LeClairRyan’s decision to cease operations this week came as little surprise to industry observers, but what’s less understood are the firm’s ambitions in recent years to rework the way it raises capital from partners and perhaps ultimately open itself up to outside investors.

LeClairRyan’s partnership voted to wind down the 30-year-old firm’s operations on Aug. 7 after months of partner departures and years of falling revenue.

According to several former attorneys at the firm who spoke to Bloomberg Law but requested anonymity to preserve relationships at LeClairRyan, the firm made attempts under its old leadership to break the traditional firm mold. But it appears to have made these moves prematurely, anticipating innovations, like the regulatory acceptance of nonlawyer investment in firms, that have still not come to fruition.

Unique Vision

LeClairRyan’s misfortunes started to mount long before C. Erik Gustafson, who did not respond to request for comment, took over as chief executive officer in March of 2016, said one former LeClairRyan partner.

The firm faced a lack of support for key practice groups and partner compensation that was in some cases excessive and unaligned with the “low-end” billing scale the firm was using for clients, several sources said.

Gustafson and his team “inherited a mess,” the former partner said.

That mess had begun to take shape, according to several sources, during the tenure of firm co-founder Gary LeClair, who stepped down as the firm’s CEO in 2011, and as chairman in 2015.

LeClair, a certified professional accountant, had a unique vision for his firm. He structured the firm with the idea if a law firm could eventually receive outside investment from nonlawyers, it would be prepared to do so, said two former LeClairRyan attorneys.

LeClair thought he was going to do something different, one of the lawyers said.

The firm co- founder and former leader did not respond to requests for comment for this story.

LeClairRyan’s apparent business philosophy under LeClair may have stemmed from the significant shift that took place in the United Kingdom in 2007 with the passage of the Legal Services Act, according to Jim Jones, a senior fellow with Georgetown Law’s Center on Ethics and the Legal Profession.

The law, which took effect in 2011, allowed law firms to begin taking investments from third parties. At the same time, it gave companies that aren’t law firms the ability to start offering legal services.

These practices are prohibited in the United States, because of rules in each state that prohibit law firms from partnering with non-lawyers, or sharing their fees with them. LeClairRyan’s home state, Virginia, is no different.

If LeClairRyan were thinking about changing its business structure now, that might make more sense, said Jones, given that the State Bar of California, other state bars, and at least one national bar group all are considering significant changes to their version of ABA Model Rule 5.4 and related regulations on law firm ownership as ways to increase access to legal services.

“Changing Rule 5.4 is on everyone’s mind these days, though I don’t think anyone expects it to happen anytime soon,” he said.

The changes in the U.K. “stimulated conversation in the U.S. but didn’t stimulate state bars to act at that time,” said Jones. “I think [LeClair] was just really premature on this.”

Preferred Stock Option

LeClair’s special vision for the firm included finding ways to raise capital from its own lawyers beyond just traditional capital contributions.

LeClairRyan created a unique arrangement, a preferred stock option for shareholders, outside of common stock, to raise capital to fortify the firm’s finances.

Purchase of the preferred stock, as opposed to the common stock held by all shareholders, wasn’t mandatory, but was highly encouraged, sources said.

They added that preferred stockholders were paid eight percent on the investment amount, but it was contingent upon the firm making budget.

While preferred stockholders did not have any more voting rights than other shareholders, their returns were paid out before the shareholder bonuses, two former lawyers said.

One lawyer noted that while these payments were intended to fortify the firm, they were put into supplemental retirement accounts at the beginning of the year or used to patch holes in the budget. At times, payments that were supposed to be made at the end of the year were then shifted to the following year, they added.

A few years into the preferred stock program the firm started missing budget and partners stopped buying more shares, a former lawyer said.

“It’s a very sad situation,” another said of the dissolution. “There are lots of good people who have paid different prices. Some have spent their entire careers here.”