Because they’re worth it? Why firms use buy-backs
1 August 2011 | By Joshua Freedman
27 March 2013
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Buy-backs can be an effective tool to retain partners. But as Joshua Freedman asks: are they just bodge-it jobs?
There are plenty of occasions when a fly on the wall in a City firm conference room would have a whale of a time. But few meetings could be better to eavesdrop on than the moment when a rainmaker - or worse a team - sits down opposite the managing partner and announces a defection to a rival.
It can be the moment the management dreads. After all their efforts to build the practice up, the top partner has expressed a lack of confidence in the business and thinks another firm will meet their needs better, or simply pay them more.
SJ Berwin competition head Stephen Kon was the latest high-profile partner to be clawed back by management after being voted in to the partnership of US firm Milbank Tweed Hadley & McCloy, together with partner Cameron Firth. It was a series of events that baffled some insiders at the firm and elsewhere, but was hardly a surprise to those who had seen him turn down moves in the past on a number of occasions.
While young partners may see the dollar signs and take the leap when a US firm approaches, it would seem inconceivable that one of SJ Berwin’s most respected and longstanding partners, who played a central role in the running of the firm and its merger talks with US outfit Proskauer Rose last year, would do so too.
Kon was far from being the first rainmaker to express unexpectedly a desire to leave a firm he was associated with so closely, which is why it is little wonder that firms have devised a myriad of ways of keeping partners whose business is crucial to the firm.
Market experts say a leading partner can bring in £5m each year, rising to £10m or more for a real top-notch rainmaker. This represents more than 1 per cent of annual turnover for a high-ranking firm such as Herbert Smith, and a lot more for a raft of City outfits.
The ’buy-back’, as those in the know like to call it, has seen a spike as economic conditions put pressure on firms to keep hold of the most profitable parts of their businesses, especially where client relationships are at risk. Firms in merger talks are often under particular pressure to persuade potential defectors to stay.
In the mid-market arena, as well as practice areas such as private equity and venture capital, where small teams of partners work directly with business executives, it can take just one partner to leave for clients to follow.
But for a relationship such as Linklaters has with BP, which is understood to win more than £10m in fees per year for the magic circle firm, buying one partner back is unlikely to save millions. The firm would have to lose more than just Lee Taylor, the key contact partner, for the institutional client to look elsewhere. With Iain Fenn and Stephen Griffin shoring up the relationship, a rival would have to snatch an entire team for the move to be seismic. There is no suggestion that any of these partners have ever made any moves to leave Linklaters.
Yet Clifford Chance lost work from critical clients such as EQT Partners and BC Partners when Jason Glover left the firm for Simpson Thacher & Bartlett last year, while the revelation in June that a four-partner funds team was leaving the magic circle outfit for Weil Gotshal & Manges has had a potentially massive effect on the firm.
“When a team’s leaving with a few clients under its belt, the firm will do what it takes to keep them on board while it forms its strategy,” says Simon Janion at recruiter EJ Legal.
Unsurprisingly, more than ever firms are doing their utmost to hold on to commercially critical partners. Defections may happen a lot in a recession, but as the economy edges out of distress, buy-backs are common.
“As the markets pick up, it becomes more prevalent,” confirms Nick Root, founding partner of legal recruiter Taylor Root. “There are more buy-backs than you hear about. It’s very common. On the partner side we see or hear of one every month.”
According to Nick Eastwell, a consultant at Kinstellar and senior adviser to recruiter SR Search, the buy-back is simply a reflection of the way the modern world of lawyers works.
“The legal market’s generally a lot more liquid than it was in the days of traditional partnerships,” he points out. “The old concepts of loyalty and lifers have to a large extent disappeared in this new corporatised legal world.”
However, a number of cases have leaked out over the years. Perhaps the best-known is Weil’s attempt to snatch Clifford Chance private equity pair James Baird, who has since retired, and Matthew Layton, now head of corporate at Clifford Chance, in 2004. At the time the claw-back was reported to have involved promises of practice shake-ups and management roles, with the duo said to have wanted the firm to be tougher on partner performance.
A senior Ashurst partner is said to have been on the verge of joining Quinn Emanuel Urquhart & Sullivan not so long ago, turning down a major inducement, although Ashurst denies he ever resigned or was close to resigning.
Another Ashurst partner is believed to have been close to moving to Weil last year. More recently, two DLA Piper partners are understood to have been ’turned’, as they call it in the trade, after being offered roles at Winston & Strawn.
In another recent case, a duo of partners were offered £200,000 and £50,000 to stay put, while a team of some four partners recently turned down an offer
of massive pay rises from a competitor and stayed after their firm’s management convinced them that they were, in fact, valued. And rumours abound about the innovative inducement given to another high-profile duo at a leading firm earlier this year in a bid to keep their business.
Market experts insist that buy-backs are not just about the money: they are also about loyalty, vision and partners feeling valued. But then, they are not just about loyalty, vision and partners feeling valued: they are also about the money. And firms have their ways of keeping their stars.
Partners take a good look at what share of the equity they are taking home and how it compares with that of others.
“Partners resign because they’re not being loved, they’re not being paid enough and not being paid enough in relation to others,” ventures Root. “For example, a younger partner may be on £750,000, while an older partner is on £1m but billing less. If a firm really wants to keep people and their clients, they can chuck a lot of money at them.”
A lot of money indeed - and sometimes, in the case of so-called ’superpartners’, more than the equity structure would normally allow.
