The Implications of Artificial Intelligence in the Legal Profession (Winner of the Legal Article Writing Competition)

The article below was written by Julita Gajewska, winner of the Legal Article Writing Competition, run in conjunction with The University of Westminster Corporate Law Society.

Artificial intelligence (AI) has emerged as a catalyst for transformative change across industries, with the legal sector undergoing its own revolutionary transformation. The integration of AI into legal practices is reshaping the legal landscape, introducing  a myriad of opportunities, challenges, and potential benefits in the sector. In this article, the narrative focuses on the implications of AI in the legal system, unravelling the current state of AI implementation and uncovering its potential for transformation.

The term ‘AI’ was coined by John McCarthy, although there is no universally accepted definition, as highlighted by the Carnegie Endowment for International Peace. The report ‘a pro-innovation approach to AI regulation’ has divided the term into two key characteristics: adaptivity and autonomy.

The integration of AI in the legal system provides numerous advantages that enhance efficiency, access to justice, and the general practice of law. By leveraging AI-powered tools, time-consuming processes can be streamlined, allowing legal professionals to work more efficiently and focus on more complex strategic matters. The positive impact of these technological developments is highlighted in ‘AI-assisted lawtech: its impact on law firms’, which showcases a model that promotes workplace efficiency and collaboration. Eurojust and eu-Lisa also reported similar benefits of AI, emphasising its ability to improve effectiveness and reduce costs, ultimately leading to increased access to justice. Particularly, administrative tasks, such as document review or due diligence, which currently consume a significant amount of energy for legal professionals, can be greatly aided by AI. Lawtech estimates that this boost in productivity could be worth up to $2.1 billion.

Conversely, there are potential challenges that occur with this technological transformation. In particular, there is a limited understanding of current AI methods, particularly in the legal sector. A recent case involving Steven Schwartz highlights the current lack of accuracy, as citing non-existent cases in court demonstrates the potential defects of AI. Nonetheless, PwC suggests that AI has the potential to improve accuracy by up to 80% in the near future.

The integration of AI in the legal system is poised to revolutionise the future of legal practice and redefine the delivery of legal services. While it is acknowledged in ‘AI-assisted lawtech: its impact on law firms’ that the traditional model may not change immediately, it is notable that an increasing number of companies are launching products to assist the legal profession and driving remarkable technological developments in the field. The investment in Lawtech is projected to reach $2.7 billion by 2026, highlighting the growing momentum and enthusiasm surrounding the integration of AI in the legal sector.

The integration of AI into the legal system represents a transformative shift in the practice of law. As AI technologies continue to advance, they offer numerous opportunities to enhance efficiency and improve access to justice. By acknowledging and addressing its potential challenges, the integration of AI in the legal system can be guided by a responsible and balanced approach.

Julita Gajewska

‘An excellent foundation from which to build’: Clifford Chance appoints new office managing partner in New York

Less than two weeks after Clifford Chance revealed the opening of a new office in Houston, the firm has announced the appointment of long-time CC real estate lawyer Ness Cohen as managing partner for its New York office, while also continuing to serve as real estate practice leader of the Americas.

Speaking to Legal Business, Cohen said: ‘The firm decided that it would make sense to have a New York office manager generally, especially with New York being one of our largest offices and also with our growth ambitions in the US.’

Cohen said that regional managing partner for the Americas, Sharis Pozen, approached him and said many of his fellow partners put his name forward for the new role. Pozen is based in CC’s Washington office, although she will be in New York for one week a month.

‘We just had an offsite meeting in Philadelphia for the US partners, as well as our colleagues in São Paulo, mainly to talk about our overarching global strategy. The alignment between the two is very clear. The global strategy identifies, among other things, that the US is a focus area,’ Cohen explained.

Cohen started at New-York based Roger & Wells back in 1998. The following year, the firm merged with Clifford Chance and Pünder Volhard Weber & Axster in Germany in a three-way merger. ‘[It] was really ambitious. To do one merger is feat, imagine pulling off a three-way merger that brought together three best-in-class firms,’ he added.

He was promoted to CC partner in 2007 and his practice focuses on real estate private equity, joint ventures, acquisitions, dispositions and financings involving real estate.

