May 08, 2020
Managing Law Firm Dissolutions in Uncertain Times
As the legal industry continues to adjust to life during a pandemic, some law firm transitions and transformations inevitably will lead to law firm closures and dissolutions. We have seen numerous headlines of law firms, big and small, actively tightening their belts. But if, or when, a law firm considers closing its doors, is dissolution the best option? And will its partners and clients be protected?
The end of a law firm marks a critical time for law firm partners, shareholders, and clients, and must be handled with the utmost care. Making the right decisions is essential to protecting the personal and professional interests of individual partners, their clients, and law firm employees. This is especially true now when there is so much uncertainty about the future of the legal market.
Law firm dissolutions happen for a variety of reasons, which are not always linked to the poor economic health or management of the firm. In small to medium-sized firms, law firm partners and managers often consider dissolution when a significant partner or group leaves, when a practice group or client base changes and can no longer support the firm, or when fundamental disagreements change the direction or future of the firm. Large firm dissolutions are typically the result of unsuccessful economic strategies or a changing marketplace and often occur out of necessity after failed merger or acquisition talks. With respect to the current pandemic, some law firms are considering closures for a combination of these reasons.
Pre-dissolutions Considerations, Options, and Planning
Sometimes a law firm has no choice but to dissolve; however, in many situations there are other options to consider. Depending on the size of the firm and the terms of the partnership agreement, a dissolution also can be triggered by the act of a partner or group of partners. Understanding the significance of a dissolution, what it means for the firm, its clients and partners, and what it entails to effectuate and complete properly, are keys to determining the best path forward.
There are a multitude of issues to consider when deciding whether to dissolve a law firm. There are also other options that should be analyzed or explored before heading down this path. If the law firm decides it must close down, the goal should be to effectuate dissolution in a way that protects clients and individual partners, maximizes liability protections, and allows lawyers to move to a new law firm with their practices and professional reputations intact.
Winding Up Your Law Firm
Once the difficult decision to dissolve a law firm has been made, execution of the dissolution and windup requires thoughtful planning, precision, and care. A law firm should design and implement a dissolution windup plan that complies with its ethical and legal obligations to clients and third parties, and protects client interests and the interests of law firm partners.
The right advice at the right time is critical here. A well-developed windup plan coupled with key analysis and guidance helps law firms make critical decisions properly, including: how and when to notify clients, employees and other third parties; how to handle leases, contractual and other third-party obligations; how to manage accounts receivable, accounts payable, work in process, invoicing and getting paid; what insurance and tail policies are required, and which should be maintained and for how long; meeting record-keeping obligations for clients, IOLTA, firm financial and employment records, and how best to maintain records in compliance with ethical and legal obligations; asset inventory, liquidation and disposal; and other administrative, financial and regulatory considerations.
Questions also arise during a law firm windup about which partners, if any, need to assist with or manage the windup process, whether those partners will be compensated, who will be considered partners in a dissolution, and if capital partners can be paid anything from the firm, when is the proper time to do so. There are also complex issues to be resolved around the return of capital and distributions to partners (if there is money to be paid out), when a partner is considered a creditor of the firm, how to handle personal guarantees, and to properly navigate the unfinished business rule, among other issues.
Terminating Your Law Firm Entity
Entity termination is the last step in a law firm dissolution. But it is an extremely critical one. Knowing how and when to terminate a law firm entity properly can mean the difference between maintaining the liability protections of the law firm entity structure during windup and needlessly exposing law firm partners to unnecessary risk and potential personal liability.
While it is often hard to consider the end of one thing, it inevitably means the beginning of something else. Not all law firm transitions and transformations will lead to dissolutions, and some will weather the storm better than others. But, for some law firms and partners it will be the right decision. And if handled properly, it may be the beginning of something even better.
Dena M. Roche
O’Rielly & Roche LLP