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Interview: LLPs: the way forward for law firms managing risk?

with Richard Linsell, head of professional practices group, Mayer, Brown, Rowe & Maw

22 April 2002

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with Richard Linsell, head of professional practices group, Mayer, Brown, Rowe & Maw

Before Christmas, the initial excitement about LLPs seemed to have died down amongst law firms reluctant to lead the way to convert.  However do you think the Withers experience will encourage other law firms to take the plunge?

Any law firm combining with one carrying on business in the United States is going to look to the management of risk and, using the GB LLP format, is going to be attractive.  I imagine that this was one of the key drivers for Withers and Bergman, Horowitz & Reynolds.  We have already announced that the United Kingdom partnership making up the combination of Mayer, Brown, Rowe & Maw are aiming to convert to LLP status later this year.  I am aware of a number of other law firms in the City that are considering the LLP option, some of which are at an advanced stage of their LLP conversion process.

Obviously there has been some reluctance by firms to use the GB LLP law based upon the requirements of full financial disclosure.  With so many US law firms competing with them in the City and international market, and those firms not having to comply with the same financial disclosure requirements, conversion to the GB model could be seen to bring about competitive disadvantages.  However I believe that will change.  Enron and other major corporate collapses that have happened around the world are one factor.  Another is that many firms widely report their financial performance.  There is significant momentum amongst a number of the younger partners in major law firms to have their firms convert.

The GB LLP law is viewed as being internationally robust, in the sense that LLPs here are registered like companies, and the approach of the judiciary here to professional indemnity claims and consequent damages awards have been sensible.  US LLP laws may have the attraction of no financial disclosure but the level of damages awarded on successful claims is likely to exceed those that the Courts here would award.

What, if anything, can the legal profession learn from accountancy firms converting to LLP?

Only one significant accounting firm has converted to LLP status under the Limited Liability Partnerships Act 2000, that is Ernst & Young.  They converted in June last year.  However both PricewaterhouseCoopers and KPMG have recently announced that they will be converting later this year.  There is a significant movement in smaller accounting firms to limited liability by selling to PLCs like Tenon and Numerica, the so-called "consolidators".  Ernst & Young's "flagship conversion" will be a great help to all who follow.  Although there was probably little doubt in this area, the accounting firms have proved that clients are not overly concerned about their professional advisers limiting liability.  Ernst & Young and other early firms converting will pave the way so far as the clearing banks are concerned in establishing policies and procedures for lending to LLPs.  They have made the property market aware of the existence of LLPs when seeking to assign leases and, even before LLP conversion, were transparent in terms of reporting their results.

What are the advantages of converting to LLP status?

It must be remembered that LLPs are but part of the risk management tools available to professional firms.  All that an LLP achieves is "to protect innocent partners' personal assets from loss in the event of a catastrophic claim or the business trading into insolvency".  LLPs do not negate the need for proper terms and conditions of business, proper PI cover, the consideration of exclusion clauses to govern the nature and extent of liability, proper internal risk management and review procedures.  I have however heard clients express the hope that LLPs might encourage "franker advice with less protection and qualification than we get now".

The first law firm to convert, Kemp Little LLP, gained much favourable publicity from adopting LLP status.  Clients now converting see the "LLP" title as a mark of modernity.  Clifford Chance became a New York LLP when it merged with Rogers & Wells in a structure which presently avoids financial disclosure.

The LLP conversion process is an opportunity to bring a firm's constitutional affairs up to date. It also may lead to more streamlining of management and other business efficiencies.

The demand for financial disclosure has been raised as a problem for law firms thinking of converting. However, many firms claim already to have a good degree of financial transparency – is this really a problem?

I think this issue has been overplayed. Mayer, Brown, Rowe & Maw are aiming to be an LLP before the end of this year and obviously the financial performance of that entity, now a major international law firm,  will be open for all to see.  We have no reservations in that respect.  Rowe & Maw were considering LLP conversion before we combined with Mayer, Brown & Platt of the States.  I know that a number of other firms have identical thinking.  Obviously those converting hope that their initial results will be strong and draw favourable comment.  But the professions, and perhaps particularly the legal profession, appear to have become quite frank about financial performance.  I can hardly remember how many league and performance tables there are now published!  There will be some novelty when the first audited accounts of firms like mine are published.  Some firms may have misled the legal media by over reporting their results and feel inhibited in converting to LLP until their performance has become more in line with market expectations.  But, as you say, once a few have taken the plunge, and others have got their houses in order, the issue will seem less significant.

Remuneration in the Corporate sector has moved ahead very strongly in the last ten years eroding an earnings differential that used to be in favour of the professions. In particular the pension benefits in the corporate sector have become extremely valuable. Furthermore I have heard the view advanced on a number of occasions that, particularly in the case of lawyers, clients like to deal with people who are overtly successful, because they associate that both with quality and strong results.

LLPs reporting their results are likely to draw attention to the cost each member bears in providing capital, which is often borrowed, and the significant cost to the self-employed of funding their pension.

Frankly it is the firms who are less successful who may have difficulties disclosing their performance to the market rather than those who are doing well.

What are the shortcomings of the LLP model?

If one can overcome the requirement for financial disclosure it is difficult to think of any shortcoming.  There is the risk that individual members of LLPs may still be personally liable and some have argued that that cuts across the ethos of partnership.  There may be difficulties for some firms that have unfunded pension contributions to retired and retiring partners.  These are not however a direct consequence of the LLP law itself, but a consequence of the common law and accounting standards that are applied because the LLP is a body corporate.  There is likely to be a higher tax charge on work in progress in LLPs due to the calculation including the owning members' time which is not presently the case for partnerships.

