Eastern promises - Chris Crowe

Twenty years after the collapse of communism, the legal market of Central and Eastern Europe is undergoing its own revolution.

The region has undergone major change. The boom times of the postcommunist privatisation era are long gone. Nevertheless, some loyalties remain deep rooted.

Amid the increasingly oppressive occupation by Soviet troops that followed the Prague Spring of 1968, 14-year-old Jan Matejcek and his family carefully loaded their car, intending to escape Czechoslovakia forever. Jan’s father, a lawyer and musician, was strongly opposed to the communist regime and recognised that gaining freedoms and rights could only be achieved by fleeing to the West.

Matejcek, now a White & Case partner in Prague, recalls the family’s escape plans: ‘We had a big debate about whether to take everything we had or to make it look like we were going on vacation. In the end we struck a balance.’

As the Matejcek family approached the border with Austria, they spotted a long line of cars, also waiting to flee to the West. Soviet officers were searching every fifth car and flinging the contents of suitcases onto the ground. Thankfully the Matejcek’s car was not searched. ‘The Russians didn’t really know what they were doing at the time. They weren’t prepared for the animosity from the Czech people and had no idea what to do. It was a complete mess’, Matejcek says. As the family car continued through no man’s land between Czechoslovakia and Austria, Matejcek’s father turned to him and solemnly suggested he turn around and have one final look at his homeland. ‘He told me I would never be coming back’, Matejcek recalls. Two or three weeks later the border closed completely and would not reopen for another 20 years.

During those two or three weeks, many of Matejcek’s fellow citizens returned to collect further possessions, but were unable to escape again. Many families would thus be separated until the communist regime fell.

Not until the Velvet Revolution of 1989 did communism collapse in the country, as it did across CEE, most vividly with the infamous Berlin Wall being torn down by emotional East Germans. Matejcek, then 34 and working as a corporate lawyer in Toronto, recalls: ‘I never believed that a change like that could happen. I saw two separate worlds, East and West, and just thought this was how it was going to be forever.’

A new market

In 1991, he chose to return to his homeland and be part of the democratic movement that had swept across the former Eastern Bloc: ‘There was a real drive to rebuild the country. The government decided to privatise the economy fast and integrate with the West; they never wanted to be communist again.’

Matejcek’s return, working initially for Squire Sanders & Dempsey, coincided with a massive influx of international law firms into the former Eastern Bloc states. American, English, German and Austrian firms all took the opportunity to capitalise on the privatisation wave and dramatic increase in trade between East and West. CEE became the primary emerging market for many expansionist law firms. At this point, China and India had yet to emerge as the economic superpowers that they are today and law firms had not yet begun their fervent fascination with Asia, other than those that inhabited the key commercial and financial centres of Hong Kong, Singapore and Tokyo.

At the time, CEE was an alluring prospect. András Szecskay, managing partner of Budapest firm Szecskay Attorneys at Law, recalls: ‘The 1990s came with tremendously positive feelings. We moved quickly in the direction of privatisation and greenfield investment and towards development and progress.’ Nick Eastwell, who retired from Linklaters at the end of October, and previously led its Central and Eastern European group, says: ‘In the 1990s, being in CEE was part of a greater European strategy and was on the back of clients’ needs in new Europe and old Europe. Our competitors were also moving into the region. I was doing a lot of capital markets work in CEE at the time, but it then began to dry up because we had no presence in the region.’

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Amid this arose a new class of local firms in Warsaw, Prague, Budapest and in all the CEE capital cities. Vladimíra Glatzová, founding partner of Czech law firm Glatzová & Co, says that American and English law firms were crucial in developing a sophisticated local legal market, by showing Czech lawyers how to draft, how to solve issues in a practical manner and how to be service oriented. ‘Many young lawyers have trained with American and English law firms. They have spread this know-how and there are now a number of Czech law firms with high professional quality’, she says. It wasn’t always the case. Glatzová talks of a time when lawyers could leave an indelible mark on a quickly evolving legal system. Back in 1990 she worked as a solicitor in a consultancy firm EEIP and was heavily engaged in the privatisation process. During a 3am meeting, she was once asked to draft a share purchase agreement for a management buy-out. In the morning she called the Ministry of Privatisation to learn that nothing of this sort had occurred before. ‘It was extremely tough, but I could never have experienced something that exciting in a mature market’, she recalls.

At the same time, after the fall of the Berlin Wall, Germany was in the process of reunification. The former German Democratic Republic (GDR) integrated with the Federal Republic of Germany to end a 40-year division. András Szecskay visited Berlin soon after the wall was dismantled and paused to reflect again on the years of oppressive communist rule and Soviet influence. ‘I saw the remainder of the wall and Checkpoint Charlie and just thought how absolutely crazy it was to divide a city and a nation’, he recalls.

