Practice What You Preach
Don’t Wait for a Crisis Before Updating Your Partnership Agreement
Posted Jun 1, 2004 5:03 PM CDT
By Mark Hansen
Ideally, the process of amending a law firm’s partnership agreement should be ongoing.
That is particularly true in today’s market, where the practice of law has become incredibly mobile, with lawyers—and sometimes entire practice groups—leaving firms for greener pastures. In a perfect world, a firm would continually analyze its partnership agreement to head off any future harm.
As most lawyers know, however, law firm life is not quite perfect. Partners are simply too busy bringing in business and practicing law to do what they would advise their clients to do, which is occasionally to take the time and effort to analyze the agreements that bind and govern them.
Unfortunately, what often happens is that the firm’s partnership agreement is put on a shelf and gathers dust. Then when calamity strikes, the firm is forced to scramble, only to discover that a very predictable disaster—one that might have been headed off with some forethought —is not addressed in the partnership agreement. That’s assuming a firm has such an agreement to begin with.
ASKING FOR TROUBLE
Despite the business acumen of lawyers, it is surprising how many firms still operate without a written partnership agreement or with an inadequate one, says
Leslie Corwin, a partner in the New York office of Greenberg Traurig.
“I see it on an almost daily basis,” says Corwin, co-author of the treatise “Law Firm Partnership Agreements,” published by Law Journal Press.
University of California at Davis law professor Robert Hillman, an expert on partnership law, says one of the biggest mistakes firms make is failing to reduce partnership agreements to writing.
“It seems obvious,” he says, “but you’d be surprised at the number of firms that operate on the basis of a handshake rather than a written agreement.”
Another mistake firms make, Hillman says, is relying on old agreements that can be practically useless. “An agreement that works for a new firm with three or four young, energetic partners may make no sense 20 years later when the firm has grown to 40 or 50 partners.”
So, as a practical matter, how often should a firm be re-examining its partnership agreement?
Corwin says the legal profession has changed so dramatically in the past few years that any firm that has not already done so should be looking at its partnership agree- ment now to ensure that it still is relevant and up to date.
Hillman recommends doing so every couple of years. “Because firms change. The law changes. Nothing stays the same,” he says.
But Art Ciampi, a partner at New York City’s Morrison Cohen Singer & Weinstein, says that a firm should think of its partnership agreement as an insurance policy that renews annually. The firm should review the document every year to see if its provisions address the risks the firm believes it will face during the coming year.
“Think of the partnership agreement in the same way your professional liability insurer thinks of your annual malpractice insurance renewal—as a risk assessment,” says Ciampi, who wrote “Law Firm Partnership Agreements” with Corwin. “The firm should sit down and ask what has changed in the life of the firm or what is likely to change and compare that to the current agreement. If there are any gaps concerning what the firm believes it will face and the current agreement, they should be addressed.”
In fact, Ciampi recommends using the malpractice insurance policy’s renewal date, which is typically annual, as a tickler to review and analyze the firm’s partnership agreement as well. “This date is a good one to use because it is obviously a critical renewal date which simply does not get put off,” he says. Ciampi offers the following as a preliminary checklist of areas to consider in a firm’s annual risk assessment:
• Admission of partners. Does the agreement address all the different classes of partners and reflect the current criteria and procedures for becoming a partner?
• Withdrawal/retirement provisions. Does the agreement reflect current thinking on the obligations of a departing partner and exit payments? Is it likely, based upon seniority, that certain partners will be retiring and, if so, what does the agreement provide?
• Compensation. Does the agreement provide a compensation process that is designed to maximize retention of productive partners?
• Lease obligations. Is the firm contemplating a new lease? If so, how does the agreement provide for the assumption of those potentially new obligations among the partners?
• Loans and lines of credit. Does the firm envision taking on new debt in the next year and, if so, how is this addressed in the agreement?
• Change in management philosophy. Has the firm changed management or management philosophy? If so, are these changes reflected in the agreement?
• Recent claims. Have there been recent claims that have resulted in shortcomings in the firm’s agreement being exposed?
Corwin says a partnership agreement should, at a minimum, define and address the major “life events” of a firm, such as death, disability, retirement and withdrawals, both voluntary and involuntary.
“You want to be proactive rather than reactive,” he says.
Because the withdrawal of a partner can be a traumatic event in the life of a firm, Corwin says, the partnership agreement should require a significant notice period. Such notice will provide the remaining partners with the time necessary to regroup, to determine whether to continue the partnership and to take the steps needed to protect themselves against the potential loss of clients. It may also provide the firm the time needed to determine the cause of the withdrawing partner’s unhappiness, if that is the case, and to make the necessary changes to retain that partner or to prevent other partners from wanting to leave, as well.
Corwin also suggests that the partnership agreement include a “continuation” provision, which simply states that the partnership shall not be terminated by any change in the membership of the partnership. In the absence of such an express agreement, he says, the departure of a partner will cause the dissolution of the partnership and all that entails, including the payment of all firm creditors and an accounting to each of the partners for his or her share of the firm.
Corwin is blunt: “Anybody who hasn’t looked at his or her partnership agreement lately with a focus on wheth-er it has the ability to compete in today’s marketplace is playing Russian roulette.”