Fall cleaning: reviewing partnership agreements

PARTNER DEPARTURE LAW

In today’s legal business environment, best practices for managing any law firm include actively managing the risk of partner departures. So, it’s a good practice for any law firm periodically to assess its exposure to potential partner departures. This involves taking a candid look at the firm’s management, operations, strategy and culture to determine whether any partners or groups at the firm are likely to depart and, if so, what can be done to mitigate the effects of any departures, and to prepare.

No Time Like the Present

It’s never a bad time to prepare, of course, but it turns out that fall is an ideal time for law firms to make this assessment. Fall is frequently the time when partners begin to analyze their year so far, and to decide whether a move may be necessary. For firms on a calendar fiscal year, a bulk of the year’s performance and numbers have been logged and reported, and partners look ahead to year-end distributions and bonuses. Other law firms also pick up recruiting this time of year, as summer vacations end and firms make the same preliminary financial assessments of their years so far to determine what they may need next year to fill any gaps.

Some relatively straightforward questions will get this risk assessment process started:

Is your firm’s partnership agreement up to date? Managing the risk of partner departures begins with the firm’s partnership agreement (although it doesn’t end there), which means that’s also the best place to start the risk assessment. Start by asking whether the specific provisions of the partnership agreement that directly govern partner departures — including disincentive provisions, retirement-related non-compete agreements, return of equity provisions, information security, and dispute resolution provisions — are current and up to date. The authorities that control these provisions can change relatively frequently, as California courts grapple with how properly to regulate the reality of attorney mobility.

Your partnership agreement should be updated regularly to reflect the current best practices on each of these topics. The same is true of firm policies and procedures, which should be modified and updated to anticipate and to manage the risk of partners departing.

Is any partner an island? Ask any legal recruiter what makes a good client, and the response will likely include the phrase “portable book of business.” After all, attorneys who leave a law firm with no business are not really a business problem for the firm. So, law firms should regularly review and analyze just how portable its partner’s business really is. Do any other partners at the firm work for those clients, or know them well enough to make a compelling pitch to keep the work if the partner leaves? Or is any partner’s relationship with the clients so exclusive to that partner that the client would have no compelling connection to the firm in the partner’s absence?

In the short term, it’s not easy or particularly subtle for a law firm to insert itself into a partner’s client relationships. For obvious reasons, partners may resist. But over the longer term, any well-run firm should have policies in place to ensure that clients are connected to the firm as much as to any individual partner. Don’t assume that even so-called institutional clients are firm clients if they only know one partner or group.

Would you be the last to know? The firm’s operations are the next line of defense to partner departures, including technology systems and practices. If a partner or group were planning to depart the firm, they typically must plan for the departure in various ways. That planning is necessary and it is not prohibited: California courts have long recognized that attorneys can plan to compete with the firm before they leave, with some restrictions and exceptions. Firms have many structural tools at their disposal to ensure — without being unduly invasive, paranoid, creepy or weird — that they will have advance notice of the tell-tale signs that a partner or group is planning, or even just thinking about, leaving. Many firms are surprised to learn, after the fact, how open and obvious the departure planning was before they learned about it.

Where are the seeds of discontent? Moving from the specific to the general, well-run law firms regularly analyze whether the circumstances exist that can lead to partner departures. Many partners decide to leave their firms only after long periods of creeping unhappiness, and not just about money or compensation. Analyze whether the ingredients for partner unhappiness are present, and what can be done about it. Are any partners or groups unfairly subsidizing others at the firm, or consistently getting less than their fair share? Are any partners or groups in practices that the firm is not actively growing, or that are ancillary to the firm’s focus practices? Have any attorneys at the firm declined a promotion to partner or to equity partner? (That’s never a good sign.)

Is it oh…so…quiet at the firm? Law firm partners tend to be critical by training, and most are not shy about voicing their concerns as they arise. Have any partners or groups raised issues or complained about structural defects in the firm that they interpret as disadvantages to their practices? That may mean billing pressure, hourly rate pressure, or other firm policies that may not be a fit for their clients. More critically, have they stopped complaining? When it comes to managing partners and groups, no law firm should assume that silence means assent.

A Little Planning Goes a Long Way

These risk assessment questions are the starting point for law firms to determine the likelihood of partner departures. For partners or groups that the firm wants to keep, or needs to keep, the firm should create a proactive plan to resolve those issues. Like any potential law firm business risk, with the proper planning, the risk of partner departures can be managed and mitigated.