Earlier this month, the firm announced the opening of a new office in Houston, bolstering its global energy and infrastructure practice in the US.

‘Our entry into the Houston market is underway by an extremely appealing range of lateral candidates, which exemplifies the essence of our US strategy. The New York strategy is very similar, and we’ve brought in a fair number of laterals recently, integrating them into our office and the region,’ Cohen said.

‘There are some other ambitions that are underway with respect to potentially other locations. It’s safe to say that the firm as a whole sees the US as a region it can really achieve outsize growth.’

Cohen explained that the firm’s key focus areas are energy and infrastructure, technology, life sciences and healthcare, while it also seeks to build on other sectors.

‘We see our existing team as an excellent foundation from which to build further and grow out further. In other areas where the firm outside the US is extremely strong, we can use that and leverage it to build further. Houston is a good example of that.’

Cohen has also headed up the firm’s Personal Committee since 2011. He said ‘I really enjoy that role. It deals with everything, including our lawyers’ work-life balance. But that’s something that probably we’ll be looking to transition, since it wouldn’t make sense for me to keep that role with this.’

[email protected]

This article first appeared on our sister publication Legal Business

‘I want the firm to be more ambitious and more confident’: Stephenson Harwood rebounds with double-digit revenue growth

Stephenson Harwood has reported an 11% rise in turnover to £228m from £206m for 2022/23, the firm’s highest-ever revenue. It comes after the firm reported largely flat financials for the year 2021/22.

This time around, profit per equity partner (PEP) is up 6% to £725,000 from £685,000 in 2021/22. The firm has added 22 equity partners, with 11 lateral hires and 11 internal promotions over the last year, while four partners have retired from the partnership.

Speaking to Legal Business about the revenue increase and the firm’s ambitions Eifion Morris (pictured), the firm’s chief executive, highlighted its five-year strategy, which launched in May 2022 with the aim of doubling the firm’s turnover by 2027. Morris said: ‘We want growth, we want ambitious partners, and we want to grow in all sectors. If you want to double revenue in a short space of time, you need an active program of lateral hires. We have had a lot of radical change in a short period, and we are starting to see that pay off. This is not the endpoint but the start.’

The strategy will focus the business on five key sectors to increase profitable growth: decarbonisation, life sciences, private capital and funds, technology, and transportation and trade. These were identified by the firm as sectors which will see strong growth and development over the next few years.

Stephenson Harwood also intends to maintain its 50-50 litigation-transactional balance. 50% of the firm’s revenue currently comes from disputes, which has always been a notable strength of the firm and several of its contentious practices are ranked in The Legal 500. This includes commodities disputes and pensions dispute resolution, which receive a top-tier ranking; commercial litigation: premium, and contentious trusts and probate, which are ranked tier two; and banking litigation: investment and retail, property litigation, and intellectual property patents (contentious) which are ranked in tier three.

The current revenue breakdown across the firm’s practice areas is finance 24%, commercial litigation 28%, corporate 21%, marine and international trade 12%, employment, pensions and private wealth 10% and real estate and projects 6%.

‘At the heart of our strategy is maintaining and leveraging the 50-50 litigation-transactional balance of the firm. This has been very important for maintaining growth, and we are a very well-hedged business,’ Morris said.

The firm has also been bedding in a new global leadership team as part of its ambitions moving forward. The team is 50% male and 50% female. Morris highlighted the importance of this: ‘With the new global leadership team, I wanted to encourage diversity of background so that the team would bring different ideas and life experience to the table. The team formed during Covid, and we have had to deal with a lot of difficult decisions, but this meant we formed a very strong team.’

Stephenson Harwood highlighted several key mandates for the year across its life sciences, dispute resolution, rail and road, and corporate practices, including advising Bicycle Therapeutics on its radiopharmaceuticals deal with Novartis to develop several oncology radioligand therapies. It also represented Trafigura in the Trafigura v Gupta case and advised on Abellio UK and Nederlandse Spoorwegen management buyout.

Other highlights include advising WindAcre Partnership on its part of the acquisition of Nielsen Holdings, valued at over $16bn and LXi REIT on its £773m debt refinancing.

