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Post-mortem on dramatic HSF partner split

Post-mortem on dramatic HSF partner split

The background on Herbert Smith Freehills’ fallout with eight defectors: hell hath no fury like 166 partners scorned – but then they settled.

When eight partners of Herbert Smith Freehills Australia announced they were leaving the firm last September, the news came as a shock to the 166 others of the local partnership.

Breakups usually involve hurt feelings but more so if one party didn’t see it coming. Even worse, if it is known you have been left for another.

For weeks, rumours floated that global player White & Case had plans to land in Australia. The prospect of a major newcomer to had all firms at the top end of town rushing to check the internal satisfaction among staff and hunker down with their top teams until the storm blew over.

Nobody wanted a repeat of the last raid that an outside firm had conducted against a local outfit, with Clayton Utz’s 14 partner loss to Allen & Overy in 2010 vivid in the minds of many.

So with the swift resignation from HSF of Brendan Quinn, Andrew Clark, Joanne Draper, Jared Muller, Tim Power, Alan Rosengarten, Josh Sgro and Joel Rennie on 1 September, the firm’s leadership had more than a suspicion that the ex-HSF partners had been flirting with the new competition.

That same day HSF sent an email to White & Case chairman Hugh Verrier.

The correspondence, signed off by joint CEOs Mark Rigotti and Sonya Leydecker, put the head of White & Case on notice: they knew White & Case planned to announce entering the Australian market and that if any HSF partner chose to quit for the rival, those defectors would be bound without limitation to the contractual agreements of the HSF partnership.

“We are […] aware of reports that your firm has approached a number of Herbert Smith Freehills partners in Melbourne, Sydney and other locations to join your firm,” the email said.

“The purpose of this letter is to put your firm on notice of some of the relevant obligations of each HSF partner under HSF partnership agreements in circumstances of a retirement or potential retirement.”

The two-page email went on to canvass the restrictive covenants that departing HSF partners are bound.

The letter concluded: “We are confident that any partner approached to join your firm will honour all of his/her obligations to HSF, and that your firm would not induce them to do otherwise. However, you will appreciate that we do have reason to believe that this is not the case, we would be compelled to enforce our rights in that regard.”

Four days after the first resignation letter was received by HSF human resources, Mr Rigotti went on the record to say that the firm had been prepared for this kind of event – that is, the eventuality that staff might choose to work for another firm. The HSF captain’s words reassured two things: that a proper transition would be given effect and the needs of the firm’s clients would continue to be met.

Of course ‘lateral hires’, as they are referred to in the legal industry, take place all the time. It is when a walkout involves a big team and the risk of losing big clients to a competitor’s brand new office that feelings get hurt and goodwill is put on the line.

What Mr Rigotti did not say in his interview with Lawyers Weekly on 5 September, was that his teams at HSF were busy mining the email archives of the eight partners who had resigned but days before, to try and piece the history and make sense of their sudden exit.

That process would unearth a number of details, that HSF ultimately aired in court, to show that White & Case had not simply swooped in overnight to raid its star finance, real estate and projects (FREP) team. The strategic poaching of the group, with a combined practice worth an estimated $30 million, had started at least one year prior.

The events following the exodus from HSF on September 1, which included 34 of its Australian lawyers plus other support personnel, would later be described by the firm as an “en masse” resignation of staff. Any initial feelings of being jilted on HSF’s part would be vindicated by an email trail that exposed the plan to leave for White & Case had been hatched right under their noses for no less than 12 months.

HSF would present to the court email dispatches between Brendan Quinn, dubbed the “rainmaker”, and top bosses at White & Case, partners Eric Berg, Arthur (Art) Scavone and Chief Operating Officer Jennifer Parks to show where the first courting and hints of an exit strategy began.

One email from Mr Quinn dated 14 December 2015 referred to matters to be addressed by those “in our court” -- what could be construed to mean those partners who were contemplating jumping ship from HSF. The email made reference to approaching another ex-HSF partner Chris Gardner for employment law advice.

It would seem Mr Quinn had anticipated a tousle with HSF nearly a whole two years before actually quitting the partnership.

“I think we’re coming to the same conclusion as you – that we need to speak directly with Chris Gardner. I am thinking that Chris doesn’t need to know whom all the partners are, but if one or two of us speak with him that would be sufficient,” the short email to Berg, Scavone and Parks read.

Mr Gardner acted as the legal representative for the eight former partners who were sued by HSF. The employment relations expert himself left HSF after more than 18 years to join international firm Seyfarth Shaw when it entered the Australian market in 2013. At the time, three other partners and a senior associate followed suit to depart the firm with Mr Gardner.

While it can only be speculated what was discussed in HSF’s crisis meetings in the wake of the FREP exodus, before the full extent of the talent hit its team had taken had sunk in, the leading Aussie firm sprang into action. The firm was driven too by a desire to preserve its relationship with key clients that suddenly risked being on the line.

In one document that supplemented an affidavit filed by HSF partner David Templeman, who explained the vulnerability of the FREP team in the wake of the resignations, the urgency for action is made apparent.

The memo outlined talking points that the firm had developed as part of a retention strategy. Key steps in the HSF retention document offered strategic prompts to help identify who the next FREP partners will be and who of those who stayed loyal to the firm they should “target retention efforts at”.

The language of the document also hinted at the concern that HSF expected could permeate its remaining ranks. For example, one page suggested that leaders tasked with driving these conversations also review their own feelings amid the destabilising drama: “There is an element of needing to put the oxygen mask on yourself before being able to attend to others. Pay attention to your emotions and give yourself the space and get the support to ensure that you are going to be the most effective in connecting and influencing others,” the document read.

