“It seems too good an opportunity to miss not to convert to a limited liability partnerships [LLP]. I'm sure that other firms are queuing up behind us.” So said Withers senior partner Diane Parker when she told The Lawyer of her firm's merger with US firm Bergman Horowitz & Reynolds.
When LLPs were an abstract concept they were one of the hottest topics of debate on the legal comment pages as managing partners lined up, one after the other, to voice their enthusiasm. But since they became a reality in April last year, City firms and their representatives are not so vocal on their once favourite topic. That was until this New Year, when Withers revealed that it was the first reasonably-sized firm to take the plunge.
“I've always thought that LLP status would benefit not only partners in the firm, but also clients, because one is not so reluctant to take on risk,” declared Parker. She said that the profession was waiting for pioneer firms “to go first, to iron out the glitches”. So far, 13 firms have turned LLP with two more pending since IT specialist Kemp & Co (now Kemp Little LLP) led the way in July last year.
The accountants have proved far more enamoured of this new corporate vehicle. Of the big five, Ernst & Young (E&Y) converted in June and KPMG looks set to go soon. The uncertain future of Andersen, caught up in the undertow of the Enron collapse, provides a cautionary tale of why accountants are seeking to limit their personal liability. Andersen is facing a deluge of claims, as well as a congressional investigation and a criminal inquiry, as a result of its involvement as auditor in the energy company's disastrous collapse.
The saga does, of course, hold a message for lawyers as well as the bean-counters. Richard Linsell, the partnership law expert at Rowe & Maw who advised E&Y on their groundbreaking conversion to LLP status last June, says: “The whole reason to go for LLP status is to protect an innocent partner's personal assets in the event of an Armageddon claim. It certainly brings it home how useful an LLP is to have your personal assets protected.” Linsell also advised Kemp Little on its formation.
“People are beginning to realise that in a global marketplace, the scale of business has pushed up the risks to professional firms,” says Linsell. Huge negligence actions have been a feature of life in the accountancy business. Linsell cites the example of Binder Hamlyn (now part of Andersen), which was ordered to pay £65m to security company ADT for its role in an audit that ADT said was negligent. The accountants faced a bill that equalled £34m more than their insurance cover and threatened the personal assets of some 150 partners.
“LLP status would benefit not only partners in the firm, but also clients, because one is not so reluctant to take on risk”
Diane Parker, Withers
“It always takes a headline event like this to concentrate people's minds,” says Quentin Poole, managing partner of Wragge & Co. The Midlands-based firm was once expected to be a trailblazer for firms opting for the LLP route. But Poole believes that the limited liability model has a number of shortcomings as a risk management strategy. “Anytime you're in a position where LLPs are relevant then you're already in dire consequences,” he says. “Your business, by definition, is going bust, otherwise you wouldn't be worrying about it.”
Poole says that in an Armageddon-style situation, the first priority should be to think of professional indemnity insurance cover or even to try to contractually limit liability to clients in the same way auditors do. “There are things that you can try and do other than an LLP, which is a recipe for wiping out your own business,” he says.
Poole also argues that many law firm suppliers – “the most obvious will be your landlord and your bank” – will demand personal guarantees from partners anyway.
Ronnie Fox, partnership law expert and senior partner of Fox Williams, believes that firms are taking a more tentative approach to the new corporate vehicle than was anticipated prior to April last year. “The nature of law firms is that lots of people are going to wait and see what everyone else does,” he says. “We've decided that it's not a good idea for us to be a leader.” So 'Fox Williams LLP' is officially “on the backburner”.
Converting is often portrayed as a trade off between the greater financial security of limited liability against the obligations of increased financial disclosure. “People will want to see what the reaction is to publication of the financial results,” says Fox.
But Poole regards such requirements as a “neutral-positive” factor in his firm's deliberations. He says: “Neutral because we publish most of that stuff anyway, and positive because it's quite a good message to be openly publishing information.”
That is certainly the thinking of Kemp Little. “We don't see it as a downside because we've always been very open with our accounts,” says Jonathon Little, who became an equity partner when the firm became an LLP. “We already publish a relatively large amount of information externally and internally,” he says. “We circulate accounts within the firm and so people will know how we're doing as a matter of fact.”
“Anytime you're in a position where LLPs are relevant then you're already in dire consequences”
Quentin Poole, Wragge & Co
But why become an LLP in the first place? “It seems a sensible way for law firms to organise themselves,” says Little. “A lot of our clients are big US firms and they're used to seeing legal services provided for in this way. It's more transparent and a better vehicle when other people come into the partnership.”
One determining factor appears to be, as Withers' Parker puts it, the “exhaustion factor”. The Kemp & Co conversion from sole practice to two-partner LLP cost around £50,000 and took just over a month to complete. Little points out that becoming an LLP was not a particularly big step for the practice as its partnership agreement had to be rewritten anyway to accommodate him as an equity partner.
Withers takes a similar line. According to head of corporate Tim Taylor, the firm had been discussing the pros and cons of LLPs in strategy meetings for a number of years before the legislation came into force. “It has always been an issue where people have been in favour of achieving LLP status provided that it could be achieved with relatively minimal disruption,” he says. “So the opportunity of going down that route at the same time as the merger was attractive and the timing was perfect.”
On the issue of greater publicity, Taylor doubts whether the firm is going to be “adding much to the sum total of human knowledge” because so much financial information is already reported about law firms. The Withers merger and LLP conversion involved a dozen lawyers from the corporate team plus five external lawyers and five lawyers in the US.
Of course, there is a huge jump in scale from Withers to a magic circle firm and, no doubt, the conversion process appears daunting. Rowe & Maw's Linsell believes that it would take a large City firm six months “minimum” to convert. It is also a labour-intensive job. On the E&Y LLP, the lawyer reveals that there was a core team of four Rowe & Maw fee-earners advising on partnership and business transfer issues plus at least 20 fee-earners. There were also two people managing the work in-house and Simmons & Simmons advised on property matters.
Of course, one magic circle firm already is an LLP – Clifford Chance. The firm acquired its LLP status under New York law when it merged with Rogers & Wells. As far as Chris Perrin, deputy chief operating officer, is concerned, “the only material difference” between a UK and New York LLP is that there are less onerous obligations in terms of financial disclosure under the US model. “The reason why we went with the New York one rather than the UK one was that the latter wasn't then available,” he says. “Rogers & Wells was already established as a New York LLP and there was no good reason for us not to continue.”
Perrin expresses “slight surprise” that more firms have not pursued the LLP route. “I suppose they will slowly but surely,” he says. “LLP status is useful, but one has to realise that its effect is fairly limited.”
According to Fox, the big question on everyone's mind is whether LLPs are going to become the “regular and standard way of practising law”, or the exception. Fox Williams set up a website to advise firms that want to make the leap. According to Fox, there has been lots of interest with a large number of professional firms “thinking about” converting, but only a small number of firms have made the decision. He is presently advising a couple of medium-sized London firms on the implications.
Fox believes that “the fear that LLPs will change the character of the firm” is holding back traditionally-minded lawyers. But he predicts that the mega-firms will eventually be the ones to take the risk and become LLPs. “It will be the very largest firms dealing in billions and not millions,” he says. “It's because the amounts they deal in are so large coupled with the fact that the culture of a small private partnership has largely gone from those practices. In a firm of 200 partners you cannot maintain any pretence that the partners play any active part in the management of the firm.”
Linsell believes that the LLP will be “the product for 2002”. He has advised on six LLP conversions since last April and he has been talking to partners at two magic circle firms who are seriously considering taking the plunge. “I think there is a head of steam building up,” he adds.