Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. This week, we look at how much it might have cost Big Law partners to come up with money on their own that they received through a government coronavirus aid program. Sign up to receive this column in your inbox on Thursday mornings.
When the time came in April to apply for loans from the Small Business Administration’s Paycheck Protection Program, managing partners across the country were struggling to respond to an economy already in a pandemic-induced free fall.
Some consultants were telling them to do everything possible to build up cash reserves that would be needed to withstand a prolonged recession. That included slashing pay for employees, lawyers, and partners. Drawing down credit lines. And applying for the federal PPP loans, which could turn into grants if the firms kept their payrolls largely intact.
“This was scary,” said Tom Clay, a principal at legal consultancy Altman Weil. “Nobody knew what was going on.”
At least 45 of the country’s 200 largest law firms received funds from the hastily arranged program, designed by Congress and the Trump administration to save U.S. jobs by bolstering payrolls through the economic standstill caused by the coronavirus. Those firms received between $210 million and $425 million.
As firms were building up cash reserves, one traditional way to tap liquidity was seen as a last resort: asking equity partners to put money into the firm through capital calls. Many firms require around 30% of partners’ annual compensation to be held by the firm, though the exact number varies.
Reducing real-time payouts to partners on way to force capital contributions. But what responsibility to their firm do partners, as owners of their business, have in a time of distress?
It’s a tricky question and one that may take on more importance in the wake of the federal loan data disclosed this week. The SBA issued guidance in mid-April clarifying what level of “need” businesses had to show to prove the loans were “necessary” to support ongoing operations.
The agency said applicants must take into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
Treasury Secretary Steven Mnuchin said in April that all loans over $2 million will be audited. The SBA said the following that any company found unable to justify its need for a loan greater than $2 million would be able to repay the loan without penalties.
Capital calls would seem to qualify as “other sources of liquidity.” Partners often finance them by taking out personal loans. But it is possible that asking partners to contribute more of their own money in the midst of a pandemic could be considered “significantly detrimental to the business.”
That’s because at law firms the business owners are the most important, most expensive, and, often unnervingly, most mobile asset. Asking partners to contribute more money than they are willing could result in a firm’s most capable lawyers departing for a competitor that will pay them more or ask them to contribute less. Too many departures, and a firm could experience a dreaded “partner run.”
So, the question becomes one about partners’ psychology, said Bruce MacEwen, an owner and principal at law firm consultancy Adam Smith Esq.
“Most partners want it to be heads I win, tails you lose,” he said. “When it comes to situations like this, they don’t really want to rise to the occasion.”
It’s possible to estimate how much it would have cost for equity partners at these firms to contribute the amounts they received from the PPP program. Call it “PPP per partner.”
In total, the 45 firms received between $210 million and $425 million from the loan program. Those firms had 3,327 equity partners last year, according to AmLaw data. For that amount of partners to raise that amount of money, the average partner would have had to contribute between $63,100 and $127,700, according to a Bloomberg Law analysis.
The average equity partner at those firms made just over $1 million in profits per equity partner last year, according to AmLaw data. That means the capital calls would have amounted to between 6.3% and 12.7% of last year’s compensation for the group as a whole, depending on the actual size of the loan.
The numbers vary widely when broken down firm by firm
Excluding Boies Schiller, where a large number of recent partner departures make the comparison to last year’s financials less apt, Detroit-based Honigman’s partners would have had to pay the lowest share of their compensation from last year to contribute between $5 million and $10 million, which is the range of the PPP loan the firm originally received. It would have cost between 3.7% and 7.5% of the firm’s $1.16 million in profits per partner, according to an analysis of the AmLaw data. That shakes out to between about $43,500 to $87,000 per partner.
Honigman returned the loan in May during a safe harbor period the SBA granted, the firm’s director of business development, Kevin Kiefer, said in an e-mail. He declined to specify why the loan was returned.
“There are firms who felt it was wrong to take the money and they didn’t,” said Peter Zeughauser, a partner at law firm consultancy Zeughauser Group. “And there were others who felt that if the money was available they owed it to their partners to go get it. And it really indicated a divide in cultures.”
Consultants agreed there is no bright line at which the capital call would have become untenable for a firm’s partners. And others noted that firms may still need to ask partners to contribute capital as economic uncertainty lingers.
MacEwen said that asking partners to contribute 10% of their 2019 salary would “seem to be fair” because it would increase the typical partners’ capital contribution by one-third.
“The heart of the situation is we are in a 100-year economic downturn,” MacEwen said. “Are partners really ready to own up to the implications of being owners? And let’s just say, ‘We’ll see.’”
Worth Your Time
On Freshfields: Last week, I highlighted Freshfields Bruckhaus Deringer’s five-partner hire as it expanded into Silicon Valley. This week, Meghan Tribe writes the firm hired former Willkie Farr & Gallagher business and corporate litigation practice group chair Mary Eaton. Eaton will co-head Freshfields’ new securities and shareholder litigation practice.
On Counterfeit Goods: Amazon has hired a former federal prosecutor to bolster its effort to bust counterfeit product sellers, my colleague Ruiqi Chen writes. Cristina Posa joined the company in March and is leading a new counterfeit crimes unit at the online retailer.
On Bar Exams: Recent law school graduates in California are urging that the state’s bar exam should be pushed back due to health concerns over Covid-19, Sam Skolnik writes. A group of 17 deans from California law schools have come out in favor of a full emergency diploma privilege, which would let certain graduates practice law without ever taking the bar.
On Group Hires: McDermott Will & Emery hired a five-lawyer group of restructuring lawyers from Katten Muchin Rosenman led by Charles “Chuck” Gibbs in Dallas. It’s another reminder that Big Law firms are eager to bulk up bankruptcy talent during the Covid-19 crisis, including in Texas.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.