King & Wood Mallesons (KWM) has asked its European and Middle Eastern partners to pay in between £80,000 and £240,000 as part of a recapitalisation plan designed to shore up its strained finances.
In a plan laid out by London funds veteran Michael Halford, who headed a recapitalisation taskforce, KWM’s partners have been 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 be asked to pay around £80,000 into the business, while those at the top of the equity will be asked to inject £240,000 into the firm. Legal Business understands this will double each partners’ total capital contribution to the business, from £4,000 per point currently to £8,000 per point.
The firm is also asking its salaried partners to supply £60,000 each into the business. Salaried partners have 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. It is understood salaried partners have until 27 July to decide on the cash call.
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 a mass exodus of big-billing partners.
The cash call across KWM’s European and Middle East business, the legacy SJ Berwin practice, also follows frequent delays to quarterly profit distributions and a sharp increase to its loan facility with Barclays. Partners were told at a meeting in March that the revolving credit facility, which had been set to expire in July 2016, had been extended and increased by £5m to £25m.
One ex-KWM partner told Legal Business: ‘I’m glad I’ve left. But they don’t have any other choice, they’ve got to get working capital from somewhere. It’s just like putting more money into a company to keep it solvent and keep it trading. There’s really no other choice. People are leaving quicker than overheads are being dealt with so revenue is falling faster than they’re cutting costs so there was no option other than a cash call.’
The move is the latest measure introduced by management to strengthen the business following a partnership restructuring in March that resulted in 24 partners being asked to leave the firm. While the move was longed for by high performing partners, the move has failed to halt a damaging run of exits, with a six-partner private equity team in Paris quitting 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.
Another former KWM partner added: ‘I’m not surprised as they will have a big tax bill at the end of July and the firm’s always survived by deducting 40% of your monthly drawings and putting it in a “tax reserve” but is actually used as working capital. They’ve always relied on billing enough in the next year to have the cash available on the 31st July.’
A spokesperson for KWM declined to comment.
tom.moore@legalease.co.uk
Read more in: ‘Global 100: Branded – Inside the troubled takeover of SJ Berwin’