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Strategic Deals Law Blog

Insight & Commentary on Distressed Company Legal Issues and other Complex Business Law Topics

How Do You Define Organizational Leadership: Excellent? Ethical? Enduring?

By John Schafer on Posted in Deal Strategy

“The best executive is the one who has sense enough to pick good men to do what he wants done, and self-restraint enough to keep from meddling with them while they do it.”

-Theodore Roosevelt

If you were asked in a blind survey to name the three characteristics to best describe your business organization, what percentage of surveyees would include the following three traits:

  1. Excellent;
  2. Ethical;
  3. Enduring?

Would you?

I have been working on this post for four weeks now, but ended up holding off until I finished reading the book discussed below (which I highly recommend and is surely worthy of a full book review).

Strengthening Business Organization Leadership Skills: Not Your “Father’s Oldsmobile” Conference

As background, I recently returned from attending the Turnaround Management Association’s all-new education symposium held in Chicago which focused on strengthening and reinforcing business organization leadership skills.  Attendees included business turnaround professionals of many stripes, and came from as far away as Finland.

Unlike those “conferences” that leaves most attendees with few new and valuable “take aways” at its conclusion, this program delivered something innovative and valuable.  Senior executives and top experts who have distinguished themselves as effective organization leaders:

a)      Illuminated in detail their respective leadership philosophies and historical “lessons learned,”

b)      Led insightful interactive discussions on leadership topics, and

c)       Laid out the tools that can be used to distinguish oneself as a professional leader.

I surely left with a much stronger “tool box” of leadership principles.  To paraphrase a colleague, “it was nice to take a step back from discussing high-level finance and legal topics specific to the turnaround industry and explore the ‘nuts and bolts’ behind the people that can be the difference between a successful business organization and failure.”

How Do You Define “Leadership”?

The symposium challenged the attendees to critically think about the meaning ascribed to the word “leadership.”

In the past few years, business schools have been re-examining how they define leadership.  Here are a few ways they are defining or characterizing “leadership”:

  • “[T]he ability to inspire others to strive and enable them to accomplish great things” – Dartmouth’s Tuck School of Business;
  • “Trustworthiness,” “Respect for Others,” “Change Leadership,” “Developing Others” -among other things, from the unique “Leadership Behavior Grid” that is now part of Stanford Business School’s applicants’ recommendation form.

Just as I was challenged at the symposium to consider the following question, how do you define “leadership” when it comes to your particular professional field?  My answer comes a little later, but first the following.

The Importance of Virtuous + Innovative Leadership

I strongly believe that ever-changing economic dynamics, driven by the inevitable impact of globalization as well as the economic disruptions of the past six to seven years, means that the financial viability of any organization requires leaders equipped to cope effectively with the complexity of today’s business environment.  This is true whether a Fortune 500 Company, a law firm, or a local small business.

Just last month, Ron Perelman donated $100 million to Columbia Business School to develop a “Center for Business Innovation” that is aimed at strengthening innovations and programs for future business leaders.  As
Mr. Perelman stated in Bloomberg:

“The business landscape is changing rapidly and dramatically, and as such the principles that define strong business leadership — such as an entrepreneurial mindset and solving complex challenges — are more important now than ever before …”

Of special interest to me, law schools have a long, long way to go in the leadership development arena.  Just a few months ago the first book of its kind was published on the topic “Law and Leadership: Integrating Leadership Studies into the Law School Curriculum.”

“Building Excellent Ethical & Enduring Organizations”

One session that I found exceptionally insightful was a dialogue lead by @BobVanourek, who explained the organizational leadership principles set forth in his book “Triple Crown Leadership: Building Excellent, Ethical, and Enduring Organizations” and discussed how they also apply to turnaround and crisis situations.

Mr. Vanourek skillfully walked through his five leadership practices (with all citations from the book):

  1. “Head and Heart” – most businesses only focus on Head (knowledge; skills; experience; education) and miss the boat on Heart (character; emotional intelligence; cultural fit; passion).  Of interest to me is that apparently Google looks at the “bottom” of a resume first.  Mr. Vanourek wonderfully quotes Nelson Mandela: “A good head and a good heart are always a formidable combination.”
  2. “The Colors” – this is a business’ “Purpose; Values; Vision.”  To be effective, an organization’s “colors” must go beyond business school jargon and truly reflect how an organization connects with its employees and vendors to further a commonly understood cause.  As explained in the book: Purpose “grounds” an organization and its leaders, values “guide” an organization and its leaders, and vision “inspires” an organization and its leaders.
  3. “Steel & Velvet” – this one I found, in retrospect, to be the one that has challenged me the most when I have been in a leadership position.  “Steel & Velvet” goes to leaders needing to know when and where to invoke the “hard edge” by decisively exercising authority to achieve excellent results, all within ethical boundaries, and the “soft edge” by employing a relational style that inspires colleagues to step-up and unleash themselves as co-difference makers within the organization.  Vanourek emphasized: people stop listening if a leader constantly operates on the “Steel” side, which is a critical point to remember in a business reorganization or reconfiguration as individuals usually need to step-up in ways like never before.
  4. “Stewards” – this leadership practice goes to the heart of leadership being driven by the business’ shared values and vision.  Stewards are most successful when every person knows that he or she is empowered by the organization’s Colors and “high-performance culture of character” to pursue and achieve exceptional results.  The goal is to reduce the risk of depending on just one “heroic leader,” which can be stifling to an organization’s Colors.
  5. “Alignment” – finally, leaders need to ensure that all team members understand what their role is and what the expected results from such role are, something my own recent professional experience surely validated.  Absent that, chaos and organizational under-performance will undoubtedly occur.

Final Thoughts

All businesses need stay ahead of the rapid changes impacting across marketplaces. In both those areas I am actively involved – law firms and business turnarounds, no matter how strong one’s educational or professional pedigree is, I am now more firmly convinced than ever that it is the “leadership difference” that will drive enterprises to future success.

The Market Is Ripe For a New Style of Outsourced General Counsels

By John Schafer on Posted in Alternative Fee Structures, Deal Strategy, Future of the Legal Profession, Law Practice Management

While it may change, at present, I believe that the legal services market does not offer a turn-to sector where optimal outsourced general counsel services are readily available to a business community increasingly scrutinizing their current law firm relationships and eyeing new ways in which their business’ legal needs can be met.

Summary of My Previous Lead-In Post

This piece is an extension of my stream of reasoning set forth in last month’s post “The Rise And Impact Of Empowered Chief Legal Officers.”  In that piece, I laid out a major paradigm shift occurring in how businesses meet their legal needs as a result of an accelerating transformation of the seller-consumer relationship and dynamics between:

(a)    On one hand, law firms, and

(b)   On the other hand, businesses that have made the smart and forward-looking business decision of installing sophisticated and empowered in-house General Counsels/Chief Legal Officers and legal departments.