“We’ve seen partners who are moved to more than the top of equity,” says Paul Deacon, managing director of recruiter Deacon Search. “The firm will say, ’We can’t afford to lose you: the top of equity is £600,000, so we’ll pay you £650,000’.”
The eye-watering figures being bandied about - inducements in the millions of pounds in some cases - suggest that firms are serious about keeping partners who rake in the cash. And although UK firms have been known to flash the cash, albeit in a slightly more under-the-carpet way, US firms such as Quinn Emanuel and Kirkland & Ellis are much more open with their methods.
“Kirkland & Ellis generally will throw money at a problem. People are elevated as a means of keeping them,” says one London managing partner.
Firms with lockstep remuneration systems can be limited in what financial inducements they can give.
“If [lockstep firms] do [make financial inducements] and it’s not provided for in the partnership or LLP agreement, if other partners find out they can argue that the terms of the agreement have been varied by conduct,” says Kingsley Napley partner Michelle Chance, an employment and partnership specialist. “It’s unlikely that the managing partner would act unilaterally and do something like that without the agreement of the management board. They’re more likely to reach a deal in
relation to discretionary elements of remuneration rather than move someone up the lockstep prematurely.”
Spur of the movement
Maybe firms need to try a different tack, however.
“Most British partners don’t move for money,” says a City partner.
Rather, according to some, partners are driven by softer factors - loyalty, vision, change and the need to feel valued - with money just one of many issues.
“I don’t think the money’s always the main factor,” says Root. “A lot of firms simply can’t do anything about the money. The main issue can often be that the individual’s looking for something a bit different. One partner moved because the firm wasn’t showing support to grow the practice area. Some feel they’re not being moved up the equity quickly enough.”
Market observers presume SJ Berwin used the loyalty card to keep Kon, an SJ Berwin lawyer since 1982 and the founder of the firm’s EU and competition practice. As one of the partnership’s stalwarts, Kon is considered an ally of managing partner Rob Day and a key negotiator in the Proskauer flirtation.
That Kon’s chances of becoming the next senior partner came up in the discussion is nothing more than speculation. But observers certainly see him as a strong candidate, even if he is considered in some quarters as more of a legal supremo than management material.
Kon is considered to have been a key player in steering the firm through a choppy 18 months that saw the collapse of the Proskauer talks, partner and team defections, a divisive managing partner election and, despite an apparent recovery, some troubling financial results.
Fidelity appears to be the main thing that keeps people put: not all partners can face the moment of sitting down with their boss to announce an intention to part ways. According to Mark Wagner, senior manager and founder of recruiter Shilton Sharpe Quarry (SSQ), this is when the decision to join a rival really hits home.
“It’s the face-to-face resignation conversation with their head of department or managing partner that most partners find difficult,” he says. “Even if the move’s right for them, it’s hard to look your colleagues in the eye and tell them so.
“A partner will always have more visibility about his or her current firm than the firm they’re moving to. You can always find a reason not to move if you want to and most people are fundamentally loyal and have a sense of moral duty.”
The emotional trauma goes both ways, however, with partners facing the dilemma of wondering whether the firm really has any affection for them. And this spurs firms to attempt to prove that they do in fact value their cherished co-head of international open-ended real estate funds.
One headhunter saw an entire team move fall through after the firm convinced the departing partners that they really were valued.
“The partners quit because they weren’t being loved. All of a sudden they were being loved beyond belief,” the recruiter observes.
A partners goes to their boss demanding more attention from the management, clarification on what value the firm sees in them and what management opportunitiesare around the corner. They also want promises of support to build a practice the partner may see as sidelined.
Sometimes the event can genuinely focus a firm’s mind on changing things.
“Firms are fighting increasingly hard to keep their best people and it’s amazing how a partner’s resignation can successfully focus a firm’s mind on retaining talent,” Deacon suggests.
Recent high-profile legal threats against departing teams, such as Barlow Lyde & Gilbert’s plan to sue its departing aviation team for a cut of its profit at new firm Holman Fenwick Willan, show just how seismic a team defection can be. The team, led by partner Giles Kavanagh, advised such clients as Rolls-Royce and Boeing.
Such legal threats can be a handy bargaining ploy for firms.
“The managing partner can take an aggressive stance and say, ’We’re going to take a hard line with respect to restrictive covenants and will enforce them against you’. The firm will say, ’You’re not going to be able to take your clients with you’,” says Kingsley Napley’s Chance.
But partners are equally savvy and know that having an offer on the table from a rival can be just as good a tool for bartering with their fellow partners.
One City partner says: “Some lawyers will go to the managing partner and say they’re resigning, fully expecting to be persuaded to stay.”
They know that if they threaten to leave, the firm might finally address their frustrations and provide those private equity partners with the banking support they had been banging on about. They may even move them up the equity or replace that faulty lightbulb.
Love on the rocks
But the consensus from across the market is that buy-backs are little more than false reconciliation.
“In the great majority of cases, when a partner’s persuaded to stay, they’ll be looking to leave of their own volition within one year as the bond between law firm and partner has been irrevocably broken,” explains recruiter Vassos Georgiadis, managing director at Melton Legal.
“The reasons they went through the process in the first place rarely go away and the buy-back often just papers over the cracks,” surmises Wagner at SSQ.
According to another recruiter, firm management usually knows the deal is temporary and is simply buying time. A parting of the ways remains on the cards.
“It leaves a lingering bad taste to say, ’I’m leaving you’, and then to stay put,” says EJ Legal’s Janion. “Buying partners back gives the firm the time it needs to decide what’s in its own interests. Leopards don’t change their spots and what’s been a problem will become a problem again once the dust’s settled.”