Struggling Law Firms and the Lateral Partner Feast

Editor’s Note: The author of this article is co-chair of the partner practice group at Garrison & Sisson, an attorney search firm in Washington, DC.

By Dan Binstock, Partner at Garrison & Sisson

Each year several firms surface on the “danger” list. There are numerous reasons, including: declining financial performance, internal struggles within the partnership, or a stream of departing partners. Many of these struggling and failed firms have been iconic to the profession, with rosters of excellent attorneys and clients, the number and quality of which are seldom available. But for the impending failure of their firm, these are opportunities that would not come to the market.

When the troubles of struggling firms hit the media, competitor firms pore over the menu list of partners and practices, seeking the best prospects of potential revenue and client relationships to slice from the roast. Like clockwork, recruiters start receiving calls from their law firm clients that can be summarized as:

• “We read the media story about Struggling Firm. Can you see if anybody there would be interested in talking to us?”

• Savvy firms are more targeted and ask, “Can you call Ms. Jones and tell her that our practice group head is interested in talking to her?”

While the prospect of a lateral partner feast is enticing, this process is wrought with potential risks. There are issues to consider when taking a seat at this crowded table.

• The odds are steep: The most respected partners at struggling firms begin receiving calls constantly, from both recruiters and partners at other firms. One partner at a dying firm kept a log of recruiting calls and noted that he had been contacted by 33 different firms. Some partners are so overwhelmed with calls (and emails) that they simply stop answering their phones from unrecognized numbers.

• Courted partners date numerous firms: In-demand partners realize this is a unique opportunity to consider their suitors at a time when they have their “pick.” Most partners with practices in the $3 to $20 million range speak with 4 to 8 firms, and know from the early stages which one or two firms are likely to rise to the top, even though they continue speaking with more firms to fully explore their options.

• Competition may adversely impact the soundness of your decisions: When a firm is failing, competition develops among peer firms for the laterals. As much as firms may not freely admit this, a sense of immeasurable pride emerges when “beating” other firms for a coveted lateral. Sometimes this is a victory worthy of celebration due to smart recruiting and a good long-term fit, but sometimes firms overpay for partners who are focused on finding the highest bidder for attractive compensation and a multi-year guarantee.

• Due diligence may be inadequate, or biased towards the hire: Given the expedited speed at which the process frequently occurs (e.g., urgency to relocate one’s practice, competing offers from peer firms), you may be unable to perform your customary due diligence because you don’t want to lose a rare opportunity. You may go through the steps but are so set on “beating the competition” for this lateral that confirmation bias makes you overlook warning signs, or overinflate the upside potential.

• Partners who want to leave may remain for fear of losing their capital: Equity partners with significant capital invested in their firm (and are usually among the highest paid) may see their firm headed in a bad direction, but face a tough dilemma. They may want to leave, but realize that if their current firm fails, they may lose their capital, ranging from mid-six to seven figures. For a high profile partner, leaving and taking a large group out of their struggling firm may only ensure their loss of capital. So unless the new firm makes them whole (which can be a tough proposition for approval), the partner(s) may be inclined to remain as long as there may be hope of a merger or “savior” acquiring firm. Remember, sometimes the most thorough attorneys sign their existing firm’s partnership agreement without looking at it closely. When it comes time to tally the cost of leaving, many are shocked at the potential costs embedded in the process, and will change their mind at the last minute. Be sure they have read, understand, priced and accepted those partnership agreement provisions before you invest too much time and effort to only have them discover—at the last minute—they have to disgorge a bonus, forfeit accrued but undistributed income, or have a capital loan that comes due on departure.

• Jewel v. Boxer/Unfinished Business Doctrine: If it appears a firm may go bankrupt, you should be familiar with whether the unsettled Unfinished Business Doctrine applies in your jurisdiction, as it may expose the firm to disgorgements of profits from active matters transferred to your firm.

Some firms have made wonderfully successful additions through lateral hires from struggling firms. But there have also been notably poor decisions, both for firms and individual partners. Before you engage in this competition and expend significant amounts of your most precious resource—the time and talent of your own partners—be mindful of all the moving pieces and potential pitfalls.

If you have a sound strategic business plan that justifies approaching a partner at a struggling firm, proceed forth and explain your interest in a compelling and thoughtful fashion that speaks to the interests of the potential lateral partner. But if you are simply looking to opportunistically grab a book of business without much strategic thought, or you simply don’t want to be excluded from the mirage of low-hanging fruit, you may be left at the dinner table with gristle, bones, and an empty plate.

Edwin Reeser, president of Edwin B. Reeser, a law firm in California specializing in professional responsibility, contributed to this article.