Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at why July and September will be pivotal moments for Big Law management weighing changes to partner payments due to the coronavirus crisis. Sign up to receive this column in your Inbox every Thursday morning.
Heading into the week, there seemed to be a firewall protecting profit distributions at the wealthiest Big Law firms.
Sorting the AmLaw 100 by profits per equity partner, none of the 15 richest firms had publicly announced changes to partner profit distributions, according to reporting by Above the Law.
Elsewhere in Big Law, those moves had been a popular cash-saving strategy along with layoffs, furloughs, and other pay cuts. Fourteen of the 15 AmLaw 100 firms with the lowest PPP had adjusted partner draws, tallying up Above the Law’s reporting.
But the apparent firewall saw a crack this week when American Lawyer reported Quinn Emanuel Urquhart & Sullivan was adjusting its partner draws and delaying some payments until July to line up with new tax deadlines. The firm had the fifth highest PPP among the AmLaw 100 last year.
The question now is how pervasive those moves will become in the upper echelons of Big Law. Much will depend on how quickly high-margin products such as M&A, initial public offerings, and big-ticket litigation return to action.
Earlier this week, I highlighted how a record amount of corporate debt issuance is helping some of the nation’s wealthiest firms avoid pay cuts for partners.
Davis Polk & Wardwell and Cahill Gordon & Reindel have leading positions in the investment-grade and high-yield bond markets, respectively. Davis Polk was No. 6 and Cahill was No. 12 in profits per partner last year, according to AmLaw. Cahill’s managing partner William Hartnett told me his firm’s busy practice meant there was no reason for cash-saving moves at the moment.
Debt markets have seen record levels of activity in recent weeks. That’s thanks in part to the U.S. Federal Reserve’s pledge to buy corporate bonds, which started in earnest this week.
While a group of Wall Street firms have benefited so far from the increase in activity, it’s impossible to say how long that will continue. At least in theory, companies can’t raise debt forever. Despite a historically busy investment grade debt practice, Davis Polk’s Michael Kaplan said he was eager to return to a more normal mix of work handling initial public offerings and routine capital raises.
Even the law firms that are in good positions are hoping for a return to normalcy. But the path to a recovery is as uncertain as ever.
I spoke this week with Leslie Corwin, managing partner of Eisner LLP’s New York office and a veteran of law firm bankruptcies who drew up Heller Ehrman’s dissolution plan. Law firm failures don’t tend to happen overnight, and so I asked Corwin if there was an event on the horizon that may precipitate financial pain for firms—and whether that might creep into the ranks of the most profitable law firms.
Corwin noted that many firms had delayed partner draws from April to July in conjunction with new tax deadlines prompted by Covid-19. Those payments are usually made in April, in-line with when partners pay their own tax bills. Another quarterly tax payment for partners will come due in September, and most firms in normal circumstances make a distribution to partners around that time, too.
“Come September, if we are facing the same types of problems we are right now, I could see these types of prophylactic measures coming into fruition at some of those [more profitable] firms,” Corwin said, referring to cash-saving strategies. “There are only a handful of those firms that could really outlast this for an extended period of time.”
Partners at firms of all stripes who took advantage of the delayed tax filing rule will be eager to see their profit distributions return to normal before the tax man calls.
One positive for those partners is that they can likely pay less in taxes if they base their payment on their actual income in 2020 rather than their projections from 2019, said John Fitzgerald, who leads the law firm services practice at accounting firm Berdon LLP. That applies if the partner is making less money this year than expected.
But that will require law firm finance departments to have frank conversations with partners about the firm’s expectations for 2020 revenue, Fitzgerald said.
And delaying tax payments will require financial discipline on the part of partners.
“We are advising our clients to make sure their partners are aware that by delaying this you are talking about a potentially big payment due in July,” Fitzgerald said in an interview. “Some people are very careful with their money, they set it aside for taxes. And some people aren’t. Those people could be in for a little bit of a surprise.”
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On Returning to Work: Wilson Sonsini’s tech subsidiary SixFifty is acting like a nimble startup in response to Covid-19. The Utah-based company released its fourth tool related to the virus, and this time it is charging for the product that helps companies draft policies for employees returning to work.
On Tentative Plans: Speaking of going back to the office, a New York State Bar working group released its first “model reopening plan” for law firms in the Big Apple. It may be a long time before New York’s lawyers are back in the office, but the group recommends that lawyers and staff get tested for the virus and wear masks at work and while commuting when they start clocking in.
On Cloud Collaboration: A trio of leading law firms in the U.S., Europe, and Asia have chipped in millions to support a new legal tech platform for collaborating on complex projects, my colleague Sam Skolnik reports.
That’s it for this week. Thanks for reading and please send me your thoughts, critiques, and tips.