Freshfields' partnership shake-up means more than a flurry of CVs for recruiters – the effects of the firm's restructuring are being felt throughout Germany's main legal centres. James Illman reports

Ask any local partner what the biggest development in the German legal market has been in the past 12 months and it is very likely the name Freshfields Bruckhaus Deringer will feature. The law firm's high-profile partnership restructuring has resulted in a raft of long-serving German partners heading for the exits, flooding the local recruitment market and raising questions about profitability and the correct strategy for large firms to succeed in the jurisdiction.

As well as picking up departing partners, Freshfields' rivals have also been quick to fuel rumours of in-fighting, disgruntlement and the death of the firm's hitherto collegiate culture.

But it would appear that the appetite of Freshfields' management for modernisation has not been dampened by the repercussions of the so-called 'size and shape' initiative – which has seen around 50 partners leave the firm's worldwide equity so far.

Co-senior partner Konstantin Mettenheimer this week told Legal Week that further evolution of the firm's structure could be in the pipeline over the next few years, with the firm open to the idea of dropping its pure lockstep model.

While Mettenheimer stressed nothing would happen in the next couple of years – the management must be conscious of giving the remaining partners time to digest the changes wrought by the restructuring – amendments to the lockstep could be the next move. Had Freshfields opted to ditch the pure lockstep while undertaking the seismic restructuring it is currently grappling with, it could be argued that the management would have had an easier job.

But for now, the plan is to see the restructuring through. Mettenheimer comments: "There are no plans to make any changes over the next couple of years as there is no business need at the moment but, should the need arise in the future, we would not rule out possible changes to the remuneration system."

For the meantime, however, that future looks very bright, both in and outside Germany. The firm's German corporate practice has recorded one of its strongest ever years, picking up a number of big-ticket mandates in the public and private arena.

Significant private equity deals the firm has acted on in the past 12 months include advising Kohlberg Kravis Roberts & Co (KKR) and Goldman Sachs Capital Partners on the e4bn (£2.7bn) acquisition of Linde's forklift truck division and advising KKR and Permira's A3.3bn (£2.2bn) sale of broadcaster SBS to German TV station Pro-SiebenSat.1 Media.

While Permira often opts for magic circle rival Clifford Chance (CC) in the City, the buy-out house has had a longstanding relationship with both CC and Freshfields in Germany.

The firm has also bagged some plum roles on the public side. Notably, advising Porsche on its high-profile bid to increase its stake in German rival Volkswagen from 27.3% to 30.9%. Freshfields is fielding a Frankfurt-based team headed by corporate partners Christoph von Bulow and Thomas Bucker.

Despite the partnership restructuring, the firm still has one of the biggest headcounts in Germany with around 420 lawyers, 120 of which are partners; a figure that makes it nearly double the size of domestic rivals Hengeler Mueller and Gleiss Lutz.

Beyond the boom

While Germany is currently experiencing record M&A activity, firms always need to be prepared for less fruitful times. Although local lawyers argue that Germany's economic cycle tends to be less brutal than the UK's – with the peaks never as dramatic and the troughs never as dire – German managing partners are keeping an eye on a correction looming in the not-too-distant future. Some of Freshfields' rivals have seized on this as a chink in its new-look armour.

While the deal flow is good the firm will make hay, but when the plentiful supply dries up, Freshfields will be left ruing its decision to scale back so many of their non-transactional practice areas; so the argument goes.

But Mettenheimer responds with the argument that the firm is well placed for an economic downturn – he insists there are plans already in place.

"It would be short-sighted if we did not look beyond the boom. We are, among other things, actively building the restructuring and insolvency practice," he comments.

"As well as building the group, we have earmarked a number of other lawyers who can be drafted in when the time is right."

The firm's German restructuring group currently houses three partners and 10 associates, but a group of about 45 lawyers from the corporate, finance and real estate groups will be drafted in when the downturn comes. A slowing of the economy will act as a robust test as to the true sustainability of Freshfields' new slimmed-down look but, for the moment, it is a case of so far, so good.

Meanwhile, London rival Linklaters, which administered a similar shake-up of its German partnership around four years ago, has also re-jigged its German practice over the last 12 months.

The firm downsized its Berlin arm and moved its media and IT practice in Munich and its real estate practice in Frankfurt, a reshuffle that saw several partners change offices.

German senior partner Michael Lappe says the move has given the firm more focus, particularly in Berlin, which now concentrates largely on regulatory work.

Lappe comments: "Like many of our competitors we questioned the need to be in Berlin, but the regulatory practice has been handed a number of mandates advising on big-ticket privatisations as a result of being in the capital."

While Linklaters' finance practice remains the envy of many of its rivals in Germany, questions have been raised over its success in the corporate arena.

The firm has not managed to land the private equity mandates that have helped to revive Germany's long-depressed deal markets, something of which partners are very conscious.

"While we have a very established practice throughout Europe, we still have some way to go in terms of developing relationships with certain big US private equity houses, but we are confident that we will be successful in these efforts," argues Munich corporate partner Rainer Traugott.

The firm has, unsurprisingly given its unquestioned City pedigree, made progress on the public M&A side. High-profile panel appointments for the firm this year include bagging a place on Linde's international panel, a client of Lappe's.

