Partner succession and law firm ownership

Written by
Jordan Furlong
Law21

Published
Aug 15, 2018

Aug 15, 2018 • by Jordan Furlong

What follows might look like a proposal to address law firm partner succession challenges. But it’s actually a thought experiment in regulatory policy for the legal profession.

As the Boomer generation of law firm partners continues to exit the demographic python, firms increasingly struggle with partner succession challenges. The unwillingness or inability of senior lawyers to transition their practices to younger colleagues has many contributing causes, including:

  • The partner’s refusal to begin winding down and transitioning his practice at its most profitable point,
  • The partner’s desire to sustain the power and privileges of his influential position within the firm,
  • The partner’s reluctance to face the looming end of a career that has given his life definition and value,
  • The partner’s unreadiness to “return to civilian life” after decades in a cloistered law firm environment, and
  • The partner’s misgivings about whether a junior colleague could replace him or serve his clients as well.

     

    They never want to go.

The degree to which any of these factors plays a role in the succession challenge varies from partner to partner. But I think the first factor in that list — the partner’s unwillingness to shrink and eventually cut off what is probably a substantial income derived from partnership — is common to virtually every case of “succession-itis.”

Once you leave the equity circle of a law firm, your entitlement to receive any share of that firm’s profits, regardless of how important your contribution to the firm’s success might have been, comes to a swift end. This, of course, is because legal regulators in most jurisdictions prohibit ownership of law firms by anyone who is not a lawyer (But see California.) Or, to be more precise, anyone who is not a practicing lawyer. And that brings me to the proposal: What if lawyers could maintain their equity in law firms after they retired from practice?

Suppose your jurisdiction amended its ethics rules such that a lawyer who holds equity in a law firm could maintain that equity, or some portion thereof, after she retired from practice. That lawyer would no longer face the prospect of an immediate end to her legal income stream, thereby removing a significant disincentive (although not the sole one) to her retirement. This continuing revenue could serve as a sort of “pension” for partners who otherwise must fund their own post-retirement income. Moreover, since this income would depend upon the ongoing success of the firm, the partner would be incentivized to properly transition her practice and clients to a competent younger lawyer, perhaps one whom she’s been grooming for years. If the firm flounders after she leaves because she did a poor job of practice transition, she would be jeopardizing her post-retirement income stream.

Now, regulators being regulators, they could and likely would create various limitations on this post-retirement equity position. They might rule that post-retirement equity requires X years of partnership in a firm before it kicks in, or that the equity share cannot be transferred and expires upon the partner’s death, or that the partner forfeits this share if she joins another legal services supplier or is appointed to a court or tribunal, or that the equity share would be capped at 65% of a practicing partner’s share, that sort of thing. We can play with the permutations and exceptions all day.

But I’m more interested in how the regulator would view the underlying premise of the proposal. Because while I think it’s very unlikely that this change to law firm ownership rules will occur anytime soon, it’s the policy challenges that I think are worth examining.

Upon what basis would a regulator turn down this proposal? What would be the objection to allowing retired lawyers to own equity in a firm? I suppose you could argue that a lawyer who no longer actively participates in the partnership should not be entitled to any income from the firm — but that’s hard to reconcile with the fact that a legal secretary who retires from the same firm is entitled to a pension funded from her own contributions of both hard work and money over many years. Why should a lawyer not have the right to receive an ongoing financial payout from a firm she helped to build into a success?

We’re not lawyers! We’re not worthy!

The potential objections around “non-lawyer” ownership are also interesting. Should a lawyer who retires from practice be considered a “non-lawyer,” the same as someone who never attended law school and practised law? Does the retired lawyer no longer meet the “character and integrity” tests that evidently separate people who are lawyers (worthy of law firm ownership) from people who are not (and therefore not worthy)? Unless we argue that lawyers lose their qualifying degree of character and integrity when they stop serving clients — and I don’t think any legal regulator wants to make that argument publicly — then I’m not sure of the policy position against this idea.

I’m not seriously proposing this change to the ethics rules, for what it’s worth — it likely would prove highly cumbersome to formulate and a huge hassle to regulate and enforce. (Although I’ll wager that, if such a proposal ever did make its way to a regulatory body, it would provoke keen interest from every lawyer over 60 on that body.) I’d much prefer comprehensive, principled reform of law firm ownership rules, rather than piecemeal exceptions that are, once again, all about the lawyers.

But I do think this thought experiment can focus our attention on the presumption behind the “only lawyers can own law firms” rule: that lawyers deserve to own law firms and “non-lawyers” do not. Why is that? What is it about lawyers — precisely and in detail — that qualifies them to own law firms? What is it about “non-lawyers” — precisely and in detail — that disqualifies them? What happens to a person when they leave the “lawyer” category and join the “non-lawyer” category? Are they downgraded somehow, and if so, in what respects, and why?

I don’t have good answers to any of these questions. But I’d be very interested in learning what the answers might be.

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