“Law firms are merging at breakneck speed,” requiring consideration and resolution of complex issues at an equal pace, speaker Janis M. Meyer told an audience at the Legal Malpractice and Risk Management Conference in Chicago Mar. 7.
The program, conducted in three segments, was “What’s Keeping Law Firm General Counsel Awake at Night?” Meyer, who is a partner in Hinshaw & Culbertson’s New York office, led the audience through segments on mergers, succession, and the EU General Data Protection Regulation.
Meyer asked Todd M. Young, a partner in Hinshaw’s Chicago office, whether at the outset of merger negotiations firms should consider a non-poaching agreement in the event the talks break down.
In the case of a small firm target and a large firm acquirer with disparate leverage, Young said he’d advise the small firm to insist on a strong agreement that the firms aren’t to hire each other’s lawyers “so if the deal falls apart, they can’t hire selectively.” Meyer remarked that she recently observed the aftermath of a breakdown of firm merger discussions in which the firms had not agreed not to solicit each other’s lawyers. The large law firm hired some of the smaller firm’s lawyers, and “the small firm had to dissolve,” she reported.
Meyer pointed out that although Model Rule 5.6 prohibits agreements that restrict lawyers from practicing law after the termination of the relationship, a recent ethics opinion approved two law firms’ agreement not to solicit each other’s lawyers for two years after the breakdown of combination discussions. See North Carolina Ethics Op. 2017-5, 33 Law. Man. Prof. Conduct 650.
Young said conflicts can be “dealbreakers” for law firm combinations and “you can’t start too early in clearing them.” A preliminary question firm leaders should ask, perhaps over the “country club lunch” where the idea might first be broached, is “who are each firm’s big clients,” Meyer said. “I firmly believe you have to do a conflicts check for every single possible client you represented for the past five or 10 years” early on in the combination process, she said, and if necessary, hire temporary employees for that purpose. “You can get in a lot of trouble here,” she said, noting that post-merger law firms have lost millions of dollars’ worth of business after being disqualified as the result of a missed conflict of interest.
Nondisclosure agreements are also essential at the outset of merger negotiations, Young said, even though they can be hard to enforce. It’s important to “set the table,” he said, by reinforcing to the lawyers in both firms that merger discussions are confidential and that information shouldn’t be disclosed except as necessary and agreed. He said he advises his law firm clients to disclose private firm information gradually. “As you get trust, you show more and more confidential information.”
Due diligence in firm combination discussions, Meyer warned, can be “like pulling teeth.” It should include not only checking conflicts but also reviewing the firm’s insurance policies, leases, loan agreements, operating software and hardware, and partnership agreement, Young said. “If they won’t show you their partnership agreement, go find another merger partner,” Meyer advised.
Reviewing firm leases during merger negotiations should help firms to consider where the combined firm might like to have its offices, Meyer said. “Should we be combining offices? Do we want to take this opportunity to open an office in Honolulu?” Reviewing each firm’s IT is vital, Young, said, because clients such as banks and insurance companies “have radically escalated” security requirements for their law firms. “So we are automatically in violation of their requirements if we merge with someone who doesn’t [meet] those requirements,” he said.
Firm fit, Meyer noted, is critical. “Do we like these people?” Each firms also needs to find out whether any litigation is pending against the other, even if it requires going to the other firm’s insurer, she said. “Stick your nose in” if you are general counsel for your firm, she counseled, “because at the end of the day you are the one who’s going to have to clean it up,” and “tell your insurers right away” that your firm is considering a merger. “It takes a while to figure out how to handle the insurance issues, and you want to do it correctly.”
Law Firm Succession
Meyer turned to law firm succession issues during the second program segment. She said merging law firms often don’t plan sufficiently for the firm’s long-term continued existence. She asked Donald L. Mrozek, a partner in the Chicago office of Hinshaw & Culbertson LLP, how a law firm can ensure it has an effective plan for leadership transition to the next generation.
Identifying the “competencies” a firm needs in its leader, Mrozek said, is the first step in ensuring a smooth leadership transition. Choosing the firm’s leader should not depend on who has the longest tenure or the biggest book of business, he noted; many of those lawyers “do not know a thing about managing or being effective in a leadership role.”
Mrozek provided a list of his preferred key competencies for a law firm managing partner:
Meyer asked Dan E. West, who is general counsel for McGlinchey Stafford, PLLC in Baton Rouge, Louisiana, to tell the audience how his firm develops leaders.
“We try not to place very much emphasis on the book of business,” West said. His firm encourages its associates and nonequity partners to serve on a number of firm committees, including technology, pro bono, and finance, as well as on nonprofit boards and community activities “that will demonstrate the leadership qualities we are looking for.” Observing firm lawyers in those roles, he said, yields valuable information “about whether the person has the necessary qualities to be a leader.”
Mrozek said grooming future firm leaders for their roles is essential and ideally should include, in addition to the activities West listed, practice group leadership. A firm must give its future leaders the ability to demonstrate that they can successfully run a project or entity and visibility while they are doing so. And once a task or term is completed, he said, the firm should publicly recognize its lawyers’ contributions.
The firm should also make clear how its leaders are selected, Mrozek said, preferably in its partnership agreement. “What steps are to be taken in order to elect the chairman?” That process should be clear and known to all, he said, “so you aren’t fumbling around when it’s time to appoint” a new chairman. “If you wait” until the current chairman retires, becomes disabled, or dies, he warned, firms can suffer from a flawed process that results in a poor leader.
For the last segment of the program, Meyer asked Steven M. Puiszis, a partner in the Chicago office of Hinshaw & Culbertson LLP, and Charles F. Barker, general counsel and partner at Sheppard, Mullin, Richter & Hampton LLP in Los Angeles, how the European Union’s General Data Protection Regulation will affect U.S. law firms.
Approved by the EU Parliament in 2016, the far-reaching privacy law covers the personal information of individuals in the EU, whether they are EU citizens or not. GDPR applies to organizations that store or process data about those persons-even if those organizations do not have offices or other facilities in the EU.
Even firms with no offices in the EU, Puiszis said, may be subject to GDPR if they offer goods or services in the EU or if they have or process the personal data of persons in the EU. That, he said, means those law firms with immigration or merger & acquisition practices, or those acting as local counsel in matters that involve transactions or litigation regarding EU citizens or persons in the EU, may come under the wide umbrella of GDPR.
Barker told the audience he views GDPR as a trend. “Expect it to come into the U.S. and into the Far East,” he said. Because “even if you are not subject to it, you may be some day,” he recommended all law firms familiarize themselves with its provisions. (For more on GDPR, see 34 Law. Man. Prof. Conduct 102.)
Puiszis said law firms face several tasks in becoming GDPR-compliant:
The conference was primarily sponsored by Hinshaw & Culbertson LLP; Bloomberg Law and the ABA’s Center for Professional Responsibility were co-sponsors.