LLPs have proved remarkably popular in other jurisdictions and once the financial disclosure issues have been overcome they are likely to prove equally popular here.

How easy or disruptive is the process of conversion?

The bigger the business the more complex the process.  It is the equivalent of incorporating the firm as a limited company.  There are a host of issues that need to be addressed.  However with proper planning and the right implementation team the process should be relatively straightforward and with over 1,000 LLPs already on the UK register there should be little if any "learning curve".  The Law Society have the regulations and procedures in place to authorise LLPs to conduct practice in this country.  There may, particularly, for smaller law firms carrying out private client work, be issues with regard to executor and trustee appointments, but with careful planning and an effective project manager the process should be relatively straightforward.

Having an up to date partnership agreement should be the starting point for the LLP members' agreement.  If you do not have one, or yours is outdated, there could be significant delays in terms of gaining agreement, but these are issues that need to be dealt with anyway.

How will LLPs change the character and culture of law firms? Could this be a reason for resistance amongst law firm partners?

There is no need for the character or culture of any firm to change because it adopts LLP status.  Indeed the whole essence of the LLP is to seek to preserve the culture of partnership, albeit behind a corporate vehicle – the LLP.  If firms want to move to a more corporate form of governance through LLP conversion they can.  However for others they can embrace the new law with minimal change to their character and culture.  Those who argue that LLP conversion is about "sorting out the management issues in the partnership" are confusing themselves.  The management issues are likely to need sorting out anyway and I can see nothing in the LLP format that guides the debate one way or another.

What will conversion mean for the role of managing partner and chief executive of law firms?

The law itself creates a new statutory position, that of designated member.  Otherwise it doesn't impinge upon the management and organisation of any business becoming an LLP.  Since the role of designated members is akin to that of a company secretary, with responsibility for filing annual returns, changes in the membership and the LLP's accounts, becoming an LLP should not change the way that firms are managed unless that is what the firm itself decides.  One of the attractions of the LLP law over the limited company model is that it avoids the legal distinctions, which in a professional firm that is a company can sometimes become a perceived "achievement gulf" between those who are directors and those who are just shareholders.  The internal constitution of the LLP can be extremely flexible and follow any lawful governance model that the firm decides to adopt.

Can you tell us a little more about your recent merger? How are plans developing for the move to full LLP status and what managerial structuring has been necessary in the meantime?

Our combination with the US partnership formerly known as Mayer, Brown & Platt became effective on 1 February this year.  As a result of the combination we are now the 10th largest law firm in the world with 1,300 lawyers, including 400 partners, and offices in 13 cities, including Chicago, Frankfurt, London, Paris and New York.  We announced, as part of the combination, that the former UK partnership known as Rowe & Maw plans to, under the name Mayer, Brown, Rowe & Maw, move to LLP status and work on that is now progressing.

As has been widely reported elsewhere, the managerial structure has changed but only to a small extent.  The partnership, comprising our London offices, Manchester and Brussels operations, is still governed by the London office Management Board and the global combination is governed by a Policy and Practice Committee made up of representatives from the numerous offices from which Mayer, Brown, Rowe & Maw now practise.  There has also been the establishment of an International Practice Committee whose primary focus will be to deal with the significant expansion that Mayer, Brown, Rowe & Maw plan in Europe in the next few years.  When the partnership here converts to LLP status there will be minimal impact on the current governance structure.  The members of the London office Management Board, perhaps with one or two additional persons, will become the designated members of Mayer, Brown, Rowe & Maw LLP.  Apart from that it will be business as usual.

What do you predict for the future of LLPs? Will they remain a feature of the accountancy profession or could they become the standard way for practising law?

My first prediction is that there will continue to be a significant uptake amongst professional partnerships in the construction industry that have resisted the conversion to limited company.  This is already marked when one looks at the first 1000 LLPs. 

Obviously the moves by PricewaterhouseCoopers and KPMG to join Ernst & Young represents a strong additional support for the new law.  The risks seen in the Enron debacle are however not limited just to the accountancy profession.  There are to my knowledge a number of significant professional firms planning to move to GB LLP status this year and they are going to change the landscape. 

It would be naïve to predict that the LLP model will become the standard way to practise law within say the next five years.  I am however aware, even amongst what may be regarded as some of the most conservative firms in the City, that there is considerable pressure from some of their partners for a change to be made.  That pressure tends to come from the younger generation of partners.  Those who have been in partnership for 20 years, even if they have encountered some significant negligence claims, tend to believe that professional indemnity insurance is the answer to the ultimate claim – there will always be enough insurance cover to meet any foreseeable claim.  We have however seen the collapse of Independent Insurance here and more dramatically of HIH in Australia;  the market for professional indemnity cover is becoming much firmer;  clients and society are becoming more and not less inclined to blame their professional advisers when things go wrong and, subject to the financial disclosure point I have already mentioned, if one looks at the rapid conversion of many law firms in the USA to LLP status, it is likely that within five years there will be more significant law firms that are LLPs than are general partnerships.

Perhaps, at the margin, it will come down to this – in the highly competitive recruitment market all that will differentiate offer A from offer B is that Firm B is an LLP or a company.  Firm B will look "more modern and open".  My prediction is that Firm B will receive the acceptance.  Professional firms have to attract and retain the best people to prosper.  If this happens a few times, Firm A will become an LLP.

Richard Linsell is the Head of the Professional Practices Group at the recent merged firm of Mayer, Brown,  Rowe & Maw

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Risk & Compliance