Looking forward, Morris is committed to raising the firm’s profile. ‘I want the firm to be more ambitious, and more confident. One of our best clients told us that we were “the best law firm you’ve never heard of”. That is something I want to change,’ he said.

[email protected]

This article first appeared on our sister publication Legal Business.

‘Our clients led us to Houston’: Clifford Chance launches energy-focused Texan office as part of US expansion plans

Clifford Chance has opened a new office in Houston, bolstering its global energy and infrastructure practice in the US.

The firm has hired seven Houston-based partners to join the office, including Jonathan Castelan and Trevor Lavelle, who both join from Latham & Watkins. However, at this stage, Clifford Chance was unable to confirm the names of the remaining five partners or the firms they are moving from.

The lateral hires will be joined by existing Clifford Chance partners Devika Kornbacher, Alexander Leff, and Anthony Giustini. Kornbacher is co-head of the firm’s technology group, while Leff is a renewable energy and infrastructure partner and Giustini is the senior partner for the firm’s worldwide projects group, co-leader of the energy transition initiative, and leader of its clean hydrogen task force.

Speaking to Legal Business about the Houston launch, regional managing partner for the Americas, Sharis Pozen said: ‘This play in Houston is all about extending our energy and infrastructure practice. We have a market-leading practice globally and the one piece of it that was missing was Houston and having a hub in the US for energy and infrastructure. So that’s what drove us to Houston.’

She added: ‘We have about 700 folks in total in the United States. We have almost 500 fee earners and 95 partners. So, we’ve been fortunate to be able to build a fantastic team in the US that’s very connected to the rest of our firm.’

The new office will primarily focus on energy and infrastructure, with the Texan location dictated by the needs of existing clients.

‘Our clients led us to Houston. Many of them are global clients headquartered in Houston and they are primarily energy and infrastructure clients. Houston right now is an incredibly dynamic marketplace. It is the fourth-largest city in the United States, one of the most diverse, and it’s really the hub of the energy transition,’ Pozen explained.  She added that she was hopeful that the Houston base would prove to be an attractive offering for new clients as well.

The launch has been several years in the making. Commenting on the process, Pozen said: ‘We’re discerning, and we play our own game. That’s who we are. So, we’ve watched other firms with some global reach go into Houston and watched the successes and those that haven’t been as successful, and we’ve learnt. In our world, there isn’t always that first-mover advantage. Often history shows that the person who sits back and watches goes in even stronger and better.’

Pozen also credited the reach and foresight of global managing partner Charles Adams as a driving force behind the office opening. The firm plans to expand the Houston office with more growth expected over the coming year, with the strategy for the next three to four years to remain on the lookout for new talent and continue to grow the team when it makes sense.

‘We will look to build out the team further for sure. That is the plan. It’s part of our plan to expand in the US generally, and we have been expanding in the US. We plan on continuing to strategically grow. We are not just a growth-for-growth’s-sake firm. We are a strategic grower and meticulous about our execution,’ Pozen added.

Currently, Clifford Chance’s Americas revenue makes up 13% of its global turnover. However, with the move into the Texan market, the firm is placing its bets on the energy transition sector as the route to breaking the US. As the magic circle firms consider their US expansion plans, the proposed Allen & Overy and Shearman & Sterling merger will see another magic circle firm make headway in Texas, giving them access to offices in Austin, Dallas, and Houston if the partner vote is passed.

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This article first appeared on Legal Business

Allen & Overy and Shearman & Sterling announce merger

In what the firms describe as ‘the first fully integrated global elite law firm’ Allen & Overy and Shearman & Sterling have announced a planned merger to create a ‘unique global law firm’ named Allen Overy Shearman Sterling – A&O Shearman for short.

In a statement, the firms said: ‘This merger will combine two of the world’s most prestigious law firms, leaders in their respective markets, to create an integrated global elite firm.

‘Together A&O Shearman will have  3,900 lawyers and 800 Partners across 49 offices. Allen & Overy and Shearman & Sterling have 250 years of combined experience and some of the greatest legal talent in the world. A&O Shearman will be the only global firm with US law, English law, and local law capabilities in equal measure. This merger is driven by clients’ needs for a seamless global offering of the highest quality and depth to support them in navigating an increasingly complex legal, regulatory, and geopolitical environment.