An Opportune Time for Offering the Legal Services Market a New Style of Outsourced General Counsel Services 

A great opportunity exists for professional legal service providers with expertise of a general counsel and statesmanship to expand into, redefine, and deliver a new and innovative package of external general counsel legal services to all sizes of businesses.  This fresh opportunity has arisen from the same pressures of change driving the rise of empowered in-house legal departments.

The opportunity centers around providing:

  1. Client-tailored menus of structured fees, for a
  2. Defined scope of work.

Such an external general counsel package of legal services is the best course of action when a company determines that such option is more cost effective and more prudent to meet the business’ ongoing legal service needs than (a) hiring a full-time general counsel or, alternatively, (b) continuing to rely exclusively on traditional law firms.  While the “outsourced general counsel” concept is not entirely new, what is new in today’s rapidly evolving legal market is a thirst for the following:

(i) skilled “general counsel” types of the lawyer-business “ally” mindset, who are in step with the “trusted advisor” philosophy, going hand-in-hand with
(ii) alternative fee structure options.

The question thus becomes: is there a turn-to professional legal service business sector that offers the total package set forth above to chose from?  My answer: not yet.

Message to Businesses: Some Law Firms “Get” What You Get, Most Don’t (…Yet)

In my opinion, Stephen Poor, the Managing Partner of Seyfarth Shaw, captured it perfectly in a New York Times “Deal Book” piece last year titled “Re-Engineering the Business of Law,” where Mr. Poor states that:

 “True long-term success requires businesses to improve continually and re-imagine how they operate in the face of changing competition and market forces.”

Mr. Shaw hits business performance reality on the head with the above statement.  However, Mr. Shaw then goes on to equally capture, in my opinion, how such business performance reality is still not in the vernacular of law firm economics as it is with other businesses when he states:

“Yet this innovative urge, which drives so much of the rest of the American economy, is largely absent from large law firms….

Instead, the measures become balancing rate growth versus discounted fees, lawyer productivity measured in tenths of hours, recruiting the partner with a book of business from one firm to another and similar yardsticks.”

Many of us have “been there, done that” and are no longer doing it for various reasons.  But times are changing … some for the better, some by returning to old ways.

The Law Firm Rate Bubble – Is Recent History Repeating Itself In Lieu of Structural Change?

In my opinion, there was a billing rate “bubble” in the 2000’s that like most bubbles was the by-product of loose credit-activity, which outpaced economic fundamentals.  Yet, billing rates have yet to properly adjust like a lot of the economy (in comparison, think of housing?).  This is not an “anti-law firm” rant — I believe it is simple economics.  But we are starting to see a billing rate uptick again in many legal sectors.

A year ago @lvanderpool Lisa van der Pool wrote a very telling article from an indicator standpoint titled “Lawyer Inflation: With Economy Mending, Many Firms Return To Raising Rates.”  Ms. van der Pool wisely cited Mr. James Westra, who diagnosed the structural disease far too many law firms face:

“The fact is that a lot of firms masked static productivity with rate increases, which is how they kept increasing profits. That became much more difficult to do starting in 2008, …

Over the last year, as the economy has started to recover, the firms that felt they can do it, have started to raise rates pretty significantly…”

The above words should not be taken lightly as Mr. Westra’s vantage point speaks for itself:

  • Foremost to the business crowd, he is currently managing director and Chief Legal Officer of the private equity firm Advent International Corp.;
  • Foremost to the legal crowd, he is the former Managing Partner of Weil, Gotshal & Manges LLP’s Boston office.

Three Factors Creating the Opportunity

With all of the above in mind, I believe there are three primary factors that are driving the market opportunity to deliver a new style of outsourced general counsel professional services:

  1. Businesses Legal Budgets.  Due to the challenging global economic climate over the past decade, many profitable small and medium sized businesses who have traditionally farmed out all of their professional legal service needs to outside law firms can no longer fit their legal needs into their legal budget.
  2. Internal Business Management Philosophies.  At the same time, static-minded number crunchers often argue that businesses should not turn to hiring a full time in-house legal counsel (setting aside for now that today is exactly the right time to make such a hire).  This is because such analysis is driven by those most comfortable with the “cost” side, which comes at the expense of the efficiency side of the question.
  3. Continued Predominance of the Old Way Law Firms Operate.  In these changing economic times, unlike any other business that are subject to nearly everyday forces of supply-demand as stated by Mr. Westra above (or as I like to put it for attorneys, “cost-value” accountability), when it comes to the most sellers of professional legal services, they are lagging far behind in adjusting their business practices.  While the old seller-consumer dynamics still predominately drive most major law firm business (i.e. compensation) models, and therefore business development efforts, I believe the clock is ticking on that approach.  This is because such an approach is not a viable long-term business plan for keeping existing clients and gaining new clients.  Unfortunately, addressing the paradigm shift is not a priority for most (but not all) law firms as it will require a significant internal culture transformation on many levels, a concept touched on by @Johngrimley in his piece “Why The Billable Hour Is Not The Issue.”

But the paradigm shift ultimately will become a focus for those law firms that have the long-term view for their firms.

My Recommendation– Take Steps to Avoid a “Hobson’s Choice”

Many businesses feel they face a truly “Hobson’s Choice” between (a) their ongoing need for consistent, high-level professional legal services, and (b) the financial reality that they can no longer internally justify the cost of their historical outside counsel’s hourly rates.  While unfortunate in the short run, forward looking businesses without an in-house legal counsel should seek out legal professionals:

  1. With expertise and demeanor that an external general counsel should possess, which includes the mindset of being a “trusted advisor” (which may not always be legal professionals who have served in-house as a general counsel),
  2. Who can meet both of the elements of the “Hobson’s Choice” set forth above,

and do so through:

  1. Client-tailored menus of structured fees, for a
  2. Defined scope of work.

Professional Excellence and a Balanced-Life Can Co-Exist

By John Schafer on Posted in Uncategorized

“What you see and hear depends a good deal on where you are standing”

-C.S. Lewis, The Magician’s Nephew

This post might seem a little “off topic” from the declared focus of this blog — “Insight & Commentary On Complex Business &Financial Law Topics.”  But I believe no matter how much “insight” we download as professionals, if we become too overwhelmed in life, both our professional excellence and personal lives will suffer.

So the proposition I put forward here is that professional excellence does not have to be sacrificed on the altar of the very amorphous concept of “work-life” balance.  Further, for those professionals that want to make being a “super professional” a priority in life, they can do so while also having a “balanced life.”  But that involves identifying priorities and making difficult choices as no one can have it all (indeed, the acceptance in professional circles over the past few decades that we can have it all is what has caused all the imbalance that exists — usually unknowingly — in many professional’s lives).