At this point Alexander von Aretin, currently a Berlin partner with German firm Graf von Westphalen, was working for Treuhandanstalt (the agency responsible for privatising GDR state-owned companies). ‘It was a wonderful and fascinating atmosphere. We had to try to privatise the entire GDR economy.’

Von Aretin recalls chancellor Helmut Kohl’s declaration that the privatisation process would be a financial success story for the unified Germany. In reality this was grossly optimistic. ‘We had to change the economy completely and all these changes were very expensive. We had to change the company forms and overhaul West German law’, he says.

Since unification, the former GDR’s economy has performed poorly. Graf von Westphalen recently closed its offices in Erfut and Leipzig, but remains in Berlin and Dresden. US global firm White & Case closed its Dresden office last year after the retirement of key partner Axel Bauer. London-based Travers Smith and UK global firm Lovells, meanwhile, closed their Berlin offices in 2007, and Clifford Chance did the same in 2005. Von Aretin says that the region was a strong market in the 1990s, but is now a much ‘smaller market’.

Retrenchment

Similar retrenchment has occurred in the wider CEE region. Freshfields Bruckhaus Deringer pulled out of Budapest in 2007, with the office launching as independent firm Oppenheim. More sensational was Linklaters’ decision to withdraw from Bratislava, Budapest, Bucharest and Prague in one movement in 2008. The offices were spun off into a new independent firm named Kinstellar and led by former Linklaters partner Jason Mogg.

Somewhat paradoxically, Freshfields’ physical retreat from the region has not lessened its workload. Last year it was the foremost adviser by value of deals in the CEE/CIS region (excluding Russia), according to figures from Mergermarket. It advised on transactions with a combined value of €5.4 billion.

Stephen Revell, co-head of Freshfields’ CEE/ CIS group, says that the firm sees no reason to have a physical presence there, because much of the work is governed by English law and is in the English language: ‘A large percentage of the work done in the region has a London nexus and a considerable amount is organised by bankers in London or in other financial centres.’ He says that with the possible exception of Poland, CEE countries can no longer support anything more than a representative office: ‘There isn’t the deal flow to give a good English or other lawyer the right experience’.

Revell’s first experience of CEE was a trip to the Serbian capital Belgrade in 1994. As he touched down at the airport, every other single aircraft appeared to belong to the United Nations. He travelled to the only hotel in the city, which had been ‘trashed’ by US servicemen, and it was full, so he was forced to stay in a ski resort that was a two-hour journey away.

This experience did not dampen his enthusiasm for the region, but he recognises that international firms are no longer the primary destination for ambitious local lawyers. ‘The scales have tipped’, he says. ‘The local offices of international firms are no longer seen as “the” place to go’.

Freshfields now has around 60 lawyers that Revell classes as ‘regional specialists’, who can jump on a plane at a moment’s notice. He sees no difference between that scenario and a Budapest-based lawyer who has a job in Belgrade. Revell suggests that many firms moved into CEE ‘to ride the privatisation wave’ that has now ended. ‘To an extent that made us adopt the strategy that we adopted, but there are still many companies doing sizeable deals and this will increase’, he explains.

Aside from retaining a Warsaw office, Linklaters has also adopted a similar strategy. Nick Eastwell, Linklaters’ primary CEE devotee for over 20 years, now recognises that the firm couldn’t continue running multiple offices in the region suggesting that its ‘premium work for premium clients’ mantra was not being sated.

German firm Gleiss Lutz also retreated from Prague and Warsaw last year, with Austrian firm Schönherr taking over the two offices. Gleiss Lutz’s managing partner Rainer Loges says that the dynamics of the market had altered and it was no longer a priority for the firm. He explains: ‘Our client base was initially foreign, but when markets mature you have to find your position. Our strategy is to be top tier in every market, but do we want to be a top tier Czech or Polish law firm? This was never our strategy. Our withdrawal was a consequence of the maturing market.’

Still investing

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Even so, Linklaters’ Magic Circle rival Clifford Chance takes a different view. Although it withdrew from Budapest earlier this year owing to a lack of growth, it entered a merger with longstanding Romanian ally Badea & Asociatii last year and also launched a Ukraine branch in Kiev. Michael Cuthbert, Clifford Chance’s regional managing partner for CEE, says that the firm wants to create full service offices in the region and replicate what it has in Western Europe. He is enthusiastic about Romania, which has a population of 27 million people and oil and gas reserves. ‘There’s a real demand for infrastructure, financing, property and corporate M&A’, he says. Ukraine, though badly affected by the global financial crisis, has 60 million people and continues to be a ‘powerful developing market which links into Russia’.

