The London Lawyer Briefing: The Week Fear Became Reality
An analysis of the week's news shows the various ways law firms are attempting to shore up their finances.
April 03, 2020 at 10:12 AM
5 minute read
There has been a definite theme to this week.
It started with fear, when a Legal Week survey showed that lawyers were worried about billing delays, bonus drops and job cuts.
Then fear became reality.
First a few firms admitted they were considering delaying or reducing partner profit distributions. Then a series of top firms unveiled measures to help them cope financially with this period of very low transactional activity. It was, after all, the worst March for European M&A volumes since the financial crisis.
The first and most shocking of these was Rose Walker's scoop that Allen & Overy had asked partners to contribute capital to the business in light of the financial pressures that had resulted from the pandemic. The firm is also gradually reducing its partner drawings, halting associate pay rises and delaying 50% of summer bonus payments for fee-earners and senior support staff until October.
And it's worth remembering A&O is one of the world's biggest firms and has no debt. Imagine how much worse things might be elsewhere.
After the A&O story, Cadwalader Wickersham & Taft said it would stop paying partners, cut associate salaries by 25% and impose staff pay cuts of up to 25%.
Reed Smith said it was reducing partner distributions.
Dentons' European and Middle East board admitted it will be meeting next week to decide whether to cut partner and fee-earner pay.
Norton Rose Fulbright said it is offering staff reduced working hours and deferring partner profit distributions, staff salary rises and bonuses.
Meanwhile, AIM-listed litigation funder Burford cancelled its final 2019 dividend and said it will reallocate bonus payments back into the business as it assures its investors that it has "more than sufficient" liquidity.
And Fieldfisher, which last week parted ways with several third party support-staff providers, has told its staff to take 25% of their annual leave before the end of June, as it expects a spike in annual leave requests in the second half of the year.
Many others are likely to be doing the same thing. It seems no firm is immune. The Law Society has asked the Bank of England if law firms can access the government's loan scheme.
Recruiters will also be hit, with some predicting that hiring in the legal industry could fall by up to 75% in the short term.
And many believe the disruption could last for a while yet. Clifford Chance has already cancelled its partner conference, which had been scheduled for late June.
What Now?
All this raises the question of what now?
Law firms should not waste their time asking how bad this is going to get, according to former consultant Hugh Simons. That is nearly impossible to answer. Instead management teams should be asking: how can we reinforce the firm's solvency? Delaying partner payments will help stave off capital calls further down the line, he argues.
This makes sense. Because isn't the point of the partnership structure the flexibility that means partners suffer the downside as well as enjoy the upside?
But this is just one of several options, says Louis Young, a co-founder of U.K. litigation funder Augusta.
Firms must focus on sensitively chasing unpaid client bills, on increasing their bank credit facilities and on seeking out government support, he believes. He also suggests that the hefty amounts raised by litigation funders could possibly be used to help cover client bills.
One thing that is for certain is that the cash management of law firms will likely be much more prudent from now on. A year ago an analysis of limited liability partnership accounts by audit firm Smith & Williamson showed U.K. top 50 law firms have worryingly little cash on their balance sheets. Here's the video. There was a similar warning in 2018. Back then it seems no one was really listening. They are now.
And perhaps rather than focusing solely on their own predicament, lawyers should think about what else they can offer the world during this time of unprecedented crisis.
In a heartwarming round-up reporter Simon Lock found law firms across the U.K. have been stepping up their pro bono and charity work as part of a huge nationwide response to the pandemic.
Dozens of firms are deploying lots of lawyers to use their skills to help others in need. Charles Russell Speechlys, for example, is supporting the Legal Advice Centre by organising webcam sessions to allow people who needed legal advice to attend. Kerry Stares, pro bono legal director at the firm, said: "The only way that many people on low incomes can get any legal advice at all is through pro bono clinics staffed by volunteer lawyers from commercial firms. Keeping this support going as law centres shut their doors and lawyers work at home is critically important."
However bad things get, good acts like these can still offer hope.
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