ABN debacle underlines limits of law firms' commercial clout and responsibilities

With the fallout at Royal Bank of Scotland (RBS) escalating by the day, it is easy to forget that little more than a year ago the bank's takeover of ABN Amro was hailed as one of the most innovative corporate takeovers yet seen in Europe.

Linklaters in particular was seen as a winner after fielding a cross-border team of 400 lawyers to bring the deal to a successful close, despite being limited only to public information due to the bid's unsolicited nature.

Fast forward a few months though, and the deal is now cited as a strong contender – in commercial terms – for one of the worst M&A deals in history, having more than any other single move driven RBS to the brink of collapse and effective state ownership.

And scrutiny of this and other deals gone bad has re-opened the issue of just how responsible law firms themselves can be held for clients' decisions, which in some cases can prove to be disastrous.

While ABN Amro has proved an extreme case of a once-lauded deal falling from grace, there is understandably a clear consensus among corporate lawyers that City law firms' claims of commercial nous don't make them to blame for such decisions.

This may seem a convenient observation for corporate lawyers – and it does underline the limits of the commerciality that law firms tout – but it is basically a sound point. Being commercial essentially means making a business-centric assessment of what clients want to do in light of the legal position. At the extreme, a law firm can advise on whether the legal hurdles or risks inherent to a deal are enough to torpedo its commercial rationale. What a lawyer cannot reasonably do is replace the commercial judgement of their client. In this context, the ABN deal crashed squarely on the judgement made by RBS, not its legal counsel.

As Freshfields corporate finance head Barry O'Brien says: "There are occasions when a lawyer might need to raise his head above the parapet and say 'this is getting to the stage where you need to be extra careful', but ultimately it's a commercial judgement only the client can make. And when you get into the really big deals, the scope for the lawyers to influence the decision does not exist."

But while veteran deal lawyers are realistic about the limitations of their role, there is still an expectation that when the deal markets revive, the more risk-centric environment could give advisers more scope to influence decision-making.

"When the deals do start to happen again events like this will make the pendulum swing back towards the cautious side and the risk taking we have been seeing will end," argues O'Brien. "At that stage people will be more demanding of their lawyers to make sure that all the risks have been properly addressed."

Click here to comment on this article.

More comment and analysis.