Linklaters is on the panel alongside Hengeler Mueller, Simpson Thacher & Bartlett and DLA Piper.

DLA Piper was drafted in to handle the majority of Linde's day-to-day legal matters while Linklaters, Hengeler and Simpson Thacher will be in line to advise on big-ticket corporate work. New York firm Shearman & Sterling will advise on US competition matters.

Another firm that will have been closely watching events unfolding at Freshfields, is Herbert Smith formal ally Gleiss Lutz. Gleiss is a firm steeped in tradition, with caution and conservation at the heart of its ethos. Housing just 220 lawyers, the top-tier German firm maintains a tight partnership with only a handful of promotions each year. Proportionately less of its practice is dedicated to the core corporate and banking and finance areas than some of its key rivals.

Earlier this year, Gleiss Lutz announced it had elected corporate partner Rainer Loges as its new managing partner. Rivals pointed to the fact that opting for a relatively young M&A lawyer based outside the firm's Stuttgart heartlands was perhaps a sign that a strategic shift might be in the offing at Gleiss.

With his term not due to start until the beginning of 2008, Loges has thus far remained tight-lipped regarding any sort of manifesto for his terms but he is adamant that the firm will remain committed to a full-service model and will not look to drastically alter the firm's current strategy.

As for the ongoing speculation as to the future of Gleiss' relationship with Herbert Smith, he remains non-committal. "There are no plans to merge at the moment and it is very unlikely to happen in the next few years, but we are always looking at ways to further integrate our practices," he says.

While the rest of the magic circle appears to be scaling back their German operations or keeping them at their current size, Allen & Overy (A&O), is in unambiguously growth mode.

The firm's newest office, in Duesseldorf, is set to open officially on 1 September with the hire of former Freshfields Bruckhaus Deringer local chief Thomas Austmann.

Austmann, who was managing partner of Freshfields' Duesseldorf arm from 2003 to 2006, left the magic circle practice on 31 March and will join his new firm in October.

A&O's corporate practice has traditionally played second fiddle to its finance practice and this still remains the case in Germany, but with the firm's management having earmarked Germany as one of its key jurisdictions for growth, more corporate hires could be on the cards.

US firms tempt new joiners with big bucks

The US firms that have set up shop in Germany have enjoyed mixed fortunes, with most looking to build small, highly-focused German practices specialising in corporate and finance work.

Deep pockets mean the US firms can compete at all levels of the recruitment market with the jurisdiction's local elite; indeed, the US firms have provided homes for many of the Freshfields departees over the last 12 months.

Notable moves include Frankfurt-based capital markets partner Walburga Kullmann and corporate partner Thomas Schmuck, who joined Dewey Ballantine; and corporate and finance partner Jens-Dietrich Mitzlaff, who switched to Morgan Lewis & Bockius.

Additionally, intellectual property partner Michael Knospe headed for Howrey's fledgling Munich operation, while respected Cologne-based M&A partner Jurgen Sieger left for Cleary Gottlieb Steen & Hamilton's small but highly-respected local practice.

Another key move in the last 12 months involving a magic circle partner jumping ship to a US firm was CC private equity partner Mario Schmidt's move to Willkie Farr & Gallagher.

A few months later the New York firm came back to CC to recruit five of Schmidt's former CC colleagues with counsels Andreas Hautkappe and Rolf Huenermann and associates Stefan Joergens, Ole Oldenburg and Ingo Bednarz all joining Willkie as salaried partners. Willkie had originally courted CC Frankfurt corporate partner Georg Linde as well, but he backed out on the deal at the eleventh hour.

The move nonetheless put a dent into CC's German private equity headcount and prompted Germany's buy-out lawyers to keep a close watch on where the deals would go for some of CC's top private equity clients, who Schmidt was advising.

Schmidt scored a significant client victory when he completed 3i's A1.5bn (£1bn) acquisition of Scandlines in June, although the magic circle firm also advised the acquirer.

One rival private equity partner comments: "It does not surprise me that Mario has managed to take that deal over to Willkie. 3i was his client and I think he will get most of the work going forward.

"However, I very much doubt he will manage to prise Permira away – it has long institutional links with CC."

The US firms also waded into the local associate salary pay war and considerably upped the ante.

Hengeler kicked off the round of pay rises – the country's first for about five years – by raising its starting salaries 13% from A80,000 (£54,000) to A90,000 (£61,000) in May last year.

The move prompted the US firms to flex their muscles with Shearman & Sterling becoming the first firm to pay starters A100,000 (£68,000), an offer swiftly raised by New York rival Milbank Tweed Hadley & McCloy who forked out A100,000 plus a bonus that could equate to another A20,000 (£13,500). Unless deal markets slow considerably more pay rises look likely.

While it may be a few years until one can comprehensively assess the true impact of the Freshfields overhaul and its effect on both the firm and German legal market, the evidence is clear that Freshfields 'size and shape' review is having an effect well beyond the firm itself.

Gone are the days when the 'gentleman's agreement' not to poach from rivals was respected. Equally, gone are the days when it was taboo to talk profits – with the US firms content to invest significantly in their German operations, sky-high profits will play a very significant part in attracting and retaining the required talent.