According to a London-based Clifford Chance partner, the charge-out rates for Warsaw partners are similar to that of a London associate. Even so, Cuthbert insists that the office and others in CEE can post impressive profits as the costs are much lower than in London. ‘It’s the margin that matters’, he says.

Jason Mogg, the managing partner of CEE firm Kinstellar, says that charge-out rates are considerably lower in CEE than in London, but reveals that Linklaters’ CEE offices were very profitable prior to its withdrawal. The sticking point was the low leverage that ensured good profitability on a profit-per-partner basis.

Unfortunately this conflicted with the necessity to offer a motivating career path. ‘Everybody recognised that in order to sustain these offices we needed to promote partners, but the problem was that it would make profitability come down’, he says.

Mogg believes that international firms will continue to retreat from the region: ‘In reality CEE is a number of smallish countries and most of the markets on their own aren’t big enough to be a top priority for international law firms.’ His firm Kinstellar will continue to expand beyond its four current offices until it becomes a ‘one-stop-shop’ for the CEE area. The network will stretch from Turkey to Ukraine.

Even so, Mogg’s ambitions are not unique. Austrian firms continue to spread out across CEE. Vienna-headquartered Schönherr now has ten offices in CEE and a further branch in Kiev, Ukraine. Managing partner Christoph Lindinger says that it was essential for the firm to expand its business: ‘This is our China and our backyard. We have increased our market from seven to 100 million people and we would never have experienced such a rise in profitability without that strategy.’ Lindinger suggests that firms that measure profitability against London will always have ‘great difficulty in getting geographic coverage into one firm’. Fellow Vienna firm Wolf Theiss also extended its CEE network in 2008, by launching in Sofia, Bulgaria. It now has ten offices in the region, plus branches in Albania and Ukraine.

London’s Bird & Bird has also recently identified CEE as a lucrative market, having launched offices in Bratislava, Budapest, Prague and Warsaw last year. Stephen Kines was Linklaters’ youngest ever equity partner at 29 when he joined the firm in 2001 and is now head of Bird & Bird’s Central European business. He says that the firm operates a different CEE model from other international firms: ‘Every member of the team aside from me is a local lawyer, yet we are working from an international platform. We can be competitive at a local level, but we can still appeal to those clients who want an international brand but don’t want all the extra stuff like a huge office lobby and magnificent paintings.’

Key markets

Leading Spanish firm Uría Menéndez is another relatively new entrant to the CEE market, having opened an office in Warsaw back in 2007. Warsaw partner Agustin Redondo says that Poland is one of the best performing economies in Europe. ‘There’s still a lot of work to be done here’, he says.

London-headquartered Norton Rose has also identified Poland as its primary CEE market. Having experienced very limited growth since its Warsaw launch in 2002, the firm made a sequence of senior lateral hires in 2008; it now has five partners in Poland.

Warsaw managing partner Piotr Strawa says: ‘Poland is the largest market in Central Europe and the economy is still doing well compared to other European countries. Many of our clients are here, including the large international banks, and there are major privatisation plans.’ Strawa indicates that recent political stability has helped to push the privatisation process along: ‘Each election has seen a swing from the left to the right or vice versa. It has been an interesting cycle and only recently have we had a succession of right-wing governments.’

For Norton Rose, Poland is a key economy in the wider Europe. It is dynamic and big enough to hold the attention of Linklaters, a firm that has closed its other offices in CEE. The CEE market has undergone a period of seismic changes over the last 20 years, but for some firms it no longer holds the allure of the 1990s and the privatisation boom. In light of the emergence of bigger and bolder economies including China and India, many firms’ priorities have changed.

On 31 October, Nick Eastwell retired from Linklaters after 29 years of service. The man who was the chief architect of the firm’s CEE business saw it semi-dismantled in 2008. His retirement must have been tinged with some regret, even though he was impressively loyal to the end, indicating that he understood the reasons for Linklaters’ CEE retrenchment: ‘The privatisation wave has gone and even in the good days our CEE network contributed not much more than five per cent of our global
turnover. It was a small cog in a big wheel. The firm had become increasingly focused on areas like the Middle East, China and Brazil and there’s a limit to how far you can spread your resources.’

Even so, his love affair with CEE will continue. He could not resist the opportunity of becoming a consultant with Kinstellar and will continue to pull the influential strings (as well as his celebrated braces) from a soon-to-open London representative office.

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Chris Crowe is a freelance journalist. He can be contacted at chrismcrowe@gmail.com