‘Allen & Overy and Shearman & Sterling are complementary with distinct market leadership, and between them they have huge strength in the US, UK, and markets all across the globe. This merger will transform their offering to clients: Shearman & Sterling will gain access to a dramatically expanded ‘rest of the world’ offering across practice areas, and Allen & Overy will benefit from increased board-level recognition and expanded access to a corporate client base in the US. The combined firm will be perfectly positioned to capitalise on global macro trends including energy transition, technology, and private capital.’

Wim Dejonghe, senior partner at Allen & Overy, said: ‘This combination of two great firms is such an exciting step for us. Both firms have a history of excellence, and together we think A&O Shearman will be a firm unlike any other in the world. We have listened to our clients and their requests for the highest quality advice to help navigate the demands they face, and to do so in an integrated and globally consistent way. We, A&O Shearman, will do this by accelerating our ability to bring the best of both firms, regardless of geography.

‘Shearman & Sterling is an incredible group of legal minds; a firm built on integrity and excellence, founded like us in a premier global financial capital and with an extraordinary group of longstanding clients. What excites me about this merger is the complementary cultures of our two firms. We have striking similarities across the board, and I believe we are going to be wonderful partners to one another on this journey.’

Adam Hakki, senior partner at Shearman & Sterling, said: ‘Client need for global elite firms has never been greater. They are calling for integrated global legal solutions and advice: merging with Allen & Overy will dramatically accelerate our ability to meet their needs in an increasingly complex environment. Allen & Overy is an outstanding firm whose work we have long admired and thought of as a kindred spirit. We have both always placed great emphasis on attracting and retaining top talent, were early to globalise, and are relentlessly focused on quality, excellence, and collaboration.

‘This is truly a game-changing moment for both firms that will create an unparalleled offering for our clients. It is also a fantastic opportunity for our people to be part of a transformative transaction and an institution of such significance, and we look forward to recruiting even more stellar talent in the coming years.’

Lazard is serving as financial adviser and Simpson Thacher & Bartlett is serving as legal counsel to A&O,  while Davis Polk & Wardwell is advising Shearman.

The proposed merger is subject to customary closing conditions, including a vote of the partners of each of the respective firms.

More detail can be found on www.announcingaoss.com, a site set up by the firms.

[email protected]

This article first appeared on Legal Business

Pro Bono

In the legal industry, pro bono is the act of giving free legal advice to clients who may not otherwise be able to afford it.  

In the US, it’s long been common practice for law firms to practice pro bono alongside their paid legal work. In recent years pro bono has started to enjoy more prominence in UK law firms too. 

When researching firms, it’s definitely worth looking at a firm’s pro bono offering. Some firms will require all trainees to get involved in pro bono and others will even allow lawyers to include a certain amount of pro bono work within their billable hours. A commitment to pro bono can say a lot about a law firm’s ethos. 

But it’s important to remember that pro bono work will almost always come second to your billable work for fee-paying clients. So, while there’s nothing wrong with mentioning your interest in the firm’s pro bono work on your application form or at an interview, it shouldn’t be your main motivation for applying. Law firms are businesses after all! 

Each year we ask trainee solicitors to share their opinions on their firms’ pro bono offering. Below are some of the top responses this year. Click on a firm name to find out more.

 

‘The only target hours relate to pro bono work and there are regular emails offering opportunities: the whole firm is geared towards taking on pro bono work when things are quiet / you have capacity, without it being a distraction from other work if you are busy on client matters’Weil

‘Pro bono is heavily encouraged by the firm and there are so many projects to get involved with, so you can be sure you’ll find something that you’re passionate about. Even if there isn’t anything (unlikely!), the firm encourages all lawyers (as well as trainees) to form their own partnerships with organisations’ Akin 

