For decades, cracking the US has proved to be a step too far for London’s top corporate law firms.
But Freshfields Bruckhaus Deringer, Clifford Chance and Allen & Overy are all in the midst of a renewed assault on the world’s most lucrative legal market as the “magic circle” firms seek to build on their past strength in Europe and become global heavyweights.
Their push is multipronged and expensive, with the firms poaching star US lawyers on record pay deals and opening offices in Los Angeles and San Francisco for the first time.
For the generation of lawyers leading the latest charge, which began in 2019, the potential rewards are compelling: a larger share of the US market and the kudos of achieving what their predecessors could not.
But chasing the prize is laden with risks. Deep-pocketed and more profitable US rivals have already forced London firms to rip up the conventions that for decades governed how they paid their lawyers. They also have deep relationships with American companies that are hard to muscle in on.
Tim House, the senior US partner at Allen & Overy, does not underestimate the hurdles facing the UK-based insurgents.
“[The US] is a very sophisticated, very deep market well served by high-quality firms who’ve had very strong relationships with US-headquartered clients so that’s a market that is challenging to [break into], coupled with the fact [US law firms are] extremely profitable and have [operated] a different remuneration model.”
Since abandoning a merger with US law firm O’Melveny & Myers in 2019, Allen & Overy has backed its American ambitions with investment. Offices in Boston, San Francisco, Los Angeles and Silicon Valley have been added since the start of 2021 while it has recruited 40 US partners over the past two and a half years.
Freshfields has proved equally aggressive in its approach. Under new senior partner Georgia Dawson, the almost 300-year-old institution has poached 20 US partners since 2020. It swiped five from leading law firms, including Latham & Watkins, to launch a Silicon Valley office as it targets a share of the work generated in the world’s tech capital.
Ethan Klingsberg, whom Freshfields lured from US firm Cleary Gottlieb Steen & Hamilton with a reported $10mn pay deal, smashing its previous pay ceiling in the process, says the expansion is paying off.
Freshfields is “competing and unseating folks . . . And the folks we’re boxing out are not UK firms, it’s [top US firms] Wachtell [Lipton, Rosen & Katz]; Sullivan & Cromwell; Paul, Weiss [Rifkind, Wharton & Garrison],” said Klingsberg. “The point [of the US strategy] wasn’t just to hire a couple of people who’ve done a lot of deals but to build a platform with broad depth.”
The London-based global firm secured a role in 2020 on drugmaker AstraZeneca’s $39bn acquisition of US pharma group Alexion Pharma, one of the biggest deals of the year. According to Bloomberg data, Freshfields was one of the top 10 legal advisers on US M&A last year, working on $164bn of transactions.
The head of one top Wall Street law firm admits that the recruitment of Klingsberg by Freshfields, along with other signature hires such as Damien Zoubek, a leading M&A lawyer from Cravath, Swaine & Moore, “certainly got people’s attention”.
“I know folks here who recently suggested Freshfields for [work] for a private equity portfolio company that we couldn’t handle: that’s not something that we ever would have done a few years ago,” they said.
But the established US firms, which include Sullivan & Cromwell and Simpson Thacher & Bartlett, are not “exactly quaking in terror,” the person added.
While Klingsberg brought with him a valuable stream of work from Google, which he had previously advised, his recruitment also exposed the controversial changes to remuneration structures that London firms are making in pursuit of their US ambitions.
Clifford Chance, Allen & Overy, Freshfields and Linklaters have all made changes to the “lockstep” remuneration model that for decades meant partners were paid by time served, rather than performance. By contrast, an “eat what you kill” model driven by the amount of work you bring in has long prevailed at most big US firms.
“To join one of the magic circle firms to build a US domestic practice is a much riskier exercise than simply staying at a firm like Cravath because you’re building something from the ground up,” says Jon Lindsey, co-founder of recruiter Major Lindsay & Africa. “So to make up for that, they have to make it financially attractive.”
The changes made by the firms have allowed them to increase remuneration for top partners regardless of time served. In 2020, Allen & Overy extended the range of equity points, each then worth around £45,000, that it could hand to star lawyers from beyond its previous range of 20 to 50 and extended its bonus pool.
“We realised we had to become much more ambitious with our lateral hiring programme and to change our compensation model to facilitate that,” acknowledges House.
Wanting to conquer America is not a new ambition for London firms accustomed to ruling their own backyards — but lacking a major US presence — and unable to crown themselves global powerhouses.
Magic circle firms first entered New York in the 1970s, with Linklaters opening an office in 1972, followed by Freshfields in 1977 and Allen & Overy in 1985. All struggled to make inroads.
More than four decades later, elite firms like Sullivan & Cromwell, an adviser to top Wall Street banks and Fortune 500 companies, and Chicago-based giants like Kirkland & Watkins, which have a roster of valuable private equity clients, remain formidable obstacles.
“You can’t claim to be a global law firm without at least 20 per cent of your revenue coming from the States,” said Tony Williams, former managing partner at Clifford Chance and founder of consultancy Jomati. “The magic circle is not there yet.”
Linklaters has not proved as aggressive as its London rivals in pushing into the US. According to its latest results, Allen & Overy generated 13 per cent of its total revenue in the US, up from 9 in the previous financial year.
The US also accounted for 13 per cent of Clifford Chance’s revenue in the 2021-2022 financial year, the same level as the prior period. It was the only magic circle firm to disclose any information about its US profits, which have grown 80 per cent over the last seven years, to the Financial Times.
Williams left Clifford Chance at the time of its merger in 2000 with New York firm Rogers & Wells, a tie-up that created a firm with 2,700 lawyers globally. While the deal prompted partners to leave and led to clashes over culture, it also forged a larger US presence which the firm has built on. Key US clients include private equity groups Apollo and Carlyle as well as banks like JPMorgan.
House of A&O points out that merging with a US firm is one means of expansion but brings risks.
“[A merger] gives you a transformational step forward in scale and capability,” he notes. “If you can do it and you can hold true to your values and culture in doing it, it’s the optimal way, but in setting those preconditions . . . you realise the complexity.”
Smashing their pay ceilings has only ratcheted up the pressure on the firms to ensure the top and bottom lines keep growing in the US.
“I don’t know what [London-based partners’] tolerance is to watching other people get huge pay cheques,” said the head of the US law firm. “It’s a bunch of sensitive fragile egos in this industry.”
US firms may not be shaken by the big pay cheques London firms are prepared to write to capture star lawyers, or their ambitions in Silicon Valley, but the magic circle firms show little sign of taking a step back.
“It’s a tough ask given the size and the depth of the US market and the differences in profitability,” said Williams. “They’re making good progress, but they’re not yet transforming the market.”