We’ve all heard stories, watched it in action, or been in the middle of what I refer to as The Run For The Door — the point at which partners determine their firm no longer has sufficient mass to cover overhead and debt, and the mass exodus begins. Those who move too slow are left to turn off the lights, and are often left holding the proverbial bag. It’s an ugly thing to watch. In some cases it’s led to some undesirable career detours. In some cases it’s led to the loss of a special culture.
Let’s be frank. Partners with a good reputation and solid book of business always land on their feet. In fact, just rumors that a firm may be experiencing difficulty, even if only temporary, is seen as an opportunity by other firms; often leading to a sharp increase in activity by competitors who attempt to lure away some of the best and brightest. When some of those recruiting efforts result in departures, even if only of a few key rainmakers, it can easily trigger “The Run” as remaining partners, particularly top earners, become concerned about the impact on their future compensation.
Such is the case with Howrey. It’s partners voted on Wednesday, March 9th, to dissolve effective March 15th. The vote required a supermajority of 85% of partner shares to carry the vote for dissolution. The story appeared in AmLaw Daily.
’”Once you lose a certain mass, you just can’t get it back,” one partner says. “It’s just a matter of days right now.” Adds the second partner: “I did it with a heavy heart, but if we don’t vote for formal dissolution, if you think it’s chaos now, it’s just going to turn into a disaster. You don’t want it to be a situation where the last person turns out the lights.”
According to the article, the firm has seen more than 140 partners depart since April 2010. They were smart enough to recognize the stampede was well underway, and take the vote which would insure the least damage for those still at the firm. Hopefully, this will not be one of those failures which leaves creditors in hot pursuit, and generates lawsuits from and between former partners.
From time to time I advise firms about to draft partnership or shareholder agreements. There are a number of the subjects I always have to put squarely on the table for discussion, and it always makes the principals squirm. I do it because I know it’s necessary. What are those subjects?
- Termination of partners. Exactly what can trigger involuntary termination? Arrest? Conviction? Public embarrassment to the firm? Damage to the firm’s reputation? Lapse in fiduciary responsibility? If termination is to be considered, how realistic is a 100% vote to get the job done? What is more realistic? What is a terminated partner entitled to, and should it be different from a partner who leaves voluntarily?
- Firm dissolution. The obvious question regards the vote required to evoke dissolution. But beyond that, there are a whole host of issues which should be addressed. For example, I believe that purchase of an unlimited-duration Extended Reporting Period Endorsement (“the tail”) on the firm’s professional liability insurance policy should be required in the event of dissolution, and that all stakeholders who were part of the firm in the fiscal year of dissolution should be required to pay their prorata share of the cost.Records retention and management issues also come into play big time. There will be enormous number of files which are closed, many of which will belong to clients no longer with the firm, and developed by lawyers long gone as well. They cannot just be thrown in the trash. (Although there have been some pretty awesome stories from time to time about the frustrated few partners left to turn off the lights who, in frustration caused by former partners who wouldn’t help and didn’t care, actually did throw files in the trash. Sanctions were always harsh.) Someone has to remain the custodian of the files, oversee destruction when the proper retention period has tolled, ensure proper authorization has been received beforehand if any original or valuable client property remains in the file, and pay for storage until all files have been properly returned to clients or destroyed in accordance with ethical requirements and Rule 1.15 [Safekeeping Property].
These are but two areas of concern which can cause a great deal of acrimony, and even disciplinary action, if not taken into consideration beforehand. And there are many more.
My point? No matter how large or small, any firm, except for a solo firm, can experience a “run for the door”. Be prepared for that eventuality, as awful and remote a possibility as it may seem. Otherwise, precisely at a time when you may be trying to start anew, your past may be holding you back by distracting you and consuming your valuable time with squabbles and lawsuits.