Healing the exit wounds

Damage controller: Clayton Utz’s David Fagan

The story of how David Fagan came to learn that 14 partners at Clayton Utz had defected to top-tier firm Allen & Overy has be retold many times within parts of Australia’s legal fraternity.

Fagan had boarded a plane in Los Angeles en route to Washington in December 2009 when he received a phone call from the firm’s chairwoman, Linda Evans, who had the unenviable task of breaking the news.

“So I had to get my bags off the plane and get on the first flight back to Australia,” the former chief executive partner says.

His reaction was one of genuine surprise – lateral hires of partners are common among domestic firms but this defection represented a strategic and calculated ploy that stripped the organisation of some of its star players.

It is understood Grant Fuzi, a former Allen & Overy lawyer in the firm’s London office, was disgruntled at having been passed over in the selection process as Fagan’s successor (Fagan’s nine-year term had expired and he chose not to seek re-election). The post was eventually awarded to the now incumbent Darryl McDonough.

Fuzi set about negotiating with fellow partners while simultaneously gauging interest from clients.

Fagan concedes he’s aware of “one or two matters” in which the now departed partners will take existing cases across to Allen & Overy, but it’s “better to have the conversation in six to 12 months”.

He insists such a level of departures was previously unthinkable but the partnership has pulled together to be a uniting force and manage the effects as they become apparent.

The dent in the firm’s revenue and profitability arguably won’t be fully realised until the end of the 2010-11 financial year.

As Clayton Utz is pursuing Fuzi over an alleged breach of fiduciary duties, Fagan concedes there has been no communication between the two former colleagues since he boarded that plane last December.

“I haven’t spoken to him since ... it’s very difficult when you’re in a situation like this to deal with what’s been thrown at you,” he says.

The market consensus of the firm’s handling of the predicament was soon evident and Mallesons Stephen Jaques chief executive partner Robert Milliner says managing a crisis of such magnitude should garner respect.

It’s not the first time Fagan has weathered a media frenzy. In the early days of his leadership, Clayton Utz became embroiled in a document-shredding scandal in a case involving British American Tobacco (BAT).

Victorian Supreme Court judge Justice Geoffrey Eames found that Clayton Utz, representing BAT, devised a document destruction strategy.

Despite the Court of Appeal eventually overturning that finding, there was damage to the firm’s brand and Clayton Utz subsequently changed policy to no longer represent tobacco companies.

The debacle didn’t, however, pose a threat to underlying revenue or the firm’s profitability. In fact, under Fagan’s leadership, the firm has recorded a steady year-on-year increase in revenue, particularly notable over the past five years.

Figures reported by The Australian Financial Review indicate Clayton Utz’s revenue has grown by 36 per cent over that period – the highest among the top tier, which collectively averaged 21 per cent. Mallesons achieved the second-highest growth, with a 24 per cent revenue increase.

Fagan says Clayton Utz’s regional presence has helped increase its market share and differentiates it from competitors.

“Especially the Perth office,” Fagan adds. “Brisbane is also over its budget and Perth continues to perform.”

Corporate advisory work for the firm has also held up well, with the involvement in the Valemus float a standout.

It has also had roles in the initial public offerings of Myer, Kathmandu and Carsales.com; acted in the merger of WesTrac and Seven Network and maintains a market-leading government practice.

However, the likelihood of continued growth by the firm for 2009-10 may be stymied by softer than expected economic conditions. Fagan says that even without the partner defection hampering revenue forecasts, a lower budget was already in place.

The firm budgeted for $468 million, he says – that’s $22.7 million less than the $490.7 million the firm reported last year.

“How much further it’ll go down from there will depend on what was billed in June,” he says.

“Certainly the departures will have a short-term negative impact. But the market has been reasonably challenging since September last year, so our performance relative to our peers won’t be that much different.”

A frequent criticism of the firm is the resourcing of its Melbourne practice, which in terms of sheer numbers, lags well behind rival firms.

“We’ve never been a great proponent of size for size’s sake,” Fagan says. “We’re always looking for good-quality lateral partners but have no specific recruitment plans for Melbourne.”

For now, July’s arrival marks the first time in almost a decade that Fagan hasn’t been the public face of Clayton Utz. He will be boarding another plane for a very different reason – a holiday in Spain and Marrakech.

Then he is expected to return as a partner in the firm’s banking and major projects group. 

Clayton Utz Timeline:

1842: Nichols and Williams established in Sydney.

1896: Clayton & Pratt formed, and becomes John H Clayton & Son 15 years later.

1920: John H Clayton & Son merges with Harold Stewart Utz, Mackenzie and Mackenzie, to become Clayton & Utz.

1983: Clayton Utz & Company merges with Pritchards and changes its name to Clayton Utz

1984: David Fagan joins the firm.

2000: Firm becomes nationally integrated.

2002: Clayton Utz is embroiled in infamous British American Tobacco document-shredding scandal which led to a change in the firm’s policy to protect the brand; the firm no longer represents tobacco companies.

2009: Former partner Grant Fuzi leads an unprecedented defection of 14 partners across to United Kingdom top-tier firm, Allen & Overy.

2010: Clayton Utz opens first overseas office in Hong Kong; Fagan’s nine-year reign as chief executive partner ends and he is replaced by Darryl McDonough on July 1.

BRW

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