluent communicator who had been initially popular, his stock was now plunging among the City partnership. For his part, Fuller was used to the slick governance of Mallesons, not the improvisational coaxing and office politics that passed for leadership at SJ Berwin.

Says one former partner: ‘Fuller is charismatic. He makes you feel like he’s your best mate, and he sold his vision well but lost sight of how to get there… If you are in his bad books he can be quite Machiavellian.’

Signs that the goodwill was failing came at a partners’ dinner in May when disputes and regulatory head Tom Usher performed a comedic song about Fuller. While Usher had previously done this for other Berwin hands – his inventive rewrite of Sinatra’s ‘My Way’ to rib former head David Harrel remains legend – in this case the joshing was too close to the bone as Fuller sat there stone-faced.

One hope Fuller had entertained to turn things around was to secure a high-impact US merger and he felt he had a credible candidate in Morgan, Lewis & Bockius. Fuller and a tight circle had held fairly lengthy discussions with the Philadelphia-bred giant, which turned over $1.84bn in 2015. A deal would have transformed KWM globally. One senior KWM partner recounts Fuller indicating in early 2016 that a US tie-up would be done in 12 months. But the talks stalled by the summer.

If Fuller was facing flak in London, his local senior partner Kon – never the most diplomatic senior partner with a tendency to throw his weight around – was doing little to steady the nerves of partners and the strain began to show.

By the early summer, KWM’s lender, Barclays, was restless that there was no replacement for Boss. As one partner says: ‘Fuller didn’t ensure there was management in place. There was global management but none in Europe. That gap should have been blinding.’ This is debatable. KWM had retained SJ Berwin’s partnership board, chaired by Kon. KWM also had a firm-wide executive committee, which had four representatives from Europe. Though some unpopular decisions were put at the door of Asia-Pacific, KWM had considerable local autonomy. It suited some senior figures in Europe to pass the buck at key moments. One Australian partner comments: ‘The European firm was run and governed by its partnership board, and it was their job to come up with and drive proposals. They needed to take responsibility for themselves and they didn’t.’

A partner suggested KWM should ‘punish’ Legal Business by giving ‘good stories’ to rivals. Fuller retorted: ‘What good stories? There aren’t any.’

A finance committee was formed that included funds heavyweight Halford and tax partner Gareth Amdor. The duo would work with Barclays, which had brought in restructuring specialists AlixPartners to monitor cashflow from the middle of the year. In late July Barclays had filed a debenture over its then £25m loan to the business, giving additional security over the firm’s revenue streams and powers to appoint an administrator. Surprisingly, given how stark the problems facing KWM were, according to one account, Barclays did not officially class KWM as a distressed debtor until July. The bank around this time drafted in one of its turnaround specialists, Stevan Healy, in place of KWM’s previous banker. Many partners were still in the dark that its debt facilities were about to expire and needed to be renegotiated.

Also in July, The In-House Lawyer’s sister title Legal Business published a cover story on KWM, which laid bare the challenges facing the firm. It went down badly. In one meeting a partner suggested KWM should ‘punish’ the magazine by giving ‘good stories’ to rival titles. Fuller reportedly had little patience for the level of denial, retorting: ‘What good stories do you want us to give them? There aren’t any.’

Crunch time. Again.

While debt owed to Barclays kept climbing through 2016 – peaking in the autumn at an eye-watering £37m – KWM’s facilities were set to expire at the end of September, requiring talks on new terms. Barclays was now putting intense pressure on KWM to get its affairs in order as a condition of a new deal.

The bank wanted partners to put in more money, resulting in Halford’s review of capital (his role was ironic for those who felt the funds team had previously led the resistance to attempts to bolster KWM’s balance sheet). Recommendations from Halford’s working party – which required the partners to put in £14m – passed on 28 July with a 98% vote in favour. Though the process had been bruising, it appeared that a crucial deal on new facilities was in sight.

