Partners or shareholders transitioning in law firms from equity to non-equity positions is somewhat commonplace. A recent unpublished decision from the U.S. Court of Appeals for the Ninth Circuit provides insight into the nature of such transitions and their ramifications for both the law partner and the law firm. In this month's column, we discuss the decision, Heller Ehrman LLP v. K. William Neuman, No. 15-17124 (9th Cir. April 10, 2017).

Heller Ehrman LLP (the LLP) was an international law firm that had been in operation for 130 years at the time of its dissolution and bankruptcy. Heller Ehrman LLP v. K. William Neuman, No. C 14-4002 at 2 (N.D. Ca. Sept. 30, 2015). Although it was based in San Francisco, the firm operated on three continents and employed 730 lawyers. Id. Local professional corporations (PCs), each operating in a different region, served as the partners of the LLP. Id. The LLP was governed by a Partnership Agreement that provided “Basic Documents” (the Employment Agreement, the Shareholders Agreement, the Partnership Agreement and the Retirement System) which created the framework by which the individual PCs interacted with the larger LLP. Id.

Heller Ehrman had two categories of employees. Id. The first category was shareholders, a group akin to “equity partners” in that they received a percentage of the firm's yearly profit, but were employed by one of the PCs. Id. The “Basic Documents” provided only for “variable, percentage-based compensation” for shareholders. Id. at 2-3. In addition, the Employment Agreement provided that, when a shareholder departed the PC, the firm would repurchase their “preferred stock.” Id. at 3. Finally, the Agreement set limits on how its terms could be amended not only by vesting certain shareholders with the ability to amend, but also by stating that “[the] Agreement may not be amended in any respect unless all other Employment Agreements to which the Company is a party and which are then in effect are amended in identical respect.” Id.