Published 24/11/16 in Legal Week, article by Anna Ward
Two days after the failure of King & Wood Mallesons’ (KWM) European recapitalisation plan, the clock is ticking on efforts by management to find an alternative solution to safeguard the future of the business.
The firm said in a statement on Monday (21 November) that management of the legacy SJ Berwin business is considering a range of options – including a merger – after just 21 partners came out in support of the rescue plan, which would have secured the partnership’s position within the global KWM verein.
Given the level of debt – understood to be around £35m – and the stark lack of buy-in from partners
for the £14m recapitalisation, restructuring experts believe a merger partner could be hard to find.
Although it is understood that the firm is currently fielding interest from a number of interested parties, the prospect of these discussions faltering raises the spectre of a potential pre-pack administration and fire sale of the business, according to lawyers and accountants with experience of similar scenarios.
Had the European partners committed to the deal, the Asia-Pacific arms of the verein would have contributed a similar amount of capital, with the collective pool being split between paying off some debt, providing working capital and guaranteeing partner earnings.
“It would be ideal if they could find another merger partner,” comments Ronnie Fox, principal of employment and partnership specialist firm Fox. “The problem is, being blunt, that so many of the partners have already left and that will reduce the attractiveness of what’s left in the London office to any prospective merger candidate.”
Former Halliwells disputes partner John Lord, who is now a partner at Knights and has previously worked on matters relating to law firm collapses including Halliwells and Parabis, says: “The process could follow the route taken by other law firms like Halliwells and Cobbetts: they could try to get into merger talks but it would be difficult to find a merger partner if the market perceived the business to be insolvent.”
Manchester-headquartered Cobbetts was sold to national firm DWF via a pre-pack administration in 2014, while Halliwells’ business was split up in a pre-pack deal when it failed in 2010, with parts of the firm divided between Hill Dickinson, Barlow Lyde & Gilbert, Gateley and Kennedys.
Smith & Williamson head of professional practices Giles Murphy says there is still “a chance” of a merger partner being found “if management moves fast”.
But he adds: “The problem is, if I was a partner sitting in those offices I’d be making ‘Plan B’ arrangements. I might not be able to afford to wait for management to make a decision. Even if they
did, how palatable would it be for me?”
A pre-pack administration would enable acquiring law firms to pick off the firm’s most attractive assets, as Fox comments: “I think there will be a lot of cherry-picking going on.”
Buying the business through a pre-pack administration would also remove many liabilities from potential acquirers.
“The pre-pack acquirer would agree what liabilities it would take on,” says one City accountant who declined to be named. “It would not only have to satisfy itself with what it can salvage of the business; it would also have to decide what liabilities it is prepared to take on.
Many partners have left the firm in recent weeks, with Goodwin Procter this week confirming the hire of UK investment funds head Michael Halford. Further exits of those with key client relationships could weaken KWM’s negotiating position with any potential acquirers.
Lord says: “This could have an impact on the price which a purchaser may be prepared to pay, and any purchaser will be seeking assurances from those who hold the client relationships that they will not leave post-deal. The purchaser will be looking for a commitment that the transferring members and staff will agree to lock in for up to three years.”
However, one UK restructuring partner argues that individual departures are now less likely. “Earlier in the process you are more likely to get disintegration – now it will be more difficult for individual partners to cut a deal elsewhere.”
Any team moves would likely involve negotiation over partners’ private practice loans, according to the partner: “The partners going to a new firm would have to put capital into that firm. The new firm may ask them: ‘When are you going to get capital at your old firm? We’ll indemnify you and take on
the liability of your private practice loan.’ So it becomes more unwieldy. Partner exits at this point in the process are fraught with difficulty.”
In this worst case scenario, creditors face losing out on funds. KWM owes around £35m to its lenders, which includes a £25m overdraft facility with Barclays. “Unsecured creditors would only be paid if there are sufficient funds realised from the sale of the assets to pay them a dividend after the secured liabilities have been discharged. In reality, unsecured creditors tend to receive nothing when law firms go bust,” says Lord.
The City accountant adds: “If the target is unable to meet any other liabilities then debtors will be called in, and beyond that creditors won’t be paid as there will be nothing to pay them from.”
Should any potential administrator attempt to ‘claw back’ profits from former partners, some believe they would be unlikely to succeed as it would be hard to prove that the partner in question knew at the time of receiving any distributions that KWM’s EUME arm was likely to become insolvent.
Fox concludes: “I think that claw back is unlikely; the problems only really became evident comparatively recently.”
KWM declined to comment.