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Paying up: KWM partners vote to inject £14m of extra capital

An overwhelming majority of King & Wood Mallesons‘ (KWM) European and Middle East partnership has voted in favour of recapitalising the firm, committing £14m in a cash call to put it on a firmer footing.

KWM said in a statement: ‘The recapitalisation is the third stage of the firm’s strategic plan to strengthen its EUME business. Firstly, with effect from 1 May 2016, the firm implemented a new organisational structure which streamlined 17 practice areas in to three divisions to better align its structure with its business strategy. Secondly, the EUME partnership was rationalised to focus on clients and practices where the firm excels and which are aligned to the firm’s regional and global strategy. Addressing the capital position of the firm in EUME is the final part of the plan.’

A partnership vote saw 98% of the firm’s European and Middle East business vote in favour of the move, which follows a period of financial strain that has seen KWM increase its loan with Barclays by £5m to £25m and repeated delays to partner payments. The latter resulted in the firm moving from a largely quarterly-based profit distributions model to a monthly system.

The vote followed a recapitalisation plan laid out by London funds veteran Michael Halford, with KWM’s partners asked to pay in an extra £4,000 per point they have on the firm’s remuneration ladder. The firm operates on a 20 to 60 points ladder, with each point assigned to partners currently worth around £14,000 in annual profit distributions, putting the firm’s top partners on around £840,000 before bonuses.

The move means those on the bottom of the ladder will pay around £80,000 into the business, while those at the top of the equity will inject £240,000 into the firm. This will double each partners’ total capital contribution to the business, from £4,000 per point currently to £8,000 per point. Legal Business understands that partners have been given the option of injecting the cash or allow the sum to be deducted from their share of past and future profits.

The firm also asked salaried partners to supply £60,000 each into the business. Salaried partners had never had to contribute capital before, and have not traditionally been assigned profit points or been allowed to vote in partnership decisions. It is unclear if this will change as a result of any capital contributions.

A former member of the firm’s executive committee told Legal Business: ‘The success of the cash call depends on what it is going to be spent on. Partners don’t want it sucked back out without any future improvement. I’d question if there are there processes around working capital so that the firm keeps financial discipline.’

While the request for capital contributions from salaried partners is not unusual in the London legal market, and KWM was something of an anomaly in not doing so following a crackdown on limited liability partnerships (LLPs) by the UK’s HM Revenue & Customs in 2014 that resulted in higher capital contributions for non-equity and fixed-share partners, the move comes at a time of instability following an exodus of big-billing partners.

A six-partner private equity team in Paris quit in April to launch Goodwin Procter in France. The team, which included KWM Paris managing partner Christophe Digoy and big-biller Maxence Bloch, are believed to have walked out with £8m worth of billings.

Read more on KWM in the feature: ‘Branded – Inside the troubled takeover of SJ Berwin’