Before proceeding, I want to make clear I believe that there are truly different strokes for different folks.  Therefore, there is nothing wrong with those that choose to make their professional career the primary focus of their life …. as long as it does not come at the expense of others who never signed up for that.

Launching Point

The launching point for the discussion below is that all professionals must step back and start with the question: what is truly meant by the commonly used phrase “work-life balance”?

As the eminent Jack Welch stated a few years ago:

“There’s no such thing as work-life balance. There are work-life choices, and you make them, and they have consequences.”

I agree (with it equally applying to both men and women professionals)

In pondering this post over the last 24 hours, I came across numerous spot-on pieces written from personal experience who discuss the need to make choices, such as:

Then, as you will learn below, last fall @rashkenas Ron Ashkenas wrote a thoughtful article “Forget Work-Life Balance: It’s Time for Work-Life Blend” where he touched on many truths that I revisited first-hand just yesterday and which propelled me to write this piece:

“The reality for many of us these days is that our professional lives bleed into our personal lives. The boundaries are increasingly permeable and movable. We check our emails in the evenings and weekends. We delay or miss family events because we can’t leave the office. And when we do, we take our communications devices with us so that we can stay connected to work.”

I assume most of you reading this have “been there, done that.”  However, just becauseit is a commonly accepted practice to let our professional lives bleed into our personal lives does not make it right.  I think what often happens is that many professionals convince themselves for the sake of survival in an overly “marginless” world that letting our professional and personal lives bleed together is OK.  Yes, there are times and places where that will occur.  But it should be the exception – it is not a fait accompli.

My Personal Mea Culpa

So all of the above leads up to the following: yesterday, May 23, 2013, was my son’s yearly “Cardinal Field Day” at St. John’s Episcopal School, which is a day of fun-focused track and field events in a carnival atmosphere.  The school is split up between yellow, blue and red teams.  Parents and other adult family members are not only welcome, but encouraged to come and enjoy the spirited atmosphere.  As with years past and most of his school events, I made sure to attend.  But this year’s Cardinal Field Day was different for all the right reasons.

Last year, I was 100% physically present at Cardinal Field Day but sadly, in retrospect, spent most of the time trying to “balance” watching my son participate from just far enough away that the noise coming from the field would not be heard on the concurrent multi-party conference call I was participating on via my cell phone.  At the time that seemed like a perfect equilibrium since my son was definitely more interested in hanging out with his friends just far enough away from “Dad”.  But later that night it was emotionally divulged to me by him of how he interpreted things, specifically that to him “all I did was talk on the phone.”  The message was loud and clear: I might have been physically present, but I was not really “there” as he wanted me to be.

My first reaction, as if pulling from some “Better Something Than Nothing” handbook for lawyers, was a “IRAC”, legalist and presumably logically response to my son: “most dads do not attend Cardinal Field Day; … I was there watching you all the time.”  In my mind, the easy justification for that response was “work like this pays for you to attend St. Johns.”  However, that response was truly an “exercise in missing the point,” even if factually accurate.

What mattered was that my son had hit on the foundational point raised in a very enlightening post by @Ju_Summerhayes entitled “The Minimalist Lawyer”, which is that “[e]verthing has its place.”  For my son, my cell phone did not have a place during those 90 minutes of Cardinal Field Day.

That experience caused me to revisit the difficult question: even though I was a name partner at a small law firm I help found and thus controlled where I was for my conference call, was my perceived “equilibrium” really a work-life balance?  I thought it was and in most respects I feel that I have identified the right priorities and made the right choices with respect to balancing the professional excellence I seek to deliver with the personal life that I cherish.  But like so many things in life, and what is especially true for attorneys like me who spent most of their formative years in “Big Firm” environments (which can still haunt us even long after we left the halls of “Big Firm” life), is staying on top of:

  • what is meant by “everything has its place” for me and my family, each day as well as in the long run, and
  • once that is figured out, how do we put that into practice with respect to my professional life (as well as my wife’s professional life) and our family and personal lives?

Undoubtedly, these questions are very dynamic, perpetually changing moment to moment.  Fortunately, this year at Cardinal Field Day I 100% “got it” by putting away the cell-phone other than to take a few pictures of my son and post them to Facebook, like the one below. …. And I still was able to complete my legal work at the standard of “professional excellence” I set for myself.

Management: Look in the Mirror Before Filing For Chapter 11

By John Schafer on Posted in Business Restructuring & Bankruptcy, Deal Strategy

“However beautiful the strategy, you should occasionally look at the results.”

- Winston Churchill

One of my favorite business topics is how to avoid the far too common “execution gap” between strategy and results.  Effectiveness is the ultimate test of any given course of action.  But before even getting to the execution stage, businesses need to get the plan of action right as the first step.  This includes avoiding being overly concerned with the most immediate task at hand, while not understanding the whole situation and future landscape.

One of those situations arises when management of financially distressed companies are preparing the company to commence a Chapter 11 bankruptcy.  Specifically, over the years of advising financially distressed companies, I regularly found that although undertaking the necessary technical steps to file for Chapter 11, management of such companies rarely thought of facing the prospect of being stripped of their management authority once the Chapter 11 case commenced.  Then, when they do once in Chapter 11 bankruptcy, as discussed below it is often too late or, at best, the legal options are much more limited.

This far to common failure of management preparing for Chapter 11 to appropriately evaluate how they are going to be perceived once the Chapter 11 case is commenced and consider pre-petition strategic options available puts the success of the Chapter 11 at unnecessary risk.  That is because after the Chapter 11 is commenced, a motion to appoint a Chapter 11 trustee may be made, in which case the Chapter 11 debtor will be at a significant legal disadvantage if a Chief Restructuring Officer (CRO) would have been a better preemptive option in lieu of a Chapter 11 trustee.

Why It Matters When & How a Chapter 11 Trustee is Appointed

Bankruptcy Code §1104(a) provides a meaningful sword for interested parties to displace the management that got the debtor in its financial predicament after a Chapter 11 is commenced through the appointment of a Chapter 11 trustee.  The Chapter 11 trustee becomes the sole fiduciary and assumes control and management of the Chapter 11 entity, including authority t exercising such day-to-day operational control of the business.

The following are the statutory delineated grounds for the appointment of a Chapter 11 Trustee arising from management’s handling of the debtor’s business affairs (whether pre-petition or after the Chapter 11 case is commenced):

  • fraud,
  • dishonesty,
  • incompetence,
  • gross mismanagement, or
  • “similar cause….” that the Bankruptcy Court determines to exist.