‘The firm is absolutely outstanding in terms of the availability of pro bono and CSR opportunities. There is an entire Responsible Business team which assists you to take part in any opportunity you wish to volunteer for. Sarah Farrelly, the Pro Bono Associate, is absolutely brilliant and she does exclusively pro bono work. If you are passionate about being involved in pro bono work during your TC I would strongly encourage CRS to be at the forefront of your mindCharles Russell Speechlys  

The pro bono work is amazing and, because we have no chargeable hour targets, its not seen as extra work but is treated as important as client work, which I gather is not the case in other firms. As a junior, you also get a lot of responsibility in running with pro-bono work which is great experience Travers Smith 

Very good, we get involved with the Suffolk Law Centre for pro bono, and always fundraising for such charities as Access to Justice, Norfolk & Waveney Mind, Walking with the Wounded, Benjamin Foundation, etc’ – Birketts 

Amazing – the pro bono team in the firm and the advertising and accessibility to these projects is huge (with a dedicated pro bono trainee to assist in these matters)’ – Clifford Chance 

‘Excellent. Trainees are automatically enrolled to do two sessions per year at the Battersea Legal Advice Clinic. Then there are additional opportunities to get involved with pro bono/CSR, and fee earners get trainees involved with any department specific pro bono work’K&L Gates 

10/10 – I have been involved in some really incredible and interesting pro bono initiatives, often working in small teams directly with partners or senior associates. Pro bono is often some of the most challenging and rewarding work. A big shout-out to the firm’s dedicated pro bono counsel who are incredible’ – Morrison & Foerster 

‘Incredible. This is a subject that BCLP really care about and there is plenty to get involved with if you want’Bryan Cave Leighton Paisner 

 

 

Russ to step down as Travers Smith senior partner

Kathleen Russ has taken the decision to step down as senior partner of Travers Smith, following a leave of absence for ‘exceptional family reasons’.

Russ (pictured) will return to her role as senior partner in a part time capacity, sharing responsibilities with Siân Keall, who has been acting senior partner since January. Russ will stand down as a partner and senior partner on 30th June, after which she will remain as a consultant at Travers, focusing on areas of strategic importance such as ESG, D&I and client listening.

The firm will hold an election for a senior partner successor in the autumn, after the summer break. Keall will continue in the role of acting senior partner until the election.

Russ first took on the role of senior partner in July 2019, succeeding long term leader Chris Hale. She has been a tax partner at Travers since 2001, leading the tax team from July 2007 to January 2017. Russ was re-elected for a second term as senior partner in November 2022.

Keall is a partner in the firm’s employment department and a member of its diversity & inclusion board.

A spokesperson for Travers Smith said: ‘The partnership board recognises that Kathleen has made a significant contribution to Travers, and they are delighted that she will be continuing as a consultant.’

Edmund Reed, managing partner of Travers, said: ‘We are delighted to welcome Kath back after her leave of absence for exceptional family reasons and the inevitable impact of those circumstances on Kath. We prioritise the wellbeing of our people ahead of anything else, and enabling Kath to share the responsibilities of the senior partner role with Siân Keall will allow her to balance her personal situation at home with the time-pressures that can come from performing the senior partner role, at a leading city law firm.’

[email protected]

This article first appeared on Legal Business

Top Tips for Training Contract Interviews

Do your research

You will no doubt have done plenty of research on the firm before submitting your application. If you’re lucky enough to be invited for interview, you’ll need to go over that research and then some. During an interview, you will have plenty of time and opportunities to discuss (and show off) what you’ve learnt about the firm.

Make sure you understand what the firm’s areas of specialism are. Many law firms look the same on paper but when you delve a little deeper you will discover that each one has its particular niche, works with specific industries or has a particular type of client. Culture is another differentiator, and while it can be hard to gauge this from a firm’s website, guides such as The Legal 500 Future Lawyers can be a great way to find out what life is really like at the firm.

Read and re-read your application

You might have been asked to discuss a recent commercial news story or legal development in your application form. It’s very likely you’ll be asked about this in your interview, so be sure to reread your answer. You should also read around the topic so that you can discuss it in more detail.

You could be questioned on any answer or part of your application form or CV, so be sure you’re familiar with what you’ve written incase you’re asked to back up any of the statements you’ve made.

