Akin Gump, Biglaw, Money, Partner Issues

Some Additional Thoughts on Law Firm Partner Capital

Is your firm financially sound? A noted law firm consultant explains "the myth of partner capital."

By  
on

In discussing the recent news of Akin Gump overhauling its partnership capital structure, I sounded some generally positive notes. I echoed the thoughts of Akin Gump’s chair, Kim Koopersmith: “We thought it made sense to have everybody have skin in the game.”

But there are less sanguine ways of assessing the situation. Are the non-equity partners who will be converted into equity partners putting skin in the game, or are they getting skinned?

If you’re a non-equity partner invited into the equity partnership of your firm, you could view the move as “buying your job.” Up until now, you’ve probably been receiving a nice income without having to put any of your own money into the firm. Now you have to pony up some capital, which will stay in the firm until you leave (perhaps with a drawn-out repayment period), and — depending on the particular deal you’re offered — your take-home pay might go down.

What if you don’t like the deal you’re being offered to join the equity partnership? Well, the door is that way. Conversion to an all-equity partnership could be used in this way to squeeze out non-equity partners the firm wanted to get rid of — or to demand from them a high price to stay, in the form of a large capital contribution to help fund firm operations.

Because issues of partnership capital are complex and firm-specific, it’s hard to generalize about them. But here are some helpful thoughts that Ed Reeser, a former Biglaw managing partner who now works as a law consultant, recently shared with me.

Sponsored

The Myth of Partner Capital
By Edwin Reeser

The myth of partner capital, as well as creative application of modified cash basis accounting by law firms, when combined with an opaque financial disclosure policy by leadership (including compensation), and aggressive over-distribution of cash to partners, has made it very difficult for partners to know whether their firms are financially sound or not.

I have been writing for years now that there are many things being done in large law firms to shore up unsustainable current distribution levels for partners, the benefits of which are being shared by relatively few, and the long-term consequences of which will be borne by partners/associates/staff in the future who are not receiving the current benefits. Worse, it is an unsustainable adventure, which under the pressure of a recessionary economy has accelerated the potential date of demise for those firms that have engaged in such strategies.

The only way to know if a firm is doing these inadvisable maneuvers is for there to be full transparency to its partners. (Outsiders don’t have to know; only the partners have to know. That should be fine — it is, after all, their business.) But what has been transpiring is a move in the opposite direction; less participation and knowledge to partners, centralization of decision making and power, and a general conversion of the firms to enterprises in which almost all of the attorneys, including at least two-thirds of the equity partner class, are net “givers” to a profit pool shared by relatively few. That is not really debatable, it is baked into the structure itself.

One can choose to accept that is the way it is with respect to allocation of profits once it is understood, though it is harder when it is presented to attorneys in the firm as something different. But what one shouldn’t accept is that it is so skewed as to be destroying these very enterprises for the benefit of a select few, and that those select few know that is what they are doing. Look at Dewey…. the leaders knew. The consequences? Based on the approved plan of liquidation in Dewey, very little consequence to those who made or benefited from the decisions. The creditors were hammered, the associates and staff lost their jobs and did not receive WARN benefits, retired partners lost their payout benefits, the pension plan was taken over and benefits reduced from underfunding, all partner capital was forfeit, and $70+ million was disgorged by the partners at large….. so far. (Partner liabilities for Jewel claims on “unfinished business” ported to new firms remain to be addressed).

Sponsored

Can we seriously think that law firm management around the country didn’t take note of all that, and that their behavior will not be influenced? Not by the cost component of the demise of the firm, but how little the architects of the strategy and the beneficiaries of the strategy had to pay in the end!

These pieces alone cover most of what one needs to know. This one is from December of 2012 and is a good primer on the myth of partner capital:

http://www.jdsupra.com/legalnews/law-firm-capital-what-you-see-is-not-wha-14932/

This one specifically refers to the non-equity partner “profit participation gambit” and was released at the end of June 2013:

http://www.jdsupra.com/legalnews/reallocation-of-money-and-governance-in-63150/

This two-part series shows how equity versus debt is irrelevant to the problem and why you need to be careful and informed:

http://www.jdsupra.com/legalnews/equity-versus-debt-capitalization-does-i-66270/

http://www.jdsupra.com/legalnews/equity-versus-debt-capitalization-does-i-58404/

And this one from four years ago shows how the leadership in some firms know exactly what they are doing and why!

http://www.jdsupra.com/legalnews/do-partners-really-want-to-save-their-la-37179/

Just as the article four years ago on the big law firm demise laid out nine warning signs, arguably all of which applied to Dewey, the strategic motivation to do what Dewey did aligns with the above article. Neither had anything specific about Dewey and its failure, as they were written almost three years before it went out of business. But they are both close enough that they are worth a close look as being industry-relevant, not just Dewey-relevant.

Earlier: Akin Gump Overhauls Its Partnership Capital Structure

Topics

, , , , , , , , , , , , , ,