Following the revisions to the Bankruptcy Code in 2005 as part of the “Bankruptcy Abuse Prevention and Consumer Protection Act” (“BAPCPA”), the Office of the United States Trustee, or “UST” (who is typically, but not always, the party that brings a Chapter 11 motion) is now required to move for the appointment of a Chapter 11 trustee under the following circumstances:

. . . if there are reasonable grounds to suspect current members of the governing body of the debtor, the debtor’s chief executive or chief financial officer, or members of the governing body who selected the debtor’s chief executive or chief financial officer, participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or the debtor’s public financial reporting.

11 U.S.C. §1104(e).

This is because I believe it is critical for the management of any distressed business facing the realistic prospect of allegations of any of the above to strongly consider consensually relinquishing meaningful management control by appointing CRO prior to filing for Chapter 11 (or the Board to affirmatively cause the same to happen if management resists).  I was prompted to write this article after a colleague read a prior article I wrote about the value of CROs and their evolution and asked about how different legal scenarios impacted the ability to appoint a CRO.

Why Pre-Petition Management & Boards Should Care About the Prospect of a Chapter 11 Trustee

Pre-Petition Management and Boards should care about the prospect of a post-petition Chapter 11 Trustee because there is a significant line of Bankruptcy Court cases that I believe provide a legally justifiable path and option – the appointment of a pre-petition CRO — that significantly increases the ability to outflank those that may later seek the appointment of a post-petition Chapter 11 trustee (or use the threat of such a motion for unrelated leverage purposes).  For most (but not all) businesses in Chapter 11, I am in agreement that a Chief Restructuring Officer is a better alternative to a Chapter 11 trustee.

Since the enactment of BAPCPA, several courts have addressed the broader question of whether a Chapter 11 trustee can or should be appointed if a CRO already has been installed to control the management affairs of the Chapter 11 debtor, including the appointment of a CRO pre-petition.

Key Case: In re 1031 Tax Group LLC

Of noteworthy importance as a potential roadmap for distressed businesses and their advisors is In re 1031 Tax Group LLC, 374 B.R. 78 (Bankr. S.D.N.Y. 2007), with the highlights of this case being:

  1. A few days before a Chapter 11 was commenced, the pre-petition management appointed a CRO but remained in place as management (which is often the case).
  2. Immediately after the Chapter 11 was commenced, Chapter 11 debtor requested that the Bankruptcy Court approve an “irrevocable delegation” agreement that was entered into pre-petition, which unequivocally surrendered management authority, including the ability of the Board to terminate the CRO.
  3. The Bankruptcy Court approved the appointment of the CRO and terms of the “irrevocable delegation” agreement.
  4. The United States Trustee then moved for the appointment of a Chapter 11 trustee to displace the CRO and all of the pre-petition management.
  5. The request for the appointment of a Chapter 11 trustee was denied.
  6. Interesting enough, the Bankruptcy Court found that the pre-petition management’s tactic of installing a CRO and approval of the “irrevocable delegation” agreement were “unquestionably done, at least in part, to avoid the appointment of a chapter 11 trustee.”
  7. However, and I believe correctly so, the Bankruptcy Court did not believe “cause” existed under Section 1104(a)(1) because the changes made “resulted in the Debtors installing new current management, free from any taint associated with . . . prior management.”

Take Away from In re 1031 Tax Group

  • If the post-petition Chapter 11 debtor can make a sufficient factual showing to the Bankruptcy Court that the pre-petition appointed Chief Restructuring Officer is sufficiently independent of the pre-petition appointing management and has the necessary legal authority and autonomy to control the Chapter 11 debtor’s affairs going forward, then the CRO will be viewed as being in effect new management and not be tainted by prior management.

The above is true even if the pre-petition appointing management engaged in fraud or gross mismanagement.

Thus, the path outlined provides a path for a pre-petition distressed business to “immunize” itself as the future Chapter 11 debtor against the post-petition appointment of a Chapter 11 trustee (provided the CRO acts accordingly and the prior “tainted” management does not influence the decision making process of the CRO).

Critical Legal Distinction

A critical note is that a very different legal dynamic arises if a Chapter 11 debtor seeks to appoint a CRO post-petition.  This is because, in contrast to the UST lacking the legal authority to directly challenge and void the pre-petition corporate governance decision of a distressed business prior to it filing for Chapter 11, once a Chapter 11 is commenced and the business entity is operating under the confines of the Bankruptcy Code and Court, the UST will always take the position that the Bankruptcy Code only provides for the displacement of the Chapter 11’s management by the appointment of a Chapter 11 trustee and does not authorize a “debtor-in-possession” (or any party for that matter) to seek the appointment of a CRO.  There is must more case law for such a situation, which I will likely discuss in a separate post.

Strategic Considerations in Bankruptcy Code Section 363 Transactions

By John Schafer on Posted in Business Restructuring & Bankruptcy, Deal Strategy

The multifaceted tactical and strategic considerations that come into play when a financially distressed company pursues the sale of substantially all of its assets by means of a sale pursuant to Chapter 11, Section 363  was the subject of a presentation I gave this morning to my Provisors’ “Mergers and Acquisitions” professional networking group.  I was kindly introduced to this group a few months ago, and then nominated for membership, by a terrific professional colleague and group member Jim Davidson of the always professional  and sophisticated financial advisory services firm Avant Advisory Group.

The presentation was entitled “Strategic Considerations in Bankruptcy Code Section 363 Transactions – It’s More than Law and Process”, which may be best exemplified by the following image for a practitioner way over its head if not fully in-tune with the M&A and Chapter 11 bankruptcy cross-over arena in which 363 sales occur:

As a quick primer, Section 363 of the Bankruptcy Code provides the means for a Chapter 11 debtor to sell substantially all of its assets “free and clear” of third party interests to an acquirer if certain legal requirements are met.

While Chapter 11 of the Bankruptcy Code was originally designed to provide an orderly legal process for distressed operating entities to reorganize their businesses and exit bankruptcy as a going concern, most distressed companies with value-add assets now simply file for Chapter 11 bankruptcy for the specific purpose of selling all or substantially all of their assets by utilizing the M&A advantages afforded by Chapter 11’s Section 363.  The practical reality is that distressed companies now commonly team up pre-bankruptcy with an acquirer of their choosing, enter into an Asset Purchase Agreement, file Chapter 11 and then seek to utilize Section 363 to consummate the M&A transition.  The driving assumption is the perceived speed, efficiency, and legal benefits obtained through Court approval of the transaction via Section 363.