Such hopes were to be undone, as KWM finally moved to address Barclays’ concerns over leadership. There was a reason Boss’s replacement had been delayed: the firm was riven with factions and lacked a unity candidate. KWM now plunged into a bitterly-fought election that fully exposed the firm’s divisions at the worst possible moment.

In early September Kon announced he would stand down as senior partner at KWM. The managing partner role would be decided in early October, followed two weeks later by the senior partner vote.

Hustings began and camps quickly formed. On one side was Amdor, who ran for managing partner on a joint ticket with Halford as senior partner. The duo had prominent support, including UK private equity co-head Jonathan Pittal, former senior partner Jonathan Blake and the firm’s funds team, which had huge clout.

As one partner recalls: ‘Funds was tight-knit. They ran things their way, a very profitable team – but had certain views on how things were to be done.’ Although the practice, worth over £20m in London, had suffered some reverses thanks to predatory recruitment from US rivals, it remained the strongest team in the City and was used to getting its way.

If office politics was gripping an already sharp-elbowed firm, there was even less leadership than usual to mitigate the situation. Kon was exhausted and Fuller, until the summer a strongly visible presence, suddenly dropped out of sight.

Although well-regarded real estate head Naunton had previously been Fuller’s preferred candidate for the election, the partnership had been turned off the ‘Eversheds lot’, as Naunton had joined the firm in early 2015 and brought with him five real estate partners, which was viewed as more than the practice needed. His development of a Cambridge branch drew criticism during a period of cost-cutting. Arguably, the only other partner perceived to have the clout to run was high-billing disputes partner Craig Pollack but he did not throw his hat into the ring.

With Naunton lacking support, legacy Mallesons chair Bednall, who had only moved to London in February 2015, was drafted in to stand, and the partnership deed amended to allow a salaried partner to take part in the election (City partners had rejected an earlier attempt to hand Bednall full equity status in Europe, summing up the poor relations within the KWM empire).

While Bednall drew resentment over Australians being airlifted in, on a personal level he was seen as a straight arrow with a genuine drive to turn things around. He also had the support of global management.

One partner recalls: ‘Gareth [Amdor]’s platform was: “Let’s go back to our old ways,” and Tim said: “We need to internationalise.” What people didn’t see was that they both had strict views on cutting costs and stronger management.’

Given the tensions between the City partnership and Australia, on paper the Halford/Amdor team looked hard to beat. But by several accounts, the insistence on a joint ticket went down badly. Amdor had gone as far as saying he would resign as managing partner if the subsequent election went against Halford; the funds team had clout but also provoked resentment from those who felt it routinely threw its weight around. ‘It was a critical error,’ says one insider. ‘It turned the partnership off Amdor.’ In contrast, Bednall said he would work with any senior partner.

The Australian narrowly won. Halford pulled out of the senior partner race, triggering immediate fears that the funds team would depart the firm.
The firm was now left without a candidate to face off against Dubai-based Tim Taylor QC, the colourful disputes veteran who was recently best known for a surreal YouTube video celebrating the KWM merger and appearances on the reality TV show Made in Chelsea. While an effective practitioner, even by SJ Berwin’s idiosyncratic standards, Taylor did not fit the classic patrician senior partner ideal, let alone being an obvious choice to steady a faltering firm.

Days before the deadline for nominations, frantic efforts were made to persuade Frankfurt head Cziesla to run. Cziesla, 44 and a well-regarded operator, had spent most of his career at the firm but was young enough to appeal to partners who wanted a new generation to take hold. As it was, it was damaging the firm didn’t have a London-based partner in the race.

‘In the waters we were riding,’ one partner notes, ‘we needed a calm personality.’ Taylor stressed the firm’s global aspirations, while Cziesla’s message was ‘make ourselves strong again’. By 18 October the election closed – Cziesla had secured a majority of the vote.

KWexit

KWM had in place two credible figures at a period when it desperately needed them. But the election had starkly exposed the fault lines in a firm divided between Asia-Pacific and Europe, younger and veteran partners and the funds/corporate practice and most of everyone else.

