One thing you can count on when two law firms merge is that neither one buys the other.  I use “buy” in its simple and core sense: Nothing is obtained in exchange for payment.

No cash changes hands; no stock is exchanged, no assets are purchased or liabilities retired.  Viewed by anyone used to dealing with the mainstream for-profit economy and not Law Land’s isolated Galapagos Islands ecosystem, this is simply weird.  Now, having trained in mainstream economics, we have marveled at this for many years and we finally decided to ask some of the smartest people we know what’s going on.

By the way, we specify “smartest” not because we don’t as a core belief subscribe to the notion that all lawyers are smart simply by virtue of their stipulated membership in the “lawyer” set, but because we knew we would need to talk to people who could get beyond retorts like “it doesn’t happen” or “it isn’t done” or “things don’t work that way.”  We know that, thanks. Those are restatements of the question, not tentative probes toward an answer.

My own favorite explanation, produced by an extraordinarily creative and hard-working corporate and securities lawyer who was for an all-too-brief period in my associate youth my mentor and rabbi, was this hypothesis (I paraphrase):  “There actually is an exchange of stock; the equity partners in the acquired firm trade their ownership interest [points] for ownership in the other/resulting firm. I think that’s it.”

This is actually the strongest answer we got.  My only reservation about it comes from the economist and not the securities lawyer in me: “Equity” in a law firm has no tradable or market value; it’s the consummate illiquid asset and even saying it represents an “ownership” interest is mostly, to my mind, a metaphor. At least it’s unlike any common form of ownership we’re familiar with in our day to day lives.

Yes, I hasten to agree with you that the voting rights that all but universally accompany equity-partner status are quite tangible, but even that indisputable feature cannot, as they recite, be sold, lent, mortgaged, pledged, assigned, hypothecated, etc.  If this is “equity,” it’s the strangest kind of equity I’ve ever seen.

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