Seeking a merger partner in an effort to reshape its future, Bingham McCutchen is still coping with the fallout from one of its past combinations.
Five years ago, Bingham joined with McKee Nelson—and approximately 60 partners from the latter firm received a guaranteed contract. The deal raises questions as to what role the contracts played in the lead-up to Bingham’s current financial state. In 2013 revenue and profits plunged to mark the firm’s worst financial performance ever.
Bingham acknowledged the McKee Nelson guarantees after sibling publication The Am Law Daily brought them to light through interviews with a handful of former partners. Guaranteed contracts to Am Law 100 partners are not uncommon, but they’ve become more controversial following the collapse of Dewey & Le­Boeuf, which guaranteed the compensation of up to one-third of its partnership. The size and scope of the McKee Nelson guarantees led to internal fissures at Bingham that caused at least some partners to leave the firm over the past few years, according to several former Bingham partners.
At the time of the merger, Bingham’s management informed its partnership about the total value of the guarantees, which sources briefed on the matter say totaled $59 million in 2010 and $70 million in 2011. (The total decreased thereafter as deals expired.) But Bingham agreed to keep McKee Nelson’s closed compensation system for its legacy partners for the duration of the guarantees. That didn’t go over well with some Bingham partners, who under the firm’s open compensation system could normally see what their partners earned. As Bingham’s financial performance began to falter in late 2012, internal distaste for the McKee Nelson guarantees grew, according to four former partners.
Bingham partners could still get information on compensation for individual McKee Nelson alums from members of Bingham’s executive board, according to Bingham and former partners familiar with the matter. The size of payments began to trickle out. According to former Bingham partners, the five largest guarantees all reached $4 million or higher: $4.7 million to McKee Nelson co-CEO Reed Auerbach, now cochair of Bingham’s corporate practice; $4 million to McKee Nelson co-CEO William Nelson, now cohead of Bingham’s tax practice; $4 million to McKee Nelson cofounder and tax partner William McKee; $4 million to McKee Nelson tax partner John Magee; and $5 million to senior partner and financial institutions rainmaker Jeffrey Smith. None responded to requests for comment.
Bingham declined to comment on individual partner compensation, but said in a statement, “The partners mentioned in this article are senior lawyers who are leading practitioners in their fields and who have highly successful and profitable practices.”
Under Bingham’s partnership agreement, its partners are guaranteed 75 percent of what they earned the year before. As a result, the firm says that the total “guaranteed” compensation numbers provided for 2010 and 2011 by ex-partners are misleading in that only a quarter of the totals should count as true guarantees.
While most of the McKee Nelson guarantees have now expired, Bingham confirms that it has other outstanding guarantees at present, but declined to provide specifics.
At press time Bingham had reportedly reached out to Morgan, Lewis & Bockius; Morrison & Foerster; O’Melveny & Myers; and Winston & Strawn for merger discussions, but had not announced a deal.