The consequences of that division would play out before the month was over. At lunchtime on 27 October, partners again congregated in London for a light lunch. Present were AlixPartners, Grant Thornton and three of KWM’s lawyers, including CMS Cameron McKenna insolvency partner Rita Lowe, who had advised on the 2010 collapse of Halliwells. The mood was tense. One ex-partner present recalls: ‘Numbers for partnership meetings always varied, but this time most were either there or on a conference call from overseas. There was a sense of anticipation.’

The anticipation soon morphed into ‘stunned silence’. Bednall had a shocking announcement: key figures Halford and Pittal, alongside former managing partner Rob Day and corporate partner Andrew Wingfield had resigned. While Day and Wingfield previously notified management of their intention to leave, Halford and Pittal’s departures were a direct consequence of the election.

Halford and Pittal had both been vocal about their plans to resign if Amdor had not won and had been pressed over their intentions. On the Friday evening just after Cziesla’s election, Bednall pulled Halford and Pittal aside and asked them to commit to the firm by Monday so that plans could proceed for the agreed recapitalisation. Neither would commit.

The significance was obvious. Halford, Wingfield and Pittal were among the firm’s leading billers, between them overseeing over £8m of business in recent years. Halford – who had been talking to a number of firms, including Gibson, Dunn & Crutcher and Hogan Lovells, often called ‘Halfie’ by colleagues – was also the public face of the funds team and had championed the recapitalisation plan. Pittal, whose clout had been further buoyed by chairing the firm’s remuneration committee, was so attached to the SJ Berwin brand that he was advocating a more semi-detached status for the European business within KWM. This approach was dubbed ‘KWexit’ after the EU referendum several months previously. Mourning the loss of the SJ Berwin brand, which was unceremoniously phased out one year after the 2013 union, was common in Queen Street Place. One funds partner had his own business cards printed that said ‘KWM – powered by SJ Berwin’.

It was another story for Day, who felt hugely disenchanted with the firm that he spent years trying to put on a firmer operational footing, often to see his efforts rebuffed. Day had initially stepped in post-banking crisis, when SJ Berwin’s lack of cash management destabilised the business and put forward numerous attempts to bolster its capital (see box below). Having stood down as KWM’s regional managing partner in October 2014, he was dismayed to not be consulted when the firm ran into persistent problems during 2015 and 2016 and was uneasy about cuts to the practice. Indeed, he felt the blame for the firm’s woes had often been disingenuously directed at him. He had nevertheless successfully returned to full-time fee-earning in the corporate practice and many considered him an excellent strategic deal man in a practice not over-burdened with quality M&A hands.

The election had also stirred up barely concealed tensions over the 2013 union, which was felt to be misrepresented by all parties. This tension had been stoked for years by pressure on legacy SJ Berwin to focus on core clients of KWM Asia-Pacific, even though profits were not shared under the verein structure that left Europe, Australia and China as separate partnerships. In some cases key client relationships were still controlled in Asia.

This was particularly acute with Chinese clients, which sometimes paid slowly and at discounted rates. Corporate partners Will Holder and Mark Sanders led on a number of China referrals in London.

One departee comments: ‘Costs were out of control, and management gave a bit of artistic licence with the referrals. They would say we’d had 35,000 new Chinese matters when the bulk of them were a £100 property check. It was always a loss leader.’

Many also believed legacy Mallesons, seeing itself as a Magic Circle-style outfit, was still routinely sending complex work to Slaughter and May and Clifford Chance instead of its own European arm.

‘Australia is not a dominant economy like the US and China so there weren’t any rivers of gold flowing into Europe, but there was some [work],’ responds KWM Australia chief executive partner Sue Kench.

In late 2013 then managing partner Day had made a proposal to KWM’s global management committee that there should be some form of ‘attribution fees’ for cross-partnership referrals and, in the event that a referred job resulted in a major write-off, that the impact be shared across the partnerships. The committee would not take this forward either at Day’s suggestion or when Boss later suggested similar measures. SJ Berwin hands also noted that post-merger conflicts had cost them work and contributed to the departure of Ray Black and David Rose, a strong IP partner duo, to Mishcon de Reya.

