Album Advisory Group, Ltd. (September 2026)

Law Firms, PE Investment and Partner ‘Poaching”

As the summer ends, perhaps there will be a respite from the constant news about “rainmaker” law partners being poached, with super guaranteed multi-year compensation packages.

Concurrent with this partner movement are the news stories about possible PE investment in the legal profession. Due to professional canons in most states (such as New York) that restrict non-lawyers from practicing law or sharing in legal fees, the PE firms structure an approach where all the “non-legal” parts of the law firm (accounting, billing, IT, HR, etc.) are hived off into a new business- a management services organization (MSO)- that is then paid a management fee by the remaining law firm. Due to ethical restraints, the management fee cannot be a percentage of law firm revenue, so it is structured as a fixed fee or cost-plus fee.

Consider these two developments together- many have suggested that the problem with law firms is that partner capital has no market growth potential, no market multiple to drive real appreciation. Rainmakers may collect annual interest on their capital and when they retire get their capital back, but if they view annual distributions as an inadequate proxy for real value creation, the alternative is for them to “jump ship” and accept massive multi-year guaranteed deals at new law firms willing to pay “market” value.

PE investment in law firms through MSOs may be an alternative that reduces this type of partner movement, by increasing the profit potential for partners on the MSO side of the ledger, but also by imposing forfeiture for competition provisions on MSO economics. Although the devil is in the details, it is likely that current rainmaker partners will leverage their existing capital to gain an ownership interest in the MSO, and try to structure the new equity ownership to qualify for some level of capital gains treatment when the MSO is eventually sold by the initial PE firm to another firm or strategic buyer at a desirable multiple on invested capital (MOIC).[1] We can also assume that an equity incentive pool (a “MIP”) will be established at the MSO, so the income partners/senior associates who did not participate initially in the MSO have some upside participation going forward.

Which brings us to the issue of rainmaker mobility: will the creation of the MSO and the new equity interests in that business serve as financial “golden handcuffs” to limit partner departures for greener fields. Because it should be assumed that the new MSO structure- as is typical in PE buyout structures- will have “golden handcuffs.” There will be forfeiture for competition provisions, which will cover the gambit ranging from forfeiture of unreturned capital to mandatory repurchase of interests or vested MIP interests at something less than FMV, to forfeiture of unvested MIP interests- all depending on the aggressiveness of the PE sponsor.

Since the documentation overseen by the PE investors is likely to be governed by Delaware law, the recent holding of the Delaware Supreme Court in the Cantor Fitzgerald case, which upheld forfeiture for competition provisions, will be relied upon. As the Delaware Supreme Court in that case noted:

“When sophisticated actors avail themselves of the contractual flexibility embodied in [the Delaware partnership law]—a statute that is expressly designed ‘to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements’—and agree that a departing partner will forfeit a specified benefit should he engage in competition with the partnership, our courts should, absent unconscionability, bad faith, or other extraordinary circumstances, hold them to their agreements.”

The Delaware Supreme Court held that the forfeiture for competition provisions imposed by Cantor Fitzgerald were legal and to be treated “on equal footing” with other bargained for partnership contract terms, rather than reviewed and invalidated as an “unreasonable” restraint of competition.

But wait, attorneys cannot ethically be subject to restraints on competition? Consider the recent (2025) opinion of “The New York City Bar Association Committee on Professional Ethics-Formal Opinion 2025-3-Permissibility of Financial Disincentives Associated With A Lawyer’s Departure From A Law Firm.” Here was the question before the Committee:

“QUESTION: May a law firm impose financial terms, including but not limited to payments in the form of forgivable loans, bonuses, deferred compensation, withdrawal payments, deductions from capital that are expressly forfeitable at the discretion of the firm, that have the effect, either by their express terms or in practice, of discouraging or deterring competition with the firm?” (emphasis added)

In reviewing the scope of Rule 5.6(a) of the New York Rules of Professional Conduct, the Committee referenced case law which emphasized the key public interest in ensuring that clients are able to choose their counsel and that private agreements among lawyers that would interfere with competition, and make lawyers who leave a firm unavailable, are impermissible and unethical. As a guide, the Committee noted the following factors in determining whether financial forfeitures imposed by a law firm partnership on departing partners were acceptable: (1) would an objective third party conclude that such terms inhibit the partners from competing and (2) has the law firm applied the terms to penalize partners because they are leaving to compete (the “Committee’s Two Factor Test’).

Up until now, this ethical framework has functioned in a traditional law firm setting.

But the MSO is not a law firm imposing the restrictions and its governing body could be structured so it will not consist of lawyers impermissibly “offering or making” restrictive provisions applicable to its departing shareholders and MIP participants.

The PE firm that controls the MSO could first argue that its back- office activities are separate and distinct from the legal practice of the law firm, in the same way that an accounting firm, real estate broker or insurance broker offers separate and distinct services to a law firm. It could then argue that as a separate and distinct business it should be able to protect its franchise, by terminating the equity rights and financial interests of former shareholders or MIP participants who jump to a competitor, and by taking other “market” steps that businesses routinely use.

The response, of course, will be that an MSO cannot do “indirectly” what a law firm and lawyers are prohibited from doing under the ethical canons. But doesn’t that beg the question- once the premise of a non-legal MSO is accepted, then the law partners who participate in that business are “just” regular business partners for purposes of the MSO (not lawyers) and should be subject to the same restrictions with respect to that investment as any other C-suite executive subject to an MBO structure implemented by a PE firm. The departing partners will still be protected by the provisions of Rule 5.6(a) in their capacity as lawyers in the law firm (and with respect to their economic interests in the law firm).

Finally, with respect to their MSO economic interests, does the application of the Committee’s Two Factor Test convincingly require invalidation of the MSO related economic forfeitures?  If a rainmaker jumps ship, after he or she has made a calculated review of the economics associated with the new deal (new and better economics (including any “make-whole” provisions) vs. lost MSO economics) can it be said that he or she really has been inhibited from competing or penalized?[2]

It will take time to sort this all out. In the meantime, maybe private equity should also focus on acquiring privately held legal executive search firms that have profited recently from all this partner poaching. There are no professional canons governing that type of investment.

---

[1] Other tax issues will include how to transfer the non-legal assets of the law firm into the MSO and ensure that select partners receive equity in the MSO in a tax-free manner. Section 83 issues associated with the acquisition of property in connection with the provision of services may also come into play (see blog post on the Album Advisory Group, Ltd. website, “1969-Woodstock v. Section 83”).

[2] The alternative (and less competitively targeted) approach would be to structure MSO forfeiture and vesting provisions that apply to all departing attorneys equally, regardless of post-termination employment, and without any different treatment for those attorneys who compete. The Committee noted that “to the extent that a provision expressly applies and in practice is applied to all partners irrespective of their departure or the circumstances of that departure, it would not likely be prohibited.” There may be legitimate business situations, however, where the MSO governing body might want to treat a departing partner differently and more favorably (e.g. retirement, transition to a NFP or non-legal business, etc.).