Thus, I was not surprised this morning before heading off to the Provisors meeting when I read a leading bankruptcy news headline story by Aviva Gat of the Deal Pipeline that a noteworthy operating business — Oreck Corporation — had filed Chapter 11 and publicly announced the intention of selling substantially all of its assets via the Chapter 11 process.  Moreover, Oreck’s bankruptcy court filings stated: “If a deal is not reached, … it is possible that a liquidation and wind down of the Debtors may ensue.”

My Presentation and Interactive Discussion

By design, my presentation and subsequent interactive cross-talk among the group members did not focus on the legal and economic policy question of whether or not the trend towards using Chapter 11’s Section 363 as a M&A tool is superior to the more traditional Chapter 11 reorganization process.  Instead, the focus was on:

  1. The need for a unique intersection of Chapter 11 bankruptcy expertise and traditional M&A expertise to best serve any major parties legal interests, which is because each expertise are fully implicated when financially distressed companies choose to pursue consummation of a distressed M&A transaction by means of Section 363 of the Bankruptcy, and
  2. The strategic “tools” that professional advisors, both legal and financial, need to be aware of and — most important from a strategy perspective — need to be instinctively attuned to in a 363 sale situation in order to utilize such tools for the benefit of their client.

Specifically, the following “variables” were discussed:

  • Statutory Provisions Governing 363 Sales: private market acquirers needs to understand that rightly or wrongly, the statutory framework and judges case law as it applies to the deal-specific situation need to be considered before become actively involved in a 363 sale situation.
  • Key Benefit of a 363 Sale – the “Gold Standard” Afforded by the Bankruptcy Court Order: Knowledgeable sophisticated acquirers place a premium on obtaining the Order approving a 363 Sale that provides for the acquisition of the acquired assets free and clear of any current or future liens, interests, claims or encumbrances, which by its nature is a Federal Court order that has the full force and effect in any jurisdiction of the United States, whether at the Federal, state or local level.
  • Deal Strategy and Deal Fundamentals: Section 363 provides the opportunity for distressed sellers to offer legal protections and inducements to acquirers, and flexibility in structuring and timing the sale (subject to the degree of leverage held by secured creditors), but such decisions need to be made after consideration of how such decisions will be made by the Bankruptcy Court and other significant parties-in-interest.
  • The Players: While the pre-bankruptcy filing “business judgment” of the distressed company to enter into the terms of a pre-filing Asset Purchase Agreement will be given considerable deference in the absence of clear evidence of collusion or fraud, by submission of the company to the Bankruptcy Court process, all 363 sales become subject to judicial oversight and thus the company’s decision making does not operate in a vacuum when it comes to major transactions pursued under Chapter 11.  It should never be lost on interested parties that the post-bankruptcy filing entity is considered a distinct legal entity from the pre-petition company, even though for all practical purposes insofar as management, corporate governance and business operations are concerned, the post-petition company operates as the same unless as previously discussed and recommended a truly independent Chief Restructuring Officer is installed.  Plus, in middle market and larger Chapter 11 cases, an official committee of unsecured creditors will undoubtedly be appointed, who play an active (although not always productive) role in how the final terms and conditions of a 363 sale evovle and finally take shape.  This includes:
    • How the 363 sale is marketed publicly and privately,
    • The terms and conditions of the bidding procedures, and
    • The terms and conditions of the final transaction documents.
  • The Court Approved Sale Process.  Last, but surely not least, parties should never loose sight that all 363 sales are a function of the judicial process and judicial oversight as ll 363 sales must be approved by the Bankruptcy Court after notice and opportunity for all interested parties to be heard.  In each situation, this dynamic can be strategically good vs bad, depending on the goals and motivations of the specific client.  But is a reality that should never be ignored by the tactically smart party.   At the end of the day, the Bankruptcy Court is the first and most important gatekeeper for approving the often amorphous but always present concept of the “highest and best” offer, which is not necessarily the highest in terms of dollars.

Presentation Take-Aways

As part of the presentation, I examined publicly filed “exemplars” from Section 363 deals I ran as lead counsel, including the following documents I made available via Dropbox:

  1. 363 Sale Asset Purchase Agreement approved by the Bankruptcy Court (http://bit.ly/10a1Hvv), and
  2. 363 Sale Court Order entered by the Bankruptcy Court (http://bit.ly/ZOqupe)

Whether a Section 363 sale is the best path a distressed company should pursue always depends first on the specific facts of each case that determine the leverage of each major party-in-interest.  I strongly believe a 363 sale is a value-enhancing tool for identifying “good” companies and “dead” going concerns.  A value-enhancing professional practitioner, whether on the legal or financial side, will not only be able to access and decipher the unique business factors implicated by the 363 sale process, but will have the ability to strategically advise and guide its client in a manner in the best interest of such client.

All told, a 363 sale never happens in an identical “vacuum” to any previous 363 sale, thus tactical and strategic decisions can be the difference between a “good deal” and a “winners curse” deal for the acquirer and the bankruptcy estate if the deal is later unraveled by any appellate court.

Facilitating the Liquidation of “Bad” Companies and the Reorganization of “Good” Companies [Part 2]: Evolution of the Role of the Chief Restructuring Officer

By John Schafer on Posted in Business Restructuring & Bankruptcy

I pick up today on the theme started in an earlier post “How the Chapter 11 Bankruptcy Process Can Better Facilitate the Liquidation of ‘Bad’ Companies and the Reorganization of ‘Good’ Companies” and discuss the evolution of the role of “Chief Restructuring Officers” in the business workout and Chapter 11 arena.

The title “Chief Restructuring Officer”, or CRO, may not be a long-standing title when compared to other historical professionals in the business turnaround field.  Indeed, the roles and duties that the modern CRO assume have been around in many aspects for as long as there have been businesses to restructure.  However, the scope of authority and role of a modern CRO has evolved significantly from its turnaround consultant predecessors.  Today, for any business facing operational or “balance sheet” challenges, the CRO has become a mainstay fixture in the strategic arsenal that businesses (and secured lenders via leverage) have at their ready disposal in a business turnaround situation.

The Turning Point: The Recession of the Early 2000s

Over a decade ago during the last restructuring apex, the role of a CRO in business turnarounds experienced a foundational change:

  • Prior to the early 2000s, crisis and turnaround management professionals typically served as independent consultants who reported directly to, and served at the mercy, of the troubled company’s “C-level” officers or board of directors.
  •  Beginning in the 2000s, crisis and turnaround management professionals started to become employed directly by corporate entities as chief restructuring officers (CROs).

The turn from relying primarily on turnaround consultants and the rise of the use of CROs developed within the Delaware Bankruptcy Courts and then proliferated in other bankruptcy courts across the Country.