Australia was very bottom-line focused, they thought with their heads. China thought with their hearts and about losing face and, let’s face it, they’ve got lots of money.

For its part the Chinese and Australian partnerships felt increasingly disconcerted with the constant drama in its European arm and mystified at the firm’s inability to put its house in order.

Whatever the baggage behind the October resignations, the immediate concern was over the firm’s finances: given the departures – and expectations that the funds team might be primed for a mass exodus – Bednall decided to go back to the drawing board and ask the partnership for a delay on the agreed recapitalisation to strike a new deal.

Not everyone thought that was the right move given that commitments were already in place but Bednall felt it was the honourable course and necessary in the event that another round of departures began. That meant the firm was going to have to get money from Asia.

‘Plan A’ and a lot of Plan Bs

Bednall and Cziesla in early November set off to China for talks to thrash out a new deal, which was ironically dubbed ‘Plan A’. Chinese KWM partner Handel Lee recalls that the duo were in Beijing for a week, and would return to their hotel after each meeting to relay messages back to the EUME partnership. Lee says after their first proposal Bednall and Cziesla came back and explained the funds team wanted additional guarantees from China to come on board. It took several days for the duo to hash out a deal, primarily struck with senior members of the China partnership – members of the Australian arm were, notably, less present in the discussions. It was increasingly clear that the Australian partnership was less interested in helping than the fast-growing China business.

Kench comments: ‘All I can say about the recap and sort of broader support is that Australia and China were aligned in relation to the provision of the support.’

Lee notes: ‘There was some difference in what was offered, which reflects the level of significance of client matter flows between China and Europe and Australia and Europe.’

Says one insider: ‘Australia was very bottom-line focused, they thought with their heads. China thought with their hearts and about losing face and, let’s face it, they’ve got lots of money.’

Australia’s distance was underlined by the confirmation on 10 November that Fuller was standing down as global managing partner. One partner claims that Fuller lost crucial support in China, which was angered that it had not been updated on problems in Europe until they burst into the open. Says one former partner: ‘Fuller was very involved then went missing. Stuart was at the centre, so I think China gave him the bullet.’

Lee says Bednall and Cziesla also offered their own cash on top of the partners: ‘Tim and Michael offered up more capital and did more than what was generally requested of the partnership. They led by example.’

The new deal – where legacy SJ Berwin partners were asked to continue the recap plan to put in £14m – included a £10m-£12m contribution from China. The Australians, for their part, agreed to write off about £2m that the European partnership owed to the global firm. In return the EUME partners were asked to submit to a one-year lock-in to stabilise the business.

The deal – which required a 60% vote to back it – would have guaranteed the remaining partners £11,000 per equity point, against a current figure of £14,000, ensuring a pay range for equity partners of between £220,000 and £660,000. Salaried partners – around half the partnership – were also asked to commit £60,000.

Once the deal was struck, Bednall and Cziesla went back to London to present the plan, going to each European office and Dubai to garner support.

Despite being obvious the firm could not continue without a substantive refinancing, this time the deal did not get close to passing. On 22 November, only 21 of the partnership voted in favour.

One former KWM partner notes: ‘I didn’t vote for the recapitalisation, I thought it was a failed proposal. The only thing it would have helped was with temporary cash flow but it won’t resolve and hasn’t resolved the fundamental financial model.’

But a current KWM partner notes: ‘I agreed because it seemed the best option to keep everybody together. People had different reasons for not voting but didn’t realise if we didn’t vote for it we would have gone down this path.’

Another ex-partner observes: ‘It was clear it wasn’t a done deal, but I was surprised just how little support it had. The problem was it had all been going on for such a long time that all the individual partners had their personal Plan Bs lined up.’

In Asia, there was surprise that the recap plan failed. ‘I didn’t think [the vote] was going to be a no,’ admits Kench.

