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AS THE SHIP WENT DOWN

When a law firm collapses, it’s not just the partners that risk being left high and dry. General counsel need to think carefully about a contingency plan should their chosen adviser face a shutdown.


L A W   F I R M  F A I L U R E S

In the summer of 2008, Cambridge-based infrastructure software firm Autonomy Corporation [now HP Autonomy] began working on a US acquisition. A UK-listed public company, Autonomy had its eye on California-based software company Interwoven, and a deal valued at $775 million. Such a large takeover would require Autonomy to approach its institutional investors for funding, through a placing to raise £220 million, and to set up a new revolving credit facility of up to $200 million.

Andrew Kanter was general counsel and chief operating officer at the time. He called up his favourite English corporate lawyers, tapping Richard Eaton, a senior partner in the London office of Heller Ehrman, a San Francisco-headquartered law firm. The pair had previously worked together in the corporate department at Brobeck Hale and Dorr, the London arm of the US firm Brobeck Phleger & Harrison that collapsed in 2003.

The Interwoven deal was progressing nicely, and Heller was doing a good job. And then the unthinkable happened. Team after team of Heller’s big billers began exiting the business in the States, and the rumour mills were alive with talk that the firm was going under. Andrew found himself in the midst of one of the biggest public M&A deals of his career, and potentially without a law firm.

He says: “We were working on a full-blown corporate transaction, and in the middle of it, Heller was going bust. We didn’t really see a disruption of service, but we always worried that at some point the lights were just going to go off.”

In September 2008, after weeks of speculation, the 200-plus partners of Heller Ehrman voted to dissolve the 120-year-old firm as balancing the books became impossible. Richard Eaton kept Andrew abreast of developments with a running commentary on the state of the firm, both in the run-up to, and after, the dissolution announcement. Andrew says he felt reassured that his deal was going to get done before the doors were closed on his law firm, but it was always going to be tight.

The problem was the banks: “[They were] desperate for us to get rid of Heller and change firm midstream,” says Andrew. “They were worried that any legal opinion Heller issued would end up meaningless, and the pressure from them was enormous. We felt the partners were telling us the truth about the anticipated timing. I made the call that we stuck with Heller to maintain continuity, but had I got that wrong it could have had an enormous impact on the transaction.”

HOW TO AVOID THE WORST

  • Ask lots of questions about financials before you appoint a law firm, and whenever you are concerned about events at the firm
  • Look out for the warning signs – frequent big-name departures, team instability, unusual billing practices, and other evidence of cash flow pressures
  • Have a back-up law firm in place, just in case
  • If the firm is closing, make sure you know your relationship partner’s plans, plus the plans for the rest of the team
  • If you need to switch firm, do it fast

As it was, September 2008 proved a bad month for anyone dealing in capital markets as financial services firm Lehman Brothers filed for the largest bankruptcy in US history. While the markets collapsed, the Interwoven deal, which had been shooting to complete in November, got held up. With the deal on ice, Andrew Kanter gave in to the bankers’ pressure and switched his work on the transaction to the UK firm Ashurst. Richard Eaton, meanwhile, sought out new employment for himself and the London corporate team.

“We got lucky in that we had a previous relationship with Nicholas Holmes, a corporate partner at Ashurst, on a prior deal,” says Andrew. “But in the absence of that, I would have been dialling 1-800-SOLICITORS and just asking for help. It would have been an absolute nightmare.”

With the benefit of six years’ hindsight, he says that though the banks were wrong on the opinion letter point – even during the course of an insolvency, Heller’s insurance was still valid – he can sympathise with their position. The top financial institutions in the world want to work with the best and most reliable law firms, after all. More tellingly, perhaps, looking back he wishes he’d made the call to jump ship out of Heller a lot sooner.

“I wouldn’t repeat the exercise of hanging on,” he says. “I would jump and I would jump early, and if I had to lose £100,000 by changing law firm, I would suck that up. It was hairy.”

Keep on talking

Richard Eaton, now a partner at Bird & Bird via a period at Orrick Herrington & Sutcliffe immediately post-Heller, was working on another meaty mandate at the time of the collapse. He was advising longstanding client MessageLabs on its $700 million sale to US software company Symantec. As a private deal, that transaction saw no such banker pressure, and Richard was able to move the transaction, along with his entire team, over to Orrick at the start of November, and see the transaction through to completion three weeks later.

Graeme Sloan, the Latham & Watkins corporate partner working for Symantec on the other side, said at the time: “The team from Heller – and then Orrick – did a fabulous job considering the uncertain times they were going through. Credit where credit is due.”

Any partner who has lived through the demise of a law firm will tell you that the key to keeping clients happy is maintaining an ongoing dialogue, even if, as one former Dewey & LeBoeuf partner points out, “sometimes the partners know less about what is going on than the press does”. Dewey was a New York-headquartered firm with some 1,400 lawyers when it filed for bankruptcy in May 2012, in what is still the largest law firm failure ever. Peter Sharp was the firm’s London office managing partner at the time, and oversaw much of the dissolution.

He says: “The impact felt by clients is really all down to the client service that they receive. The really good lawyers, who look after their clients in a real way, will rise to the challenge and look after them through this as well. They will also, in a sense, be rewarded by it, through loyalty and appreciation.

