Law Firm Partnership & Shareholder Agreements: 6 Deadly D’s

Back when I was a Practice Management Advisor with The Florida Bar’s LOMAS program this subject used to come up so often I could rattle-off a litany of “cautionary tales” about law firm partnerships gone bad.  And I mean, REALLY bad.  These days, thankfully, I get to be alot more selective so we rarely have to deal with this kind of thing anymore.  But the subject has been bantied-about lately in the wake of all the big law firm layoffs.  And I’ve seen it discussed on Twitter so I give you. . .

The 6 Deadly “D’s” When It Comes To Law Firm Partnership/Shareholder Agreements

Death.  Your law firm partnership or shareholder agreement should address what happens to the firm if one of you dies.  Best practices generally call for the firm to maintain “Key Person” insurance so that in the event of the unexpected there are some resources to keep things going when half the income dries-up and the remaining attorney(s) are presumably operating at reduced capacity due to grief.  Best practice is also to address the “buy out” so that if you’re the unfortunate one in this example your family gets some compensation for your share of the firm’s value that you helped to create.

Disability.  Suppose you’ve co-signed on a lease, committed to a few hundred clients each with a statute of limitations and various deadlines attached to their file and of course there are the staff who rely on the salary from operating revenues.  Now suppose your partner gets sick.  Or injured.  It happened to my wife with little warning.  So believe me it can happen to you too.  If your partner were suddenly out of the picture for a few days it might be a minor inconvenience.  But what about a few weeks?  A few months?  At some point fair is fair and you have to cut him or her loose.  Best practice is to cover disability insurance out of firm revenues and document your agreement as to how long a partner can be out on disability before they start to lose equity.  Best practice is also to agree ahead of time how the rent is going to get paid if one of you is unable to contribute to revenues through your own personal labor.  For example, will the firm hire a temporary replacement attorney to fill in for your equity partner?  Remember you both work for the firm.

Divorce. In the absence of any kind of agreement to the contrary your ex’s or worse your partner’s ex’s divorce attorney is going to argue for a portion ownership of his or her businesses and don’t be surprised if that includes your law firm because it’s happened more than a few times before to some pretty smart lawyers.  Best practice is to address right of first refusal and how equity ownership of the firm can be transferred i.e., not without consent of remaining partner/shareholders.

Disbarment.  What do you think happens when there are two lawyer who have been practicing together for awhile and all of the sudden one of them gets disbarred?  If you guessed that all hell breaks loose you’d be right.  Typically the State Bar will give a disbarred attorney some period of time to divest him or herself of ownership in any law firm.  But imagine being the lawyer negotiating THAT deal for your recently disbarred client!  The phrase “take it or leave it” has been heard uttered a time or two in those scenarios.  Best practice is to agree ahead of time on a divestiture formula similar to the one you could use for each of the scenarios discussed here.  As an added precaution you may consider adding in a liquidated damages multiplier in the event of disbarment in anticipation of the fact that if an attorney does get him or herself disbarred the firm will probably be made to suffer on the ride down.

Disciplinary Actions.  Part of my job for The Florida Bar was to go into firms of attorneys who were on discliplinary suspension in order to investigate the law practice management mistakes that usually contribute to the violation of Bar Rules.  54% of the lawyer disciplinary cases handled by The Florida Bar during my tenure there traced their roots to law practice management problems, not bad lawyers.   So how do you want to handle it when you or your partner gets disciplined and cannot practice for 90 or 180 days or even a whole year?  Out on your ass or divestiture or. . . ?  Best practice is to have the firm pay for defense costs and take it out of equity if the defendant is found guilty of violation of bar rules.  If suspended the firm should pay for replacement talent out of the disciplined lawyer’s share of proceeds until he or she is fit for duty again.

Dislike.  What happens if one day you wake up & decide you simply don’t like practicing with your partner anymore?  By addressing each of the above scenarios you’ll be forced to agree on policies, procedures and formulas and emergency contingency plans that will enable you to manage to go your separate ways without both coming out losers.

For more practical, real-world law practice management advice, tips & information be sure to sign up for the newsletter today at www.HowToManageaSmallLawFirm.com.

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