This is the first of two installments that examine the changing landscape of distressed law firm acquisitions and how recent developments may encourage healthy firms to pursue struggling firms like never before.
Last week, the long-anticipated Morgan Lewis acquisition of a core component of Bingham McCutchen’s practice was announced. Described as a mass lateral acquisition as opposed to a merger, reports indicate that somewhere around 70 Bingham partners were not invited to join in the move. It is also reported that Morgan Lewis drove a hard bargain with some requirements not commonly seen. But with the Bingham ship taking on water, its ownership had no choice but to go along.
Morgan Lewis’ proposed acquisition comes after the New York Court of Appeals rejected the unfinished business doctrine-a legal development that can provide comfort to acquisitive firms like Morgan Lewis.
A recent decision in In re Dewey & LeBoeuf LLP shows, however, that partners at failing law firms have more to worry about than any fallout from the unfinished business doctrine. As a result of the Dewey decision, owners from failed law firms may be subjected to strict liability for all monies paid to them while their failed law firms were insolvent or inadequately capitalized. Given the agonizing and lengthy path of some law firm failures, the dollar amount of the risk could be substantial. One might assume that when facing these risks, the owners of a distressed law firm might fight doubly hard to keep their law firm alive. But as we can observe from the Morgan/Bingham experience, embracing a deal, even an onerous one, may be a better alternative.
Indeed, the reduced vitality of the unfinished business doctrine (at least when New York law is involved) juxtaposed against the scary potential for owner strict liability, work together to create the ideal environment to stimulate distressed law firm acquisitions. Almost in the nature of a case study, the Morgan/Bingham transaction manifests the reasons why acquisitive and distressed law firms may be perfectly suited to join in a transaction that benefits most if not all parties. These reasons meld the interests of the healthy but acquisitive firm, the interests of the struggling distressed firm, and the desire of all parties, particularly the distressed firm’s owners, to avoid bankruptcy.
The next installment in this two-part blog will review the reasons, or dynamic circumstances, that can bring together such divergent interests to create a successful distressed law firm transaction.