Kirkland & Ellis is overhauling its equity partner exit terms – ushering in new policies to withhold compensation for departing partners, as well as slashing notice periods and speeding up the time it takes those leaving to be repaid their capital.
Partners are understood to have unanimously approved the changes earlier this week (16 July), with the move, first revealed by Financial News, meaning equity partners leaving the firm could potentially see millions in accrued compensation withheld by Kirkland, where average PEP stands at nearly $8m and stars are paid significantly more.
Until now, Kirkland has withheld 55% of equity partners’ annual compensation until the following year. The new policy grants Kirkland the option of withholding this accrued compensation from departing partners altogether. It will be at Kirkland’s discretion whether it chooses to withhold the distributions.
In addition, the firm has also approved a change that will reduce the notice period for exiting partners from 120 days to 60 days, effectively returning Kirkland to the notice period it had prior to 2016.
The firm has also slashed the time those leaving will have to wait for their capital to be repaid from 12 months to three months.
The changes to Kirkland’s exit terms on its partnership agreement come after the firm saw a string of high-profile departures to Paul Weiss in London last year.
Debt finance partner Neel Sachdev and buyout partner Roger Johnson left to launch an English law practice for Paul Weiss, going on to bring in equity partners including Timothy Lowe (tax) and Matthew Merkle (capital markets), as well as several non-equity partners. For more on Kirkland and Paul Weiss, see LB’s feature ‘Market forces: Paul Weiss, Kirkland and the war for London talent’ .
With new firms likely having to pick up the cost of any potential profit distributions withheld from new recruits, the overhaul will make it more costly to add lateral teams from Kirkland in future.
Danielle Crawford, a partnership counsel at Forsters, said that in practice departing partners would likely not lose out personally because of the change, with their new firms instead picking up the additional cost of matching the withheld distributions.
She told Legal Business: ‘Talking about the discretion to withhold distribution payments for departing partners is very common across the bigger firms especially Kirkland’s competitors. It makes it less attractive for partners to leave, if a firm wants to poach a partner, they might have to make good that loss to persuade the partner to leave.’
Meanwhile speeding up the time it takes to get departing partners out of the door and to receive their capital back will save Kirkland money and it will also be better for firm culture, according to partnership experts.
‘Prolonged departures are not good for team morale/key firm-client relationships,’ added Crawford. ‘There is also a higher risk that the departing partner can take more business from the firm if they continue with client work for a number of months after they have decided to leave.’
Another partnership lawyer said: ‘When someone is so disaffected it’s best to get them out sooner rather than later rather than having them hanging around for a longer period.’
Partners suggest reducing the notice period and time taken to repay capital could well have been sweeteners for partners to get the changes over the line and boost retention. They also bring the firm in line with other firms, which have increasingly been looking at exit terms. Linklaters for example discussed withholding profit from departing partners before deciding against it.
‘It is increasingly common, particularly for the large, high earning US firms,’ said Jon Haley, head of professional partnerships at Farrer & Co.
He added: ‘It has not historically been common in UK legal partnerships but you do not have to look hard to find similar Bad Leaver mechanisms – whereby retained value in some form or other is forfeited on exit – in other high earning sectors such as private equity and financial services, so in some ways the legal profession could be said to be lagging behind and I suspect others will follow soon.’