Less than two weeks ago, Ashurst voted to fully merge the partners from the former Blake Dawson into its global partnership. Though the British and Australian firms announced their tie-up two years ago and the latter adopted the former’s brand, they had held off on a financial integration.

For many years, the difficulty of integrating hundreds of Australian lawyers was a frequently cited reason for why U.K. firms would likely avoid mergers Down Under. And, indeed, most British firms that have pushed into the market in recent years have sidestepped the issue by adopting verein structures, merging with small firms, or launching standalone offices.

But Ashurst and, even before, Herbert Smith Freehills, embraced full integration. At both firms, there is a strong belief that only partners in the same profit pool will be reliably motivated to work together, rather than competing with each other. They’re holding on to that belief despite the past year’s slowdown in the formerly red-hot Australian economy.

“Everyone has an interest in growing the overall pie and no one has to worry about where the work is done,” says Mary Padbury, the Australia chairwoman for Ashurst.

Financial integration is more difficult for firms like Ashurst and Herbert Smith Freehills because their partner compensation systems have traditionally been based on lockstep models. In a pure lockstep like the former Herbert Smith, partners are paid strictly according to seniority. In a modified lockstep, as at Ashurst, part of a partner’s compensation is tied to seniority with the rest tied to various performance metrics.

Herbert Smith is currently working on combining its U.K. lockstep and the Australian side’s modified lockstep into a global modified lockstep system. A firm spokesman declined to comment on those discussions but said a new system is on track to be implemented in the next financial year.

But in any form of lockstep, higher-grossing partners can be seen as subsidizing their lower-grossing partners.

Most firms ward off such perception by building strong internal cultures and a strong sense of collegiality among partners. But that’s tougher in a merger situation. A decade ago, a lockstep that couldn’t accommodate superstar U.S. partners launched a cascade of problems for Clifford Chance’s merger with New York’s Rogers & Wells. A similar dynamic is certainly possible between broadly more profitable U.K. firms and their Aussie merger partners.

In the months leading up to and following the merger last October of Herbert Smith and Freehills, several leading London partners have walked. Litigators Ted Greeno, Simon Bushell, and Kevin Lloyd joined Quinn Emanuel Urquhart & Sullivan, Latham & Watkins, and Debevoise & Plimpton, respectively. Corporate partner Will Pearce went to Davis Polk & Wardwell, while financial regulatory practice head Martyn Hopper and partner Nikunj Kiri both moved to Linklaters.

Four former Herbert Smith partners interviewed for this story said the merger had been a factor in the departures. They say there was widespread concern that the U.K. firm partners would wind up subsidizing the Australian partners, whose rising profits were seen as the result of a skyrocketing Aussie dollar and a once-in-a-lifetime mining boom. According to The American Lawyer’s 2010 Global 100 survey, Herbert Smith had profits per partner of $1.36 million compared to Freehills’ $970,000. The following year, the last in which the two firms released separate financials, Herbert Smith sank slightly to $1.34 million while Freehills had jumped to $1.27 million.

The two firms’ different trajectories at the time gave Freehills an edge in merger talks, says one former Herbert Smith partner. “They were playing a very strong hand because they’d had at least three years of successful upward performance while Herbies had three years of downward performance,” he says.

But even then, the partner says, some at Herbert Smith saw that Australia’s boom, based on massive Chinese investment, was starting to wane. “What we were seeing at that stage was the ‘China sneezes and Australia catches cold’ scenario,” the partner says. “China slowing down meant less investment into Australia, and that meant less business [for law firms].”

Some Herbert Smith partners proposed that a combination with Freehills be undertaken through a Swiss verein structure, as King & Wood Mallesons and Norton Rose Fulbright had done, or even a looser deal similar to that between Linklaters and Allens. But the senior management of both Freehills and Herbert Smith only ever put full merger on the table, these partners say.

Former Freehills chief Gavin Bell, now co-head of the combined firm, dismisses the idea that there was widespread opposition to full integration and says most of the partners who left did so for other reasons. “The merger’s really been embraced, not just at partner level, but right across the organization,” he says.

Bell stresses that the advantages of having a single partnership in terms of encouraging lawyers to work together are paying off. He says partners are able to make decisions without worrying about different profit pools and that the results have already been positive for both sides. He cites the firm’s work advising China National Offshore Oil Corp. on its $1.93 billion investment in the Queensland Curtis liquefied natural gas project in May.

“I don’t think either firm would have won that on their own pre-merger,” he says.

Bell also thinks the current slowdown in Australia is temporary and won’t have a major impact on the firms working together. “Some of our markets were stronger two years ago than they have been in the last 12 months,” he says. But, “I don’t think the fundamental reasons for merger change because of a short-term downturn in the Australian economy.”

For both Ashurst and Herbert Smith, it was seen as important not just to enter the Australian market but to do so with a leading player. Ashurst, in particular, was a relative newcomer to the region compared to other U.K. firms, including Herbert Smith, and wanted to scale up quickly.

“Ashurst was not strong in the region and we concluded organic growth was too difficult,” says London-based senior partner Charlie Geffen. “Ashurst Australia brings a strong client base, a strong common law capability, very high quality people and scale to help with the investment cost.”

Herbert Smith made its move after a firmwide strategic review and amid fears that it would lose ground to rival U.K. firms like Clifford Chance, which entered the market via mergers with boutique firms in Sydney and Perth, and Allen & Overy, which opened its own offices with partners recruited mainly from Clayton Utz but also Freehills.

But overall strategy has also led firms to abandon long-held business models. The former Mallesons Stephen Jaques, which previously discussed a merger with Clifford Chance, had no option for a full merger with China’s King & Wood. Regardless of the economics, such a deal would have been illegal under Chinese law, which foreign firms are forbidden to practice.

The Australian firm ultimately decided that being able to put forward a different kind of brand in the market was worth adopting a verein.

King & Wood Mallesons Australia chairman Stephen Minns says the firm hasn’t lost sleep over it.

“You can burn up a lot of energy on internal matters,” he says. “And so in a sense the benefit of a verein structure is that you pull the firms together, you have one name, you have one brand, you focus on building the pie and building the practice, and you focus less on the structural and remuneration issues.”

Minns says he’s not necessarily arguing that a verein is better than a more traditional structure, but he doesn’t think it hurts in terms of getting business.

“Clients tend not to be interested in how we sort ourselves out,” he says.

Email: tbrennan@alm.com.