Be confident (but not arrogant)

You’ve made it this far so the firm clearly thinks you would be good enough to work there. The interview isn’t just to interrogate you, it’s also to find out what you are like as a person.

Confidence is key in the legal profession. Your interviews will be looking to see whether they would feel comfortable putting you in front of clients, and whether you are the type of person who can take initiative (within reason for a junior lawyer of course)! This means that you need to show them that you are confident in your abilities.

It’s normal to feel nervous in an interview, but if you speak confidently and back up your answers and ideas with reasoning or examples, you will do well. Just be sure not to let your confidence turn into arrogance – nobody wants to work with a cocky trainee!

Body language

A little goes a long way when it comes to body language. Sit up tall and don’t slouch. Start the interview with a strong handshake and make plenty of eye contact with each interviewer throughout.

Look at the firm’s recent cases/deals (and don’t just pick the most recent one)

Recruiters tell us that all too often interviewees mention only the most recently published deal or case firm’s on the website. There’s nothing wrong with this, especially if it’s a big deal that has made the news, or is particularly topical. However, ideally you should make sure you’ve read past the first page of firm news and have a couple more examples up your sleeve incase you’re asked to elaborate.

Ask questions

Always Prepare questions to ask at the end of the interview. Asking insightful questions makes you look interested and engaged in the firm and that you’ve actually thought in more depth about what it might be like to work there. It doesn’t look great if you don’t have anything to say!

Reflect

It’s normal to feel frustrated after an interview and dwell on all the things you didn’t get a chance to say. A good tip is to write down some of the questions you found difficult and think about ways to answer them if they come up in future interviews. A short follow-up email to your interviewers thanking them for your time is also a nice touch.

The Silicon Valley Bank Failure

For the past month the name Silicon Valley Bank has been floating in the economic and financial news like the Lehman Brothers’ ghost. The bankruptcy of the favourite bank of start-ups brings back memories of the 2008 crisis that turned the banking sector upside down on a global level.

The Subprime crisis

References to the 2008 crisis can sometimes appear vague when you don’t know the ins and outs of it. What happened at that time?

When buying a house, buyers often take out a bank loan, also known as a mortgage. Property prices can be very high and so the use of financial aids when purchasing property is commonplace. In the United States, as elsewhere, the principle of a mortgage is simple: the borrower has to repay a sum to the bank each month for a fixed period of time. The monthly payment paid by the borrower is supplemented by an interest rate that makes the operation profitable for the banks.

If the payment is not made, it is referred to as a “default”. The risk of default is different depending on the household: those with the least risk, i.e. borrowers who officially have sufficient income to pay the monthly instalments are called “prime”. On the contrary, households or borrowers who are at the highest risk of defaulting are called “subprime”, and often banks are reluctant to lend money to them.

In the early 2000s, the interest rate on bank loans was low due to a cut in rates by the central bank of the United States (the “Fed”). This encouraged households to take out more loans, especially real estate ones, which, according to banks and investors, offered a certain security: if the loan was not repaid, the bank had the right to sell the debtor’s house.

These collaterals quickly attracted the interest of investors who acquired them in the form of securities – virtual assets with a market value – from banks. As demand grew, banks had to find new borrowers and turned to subprime mortgages. Even though the securities acquired from these high default borrowers were not particularly reliable, credit rating agencies were paid to create the illusion that these securities had a high monetary value. At the same time, real estate prices rose rapidly, making the securities more “valuable” and creating a speculative bubble.

This bubble burst when defaults started to accumulate on the subprime side. At first, it was easy to resell the properties, but the subprime defaults got to a point where nearly $600 billions worth of real estate had to be resold and no buyers came forward. Investors stopped buying the securities that the banks were selling, and these banks were faced with many loans that could not be repaid.

In 2008, the collapse of Lehman Brothers bank sounded the death knell for the beginning of the financial crisis. The banking system is highly interconnected, with banks lending money to each other and the crisis had spread around the world. In the United Kingdom, for instance, the Northern Rock bank went bankrupt after a sudden massive withdrawal of money by customers panicked by the turn of events. Short of liquidity, the bank could not keep up with demand.

But then, why is there a connection between this crisis and what recently happened to Silicon Valley Bank?