Barclays’ patience was exhausted. Recalls one observer: ‘It was basically: ˝Computer says: ‘No’”.’ Funding would soon be cut off. The firm had no choice but to put the European business up for sale. A distressed sale.

In pieces

AlixPartners had shortlisted seven candidates out of an initial list of 20 firms that had expressed some interest: Dentons, Greenberg Traurig, Goodwin Procter, DLA Piper, Reed Smith, Winston & Strawn and KWM China.

From this group, a week later six signed non-disclosure deals and were given access to KWM’s books and management time.

Dentons and Winston & Strawn were interested in acquiring the majority of the practice. Not wanting to lose its European presence and uneasy about Dentons taking on the practice after having recently merged with Chinese giant Dacheng, KWM China also threw its hat into the ring.

Ironically, KWM had concerns over Dentons’ ‘unacceptable’ levels of profitability. Despite Barclays being enthusiastic for a clean takeover by Dentons, there was a general lack of warmth from KWM partners, though Dentons US leaders Elliott Portnoy and Joe Andrew showed considerable initial interest. ‘Nobody was keen on Dentons other than Barclays,’ says one KWM hand. ‘The numbers just didn’t work. Headcount-wise it was pretty big, but the numbers were going down every day and some people had offers in their pockets already,’ responds one Dentons partner.

‘Winston was more interesting, they came in to give a presentation. But I think they got cold feet and only made 20 offers in the end,’ says one ex-KWM partner. The US-based firm ultimately only ended up taking finance partner Ian Borman, a surprise, as Winston had ‘made a huge play’.

A deadline for indicative offers of 7 December generated bids from four parties. According to a creditors’ report issued on 23 January, one of the four was cited as the preferred bidder, though on 11 December, the preferred bidder downscaled its offer to ‘circa 20 partners’ (it is unclear if the preferred bidder was Winston, Dentons or another party).

The other interested parties were focused on teams or individual partners alongside work in progress (WIP) and accounts receivable, with many of the deals tied up through December or early January.

One of the most significant deals came from Goodwin, which absorbed the bulk of the City funds team. As part of the deal, KWM abandoned a lawsuit that had been launched over Goodwin’s devastating Paris raid. Including key figures like Halford, Ajay Pathak, Ed Hall and Arnaud David in Paris, the transferring team controlled an annual client book of over £15m.

Reed Smith was an ambitious suitor that took on 17 partners, adding 10% to its European headcount, while DLA Piper and Addleshaw Goddard together took large chunks of KWM’s real estate team. DLA Piper had at one point looked at a larger team, including the property practice that went to Addleshaws, which included Boss, and real estate funds rainmaker Steven Cowins, who controlled a £6m book of business.

Cowins instead opted for Greenberg Traurig as part of a six-partner team. Pollack moved to Covington & Burling, while Day joined a group of former colleagues at Proskauer Rose. On 6 January – just ahead of its official administration filing – senior partner Cziesla joined the Frankfurt arm of McDermott Will & Emery.

Usher joined Macfarlanes along with two fellow competition partners, and Stephen Kon, who became a consultant.

The tide didn’t turn against Tim Bednall (pictured), it turned against the partnership. People were angry at partners about not doing the recapitalisation.

While KWM China initially wanted a longer list of people, including 90% of the German operation and partner Sanders (who joined Reed Smith) for China corporate work, it ended up keeping on 17 partners across Europe in what is now dubbed as KWM 2.0. The firm’s New York presence is currently being discussed.

While some claim the new entity – which lacks KWM’s leading names – is purely a small front for Chinese referrals into Europe, remaining partners argue it is an ambitious beginning. Asserts disputes partner Darren Roiser: ‘Our bread and butter is to continue going out to our contacts and continue work here in the City, whether it’s cross-referral or otherwise. We are not just waiting for the phone to ring from China.’

Although it is legally a separate entity to the Chinese partnership, KWM 2.0 is funded by the Chinese arm and does not have a separate European managing partner. Partners in Europe were invited to the global partnership conference last month in Beijing, as the plans for the new business are being fleshed out.

