Leaders of New York law firm Dewey & LeBoeuf LLP are considering a novel rescue plan that would put the firm into bankruptcy protection but might be its best hope at preserving value at a prestigious firm that this year has been hemorrhaging talent.
Amid a wave of partner exits, Dewey's leaders in recent days have reached out to law-firm peers with a fresh proposition, said people familiar with the situation. The partners have discussed filing a "prepackaged" bankruptcy plan that would allow a merger partner to take on the firm free of its mounting debts and substantial unfunded pension obligations, these people said.
Asked about such a scenario, a spokesman for Dewey said: "The firm does not comment on speculation."
A merger, if it happened, would mark a striking turn for a firm that became one of the largest in New York five years ago with the linkup of two storied firms. Dewey Ballantine, founded in 1909, was for years run by former New York governor and presidential candidate Thomas E. Dewey. LeBoeuf, Lamb, Greene & MacRae began in 1929 and developed extensive experience in insurance and energy work. With 1,300 attorneys in 12 countries, and projected annual revenue of around $1 billion, the resulting Dewey & LeBoeuf sought to wrestle corporate work away from the elite Wall Street firms that dominate that market.
The firm aggressively recruited star lawyers and their big books of business but was hampered by sagging demand for legal services in the wake of the financial crisis. This year saw a stream of partner departures, rooted in compensation promises made to some lawyers recruited by the firm that cut into money available to pay others.
While a number of large law firms have foundered over the past decade, Dewey & LeBoeuf is the largest to so publicly enter what legal experts have said is a danger zone—when speculation about the firm's future can trigger a partner exodus.
Among potential partners for the merger-and-bankruptcy plan being floated, Dewey has made overtures to New York-based Shearman & Sterling LLP; Greenberg Traurig LLP, which has roots in Miami; and Pittsburgh-based Reed Smith LP, these people said.
A Greenberg Traurig spokeswoman said: "We have a great deal of respect for Dewey LeBoeuf and their quality lawyers. It would be inappropriate for us to comment on market rumors." At Shearman & Sterling, a spokesman said the firm "isn't in discussions with Dewey & LeBoeuf concerning a merger." Reed Smith wasn't immediately available for comment.
The merger idea being discussed is just one among possible outcomes for Dewey. The firm could restructure itself with a leaner footprint, shedding less-profitable practices and lawyers. Partners could also vote to dissolve the firm, something the leadership has said isn't on the table.
For Dewey, one value of the merger-and-bankruptcy plan would be to avoid a liquidation, which is an outcome that would make recovering accounts receivable and yet-unbilled legal time much more difficult, those familiar with the situation said.
Under the plan, the firm would file for bankruptcy, which would freeze most debts owed to trade creditors and employees, as well as payouts to pension holders.
The remainder of the firm—currently estimated at 250 partners and a total of 1,000 lawyers—would then fold into the merger partner. The hope is that enough of the "old Dewey" could be preserved to enable a robust collection of debts from clients, these people said. The acquiring firm would pay little or nothing up front, but would likely be expected to cover ongoing operating costs as the bankruptcy case proceeded.
Law-firm bankruptcies are difficult to manage because creditors typically seek "clawbacks" from partners who leave for new firms and take along clients. In hoping to contain such a problem, Dewey is considering a feature that would in effect give clawback waivers to attorneys who stay with the surviving firm. Should those attorneys work for a number of years, for instance, Dewey might agree to absolve them of any future clawback claims.
The key part for Dewey will be holding on to its most valuable attorneys, so it can maintain itself as an attractive asset for a suitor. This has proved difficult for the firm, which has already lost at least 67 partners amid internal fights over money. The firm has said many who left were asked to go, and said the departures won't hurt the firm's profitability.
By 2010, Dewey ranked 29th out of the nation's top 100 law firms in gross revenue, according to the American Lawyer magazine. The publication had initially ranked the firm at No. 22, with $910 million in revenue. The magazine revised those numbers, along with 2011 figures, downward by about 16% after The Wall Street Journal and other news outlets reported that 2011 earnings were lower than the firm had reported. The firm disputed the changes and has said it stands by its numbers.
To lure noted lawyers when it was pursuing its ambitious growth plan, the firm made promises to dozens of partners of a certain amount of money each year—instead of a certain percentage of profits. Cracks in that strategy began to show earlier this year when profits didn't meet expectations.
Money to meet guarantees came out of pay other partners had been promised, according to ex-partners and a partner still at the firm, who said Dewey has been issuing the equivalent of IOUs to some partners for years. Many partners, including some with lucrative guarantees, had much of their compensation deferred because there wasn't enough money to honor commitments, according to current and former lawyers.
In a memo to partners last month, the firm's leaders said revenue for the first two months of 2012 was up 28%, and billings up 13%, from a year earlier. Dewey has handled some high-profile work this year, advising the Los Angeles Dodgers in its recent sale and representing Dell in its $1.2 billion purchase of device-maker SonicWall.
A low-cost acquisition of Dewey could have an appeal for opportunistic firms. Dewey's lawyers have a reputation for excellence, and a number of law firms are eyeing profitable practices and offices here and abroad.
Dewey has prominent clients and a number of well-respected practices, including bankruptcy and its once-core insurance and energy practices. Recent defections have decimated the insurance group—something firm management has said won't affect profitability.
Among places where Dewey has offices, "Russia's attractive because it offers access to an important emerging market," said Kent Zimmermann, a legal consultant in Chicago. "France is particularly attractive because of the concentration of multinational companies there that spend heavily on outside legal services. The Middle East is a hub for sovereign wealth-related transactions and important for the energy industry."
Usually, when a business is contemplating a prepackaged bankruptcy, this means it has proposed the plan to creditors and they have voted to approve it. Ex-partners have said Dewey owes about $150 million from a 2010 bond offering and also has a $100 million revolving line of credit from a syndicate of banks. It is unclear how much the firm owes on that credit line. Last month, a person familiar with the matter said roughly $33 million had been drawn, though the numbers change periodically.
[WSJ, Friday, 04/20/2012, p. A1]
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