In Surprise Move for Troubled Times, DLA Piper Asks Partners to Contribute Capital

Amanda Royal

11-21-2008

DLA Piper raised some eyebrows when it said Wednesday it would ask 275 income partners to contribute capital -- up to $150,000 each -- to shore up its balance sheet.

But those who watch the industry said the move should not be a great surprise, nor raise alarm bells. It could simply be smart, given the turbulent economic times, shrinking credit, and the looming start of the first quarter, when cash flow tends to slow.

The move is surprising, but could be interpreted as good management, said Bruce MacEwen, a consultant who pens the Adam Smith Esq. blog.

"This arguably is a very prudent thing to do. I don't read anything negative into it," MacEwen said. "I do read it as unprecedented. ... I would not be alarmist about it."

The National Law Journal, a Recorder affiliate, reported online Wednesday that DLA Piper, the nation's largest law firm by attorney head count, plans to ask U.S. income partners to contribute capital to the firm for the first time starting next year and to reduce monthly payments to some top U.S. equity partners. The firm says it wants to reduce its reliance on bank credit and simplify its compensation structure.

The amount of capital that each income partner will be required to contribute will depend on seniority. The plan will give them a limited stake in the firm's profits and less responsibility for losses than current equity partners, said DLA Joint CEO Frank Burch Jr.

The proposed capital and partnership structure changes will be voted on by partners next month, but are likely to be approved and take effect in January, he said.

"Everybody who is a partner in the firm will have some skin in the game, and as you evolve and progress, you will contribute more capital and have more skin in the game," Burch told The National Law Journal.

DLA declined to comment Thursday for this story when asked for specifics on how the plan would work.

One person in a high leadership position at a California firm, who declined to be named while discussing another firm's internal matters, said the move seems to amount to a pay cut, or a reduction in partner benefits, but does not spell doom.

"I don't view it as an act of desperation," he said. "This is a really good time to be strengthening your balance sheet. This is a plus to the balance sheet, not a plus to the income statement. It will ... improve their working capital position."

Consultant Peter Zeughauser said he was not surprised at the move, and said such arrangements are "not uncommon." He disagreed that it was unprecedented. Managing capital and debt are things "these law firms think about a lot, especially in these economic times," Zeughauser said. He said he did not advise the firm on the matter.

U.S. managing partner J. Terence O'Malley has been quoted as saying he expects most income partners to make the buy-in move. Burch told The NLJ that he thinks equity status will affect the mind-set of those partners.

"We want every partner to act like and feel like an owner of the business even if it's only partially so," Burch said. "We have found with a large class of income partners, there's a tendency on the part of some people to behave and think like an employee as opposed to someone with a vested interest in the long-term success of the firm."

RUN TO THE BANKS

DLA Piper's main lender is Wachovia Corp., which was the nation's sixth-largest bank before it was battered by overexposure to subprime mortgages this fall. Wachovia is now owned by Wells Fargo.

Jeff Grossman, national managing director in Wachovia's legal specialty group, said the bank's relationship with DLA remains positive.

"The relationship is very strong, and we are very pleased with the steps they are taking," Grossman said.

Grossman told Recorder affiliate The American Lawyer's blog that firms in the bank's portfolio are 30 percent from the levels they usually pay down.

"It's pervasive," Grossman said. "It's across the whole industry. It's not just New York City. It's not one practice area. It's not one geographic location."

For its part, DLA said it is "experiencing no difficulty in paying down our credit facility."

"Our performance in this regard this year is quite consistent with our performance in the past," Executive Director Steven Colgate told Recorder affiliate The Am Law Daily in a statement. "We are fully compliant with all of our covenants."

Other bankers said many law firms dug deeper into their credit lines this year than they have in the past. Citigroup, a dominant lender to U.S. firms, has $6 billion in loans outstanding to legal institutions, said Danilo DiPietro, client head at the bank's law firm group. At the end of the third quarter in September, Citi's lending was up more than 30 percent over last year, DiPietro said.

"What has happened is a lot of firms have come in to make new loans or increase lines," he says. "We're quite surprised by the increase in magnitude of our portfolio."

Nate Raymond of The American Lawyer and Lynne Marek of The National Law Journal contributed to this story.