Switzerland's legal market has long been dominated by domestic law firms but recent changes in the banking sector and in financial legislation are encouraging a more international outlook, says Suzanna Ring

"In Switzerland there is an increasing awareness of the need to change," says Stephanie Jarrett, head of Baker & McKenzie's wealth management practice in Geneva.

Jarrett's statement reflects a slowly turning tide in a region that has always managed to hold steady behind its conservative doors. It has mostly resisted the large scale hiring, firing and office openings that has been common in other jurisdictions across the continent.

However, the past 18 months have brought about some international interest, not least from the infamous UBS scandal, which has forced the offshore banking capital to admit that some influence from the outside world might not be all bad.

International work

The incrimination of UBS, ongoing since 2008, saw the US Government investigate its citizen's offshore accounts in Switzerland for tax evasion and demand that the bank hand over details of suspected US account holders. The issue saw the majority of Swiss law firms take a role as the litigious cases piled up. But it also brought about huge contention regarding the country's banking secrecy laws which made a distinction between tax evasion and tax fraud and only provided account information in the case of the latter.

The contention resulted in the Swiss Government finally agreeing to change its banking secrecy laws in June 2010, giving rise to an inordinate number of investigations over the coming months and years that look set to change the region's banking landscape.

"Some banks are very actively changing, although some are waiting to see what happens next on a political level. I believe that there will be mergers, in particular in the middle market," says Jarrett (pictured).

With change afoot in the financial sector, Swiss law firms are lining up to take on an increasing amount of work, with the ever-growing international influence in the Swiss financial sector not stopping there.

The new UK 50% tax rate has led to talk, particularly among the hedge fund management community, of relocation to more favourable jurisdictions including Switzerland. While this has generated a limited amount of work to date, many lawyers are hopeful that there is gathering momentum. Charles Adams, head of Akin Gump's Geneva office, says: "Lawyers are currently questioning and hoping that this trickle [of hedge fund managers] we have seen so far will become a flood."

A significant amount of inbound work has already been seen by Swiss domestic firms over the past 18 months. Transocean, the world's largest offshore drilling contractor, entered into the market this year, launching on the SIX Swiss Exchange in April 2010, advised by Homburger.

Nestle was the subject of one of the biggest Swiss deals this year which saw the $40bn (£25bn) buyout of its majority share in eyecare company Alcon by pharmaceuticals company Novartis in January 2010. The deal saw Baer & Karrer act for Novartis, Nieder Kraft & Frey and Pestalozzi Lachenal Patry act for Alcon and Homburger advise Nestle.

Lenz & Staehelin corporate and M&A head Rudolf Tschaeni comments: "There have been quite a number of transactions in the past 18 months as the recession did not affect Switzerland as badly as many other parts of the world."

International model

While lateral hires are still not commonplace and the majority of Swiss firms have remained independent from international alliances and mergers or big hiring sprees, there has been increasing movement and activity in the past year.

Vischer M&A partner Benedict Christ comments: "In the Swiss market there has been an increase in lateral hires. There were almost no moves until recently. People are still more loyal than in New York and London and it is still not the norm, but it is definitely on the rise. It is a completely different world today compared to what it used to be and with this growth we have more Anglo-Saxon influences and new dynamics."

Pestalozzi's corporate and M&A head Jakob Hoehn confirms: "Lateral hires are still more the exception than the rule."

Recent examples of movements include the split of Pestalozzi Lachenal Patry's Geneva and Zurich offices, with eight of the firm's partners in Geneva leaving to set up their own office under the name Lachenal Patry in September 2010. The firm also made two lateral hires in Zurich last year from Ernst & Young and Stiffler & Partner.

A number of third and fourth-tier firms have also merged to gain critical mass for big ticket work, with Kellerhals a recent example, merging with Basel-based Christen Rickli in 2009.

Schellenberg Wittmer's Zurich M&A head Martin Weber believes this is a growing trend: "There is a continued, and again intensified, search for hires. Until a few years ago, it was not a good style to seek the assistance of headhunters when looking for hires to expand your firm. Now, lawyers in the big Swiss law firms get calls from headhunters more and more."

Lenz & Staehelin's Tschaeni comments: "Some Swiss firms have gradually changed. Their original business model was less international and less institutionalised, which has led to a number of firms joining forces to rectify this."

However, despite an increase in hiring and movement in the market, Swiss firms are adamant that this will not lead to a trend of formal tie-ups with international outfits. Homburger managing partner Heinz Schaerer (pictured) says: "Being independent is absolutely key to our strategy. We have connections with most of the leading international firms in the key markets, but we are not considering moving these relationships into an exclusive status."