It has been argued, and correctly so, that acceptance of CRO’s is a function of:

  1. The frequent reluctance of entrenched upper-management or the CEO (even if conflicted) to delegate the necessary authority to turnaround consultants, thereby leaving such financial advisors in the ineffective position of being at the discretion of upper management and/or the board of directors when it came to differences of opinion.
  2. This is turn resulted in turnaround consultants being viewed both internally and more importantly, by external parties-in-interests, as not being able to achieve the desired turnaround results because they lacked the necessary operating control and authority of over the financial and operational decisions of the company.

Thus, the philosophy behind the greatly increased scope of a CRO’s role and authority, in contrast to the historical turnaround consultant, derives from two foundational notions:

  • CRO’s need to have the necessary authority to direct the course and direction of a restructuring, and
  • CRO’s need to have greater independence over existing management, so that they can be more objective in the hard decisions that have to be made.

In a 2004 American Bankruptcy Law Journal article titled “Does Chapter 11 Reorganization Remain a Viable Option for Distressed Businesses for the Twenty-First Century?”, the eminent Harvey Miller of Weil Gotshal described the CRO as follows:

The CRO is vested with executive decision making powers and direct access to the debtor’s governing body.  Direct access to the CRO is given to the creditor constituency responsible for the CRO’s appointment. The CRO has the authority to meet privately with the creditor constituency and otherwise deal with that creditor constituency as to the administration and formulation of a reorganization plan. From the perspective of some observers, the CRO is almost a de facto trustee.

CRO’s are thus viewed as having the ability to effectuate a more impartial and effective restructuring.  This is believed to be true whether in a Chapter 11 proceeding or an out-of-court workout.

Why the Evolution and Acceptance of the CRO Role?

Commentators have debated what drove in a relatively short period of time the evolution CROs to becoming a commonly accepted role-player, if not necessary party, for business turnarounds.  Many have argued that the primary cause or factor is a now customary insistence of major secured lenders for a CRO to be installed as a condition to that lender consensually working with the distressed business or Chapter 11 debtor.  Whether such insistence arises from an altruistic desire of secured lenders to put into place a mechanism to bridge differences between a debtor and its creditors or a purely self-interested means to unfairly control a distressed situation (or somewhere in between) is question beyond the scope of this piece.

Thus, without exploring the legalistic question of causality and the relation between the set of leading factors (causes) and the CRO phenomenon (effect) and recognizing the CRO phenomenon has been affected by a variety of factors, I believe the most direct factors in the evolution and acceptance of the modern CRO’s role in place of turnaround consultants was driven by the concurrent emergence of:

  • Much more complex financial and capital markets, as well as increasingly challenging operating markets for business, and
  • More sophisticated and aggressive lenders (rightly or wrongly).

As a result, the need arose for a more advanced and specialized skill set based on an integrated understanding of managerial, financial, operational and corporate governance expertise for distressed situations.  The old way of relying on existing management and boards of directors, assisted by traditional turnaround consultants, no longer sufficed.  Modern CROs filled that void.

Whatever the precise genesis of the evolution of the modern CRO, they are now a mainstay in the business turnaround arena and they continue to have a significant, and I believe overall positive impact, on the ability for the system to sort out “good” companies and “bad” companies.

NEWS INSIGHT: Public Hearing by the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11

By John Schafer on Posted in Alternatives to Bankruptcy, Business Restructuring & Bankruptcy, Deal Strategy

This past Friday, April 19, 2013, the highly anticipated public hearing of the American Bankruptcy Institute’s (ABI) Commission to Study the Reform of Chapter 11 occurred at the ABI’s 31st Annual Spring Meeting in Washington D.C.    The Commission consists of Chapter 11 experts from across the Country, and includes my bankruptcy professor and law school mentor Ken Klee of UCLA School of Law and the law firm Klee, Tuchin, Bogdanoff & Stern.

The Commission’s mission is stated as follows:

In light of the expansion of the use of secured credit, the growth of distressed-debt markets and other externalities that have affected the effectiveness of the current Bankruptcy Code, the commission will study and propose reforms to chapter 11 and related statutory provisions that will better balance the goals of effectuating the effective reorganization of business debtors—with the attendant preservation and expansion of jobs—and the maximization and realization of asset values for all creditors and stakeholders.

The April 19th hearing covered a spectrum of issues enmeshed in all business Chapter 11 cases, but had a particular focus on so-called “middle market” Chapter 11 cases – the predominate type of business bankruptcy case in Southern California.

I have long been a proponent of meaningful reform to the Chapter 11 process, but it must be targeted at making the Chapter 11 process both more efficient and more true to its purpose – that is, preserving the value of a business as a reorganized going concern where that path preserves substantially more value than the value realized from the sale or liquidation of the business’ assets, and concurrently and promptly filtering out the rest.

I read through most of the witness testimony, which is available on the Commission’s website, and found all the testimony compelling and in many instances on-the-mark when it came to diagnosing the problems.

Dan Dooley, the CEO of the national turnaround firm MorrisAnderson, http://www.morrisanderson.com/team/profile/daniel-f.-dooley aptly hit on the most telling structural drawback of the current Chapter 11 system, which I characterize as follows:

It is very difficult for middle market companies to use the Chapter 11 process to turnaround a business and exit Chapter 11 as a reorganized going-concern entity. 

As Mr. Dooley stated:

“Chapter 11 is now viewed as too slow and too costly for the majority of middle market companies to do anything other than sell its going concern assets in a 363 sale or to simply liquidate the company.  Both of these outcomes are often pursued almost exclusively for the sole benefit of the secured lender.”

Mr. Dooley’s characterizations as to the current state of Chapter 11 cannot be dismissed, as some may, as coming from a biased professional vantage point.  Whether the current state of the Chapter 11 system is good or bad from a commercial system perspective, what Mr. Dooley describes is accurate.

Where I diverge, at least in part, from some of the experts goes to the harder question: what are the best solutions?  I continue to believe that our economic system benefits from a Chapter 11 mechanism as long as it provides a clear and fair-to-all path for “good” companies to consummate a turnaround and exit as a reorganized and healthy going concern entity.   There are many great success stories out there, not just the horror stories that tend to grab the headlines.  Furthermore, Chapter 11 can serve other purposes that just the reorganization and exit of going concerns.  Indeed, Chapter 11 has increasingly become a new niche forum for consummating an M&A deal by means of a 363 sale.  As I have previously discussed, I believe there is great value in having this option available because if properly navigated, 363 sales can be strategically utilized as a tool to meet multiple parties’ respective goals while also being in the best interest of the bankruptcy estate.

Nonetheless, the slow speed of Chapter 11 and increased control secured creditors have over the direction of a Chapter 11 case is likely driving companies that would have otherwise been better off reorganizing as a going concern being instead forced to sell-off their assets in Chapter 11.  I think the degree to which this is occurring is open to debate, but it surely occurs and thus needs to be addressed.  That is a tall-task for the Commission but one I am glad they are trying to tackle.

