Taking a share

Shares may be weak, but they are only one part of strong capital markets that can offer lucrative work for solicitors, writes Michael Gerrard

Solicitors working in the capital markets sector are not short of work.

News of a weak share market may grab the headlines, but this is only one aspect of a busy practice area.

The capital markets field covers the many ways in which corporate institutions and government bodies raise money, and it takes in a whole spectrum of products and processes, of which shares are a part - alongside products such as bonds and derivatives.

Whatever the financial product, there is a mountain of law and regulations to keep the solicitor working in this area occupied.

Proof of this was provided by news last month that City giant Allen & Overy (A&O) has finished two years of work on the relaunch of two documents central to the derivatives market - the International Swaps and Derivatives Association's (ISDA) 2002 master agreement and the accompanying ISDA's equity derivatives definitions.

ISDA is the world-wide trade association that represents leaders in the derivatives sector.

The master agreement, which was originally published in 1987 and last updated a decade ago, provides the contractual basis for around 90% of the global derivatives market, which has a notional value of $128 billion (80 billion).

Highlights of the new master agreement include a means of valuing transactions, a force majeure termination clause, and also set-off provisions, enabling parties to obtain assets in addition to money from defaulters.

The new equities definitions include provisions to cater for derivatives contracts where the underlying equities change as a result of mergers.

A&O partner Simon Haddock recognises the importance of these documents for the global trade in derivatives - financial instruments that rely directly for their worth on the value of other products, as in the futures or options market.

He says: 'This suite of documents is the bible for those working in the derivatives industry.

The 1992 master agreement, now updated, has become the basis of all derivatives contracts in the world.'

Unsurprisingly, the same economic ill winds that are currently biting at the equities market, principally poor investor confidence caused not least by fears of imminent war, have also hit parts of the derivatives market.

But it is the type of detailed documentation work engaged in by A&O on this project that lies at the heart of what a capital markets solicitor does - seeing how related documents are drafted and whether their clients' legal liabilities have been properly covered.

This painstaking work is required whether one is engaged in a share issue complete with the minefield presented by a prospectus, or with the similar work required in issuing bonds for clients, or restructuring and refinancing debt.

It is an area where a misplaced comma or inappropriate use of a word could prove costly to a client, so the lawyers involved must maintain a high level of accuracy.

Naturally such work demands that those engaged in it possess a number of specific qualities in order to execute their duties successfully, not least a cool head and an analytical mind well versed in several legal disciplines, such as tax and corporate law.

Linklaters partner Phil Charlton notes that a capital markets solicitor must display precision when dealing with the many pieces of documentation associated with this area of practice.

He says: 'Generally we are employed to make sure that everything done is truthful and accurate with no omissions.'

Despite the economic conditions, work has not dried up for the solicitors; merely the focus has shifted to other areas.

A&O's Daniel Shurman notes the shift in investors' attitude: 'People are looking for more certainty, that is a clear trend, thus they are moving away from equities to structured products with defined profits.'

The issue of bonds, in a process often known as securitisation, is used by companies in an attempt to raise finances in a manner which provides far more security to the bond buyer than can ever be provided by equities and derivatives with their 'feast or famine' culture.

These bonds may be asset-backed, with companies using their cash flow as security for the deals, or they can be just straight bond issues.

Unlike shares, these are based on specific time periods for repayment, with set rates of interest on the investment.

Freshfields Bruckhaus Deringer partner Jeremy Pitkin says: 'Bond investors will expect to get their money back at the very least with an appropriate return, whereas the equity market is altogether more volatile and so more uncertain, although the potential upside is much greater.'

Bonds are also a popular way for governments to raise money, and some specialists in the City note an increase in such business coming from countries relatively new to the capitalist system.

Mr Charlton says recently announced issues by Poland, Croatia and Lithuania are the latest in a line of repeat transactions by such countries.

He says: 'According to the market, these Sovereign bond issues are popular with investors, and in part show the increasing convergence of countries in the former Soviet bloc with western European financial markets.'

At the same time as solicitors are being kept busy by the steady flow of bond issues, they are also engaged in a round of restructuring and refinancing packages, often referred to as changing the 'wrapper' around a deal.

This process is aimed at shoring up the finances of companies which may be finding that the economic climate has vastly changed since their original packages were first negotiated.

Indeed, many companies have seen their credit rating downgraded in recent times.

As with the equities market, the mega-deals of a few years back are not happening, but there are signs that there is life in the market yet - witness the battle for the control of the supermarket group Safeway, and some assert that there is also a greater degree of less high-profile work to be found.

Slaughter and May partner David Frank says: 'There are signs that there is more M&A activity growing again slowly.

Ultimately there will be purchasers if a product is seen to be to be at the right value.'

But while small companies may be driving the market, the opposite holds true in the legal world.

This is a field dominated by multinational blue-chip City firms - A&O, Linklaters, Slaughter and May, Clifford Chance and Freshfields are keeping the British flag flying high.

This is hardly surprising given the highly international nature of the work, with clients hailing from a diverse range of jurisdictions.

Mr Shurman says: 'As trade tends to involve a lot of cross-border transactions, it is helpful for a client to engage a law firm that has people on the ground where the securities are being sold.'

Unlike other practice areas, such as litigation or M&A work, the capital market sector tends not to favour overt aggression.

Its practitioners prefer to adopt a more cerebral approach, where due regard is given to your opponents.

Mr Frank says: 'Junkyard attack-dog tactics tend not to work in this area, as it is really quite a small sector and you often find yourself coming up against the same people time and again.'

This point is taken up by Mr Pitkin, who claims the nature of capital markets work tends to negate any aggressive tendencies.

He says: 'It tends not to be very confrontational in terms of the people you are working with on the other side, as - unlike with some other disciplines such as litigation - you are all moving in the same direction.'

Capital markets is a sector which demands long hours from its participants, but practitioners argue this is true of City law firm culture generally.

Mr Pitkin says: 'We are not supermen and I don't think that we work any harder than anyone else at a City law firm, where people work long hours whichever sector they are working in.'

Michael Gerrard is a freelance writer