International firms in Switzerland

The Swiss legal market is monopolised by domestic firms, with a number of US firms present in Geneva only to be near the World Trade Organisation (WTO). King & Spalding is the most recent US outfit to set up in the market, opening in June 2010 with the hire of local lawyer Daniel Crosby from Budin & Partners.

The insular nature of the market has always led to speculation over whether the UK and German firms will attempt to enter into it.

"What is still up in the air is whether UK and German firms will enter the Swiss market," says Baer & Karrer's Andreas Laenzlinger, head of the firm's internal investigation and cross-border proceedings practice.

Homburger's Schaerer adds: "We observe a certain concern of some foreign firms – particularly UK firms – due to the fact that a number of businesses have recently moved portions of their business to Switzerland (in the financial industry, mainly hedge funds), and others have communicated that they are considering similar moves."

A number of firms such as CMS Cameron McKenna and, most recently, Eversheds do have offices in the region; however, the general consensus seems to be that the moment has passed.

Lalive banking and finance partner Alexander Troller (pictured) comments: "It is unlikely that major UK firms will move into Switzerland because the domestic market is too small and I understand size to be key to their decisions."

Lenz & Staehelin's Tschaeni adds: "We haven't seen any firms moving in. The Swiss market, being what it is, is probably not all that attractive for entry by non-Swiss firms. This is not because of barriers to them, but the market is very small and fragmented with several languages including German, French and Italian. Further, the large Swiss corporates can be served from outside Switzerland, and Swiss law firms already deliver high-quality service."

However, come January 2011 the new civil procedure law will come into play, unifying one element of the existing fragmented market.

The new law marks a significant change in history as the 26 different 'cantons', or member states, will now operate under the same procedural laws in court making it easier for lawyers to move around.

Homburger's Schaerer says: "For us as a nationwide firm this is a great move, because it will now be easier for our lawyers to migrate between courts more freely."

The future

So will Switzerland continue to be influenced by other legal markets? The increasing amount of inbound work the region is seeing from Asia suggests that it is gradually seeing some of the international work that other jurisdictions, such as the UK, have already been active in.

Vischer corporate partner Juerg Luginbuehl comments: "There has been quite a spate of activity since the beginning of 2009 and early 2010, with Asian companies starting to be very active here in Switzerland."

An example of this came in March when Indian infrastructure firm Hindustan Construction Company (HCC) bought a 66% stake in Swiss real estate firm Karl Steiner for Rs 150 crore (£20.7m).

When considered in context with the increasing competition for the best young lawyers, it seems inevitable that Swiss firms will adapt their style and model to ensure they are at the top of their game, which may mean adopting some international practices.

Luginbuehl adds: "Young people tend to be quite aggressive in negotiating contracts. In five years we will see who won the talents and I think law firms will need to think more about transparent and clear career planning."

Bakers' Jarrett comments: "Some law firms are going to have to do something because the ones that relied on offshore company directorships and administration for their revenue streams are seeing that work evaporate as clients' objectives change."

With an increasing amount of inbound work and therefore increased interaction with international clients, local law firms will be expected to compete and offer the same services as their international counterparts if the work is going to stay.

Whether this will involve firms admitting more international influence through their doors or not remains to be seen, but as one partner comments: "We will have a different world in five years, I am sure."

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Swiss work streams

Overall, the pattern of legal work across Europe has been emulated in Switzerland – the loss of M&A and initial public offering (IPO) work has been compensated by an increase in insolvency, restructuring, banking and regulatory matters, distressed transactions and dispute resolution.

"In Q4 of 2009 and Q1 of 2010 there was a clear but not overwhelming increase in transactions beginning with a certain emphasis on the financial and the healthcare industry," comments Heinz Schaerer, managing partner and deputy head of Homburger's corporate and M&A practice group. "In other areas, restructuring and distressed asset transactions were still predominant."

Homburger was counsel to Transocean, one of the largest offshore drilling companies, in its redomestication in 2008-09 from the Cayman Islands to Switzerland and its listing on SIX Swiss Exchange during 2010.

The Zurich firm also advised Nestle in its acquisition of Kraft Foods' frozen pizza business in the US and Canada for $3.7bn (£2.4bn) this year and took a lead role for Dufry on a cross-border triangular merger with a secondary listing on BM&F Bovespa.

"There have been more deals during the last few months," says competition and corporate law partner Patrick Sommer. His firm, CMS von Erlach Henrici, recently advised Flachglas Wernberg, one of the leading glass manufacturers for buildings and vehicles in Europe, in the acquisition of Pilkington (Schweiz), Pilkington Glas Wikon, Pilkington Glas Thun and Pilkington Glas Munchenbuchsee. The firm also advised BC Partners in the b400m (£331m) acquisition of Future Lab Group, in one of the largest private equity deals in 2009, and assisted Bayer in an investigation of the Swiss competition authorities on the pharmaceutical market.