The end

On 22 December the inevitable happened. KWM filed a notice of intention to appoint AlixPartners as administrators.

There was a hard deadline of the end of January, when a large tax bill was due, but Bednall hoped that most staff would be paid until then.

Incredibly, given the months of alarming news, many support staff and even some associates were only grasping now how dire the situation was. Recalls one staffer: ‘A lot of people didn’t realise how bad it was until December when they were told it was going into administration. Even senior staff. I was shocked that they could be that naive.’

Even the appointment of the administrators caused some last-minute drama. Some were unhappy with AlixPartners, feeling it was unclear if it was representing KWM or Barclays, while some criticised what they felt was foot-dragging.

The staff  helped more than the partnership. Some partners behaved very badly and people like Tim would have to step in and tell partners’ secretaries what was going on.

Matters came to a head in early January, when AlixPartners presented a projected cost for its work which leadership thought excessive. Bednall over the first weekend of January called in Quantuma as a replacement as AlixPartners stepped back, citing concerns over how the administration would be funded.

Bednall had to tell all staff in early January that the bank was cutting off funding, meaning that most remaining staff would not be paid through the month. Bednall, who had fought fiercely to protect staff, was bitterly disappointed.

But while widely praised for his commitment during this process (described as ‘a thoroughly decent man, who inherited a load of basketcases’ by one observer), some thought Bednall – who returns to KWM Sydney to practise later this year – had been naive.

‘Bednall is a born optimist. He believed for far too long he could rescue things, and kept giving people hope,’ says a former partner.

Another SJ Berwin veteran drolly salutes Bednall’s efforts during this period: ‘I didn’t think he was a good manager but turns out he was good at arranging a funeral.’

During the final weeks, a few individuals went out of their way to help staff, notably Amdor and corporate partner Delphine Currie (both now at Reed Smith), who alongside graduate recruitment partner Caroline Sarson made strenuous and successful efforts to find new homes for trainees. Key client partners like Naunton, Pathak and Hall are also cited for watching out for colleagues. ‘Delphine was an all-round star,’ notes one insider. ‘Amdor did a fantastic job looking out for the trainees. He got straight on the phone.’ General counsel David Wilman became known as ‘the psychiatrist’ for the number of long, comforting conversations he had with staff.

The normal working environment was breaking down. The SRA’s adviser had to email partners to remind them of their duties with client files. ‘It was like student accommodation – there were files on the floor everywhere,’ recalls one staff member.

In the round, however, the partners were not covering themselves in glory according to several accounts. Says one former board member: ‘To be very honest, the staff helped more than the partnership. There were some exceptions, but some partners behaved very badly and people like Tim would have to step in and tell partners’ secretaries what was going on.’

Another insider recounts: ‘The tide didn’t turn against Bednall, it turned against the partnership. People were pissed off at partners about not doing the recapitalisation and not taking the Dentons deal.’

As at 30 November SJ Berwin WIP in the UK totalled £9.4m and UK accounts receivable totalled £27.7m, with approximately 5,000 clients and 12,000 active matters.

The normal working environment was breaking down. While claims the toilet roll ran out are denied, there was a shortage of hand towels.

Solicitor-manager Sam Palmer, of Ashfords, has been working with the Solicitors Regulation Authority to transfer client files and has had to email several partners reminding them of their legal duties. ‘It was like student accommodation in the building – there were confidential files on the floor everywhere,’ says one former staff member.

Quantuma is due to release creditor proposals this month. Joint administrators Andrew Hosking and Sean Bucknall have already expressed concerns regarding the collapse of legacy SJ Berwin, including the tax account and handling of the books. ‘This was a £200m law firm that sadly imploded,’ Hosking says, ‘and the way it did raises concerns about how it happened.’

As The In-House Lawyer went to press the administrators were examining the actions of the previous leadership. Meanwhile, a group claim has been launched by 288 former KWM staff over the terms of its redundancies.