UPCOMING EVENT: Strengthening Professional Leadership Skills the Focus of Upcoming All-New TMA Program

By John Schafer on Posted in Deal Strategy

Strengthening and reinforcing leadership skills among business turnaround professional service providers will be the focus of an all-new education symposium by the Turnaround Management Association (TMA), aptly entitled “Leadership For Today, Tomorrow, and Beyond“, set to take place at TMA Headquarters in Chicago May 14-16.

Curriculum Focus

The curriculum will focus on leadership decision-making themes, including “how to” and the importance of:

  • Building strong teams;
  • Creating quality client goal-focused work product;
  • Managing well in the midst a crisis;
  • Marketing and communicating in an interconnected world;
  • Transcending situational discord to protect your client’s interests;
  • Negotiating to maximize outcomes; and
  • Dominating your niche specialty.

Who Will Be There

The event will bring together experts in leadership from a broad range of sectors and include senior level financial services and legal professionals with a specialty in bankruptcy and restructuring, ranging from smaller firms such as my fellow 2013 TMA Western Regional Conference Co-Chair Andrew Toft to large firms such as turnaround and business services firm Alvarez & Marsal and the international law firm Greenberg Traurig LLP.

After The Event

I will be attending the TMA Senate program and am looking forward to forging new relationships and enhancing my individual and firm leadership skills.  I plan to follow-up with a write-up of my “take-aways” from the program, especially how they help me apply my professional skills in creating winning scenarios for the clients I service facing business restructuring matters.

As the Debate Continues, What About Alternative Attorney Fee Arrangements in Large Chapter 11 Business Bankruptcies?

By John Schafer on Posted in Business Restructuring & Bankruptcy, Law Practice Management

Last week I wrote through the lens of sophisticated and empowered in-house legal counsel about how they are shaping the future delivery of professional legal services by outside law firms.  In this piece and in a subsequent piece to follow, I take a look at making the delivery of professional legal services more efficient and value-result driven in chapter 11 bankruptcy cases.  To accomplish this, new and alternative fee compensation systems need to be considered and implemented instead of merely adding more rules and disclosure requirements with respect to law firm billable hour billing practices as is currently being debated.  As discussed in multiple pieces on the topic by my favorite authority on the legal profession – John Grimley, alternative billing arrangements is a worthwhile trend in the legal market at large.  For the benefit of its constituents, the chapter 11 bankruptcy system should not be sheltered from the benefits in the delivery of professional legal services that the evolution of alternative billing options has made available in the legal marketplace.

The Pressure For Change (Factor One): a Time of Record Size Chapter 11 Cases With Record Attorney Fees

Professional fees in chapter 11 bankruptcy cases have always been the source of heated debate, sometimes for good reason and other times because the general public has a hard time understanding how the terms “bankruptcy” and multimillion attorney fees can coexist as discussed in the New York Times nearly three years ago.   The recent news that the professional services tab in the Lehman Brother’s bankruptcy case crossed $2 billion dollars brought a lot of attention due to the sheer size of the professional fees gross number, regardless of the degree of value the bankruptcy estate undoubtedly received from such services.  In a recent piece titled “One Group Always Wins In Bankruptcy: The Lawyers”, Joe Cahill of chicagobusiness.com brought to light a financial dynamic that all bankruptcy cases face: “Chapter 11 reorganizations usually force creditors to accept less than they’re owed, but one group almost always collects 100 cents on the dollar: lawyers”.  While attorneys do not always collect 100 cents on the dollar for a variety of reasons, the dynamic Mr. Cahill correctly identifies is a function of the Bankruptcy Code’s provisions on how attorneys are hired and compensated.  Specifically, as a result of the “Administrative Claim Priority” each professional service provider employed by the bankruptcy estate is entitled to under the Bankruptcy Code, such professionals are in fact paid out first from the debtor company’s unencumbered assets.  In most cases this means that the more money paid to attorneys, the less is available for creditors if creditors are not paid in full (setting aside for the moment that attorneys usually play an indispensable role in obtaining recovering for the benefit of creditors).

The Pressure For Change (Factor Two): New Proposed Attorney Compensation Guidelines By the Office of the United States Trustee

Another dynamic that caused bankruptcy attorney fees to come under heavy scrutiny was the release by the Executive Office of the United States Trustee Program on November 11, 2011 of new proposed “Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses” under Bankruptcy Code Section 330 (the Office of the US Trustee (“OUST”) is charged with monitoring professional fees in bankruptcy cases).  The OUST received in-depth comments as well as intense criticism by many “bankruptcy practice heavyweights” in response to the November 11, 2011 proposed new guidelines.  After the public comment period ended, the proposed guidelines were updated by the OUST in November 2012.  As thoroughly discussed in an article by Christine Simmons of the New York Law Journal after the new proposed guidelines were released, Clifford White, the Director of the OUST, stated that the “updated proposed guidelines will add needed accountability and transparency to the billing practices of bankruptcy attorneys who seek payment of fees and expenses from large Chapter 11 bankruptcy estates.”

Missing the Mark: It is About More Than Billing Practices

While billing practices by attorneys and other professionals in chapter 11 cases is a matter of vital importance, I believe that a lot of the debate is missing the mark by overly focusing on billing disclosure.  There is a better solution to the concerns raised.  In January 2012, shortly after the original proposed new guidelines came out, Stephen J. Lubben, writing in the New York Times in a piece titled “Time for a Fresh Approach to Bankruptcy Fees,” stated that “the United States Trustee should focus on the overall package of professionals retained in a case, and demand that the debtor explain how tasks will be allocated among these professionals and within the hierarchy of any particular professional firm.  Too often both courts and trustees seem content to abide boilerplate discussions of such matters.”  Whether or not intended, Mr. Lubben hit on the real issue that needs to be addressed, namely how the system can best promote the dual goals of attorney value and results in chapter 11 cases.

For me, the question thus becomes: what type of alternative fee model would best serve chapter 11 business bankruptcies?  Alternative billing structure can take many forms, and include straight flat fees for the entire engagement, milestone fee arrangements, “value” billing, incentive billing or “success fee”, or a combination of these.

In a follow-up piece I will discuss alternative billing options and propose that a compensation model similar to what bankruptcy judges regularly approve for professional Financial Advisors in chapter 11 bankruptcy cases, namely a “flat fee plus success fee,” should also be also be utilized for attorneys in chapter 11 bankruptcies.