What happened with Silicon Valley Bank?

Silicon Valley Bank (“SVB”) is a bank specialising in servicing start-ups, financing innovation and tech and is considered the 16th largest US bank with nearly $210 billion in assets at the end of 2022.

In recent years in the United States, the Fed has applied a Covid policy, which lowered credit rates in order to help households and businesses borrow. However, in 2022, after the end of the pandemic, of the rise in inflation and the war in Ukraine, the Fed raised credit rates again. Start-ups turned to SVB to recover their funds and meet their own obligations such as paying their employees’ salaries.

Short of liquidity, the bank had to sell off some of its financial investments at a loss, which alerted tech investors who in turn warned their clients. A banking panic ensued, as in 2008, and a bank run took place on 9 March 2023, resulting in a withdrawal of around 42 billion dollars in less than 24 hours. This caused the bank to fail as it did not have the liquidity to meet the massive customer demand.

To immediately alleviate the problem, the US government officially took control of the bank to reassure people and try to guarantee their deposits.

Conclusion

Although the current situation of SVB is reminiscent of the 2008 crisis given the similarities between both periods, the risk of a new global economic crisis is currently low. The 2008 crisis allowed for the creation of strong regulation, ensuring that banks build up sufficient liquidity in the event of a crisis to be able to meet customer demand. The situation, despite being worrying, now appears to be under control.

Tanina Hadadou

LL.M. Candidate in International Financial Law at King’s College London

‘Crisis averted’: City banking and corporate partners react as HSBC acquires SVB UK

After a tense weekend of negotiations, the Bank of England announced on 13 March that HSBC would buy the UK branch of collapsed US bank Silicon Valley Bank (SVB). The acquisition, which was completed for a token amount of £1, prevents SVBUK being put into insolvency.

The Bank of England said in a statement that all depositors’ money with SVBUK is safe and secure as a result of this transaction: ‘SVBUK’s business will continue to be operated normally by SVBUK. All services will continue to operate as normal and customers should not notice any changes.’

Clifford Chance acted on the buy-side for HSBC, while Hogan Lovells provided advice to clients in the UK and US through its multi-practice SVB Task Force. Legal Business understands that Slaughter and May acted for SVBUK and Ashurst for the Bank of England, with Freshfields Bruckhaus Deringer among other firms playing a role in the acquisition.

Despite ongoing tumult in financial markets, UK banking and corporate lawyers greeted the news of the acquisition with optimism.

Jonathan Chertkow, a partner in Hogan Lovells’ financial services team, spoke about the deal to Legal Business. ‘From a fintech perspective, from a bank confidence perspective, this should give everyone real confidence. This was resolved quickly and in a way that protected depositors. That’s clearly a good outcome for everyone. The powers that the regulators have were designed to explore various options for how best to resolve a bank in difficulty. And, very quickly, over a weekend, they’ve done that.’

Taylor Vinters corporate partner Charles Fletcher took a similar view. ‘Action was taken really quickly, with prioritisation from policymakers, because SVB’s operations are so important to our technology and life science sectors, which in turn are so important as a source of growth and prospects for the UK in the short, medium, and long term.’

The rescue deal preserves a key source of funding for the UK tech sector. ‘SVB has been a mainstay of the emerging technology and venture capital ecosystem in the UK’, said Fletcher. ‘They’ve been a really valuable source of both banking services and debt finance to our emerging companies. They’ve been a go-to specialist provider in a part of the market that has been underserved.’

SVBUK had been so crucial in part because traditional lenders have shied away from making major investments in the relatively untested sector.

With SVBUK now owned by a major bank that may change. HSBC’s shares fell 3.8% on Monday on the back of the announcement, and dropped by a further 4.6% between Tuesday and Wednesday. Between Wednesday and Thursday they increased by 2.6%, for a total decline of 9.5% for the five days to Wednesday.

But Fletcher argued that the longer-term picture is far rosier than the immediate drop on Monday suggests. ‘I think HSBC will have got a bargain here. My hope is that they will invest in continuing SVB’s mission in the UK – that they will see that this is actually a serious book of business here, with some great companies in the innovation economy.’