THE ENDGAME - SALVAGING THE WRECKAGE

If the worst happens and the law firm goes under, when the wind-down starts, Peter Sharp says: “My advice to clients is, it’s not just about the partners. In these situations some people just go off and look after themselves, leaving behind associates, trainees and secretaries, all of whom have been valuable members of the team. That really impacts client service because any reasonably sophisticated legal work involves a team, and that team is important. Clients should be asking partners: ‘What about the team? Are you looking after them? Is this going to stay together and will everyone be alright?’”

Peter led a sizeable team of Dewey lawyers to the London office of Morgan Lewis & Bockius when the firm closed, including nine trainees, forcing the new firm to move fast to establish a training scheme.

His other tip for in-house departments is to pay close attention to the destination firm and its systems. While Morgan Lewis was efficient at smoothing the handover of files from Dewey, other partners found that their new firms would not even conduct conflict checks on their clients until their feet were under the desks.

To avoid being left high and dry, and having to make that call to 1-800-SOLICITORS, general counsel might also want to consider having a back-up law firm on speed dial. “It probably encourages the use of panels,” says Tony Williams. “That way, you have more relationships with more firms, so that if you need to flip you have the back-up policy in place.”

It also makes sense to keep your relationship partner close, so that you are able to have frank conversations, and to potentially increase your influence over where your file ends up when he or she switches to a new home.

“But it is one of those times when you see who’s really good at that and who just pays lip service to it,” says Peter. “When the lawyers themselves are under intense personal pressure, there is a temptation to put themselves first and not think about the client, and that can have very adverse consequences.”

Keeping in-house lawyers properly informed has other advantages beyond the long-term relationship point. Tony Williams, now a consultant at his own firm Jomati, is the former worldwide managing partner of Andersen Legal and head of its UK practice. That firm was, in 2001, the ninth largest global law firm by fee income, and following the Enron crisis Tony managed its dissolution.

“Anyone half sensible would try as hard as possible to keep clients informed, and make sure there’s an orderly transfer of all the business to new law firms,” says Tony. “That is good for the client and good for the firm, because it makes it much more likely that bills and work in progress will be recoverable, and less likely that things will fall through the cracks and a professional negligence claim will arise.”

For in-house counsel, that means not being afraid to ask questions about the state of the finances, both when appointing law firms, and on a frequent and ongoing basis if rumours of problems start circling. “I was probably having weekly conversations with Richard about it,” says Andrew Kanter. “I just kept calling him, asking him about what I’d just read in the paper.”

Here comes trouble

In almost all law firm collapses, the first sign that the outside world sees of serious problems is when teams of big-hitting lawyers start calling time on the partnership. Nearly all firms witness a degree of to-ing and fro-ing, but if significant numbers are leaving, it is time to start asking those tricky questions of your relationship partner.

Richard Eaton says: “The rumours started swirling around at Heller about August time, when teams of people started moving. If you listen to the rumours and you see your partners leaving, it becomes a self-fulfilling prophecy.”

He adds: “As soon as the rumours started, we started talking to clients. As soon as we knew things were going wrong we made phone calls. You can’t wait for the clients to ask you, because then it’s too late, and you start losing their trust. Clients shouldn’t be afraid to ask questions, and demand answers, all the time.”

Alongside the team moves, another sign of something amiss might be frequent changes to the legal team handling your matters, and above-average churn among associates. At Heller, the business declined after several major litigation cases were either settled or dismissed. At other firms problems can arise after new liabilities are entered into, such as expensive new office space.

On a day-to-day basis, corporate counsel may spot problems if billing is not being conducted in the way that was previously agreed; if partners are getting unusually het up about outstanding monies, or if there are other signs of cash flow pressures. That is the cue to probe for proper answers.

Richard advises general counsel to move quickly once they work out something is going wrong, and make sure they are reassured that their advisory team is going to move en masse to somewhere else that is acceptable. If that’s not the case, hire new counsel.

“the first sign that the outside world sees of serious problems is when teams of big-hitting lawyers start calling time on the partnership.”

In the end, spotting problems in advance can often be close to impossible, and some GCs have better things to do than follow the legal rumour mill. Peter says: “If you look at the big US firms that have folded in the last decade, it has very often been big firms with strong, high quality reputations, that perhaps lost some lustre. Coudert Brothers, for example, was, up until a short time before its demise, one of the classiest international US law firms with some very good and pre-eminent people in its ranks. As a client, what could you have looked for a year before its collapse? And what would it have meant?”

The experience of clients when their law firm’s death bell tolls varies enormously, dependent not only on the individuals concerned, but also on the type of issue in hand. Large litigation matters, though requiring constant activity, are often easier to move than pressing M&A deals, and public transactions are far trickier.

Andrew Kanter concludes that: “If you have got a deal going on, you can’t switch that off overnight. You can’t be a little bit pregnant. It is a nightmare to switch firms, and it costs a tonne of money, but in the end, for us it became the only viable outcome.”

When Richard landed at Orrick, he got back to working for Autonomy. He and Andrew remain good friends.

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