One of the more thoughtful and, frankly, creative responses to my two recent columns on lateral partners asked a simple question: What should a firm recruiting a potential lateral be obligated to tell the putative future partner?
This is the kind of question that gets the juices of us securities lawyers flowing. (No, I don’t practice actively anymore, but I would like to think I remain a student of securities law in general and its perpetual evolution.)
The first reaction I had was that we already have a template for what ought to be disclosed, and how: The Private Placement Memorandum.
A PPM, for the record, is a sort of species of prospectus typically used in conjunction with a “non-public offering” under §4(2) of the ’33 Act and/or Reg. D, which was promulgated in 1982 as a non-exclusive “safe harbor” describing a roadmap for complying with §4(2). Basically, Reg. D introduces the concept of an “accredited investor,” which is defined as institutional investors, insiders of the issuer, rich folks (with a net worth of >$1-million or net income >$200,000 for a few years), and, more or less, combinations of the preceding.
Of course, as with all matters securities-law related, the antifraud provisions always and everywhere apply.
So what’s the analogy to a lateral partner?
Roughly speaking, I see it this way: A prospective lateral is pretty much by hypothesis a sophisticated investor when it comes to evaluating a commitment to a new law firm, at least if he/she has been paying any attention to the business operations of their current law firm. So consider them analogous to an “accredited” (Reg. D sense) investor.
The interesting question is then what this hypothetical PPM ought to disclose.Â Here’s what the template of a prototypical PPM’s table of contents, adapted to Law Land, might look like:
- Summary of the Offering
- Investor [Lateral Partner] Suitability
- Risk Factors
- Conflicts of Interest
- Management of the Firm
- Legal Proceedings
- Purpose of the Offering [Becoming a Partner]
- Capital Structure; Dilution
- Financial Statements
- Financial Model, Projections
- Income Statement
- Balance Sheet
- Statement of Cash Flows
- Business Plan
- Client Base
- Growth Strategies
- Practice Areas
- Geographic Footprint
- Industry Focus
- Client Conflicts, Current and Projected
- Recruitment and Retention Strategies
- Fees and Billing Methodologies
- Partner Capital Obligations
- Amounts: When Due
- Uses of Partner Capital
- Conditions for Return of Partner Capital
- Risk Factors
- Partnership Agreement
- Compensation Model (to the extent reduced to writing)
Now, your reaction is probably either that this is fascinating or that it’s preposterous. I doubt many of you fall inbetween..
If that’s the case, join the club.
My reaction is precisely the same.
Yet we are, among other primary and salient virtues, a profession dedicated to disclosure, transparency, and precision. And of course you know that to we securities lawyers, Disclosure Is God.
How many lateral partner acquisitions fail because of mis-communication, unarticulated expectations, “surprising” capital demands, unforeseen conflicts, unexpressed cultural assumptions? Wouldn’t it be marginally logical to try to lay out some of those expectations beforehand, in a PPM?.
Which leads me to this observation: If you think the notion of a PPM for potential laterals is preposterous, I strongly doubt that yours is a rational objection: I suspect that instead it’s a cultural, “not done here” objection. That doesn’t make your objection remotely less substantive; but I submit that it puts the burden of proof on you to explain why your firm should not make those parameters I summarily laid about above somewhat clear to prospective laterals. Labeling an objection “non-rational” is by no means tantamount to labeling it vacuous or empty; but it at least requires the proponent of the non-rational objection to explain its substance and its historic or cultural context.
Then again, there’s a very realistic objection to developing a PPM for your firm. It’s hard work.
Not only hard work, but consensus work. Can’t you just imagine being in on the conversations defining the terms in the sections of the PPM dealing with “Competition,” “Client Base,” and “Growth Strategies?” You can hear the gears clashing from here.
So is the real objection to the concept of a PPM not that it’s untoward, that it’s unprofessional, that it’s “not done,” but that in reality it’s un-do-able, because the firm could never achieve consensus on what should go into it and how to describe the firm, its prospects, its competition, and its risk factors? That, in other words, the strategic business path ahead for your firm is in some profound sense ineffable?
Try telling that to your next startup client.