Arguably, a collapse on this scale should, by rights, send shockwaves through affected industries. While SVB was not on the level of the true titans of US banking, such as JP Morgan Chase and Bank of America, it was significant, as the sixteenth-largest bank in the US financial system. And its collapse was the biggest banking failure since 2008.

Still, lawyers do not predict that clients in the sector will move en masse to more established banks. ‘When there’s a shock like this, you often see a flight to safety, to size and scale’, Chertkow explained. ‘But I suspect, if that happens, it’ll be relatively short-lived, because there’s still a lot of innovation, a lot of competition in the market.’

The key question on the minds of clients will be the risk of contagion, and lawyers already note an increase in demand for advice on risk management.

‘Rapidly rising interest rates have created a concern here’, Chertkow noted, ‘and it’s very difficult to say whether that has wider contagion risk.’

But the wider market can take heart from the fact that factors unique to SVB were crucial to its collapse. SVB was doubly exposed to risk from interest rate increases, due to both its significant investment in US Treasury bonds and its client base’s strong reliance on venture capital, which tends to be less willing to invest when rates are higher.

Venture capital investment in tech may be down from the soaring heights it reached in 2021, but Fletcher was keen to stress that it is by no means drying up. He said: ‘SVB was a bank that had a challenge to deploy funds appropriately following a surge of deposits in 2021. Evidently, they invested in the wrong log-term financial instruments and they got caught out in terms of their own treasury and investment strategy as interest rates rose significantly.’

Crucially, SVB in the United States was an outlier in terms of deposit protection. The average US bank has about 50% of its deposits covered by the Federal Deposit Insurance Corporation’s (FDIC) guarantee, capped at $250,000. JP Morgan Chase and Bank of America each have about 30% of their deposits covered. At the end of 2022, just 2.7% of SVB’s deposits were protected.

While US regulators failed to find a buyer for SVB on Sunday, their announcement that same night that all depositors would have all their deposits protected provides confidence to the sector, reducing large investors’ incentives to pull their money out of similar operations, and in turn mitigating the risk of similar bank runs in future.

In this way, regulators in the US and the UK were able to limit the fallout from the crash.

Still, lawyers should expect to see a significant increase in regulatory work. Chertkow said: ‘There will be questions asked on both sides of the Atlantic, about what the regulators were looking at, and whether they had information that could have predicted this.’

He also noted that the story will impact ongoing debates about post-Brexit changes to the UK regulatory regime. ‘There’s always a tension in how far you go, whether you have a light-touch regime to improve competition and boost the economy. This event will weigh into some of those decisions. It focuses the mind when you have an event like this. It’s now less theoretical than it might otherwise have seemed, when there hadn’t been anything like this for a decade or more.’

Investigations will likely focus in particular on the speed of the collapse. Just after market close on Wednesday 8 March, SVB announced that it had sold some of its securities at a loss, and that it was seeking to raise $2.25bn in a new share sale. On Thursday, venture capital firms including the influential Founders’ Fund advised portfolio companies to pull their deposits out of SVB.

News of this advice spread, and a full-on bank run began. Trading in SVB shares was halted on Friday morning, and the bank was shuttered by California regulators before the end of the day, and placed into receivership under the FDIC.

Chertkow noted: ‘The speed with which it happened was pretty unusual, and probably a reflection of the digital age we’re now in.’ How to guard against bank runs in such a fast-paced environment will be one of the main questions with which regulators grapple moving forwards.

Clients continue to seek advice, and many law firms have put together cross-border and cross-practice teams to meet demand. But the message remains one of cautious optimism. ‘I think this could have been far worse for customers’, Chertkow said. ‘It’s worked well to come out with a great solution where nobody has lost any money that they deposited, and nobody has lost access to any facilities that they might need to draw down.’

In Fletcher’s view, the UK tech sector in particular has reason to be optimistic: ‘After an anxious few days, it’s great to see that our tech companies got the support they needed, and can go back to being disruptive mould-breakers that are squarely focused on tackling some of the biggest challenges of modern life . The main thing it means is, back to business as normal for them. It’s crisis averted.’

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This article first appeared on Legal Business