The Rise And Impact Of Empowered Chief Legal Officers

By John Schafer on Posted in Deal Strategy, Law Practice Management

As put bluntly by Kevin O’Keefe, an expert in the legal marketing field, a lot has changed since he graduated from law school 30 years ago.  A recent post by John Grimley of International Business Development accurately assessed the current reality that “law firms need to end the internal culture of seeing clients as purely a source of revenue, and instead … align their services to advance the commercial objectives of clients – one of which is to reduce their clients legal fees” (If you have not been reading John Grimley’s posts on this subject matter, you really must start).

How to best align professional legal services with companies’ business objectives goes to the heart of the inside‐outside relationship “crossroads” law firms and in-house legal departments face:

  • What is the division of professional legal services as between in-house legal departments and outside law firm?; and
  • How is the professional legal services predominately managed (i.e. project management)?

As general background, I use the title “Chief Legal Officer” in this post as opposed to “General Counsel” because I believe that title more accurately describes the role discussed in this post, but many in-house attorneys with the title “General Counsel” have also taken on the same substantive role.

THE SOPHISTICATED CHIEF LEGAL OFFICER’S NEW MANDATE

This new reality for law firms is being significantly impacted by a concurrent development that has also evolved since Mr. O’Keefe and Mr. Grimley graduated law school: the emergence of sophisticated and empowered Chief Legal Officers with in-house legal teams who far more often have skills equal to their peers in outside law firms than they historically have had.  I believe the empowered Chief Legal Officer trend has been accelerating these past few years and is not only here to stay, but is an advantageous development for the legal profession meeting the needs of businesses.  As put in an excellent “Blue Paper” titled “The General Counsel As Lawyer-Statesman,” “in the course of a generation, General Counsels’ prestige, status, compensation, power and position at the core of major transnational corporations have been transformed.”  The author also aptly characterized the growing role of the sophisticated and empowered Chief Legal Officer and other in-house lawyers as “extremely broad, involving three distinct functions: acute technical lawyer, wise counselor and lawyer as leader.”  The end result is that Chief Legal Officers are not only being authorized to do so, but are being directed as one of their “Key Result Areas” to manage the direction of a wider range of sophisticated legal and business matters as well as perform and execute upon a greater share of the company’s substantive legal service needs.  This development is one that law firms need to understand and respond by adjusting their business model and “marketing” approach.

PERSONAL CONFIRMATION: MY BARCLAYS NORTH, INC. EXPERIENCE

I became convinced of the wide-ranging value of an “inner circle” Chief Legal Officer during my experience in 2007-2008 when I left a “Big Firm” job to serve one client — real estate developer Barclays North, Inc. — as its Interim General Counsel and Chief Restructuring Advisor during the real estate crisis.  I experienced firsthand the contrast in the value-added proposition that sophisticated in-house legal counsel can create when it comes to furthering a company’s business objectives, as compared to outside counsel (especially when it came to the delegation and execution of legal tasks that involved ongoing third-party business relationships).  This is because by being a part of the inner circle of the company and its day-to-day business flow, the empowered and sophisticated Chief Legal Officer has a “constant pulse” on a company’s rhythms and peculiarities.  This is turn results in superior legal guidance, more effective management of and practical solutions to complex business and legal situations.

The lessons from my Barclays North experience hold true even more today: at a time many law firms are undertaking internal “survival tactics”, as a result of being empowered by the above-described three distinct functions, forward-looking Chief Legal Officers are driving a redefinition of the role outside law firms play and how a company’s legal affairs are handled.  By doing so, new structures of true strategic partnerships are taking shape.

THE HISTORICAL BIFURCATION OF THE ROLES OF IN-HOUSE COUNSEL AND OUTSIDE LAW FIRMS

The rise of the empowered Chief Legal Officer has been and continues to be driven by many factors.  The most significant factor is the “Work-Role” Gap that has led far-to-often to an inefficient over-bifurcation in the delivery of professional legal services between the:

  • In-house “company attorney”, whose primary role became farming out the challenging and complex legal work to outside counsel while focusing on internal legal risk management instead of first and foremost being a strategic “business law advisor” to the company; and
  • Law firm “situation-specific attorney”, who in the over-specialized legal world has taken on the role of delivering myopic deal-specific documents or taking near full-ownership of litigation matters, without in either situation providing the long-term “big picture” legal guidance that a properly empowered strategic “business law advisor” should continuously delivering.

The ideal situation is one where the Chief Legal Officer can serve both sides of the “business law advisor” and “situation-specific attorney” equation for a company, delegating and managing internally what can best be performed in-house, with outside counsel serving as a supplemental or situational-specific resource when appropriate.

BEYOND LEGAL COST REDUCTIONS: INCREASED LEGAL AND INTERNAL BUSINESS OPERATING PERFORMANCE

Surely the pre-recession hourly rate “bubble” driven by the increased focus on “Profits Per Partner” caused many companies to re-evaluate the budgetary impact of the over-bifurcation of inside-outside roles.  But the impact of this over-bifurcation goes beyond mere budgetary costs and instead gave a major boost to the new Chief Legal Officer legal paradigm, whereby:

  1. The CLO is now more often the “go-to” legal strategic advisor to a company’s top management instead of a senior partner at the company’s historic outside law firm;
  2. The CLO is a core member of senior leadership and helps shape the debate and has a voice as to the company’s current and future business affairs; and
  3. The CLO has the power (and financial leverage) to redefine the company’s relationship with preferred outside counsel by addressing the “Work-Role” gap.

In many ways, the rise of the empowered Chief Legal Officer and its legal team may most accurately viewed as simply a market-driven corrective response that serves the company’s best business and budgetary interests.  Whatever the reasons and driving factors, the rise of the empowered in-house legal counsel was long overdue.  This is because the business value of a strong in-house legal team working closely with top management has been an underutilized source of tangible and intangible operating efficiencies, beyond just substituting cheaper inside legal resources for what had become increasingly expensive outside legal services.  If properly utilized, the result is that a company’s legal needs are delivered:

  1. More cost-effectively; and
  2. With the same or greater level of high-performance that top law firms claim only they can always provide.

Achieving one of the above does not have to come at the expense of the other (this is where better project management of an entire legal project comes into play by the Chief Legal Officer and its team leveraging the most appropriate professional resource for a particular project task or undertaking).  Moreover, the risk of unexpected legal troubles can be better planned for and – if and when they arise – can be addressed earlier and more effectively managed in a way that usually reduces higher litigation costs down the road.  This does not mean that outside law firms will no longer provide ongoing and substantial professional legal services for companies — as that need will continue, albeit with new dynamics.

FINAL TAKE-WAY

The end result for in-house legal teams, if led by an empowered and sophisticated Chief Legal Officer, is the opportunity for that team to add value in more ways to their company’s distinctive business objectives than historically has been the case.  Law firms, as businesses that also operate in a market system, who fail to adjust to this trend will find themselves truly left on the outside.