"Since late 2009 we have noticed an increased interest for M&A transactions by strategic investors," comments Vincent Jeanneret. "Notwithstanding that, the time is still not right for big and highly leveraged transactions. There is, however, an increased number of small and mid-sized transactions successfully getting into the negotiation and completion phase."

Schellenberg Wittmer recently advised the Swiss subsidiary of one of the four shareholders in connection with the Phase I financing of the Nord Stream gas pipeline project that will directly link Europe's energy grid to one of the world's largest natural gas reserves in Russia via the Baltic Sea. The firm also acted for Life Technologies, a NASDAQ-listed, California-headquartered global provider of life science solutions, in the sale and transfer of its mass spectrometry business to NYSE-listed multinational US company Danaher. The corporate group is currently advising investment companies and financial advisers in relation to their rights under the applicable Swiss corporate and merger laws as minority shareholders of Alcon, the Swiss-based and NYSE listed global leader in eyecare, having become a 77% majority-owned Novartis subsidiary upon completion of a sale and purchase transaction with Nestle.

Schellenberg Wittmer's banking and finance group has been appointed as commissioners and liquidators by FINMA for Kaupthing Bank Luxembourg (Geneva Branch), as well as for ACH Securities, a Swiss securities dealer. The group also acted as lead counsel for three secured (acquisition) finance transactions arranged by Credit Suisse and advised APEN, formerly AIG Private Equity, a private equity company listed on SIX Swiss Exchange, in the standstill, restructuring and refinancing of bank debt by raising new financing of $225m (£146m) provided by Fortress Credit, an affiliate of Fortress Investment Group, and a Swiss bank.

"The first quarter of 2010 has seen a rebound – although restrained – of M&A activities with both opportunist industrial buyers and also financial investors being back in the market," says Vischer corporate partner Adrian Dorig. "Distressed M&A generated fewer targets than expected earlier on. In fact, there are generally not too many attractively priced targets up for sale. In some cases, buyside interest is overwhelming, also because some of the private equity firms are anxious to close a deal again. Banks are again willing to provide leveraged acquisition financing in the mid-market segment."

In 2009-10, Vischer advised Mondial Assistance, the worldwide leader in assistance services and travel insurance, in the global restructuring of its b1.75bn (£1.45bn) business within the Allianz Group. The firm also acted as counsel for CTS Eventim in the purchase of Ticketcorner Holding, one of the largest ticketing and ticketing-related software companies in Switzerland and advised Julius Baer Holding in connection with the separation of the Julius Baer Group into two independently listed units. In January 2010 Tyco International announced plans to purchase Broadview Security for $2bn (£1.3bn) in a cash and stock deal. Simpson Thacher & Bartlett advised Tyco on the deal in New York, assisted by Vischer, which advised Tyco International on Swiss matters. Tyco International changed its domicile from Bermuda to Switzerland in March 2009.

"Our capital markets group has been very busy in recent months," says Baer & Karrer financial services head Eric Stupp. "We saw a number of convertible bonds which have been issued by Swiss corporates in order to benefit from the very low interest rates which prevail in the financial markets. We furthermore assisted in difficult high stakes restructuring cases such as OC Oerlikon and advised the banking syndicate in the IPO of Orior, a fresh food company. This was the first IPO in 2010 in Switzerland. We also noticed a revival of private equity investments. A good example for this trend is the investment of Herkules Private Equity Fund acquiring Odlo Sports Group in April 2010."

Recently, Baer & Karrer advised Novartis on its $5bn (£3.2bn) bond issue and advised SIX, the biggest stock exchange in Switzerland, in the revision of the market participant rule book. "The international arbitration practice has continued to be robust," adds Akin Gump Geneva office head Charles Adams. "This is an area of practice which is generally impervious to macro-economic cycles, since commercial disputes are typically even more intense when times are tough. Our international tax planning and restructuring practice has also been exceptionally busy, given the migration toward Switzerland of several large hedge fund operators fleeing an inhospitable tax environment in the UK.

"We were very much involved in the settlement of the Eureko/Republic of Poland treaty investor dispute, one of the most significant such proceedings in recent years," continues Adams. "We have been representing one of the parties in the Elektrim/Vivendi/ Deutsche Bank matter, a longstanding international arbitration proceeding now approaching its ultimate disposition. On the transactional side, we have played a major role in the relocation of two major hedge funds from the UK to Switzerland, and have advised several financial institutions on matters pertaining to the US effort to promote the exchange of information with respect to American account holders."

By Camilla Sutton. A version of this first appeared in Focus Europe, Legal Week's US sister title.