Akin Gump, Biglaw, Money, Partner Issues

Akin Gump Overhauls Its Partnership Capital Structure

If you’re a law firm managing partner, the captain of a Biglaw ship, have you done all that you can to make sure your vessel is as seaworthy as possible? You don’t want your ship to suffer the fate of the S.S. Dewey.

Some steps are easy and obvious. Conduct layoffs of unneeded associates, whether openly or stealthily. Offer buyouts to surplus support staff (or lay them off, if feeling less generous). Usher underperforming partners towards the exit, to lower the denominator for your profit per partner figure; keeping PPP high reduces the likelihood of crippling defections and helps you attract star laterals.

Those are the basic moves, which everyone is doing. For something that’s a little more challenging, a maneuver that might even impress the East German judge in its level of difficulty, you can play with your partnership capital structure….

For starters, you can issue a capital call to your partnership, which an increasing number of firms are doing. More capital from partners means less dependence on outside sources of funding (like banks, who can make life difficult for you if you hit a rough patch; again, see Dewey).

But if you’re feeling more ambitious, you can revamp the partnership capital structure itself, to get your hands not just on more capital but on more capital from more people. Here’s a report on what Akin Gump is up to, from the WSJ Law Blog:

The firm is revamping its partnership structure, moving from a system where some partners are salaried while others hold ownership stakes into what the firm calls an “all-capital” partner system, where every partner contributes pays in and gets an equity stake….

The changes at Akin Gump will take effect in January 2014 and were announced on Monday evening, the firm said.

“We thought it made sense to have everybody have skin in the game,” Akin Gump chair Kim Koopersmith told Law Blog. “It was overwhelmingly viewed positively by our income partners. They like the idea of having a stake in the firm, and the ideas of advancement and success feel more attainable in a consistent partnership.”

As you may recall, DLA Piper made a similar move back in 2008, requiring capital contributions from former “income” partners. Cynical observers viewed it as an effort by DLA to get more money in the door (although here at ATL, we were not cynical; Elie Mystal called it a “really interesting” move and praised DLA for taking “a hard look at the underlying [Biglaw] business model”).

What’s going on in Akin’s case? It’s hard to say, since we don’t have access to Akin’s full financials, but the firm told the WSJ that the capital infusion was not the motivation for the move.

Regardless of motivation, the outcome could be good. There’s much to be said in defense of partnerships composed entirely of equity partners; all-equity partnerships tend to be more stable, collegial, and cooperative than two-tier partnerships. For more extensive discussion of the virtues of single-tier partnerships, see our interview with former Kirkland & Ellis partner Steven Harper, or read his excellent book, The Lawyer Bubble (affiliate link).

Many of the changes instituted by large law firms over the past few years have caused industry observers to mourn the Biglaw of yore. These changes — easing out non-superstar partners, dismissing associates and staff, cutting back on future hiring, tightening up on office expenses — are part and parcel of the “new normal.”

But a move towards all-equity, single-tier partnerships, whether motivated by economic need or not, is different. It’s a shift towards the “old normal,” the traditional approach to partnership, in which everyone must pay to play. It makes sense in the current economic climate — in which firms simply cannot support “bloated” partnership structures, however defined — and it could be a trend worth celebrating in the end.

(For additional detail on the Akin Gump changes, flip to the next page, where we’ve reprinted a statement the firm sent to us about its shift to an all-capital partnership structure.)

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