Documents supporting Mr Templeman’s affidavit offer additional insight into some of the bigger issues HSF faced.

Strictly speaking, the 166 HSF Australia partners may have been suing their former partners but every staff member lost to White & Case was considered by the firm to be a person too many – and not all of them were lawyers.

Mr Templeman’s affadavit mentions one highly experienced member of the Business and Development team, Michael Knoff, whose departure from HSF was considered just as significant as any of the high-flyers. Mr Knoff had been Mr Quinn’s right hand man for more than five years, working on project finance business development activities and often travelling overseas with “the rainmaker”.

“Michael Knoff has significant experience of the running of the project finance and project delivery practices’ business, including the pricing and modelling used to compete for work in that practice, participating in our regular video conferences and maintaining the pipeline document recording upcoming projects and the potential clients we are pursuing,” Mr Templeman said.

“He also has considerable knowledge of the key clients in those practices.”

According to Mr Templeman, the retention measures (most of which were redacted in court documents) had been necessary as more staff, in addition to those who had already resigned, were at risk of quitting for White & Case. His affidavit explained that because of the nature and structure of the FREP group, it was especially vulnerable to a poaching of this kind, also noting the breadth and depth of the practice.

“The basic concept of a major project is the same in any number of jurisdictions, and accordingly, the skill set required is highly transportable,” Mr Templeman said.

“In some cases, projects are also staffed with partners and lawyers from the FREP team outside of Australia who have relevant specialist expertise,” he said.

Two other HSF partners, Fergus Smith and Matthew Osborne, based in Hong Kong and Singapore, also quit around the same time to join White & Case Australia.

Mr Templeman went on to describe the potential negative impact on client confidence an exodus of the kind suffered by the Australian FREP team would have. He underscored how client perception of “breadth and depth” would shift and likely send allegiances to competitors.

“If a critical mass of partners with the right capabilities all left in order to work together, with former solicitor members of their teams, issues with capacity and breadth of expertise would be less of a concern for clients. Clients would have increased confidence that the departing group could comfortably run the matter with a quality team,” Mr Templeman said.

“The other significant effect of a large group departure is that the senior and junior lawyers in the team are more likely to follow a large group of departing partners rather than a single partner. This has played out in the present circumstances,” he said.

HSF’s talent had walked out on the firm for a competitor who planned to open the doors to its new Melbourne office in December, and with a start date for White & Case Sydney yet to be revealed.

It was a scenario akin to being told the person you are married to wants a divorce and custody of the children. Then with further potential that a significant number of your mutual friends may distance themselves and opt instead for the company of your ex.  

Last September emails between Mr Verrier, Mr Rigotti and Ms Leydecker escalated in urgency and emotion.

One email from HSF dated September 9 accused White & Case of directly approaching lawyers through a recruitment agency, claiming that the contact details of many of those individuals were not publicly available and therefore likely to have been shared by the defecting partners.

White & Case responded, asking HSF to appreciate widespread media interest in the firm’s pending landing in Australia. Mr Verrier reassured the HSF CEOs that White & Case would be mindful of any obligations it may have relating to the departure of HSF staff, as would the departing individuals “to the extent that they are enforceable”.

By the time HSF’s civil action against the eight White & Case hires became public earlier this year, a flurry of letters had been exchanged between both sides about the terms of the eight partners’ exit.

The correspondence, all filed as part of the NSW Supreme Court proceedings of Michael Keith Hamilton Pryse and 166 others v Andrew Simon Clark, show that HSF was unwilling to accept written undertakings proposed by its eight former partners in place of being totally bound to the partnership restraints.

Herbert Smith Freehills Global LLP joined the action against the eight partners as the 167th plaintiff in the case.

A settlement between the parties, announced earlier this week (May 1), made the interlocutory orders, handed down by Justice Robert McDougall on the critical date of March 2, final. The financial details of the agreement have not been disclosed.

HSF originally pursued the civil action with a view to restraining seven of the eight partners from working at White & Case at any time during the period of 2 March 2017 to 1 September 2017 inclusive. 

The plaintiffs also applied for a court order to restrict the new White & Case partners from dealings with former clients. 

The overall objective was to have the court enforce the provisions of the HSF partnership record and seven clauses of the global LLP members’ agreement.

Justice McDougall ruled in favour of HSF, however did not enforce three contested provisions of the HSF partnership agreement. These provisions were the ones the eight defectors had taken specific issue with, although the court did not adopt some of the proposed definitions that the defecting group wanted to replace for those in the HSF partnership agreement.

The orders, made in March, was therefore a compromise on the position taken by both sides. Official statements issued on behalf of both firms suggest that the parties are all happy with the now final outcome.

The settlement also suggests the parties resolved the outstanding ambiguity over whether the defendants can join White & Case as partners.

In March White & Case announced the eight had officially joined the firm with the title of senior lawyer.

Commenting on the resolution of the dispute, representatives from both HSF and White & Case (which was not a party to the action), said they were pleased the matter had been put to rest.

“We are pleased to announce we have reached a settlement in our proceedings,” the HSF spokesperson said.

“Under the settlement terms the current interlocutory injunctions will be made final. We are happy to bring this matter to a conclusion.”

A White & Case spokesperson said: “The current interlocutory injunctions have been made final by the court and will continue to 2 September 2017. We are extremely pleased that the eight lawyers were able to join the firm as of 2 March 2017 and are making a significant contribution to the firm and its clients.”

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Post-mortem on dramatic HSF partner split
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