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Partners at Steel Hector & Davis are smarting over being forced to sign releases barring them from suing firm management as part of the recent merger agreement between the firm and Cleveland-based Squire Sanders & Dempsey. Details of the release and merger agreement, which were signed by every current Steel Hector partner, were revealed to the Daily Business Review by partners of the firm. The merger was announced Sept. 6. According to several current and former partners, the seven-page release — described by one as “draconian” — was the most objectionable part of the 70-page merger agreement. It released the management of both Miami-based Steel Hector and Squire Sanders from liability for any potential problems, even “hidden” ones. Under other terms of the agreement, Steel Hector partners will receive the same draws they had been receiving for a one-year transition period, then will receive draws according to Squire Sanders’ distribution method, said Alvin Davis, the former Steel Hector managing partner who is now the Miami managing partner for Squire Sanders. “There will be a gradual period of adjustment,” Davis said. Davis also said some Steel equity partners are no longer equity partners under Squire Sanders. But he declined to identify the de-equitized partners. The agreement contains no noncompete provision. Previous attempts by law firms to include such provisions in contracts have not held up in court because courts generally find that clients have the right to choose whichever attorneys they want. Individual salaries of partners were not revealed in the agreement. But they will be revealed soon because Squire Sanders has an open policy on disclosing partner salaries, while Steel Hector did not. The merger agreement also says nothing about whether former partners will receive compensation for missed draws or previous capital contributions. As many as 20 former equity partners who left Steel over the last few years claim they were never repaid their capital contributions. Those contributions — in some cases 20 percent of their pay — could total millions of dollars, sources said. Davis said former equity partners who never received repayment of their capital contributions will get those monies, although he declined to say when. “The capital contributions will be repaid as required as terms of the partnership agreement,” Davis said. But he claims Steel has no legal obligation to pay missed draws. “I’m going to take care of the people who stayed, not those who left, those who bailed out when the going got tough,” he said. But several former partners who did not want to be named say they are considering legal action against Steel Hector if they are not repaid their draws and capital contributions. They are talking to Miami lawyer John Kozyak about representing them in a breach of fiduciary duty lawsuit. Such litigation likely would claim that longtime managing partner Joseph P. Klock Jr. and former chief financial officer Jeff Mullens engaged in mismanagement and that Steel Hector board members breached their fiduciary duty in failing to adequately monitor them. Davis said he heard former partners are considering litigation and he is not concerned about possible lawsuits. Alberto Del Castillo, a partner and Florida coordinator for Squire Sanders, declined to comment for this article. Kozyak and Miami lawyer C. Thomas Tew, longtime outside counsel for Steel Hector, declined to comment. William Hill, a former Steel Hector partner and current partner at Bilzin Sumberg Baena Price & Axelrod in Miami, is said to be organizing the legal action. He refused to comment. Steel Hector, which long was one of Miami’s most prestigious and profitable law firms, represented such clients as Florida Power & Light, the Fanjul family, Southeast Bank and Eastern Airlines. But in recent years, the firm was beset with financial woes and the defection of many prominent partners. The Review interviewed more than a dozen current and former Steel Hector partners for this article. All spoke on the condition of anonymity. ‘SMELLS BAD’ The merger agreement was e-mailed to all partners, who had several days to print it out, sign it and return it to Davis. Several exhibits, including one showing which partners would be equity partners and which would not, were only available for viewing in an office and could not be copied by lawyers. The agreement was signed by all Steel Hector partners — totaling just over 100, according to Davis — as a condition of joining Squire Sanders. It was negotiated for Steel Hector by Davis. Current partners were most unhappy about having to sign the release barring them from suing firm management no matter what they subsequently find out. One former partner said it was understandable that Steel Hector partners would be required to sign releases barring them from ever suing Squire Sanders. But he said he was surprised that the agreement also prevents them from ever suing Steel Hector management if it is discovered that they engaged in misconduct. He doubted that such a release would hold up in court. “It’s disappointing that they would do that, and it smells bad,” the partner said. “Every partner is entitled to believe their board is doing things to the best of their ability. There will be litigation over this.” “It’s highly unusual to have employees sign a general release in a merger agreement,” said James Cassel, president of Capitalink, a Miami-based investment banking company that specializes in national mergers and acquisitions. “If I were asked to sign it, I’d want to know if there is something to hide. If the partners find out later there were side deals, this would be unenforceable.” But Davis defended the release provision, saying it is “customary.” He explained that “the point of the merger is to go forward, not backward.” Davis will serve as an ex-officio member of the Squire Sanders board of directors. He doubts that anyone from Steel Hector will be a full member of the Squire Sanders board since that firm was seven times larger than Steel Hector. RECEIVABLES AND WRITE-OFFS According to the merger agreement, the actual joining of the two firms’ finances will not occur until Jan. 1. Until that time, Steel Hector partners will receive the same compensation as they did previously. Steel Hector will be able to collect and keep all the accounts receivables it is owed through Jan. 1 and will remain responsible for paying its own debts. Davis declined to say how much Steel Hector is owed in receivables, but sources say the amount exceeds $13 million. Davis said his firm will not offer clients any discount to pay immediately, and that he’s confident the clients will pay. Davis also said the firm has paid off its outstanding line of credit from Wachovia Bank. He declined to state the amount of the debt, but sources put it at about $6 million. They also estimate the firm has about $5 million in other assets, including computers, furniture and other equipment. As part of the merger agreement, Squire Sanders will pay $1 million to Steel Hector for “intangibles.” This is a standard recognition in a merger agreement of the value of Steel Hector’s brand name. In addition, the agreement calls for a $4 million write-off for Steel Hector’s two Brazilian law offices, including the write-off of a loan to Stroeter e Royster, one of the Brazilian law firms with which Steel contracted. Squire Sanders will close Steel Hector’s Brazilian offices, as well as its Tel Aviv and London offices. COSTLY ERRORS Former Steel Hector partners and employees say Klock — a highly regarded litigator and prolific rainmaker who remains an equity partner with the merged firm — made a series of costly management errors that exacerbated financial problems at the firm that eventually led to the merger. These included having the firm buy him a jet, and risky and overly rapid Latin American expansion accompanied by first-class foreign junkets by top Steel Hector lawyers. Some partners were also upset that Klock hired students from a Miami school for troubled teenage boys, and suspected some were responsible for thefts at the firm. They say problems with some of the Bay Point students were a factor in Klock’s ouster as managing partner last November and from the board several months later. In an interview, Klock denied allegations of mismanagement and that there were any problems with the Bay Point students that he hired to work at the firm. “There have always been problems with theft in this building,” he said. “We have a commitment to diversity here and we should follow through with that.” Klock served on the board of the Bay Point Schools. A few years ago, he launched an effort to help the predominantly low-income, minority students by employing them at the law firm. Over the last few years, firm employees said, about 25 teenage boys worked in the mail room full time and were paid $10 an hour. Firm employees say they suspected some of the students in the theft of computer equipment and personal checks. None of the students was charged with a crime and no arrests were made for thefts of Steel Hector property. In July 2004, partner Barry Craig filed a report with Miami police after one of his checks was stolen and cashed. Another lawyer said money was stolen out of his desk. The firm hired a private investigator to look into the thefts at the firm and warned secretaries to lock their purses in drawers, sources said. Klock also assigned two lawyers to represent some Bay Point students when they faced criminal charges for an alleged armed robbery not related to their work at the firm. Between these legal costs and the students’ salaries at the firm, Steel Hector spent $1.5 million on the students, former employees said. “It was the last straw,” one former employee said.

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