A second report from Quantuma, issued in March 2017, said that unsecured creditors were owed £37m, while there was only £3.5m to distribute as of 17 January. Barclays’ outstanding unsecured debt stood at £13m. Of the unsecured creditors, £6.8m was owed to trade creditors, just over £3m for premises and £985,000 to HMRC. Former partners were owed £12.6m.

Ironically, KWM’s poor financial management has buoyed Barclays’ prospects of recovering substantial amounts of the money owed it, though one source estimates the bank will still ultimately end up writing-off at least £17m of debt, commenting: ‘KWM always had a huge debtor book because it was crap at financial management. There was always £17m, £18m, £19m – just waiting to come in.’ One person who saw KWM’s cashflow in 2016 says that one team ‘chose not to bill for a month’, as an apparent gesture of defiance.

Many of the partners – operating in areas like private equity, funds, real estate and disputes, in which US law firms are investing heavily – have found it relatively easy to find lucrative new employment. Far easier than staff.

***

The good old days

There is no shortage of views on why KWM’s EUME partnership collapsed. Former partners express frustration at power plays by the funds team, misjudged global management initiatives and a lack of European leadership at crucial times as factors for the collapse.

One partner notes: ‘People didn’t want it to be their home anymore. SJ Berwin’s success was in being assertive, pushy and hungry to impress – but perhaps that was its downfall.’

It is plain that the original merger – having been fundamentally mis-sold to all sides – could never adjust expectations quickly enough to reflect current realities. On top of that KWM faced huge operational challenges, given the three-way nature of its business and the cultural gap between the Chinese law firm and partnerships in Australia and Europe. Not only do the three firms have vastly differing histories but they operate in fundamentally different markets. The difficulty of integrating and galvanising a firm across differing profits centres under the verein structure has once again been starkly exposed.

As Greenberg Traurig chair Richard Rosenbaum comments: ‘While each verein is unique by agreement, the concept is always the same and KWM is an example of why it doesn’t work – it is not one firm.’

The lack of shared incentives played a material part in the downfall of KWM. Or as one KWM insider says: ‘The verein has done what it was supposed to. It contained the liability, but what is the impact on the business?’

How the remaining KWM develops will be interesting, given frequent claims of a troubled relationship between an Australia partnership dealing with a stagnant national market and a Chinese business which grew turnover by 26% in 2015. Says one insider: ‘China is wholly dominant now.’

Thriving in such a set-up would be difficult for any major London firm, with hindsight it is hard to imagine a law firm less culturally suited to this challenge than SJ Berwin. Because ultimately, few seriously question the basic truth that SJ Berwin brought most of the problems to the 2013 merger, with its history of poor cash management, hazy governance and a disparate collection of strong personalities. There were numerous attempts to address such issues, none of them came close to delivering because the partnership, or at least the influential parts of it, repeatedly blocked reform. And that was a collective failure.

Few seriously question that SJ Berwin brought most of the problems to the 2013 merger, with its history of poor cash management, hazy governance and a disparate collection of strong personalities.

Current KWM partner Dorothy Murray says: ‘The collapse made me realise what is important, how lucky it is that I love being a lawyer and that there were people that I wanted to protect. The message is to make sure you know and like everyone you work with, and remember to be human.’

A former partner says: ‘The firm never grew up from being a small club of individuals to a large properly-run law firm.’

One professional with experience of several law firm insolvencies notes: ‘When they tank, it is about people who are long on self-importance and short on self-awareness.’

In the end a firm known for being hard-nosed was exposed for having a sentimental streak, with partners unable to forget the Berwin legacy and the adrenaline-charged team spirit that typified SJ Berwin at its best (while selectively forgetting frequent examples of the firm at its worst). ‘That was always the way,’ notes one corporate partner. ‘Even at the end, people still talked about the good old days.’

Another KWM veteran picks up the point. ‘SJ Berwin was an eclectic mix of people and indicative of a culture and a firm that is fractured.’

Fractured and now broken beyond repair.

victoria.young@legalease.co.uk

georgiana.tudor@legalease.co.uk