Slater and Gordon downgrades 40 UK partners ahead of lender taking control as BLM confirms interest

Slater and Gordon moved more than 40 of its UK partners out of its partnership before agreeing a recapitalisation package with Anchorage Capital that will give lenders ultimate control of the UK business.

Filings with Companies House show 41 UK limited liability partnership (LLP) members were terminated from the partnership in the year to 30 June 2017, with 29 of these terminations taking place between 1 March and the end of May. All of those affected remain with the business as employees.

In addition, 12 partners left the firm during the course of the year, with a further three leaving after the close of the firm’s financial year at the end of June, when the initial refinancing package with Anchorage and other senior lenders was announced.

According to ex-partners, the move to transfer LLP members into employees was made in response to partners’ fears that their capital could be at risk in the event of the debt-laden business going into administration.

Many of those leaving the partnership have been repaid their capital, according to former partners.

One ex-partner said LLP members, which included partners from legacy firms Russell Jones & Walker, Pannone and Fentons, were repaid their capital around the same time that they transitioned from the partnership to employee status.

“If the firm had not survived, members would have been responsible for their capital loans and their tax and people had in mind a Halliwells scenario,” said one former partner, referring to the Manchester law firm that collapsed in 2012.

Another added: “Members of the business wanted employee status because they were worried about any personal liability they might have. The former salaried partners all made a financial investment in the firm and they were worried about losing that investment, so they thought they might be better going back to becoming employees.”

A spokesperson for Slater and Gordon said: “Slater and Gordon stopped adding new members to the LLP in 2015 as it was no longer viewed as the optimal structure to support the business strategy. The LLP continues to operate and whilst many members have chosen to transfer to employee terms, not all capital has been returned.”

Ex-partners told Legal Week that management were initially reluctant to make the change but agreed in response to a steady trickle of exits. Some 30 partners left in the year to 30 June 2016.

“The firm was initially resistant to the idea, I think because it could have upset their lenders and made it look like the people in charge were panicking,” an ex-partner said.

Another said that despite the initial reluctance, the decision was taken to make the change in order to prevent key partners leaving.

“I think the hedge funds [that now control the firm] took the view they needed to make the change to keep the senior management team in place and to prevent any more exits,” he said.

News of the move comes as Slater and Gordon continues to attempt to stabilise its business in the UK, in the wake of its £637m takeover of the professional services arm of Quindell in March 2015. The firm has slashed UK headcount by 20% and closed at least 18 of its 48 UK offices since the acquisition.

It has seen a string of exits in recent months, including personal injury partner Tristan Hallam who joined Pennington Manches last month, London clinical negligence head James Bell who joined Hodge Jones & Allen in May, personal injury specialist Paul Kitson who joined Hugh James in May, and real estate partner Stephen Chalcraft who joined Shakespeare Martineau in April.

Last week it, announced  in a statement to the Australian Stock Exchange that fee and service revenue for the UK arm had plummeted 31% from A$230m (£141m) to A$157.8m (£97m) for the 2016-17 financial year, as a result of the rationalisation programme.

The same statement confirmed the plans to separate its struggling UK business from its listed Australian arm, with lenders taking control.

It also launched a strategic review of its UK business legal services division last month, with former partners now expecting a sale of some or all parts of the UK business.

UK insurance player BLM confirmed to Legal Week that it is in talks with the firm about the business legal services division.

A BLM spokesperson said: “Conversations with Slater and Gordon about working closely with its business legal services experts are in early stages. We’ll be sure to share details of any new projects or initiatives with our colleagues, customers and the wider industry at the appropriate time.”

One former partner said:  “I would have thought that they are probably going to sell the profitable bits of the business off bit by bit to get something out of it.”

Shortly after the Quindell deal was announced, Quindell was placed under investigation by the Serious Fraud Office over its previous accounting practices. This June, Slaters served a £600m claim against Watchstone Group – Quindell’s new identity – over the acquisition.

Former partners squarely blame the disastrous Quindell deal for the current financial challenges. In February, the firm significantly wrote down the value of the acquisition, announcing an A$350.3m (£212m) “impairment charge”.

An ex-partner said: “They overextended themselves by a huge margin, buying at A$1.3bn; if you make an error there is no way back.”