Credit: Sergey Nivens – Fotolia

A recently filed lawsuit against Am Law 100 firm Blank Rome raises the question: What makes a merger?

Former partners of now-dissolved Dickstein Shapiro sued Blank Rome on Wednesday in Los Angeles, alleging that the firm’s mass lateral hire of more than 100 lawyers from Dickstein in 2016 should be treated as a merger, with all the legal obligations that entails. The plaintiffs, who are spread across New York, Florida, Washington, D.C., and California, are seeking to recover more than $4 million in capital contributions from Blank Rome.

Consultant Tom Clay, of Altman Weil, said claims by former partners of a dissolved entity against acquiring law firms are not typical, but not unheard of either. “It’s not part of the standard fare. It happens when you get unusual circumstances over moves,” he said.

The ex-partners allege Blank Rome “tried to ‘play cute’ by structuring the merger of Dickstein Shapiro into its law firm by the artifice of labeling it as an ‘asset sale,’” so it would not have to take on the liabilities of the former firm. “This mega deal was not the mere hiring of a few partners and associates from one firm to the other,” the plaintiffs argue. “Simply stated, Blank Rome did not want to pay the more than $4 million owed to former partners of Dickstein Shapiro—while it wanted the full benefits of acquiring Dickstein Shapiro.”

Blank Rome, for its part, has said the lawsuit “has no merit and we intend to vigorously defend it.”

Winners and Losers

According to Clay, whose company tracks law firm merger activity, the majority of deals are still traditional mergers, and even if the currently frenzied pace of consolidation and lateral movement continues, a wave of suits like this one is unlikely.

Still, the type of deal Blank Rome completed is not unique. Several large firms in recent years have made headlines by hiring big groups of lawyers from firms that dissolved shortly afterward.

Morgan, Lewis & Bockius did it with two large firms—Bingham McCutchen and Brobeck, Phleger & Harrison. When Wolf Block voted to dissolve almost a decade ago, several Philadelphia-based firms hired the lawyers who remained, with Cozen O’Connor taking a big chunk of them. On a smaller scale, midsize firm Offit Kurman has recently used nonmerger affiliations to expand in markets of interest, like New York.

“Both mergers and nonmergers are much more common now than they have been in the past, and they are increasing in frequency as law firms try to adapt to market changes,” said Robert Hillman, a professor at the University of California, Davis School of Law who has extensively studied lawyer mobility and firm breakups, in an email.

As these deals increase in frequency and size, the potential for disputes grows as well.

Remember that a combination does not just involve two sides. Many lawyers, sometimes in the hundreds, may be involved,” Hillman said. “It is a little unusual to see large numbers unhappy, but not at all unusual to see some lawyers displeased with their changes in circumstances. Combinations will create winners and losers within each group.”

Nonmerger combinations, or mass lateral hires from a dissolving firm, come with major advantages for the acquiring firm, said Mary Young, a consultant at Zeughauser Group. It allows the acquirer to bring along only those practices and lawyers it wants most.

It also allows firms to more easily trim unproductive partners from the deal, at a time when many law firm leaders say they have a surplus of partners, Clay noted.

“Law firms really ought to purge more people than they do when they do combinations,” he said. ”As larger deals happen, like 100 lawyers, you could find more of that, if firms start to get more rigorous, or ruthless, some might say.”

And there’s the obvious perk—when dealing with a cash-strapped firm—of avoiding costly liabilities, Young said. Hillman noted that at the outset of a combination, the true extent of those liabilities may be unknown.

In Blank Rome’s case, those alleged liabilities are exactly what provoked ire among the plaintiffs—all former Dickstein partners who did not join.

In a nonmerger combination, the acquiring firm must be careful how it describes the arrangement publicly, Young said, and must take an “a la carte” approach to acquiring the other firm’s assets. Still, she said, the potential payoff of these deals outweigh the risks.

“Even to have a lawsuit play out like this, it’s not a great thing but it’s a cost-of-doing-business type of thing,” Young said. “The firms that want to pick up lawyers this way will do it if they think it will benefit them, even if there is some legal fallout.”

READ MORE:

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