Partner succession and law firm ownership

What follows might look like a proposal to address law firm partner succession challenges. But it’s actually a thought experiment in regulatory policy for the legal profession.

As the Boomer generation of law firm partners continues to exit the demographic python, firms increasingly struggle with partner succession challenges. The unwillingness or inability of senior lawyers to transition their practices to younger colleagues has many contributing causes, including:

  • The partner’s refusal to begin winding down and transitioning his practice at its most profitable point,
  • The partner’s desire to sustain the power and privileges of his influential position within the firm,
  • The partner’s reluctance to face the looming end of a career that has given his life definition and value,
  • The partner’s unreadiness to “return to civilian life” after decades in a cloistered law firm environment, and
  • The partner’s misgivings about whether a junior colleague could replace him or serve his clients as well.

    They never want to go.

The degree to which any of these factors plays a role in the succession challenge varies from partner to partner. But I think the first factor in that list — the partner’s unwillingness to shrink and eventually cut off what is probably a substantial income derived from partnership — is common to virtually every case of “succession-itis.”

Once you leave the equity circle of a law firm, your entitlement to receive any share of that firm’s profits, regardless of how important your contribution to the firm’s success might have been, comes to a swift end. This, of course, is because legal regulators in most jurisdictions prohibit ownership of law firms by anyone who is not a lawyer (But see California.) Or, to be more precise, anyone who is not a practicing lawyer. And that brings me to the proposal: What if lawyers could maintain their equity in law firms after they retired from practice?

Suppose your jurisdiction amended its ethics rules such that a lawyer who holds equity in a law firm could maintain that equity, or some portion thereof, after she retired from practice. That lawyer would no longer face the prospect of an immediate end to her legal income stream, thereby removing a significant disincentive (although not the sole one) to her retirement. This continuing revenue could serve as a sort of “pension” for partners who otherwise must fund their own post-retirement income. Moreover, since this income would depend upon the ongoing success of the firm, the partner would be incentivized to properly transition her practice and clients to a competent younger lawyer, perhaps one whom she’s been grooming for years. If the firm flounders after she leaves because she did a poor job of practice transition, she would be jeopardizing her post-retirement income stream.

Now, regulators being regulators, they could and likely would create various limitations on this post-retirement equity position. They might rule that post-retirement equity requires X years of partnership in a firm before it kicks in, or that the equity share cannot be transferred and expires upon the partner’s death, or that the partner forfeits this share if she joins another legal services supplier or is appointed to a court or tribunal, or that the equity share would be capped at 65% of a practicing partner’s share, that sort of thing. We can play with the permutations and exceptions all day.

But I’m more interested in how the regulator would view the underlying premise of the proposal. Because while I think it’s very unlikely that this change to law firm ownership rules will occur anytime soon, it’s the policy challenges that I think are worth examining.

Upon what basis would a regulator turn down this proposal? What would be the objection to allowing retired lawyers to own equity in a firm? I suppose you could argue that a lawyer who no longer actively participates in the partnership should not be entitled to any income from the firm — but that’s hard to reconcile with the fact that a legal secretary who retires from the same firm is entitled to a pension funded from her own contributions of both hard work and money over many years. Why should a lawyer not have the right to receive an ongoing financial payout from a firm she helped to build into a success?

We’re not lawyers! We’re not worthy!

The potential objections around “non-lawyer” ownership are also interesting. Should a lawyer who retires from practice be considered a “non-lawyer,” the same as someone who never attended law school and practised law? Does the retired lawyer no longer meet the “character and integrity” tests that evidently separate people who are lawyers (worthy of law firm ownership) from people who are not (and therefore not worthy)? Unless we argue that lawyers lose their qualifying degree of character and integrity when they stop serving clients — and I don’t think any legal regulator wants to make that argument publicly — then I’m not sure of the policy position against this idea.

I’m not seriously proposing this change to the ethics rules, for what it’s worth — it likely would prove highly cumbersome to formulate and a huge hassle to regulate and enforce. (Although I’ll wager that, if such a proposal ever did make its way to a regulatory body, it would provoke keen interest from every lawyer over 60 on that body.) I’d much prefer comprehensive, principled reform of law firm ownership rules, rather than piecemeal exceptions that are, once again, all about the lawyers.

But I do think this thought experiment can focus our attention on the presumption behind the “only lawyers can own law firms” rule: that lawyers deserve to own law firms and “non-lawyers” do not. Why is that? What is it about lawyers — precisely and in detail — that qualifies them to own law firms? What is it about “non-lawyers” — precisely and in detail — that disqualifies them? What happens to a person when they leave the “lawyer” category and join the “non-lawyer” category? Are they downgraded somehow, and if so, in what respects, and why?

I don’t have good answers to any of these questions. But I’d be very interested in learning what the answers might be.



3 Comments

  1. Dustin Cole

    Jordan, good idea, but lawyers can always maintain a “practicing” status, and therefore maintain either a few shares or an of counsel position. I’m not aware of any regulations in the U.S. that require an attorney to be “actively practicing” – if that can even be defined – to maintain connection to a firm and the practice.

  2. Amy

    It would still be difficult to attract new attorneys to stay if all the equity and $ are owned by retired partners who have little or no incentive to sell. Also, why arent attorneys funding retirement accounts and making investments for their future, just like all other business owners? Law is a business.

  3. Jordan Furlong

    Amy, thanks for your comment! I’ll reproduce here a lengthy response I gave to a similar question on LinkedIn.

    This “partner pension” approach absolutely would not work for all firms, or maybe even most firms, but I could see a midsize or smaller firm in particular finding it a useful way to help ease the transition from the “founding generation” of partners to the next cohort without an overdose of personal tension and conflict.

    As the post indicated, of course, I’m not actually advancing this as a serious option for regulators to pursue. As mentioned in the post, the hassles would in most cases outweigh the benefits, and it would only cloud and delay the need for comprehensive reform. What I really wanted to do was to provide a different way for lawyers to consider the “non-lawyer ownership” issue. We’ve grown accustomed to a kind of casual demonization of “non-lawyers,” an automatic dismissal that of course such people couldn’t own law firms. But is a retired lawyer a “non-lawyer”? By any legal definition, the answer is yes — but I suspect most lawyers would “feel” the opposite way.

    All that having been said — I recognize your point that many lawyers might be reluctant to buy into a law firm that’s paying a share of its profits to partners after they’ve retired. But the realty is, firms are going to pay for their retired partners one way or another.

    Perhaps the partner will be allowed to stay on too long, past his or her point of diminishing returns, and will hurt the firm’s productivity or even its reputation. Perhaps the partner will be incentivized to “keep the pedal to the metal” in terms of client contact and billable hours, right up until the day they’re forced to leave, knowing that once they walk out the door, there’s no more cash — and in the process, damage the development of younger partners or even compel them to leave prematurely.

    The one advantage of the “partner pension” proposal is that it brings the costs of transitioning retirement-age partners out in the open. It surfaces and makes visible the tradeoffs that must occur, the prices to be paid, when a partner wishes to stay but his firm needs him to go.

    Firms can pay those costs transparently, with full disclosure to all present and future partners, in predictable amounts and at known intervals, all the while ensuring the quid pro quo is taken care of — that the partner really is prepping the firm to succeed after his departure. Or the firm can keep doing what all firms have always done, and shuffle through the whole process quietly and uncomfortably. We know the latter method works, however ineffectively. But it might be worth giving the former method some thought as well.


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