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Law firm partnerships are inherently fragile due to their lack of residual equity value and transactional cultures, making them susceptible to sudden partner departures and bank-like runs – and proposed government restrictions on non-compete clauses will make it worse, says Stephen Phillips
I was a partner in a couple of major global law firms. At some point a stark realisation hit me: although as an equity partner I owned a fraction of the business, the moment I stopped working, my income and interest in the business stopped completely. There was no residual value from past deals. The day I walked out, my past work added nothing to the firm’s future balance sheet, and there was nothing for me to cash in – when you leave you just get your equity back – the exact same amount as you put in.
Contrast that with a senior executive at a listed company or private-equity-backed business. Over a long tenure they typically build a residual stake in shares or options that continues to reflect – and often grows with – the enterprise they helped build. The lawyer has none of that. The firm retains nothing lasting from the partner’s past labour, and the partner retains nothing lasting from the firm.
This difference shapes behaviour. The hard stop to earning creates quiet pressure to keep going. Lawyers often leverage their lifestyles, leaving little cushion, and whilst it might sound ridiculous from the outside, many fail to save adequately. Some stay too long, blocking the next generation. Others feel an imperative to move quickly the moment they sense their face no longer fits, or that they could do significantly better elsewhere. In a more transactional world, where the velocity of partner moves is increasing, partnerships are more brittle than they appear.
By any metric Weil in 2026 was spectacularly successful with profits per equity partner of roughly $5.6m. Its demise has been well covered in the media but arguably its key problem was that it was beginning to lose ground to a number of its rivals and certain of its top rainmakers had looked for pastures new. The fact that a leading bankruptcy firm is now looking at a wind down is a notable irony
The October 2026 dissolution of Weil, Gotshal & Manges makes the fragility vivid. I often worked alongside Weil in my career and whilst established almost 100 years ago they made their presence felt in the London market in the High Yield bust of the early 2000s, acting for many of the High Yield issuers at the time which were experiencing financial difficulties. They were the leading bankruptcy firm in the world in the early 2000s, establishing a storied relationship from blow ups such as Enron. By any metric Weil in 2026 was spectacularly successful with profits per equity partner of roughly $5.6m. Its demise has been well covered in the media but arguably its key problem was that it was beginning to lose ground to a number of its rivals and certain of its top rainmakers had looked for pastures new. The fact that a leading bankruptcy firm is now looking at a wind down is a notable irony.
What makes the episode shocking is that it was not a story of a liquidity squeeze, which is usually the way firms go down. Their position was about as far from my typical distressed client as could be. Relative underperformance against faster-growing peers created vulnerability, but the terminal event was a loss of confidence and cohesion among the partners themselves. Once the run began, profitability and history were irrelevant. The assets really did take the elevator down every night, the trouble being that some of them were not showing up the next day.
Their downfall was a classic run which mirrors a bank run. One high-billing partner leaves and the remaining partners immediately worry about diluted profits. A few more departures intensify the anxiety. Those still inside begin to fear being left holding the baby – responsibility for the firm’s liabilities, lease obligations and residual costs once the revenue has walked. The rational response is to get out first and extract one’s capital while it still exists. In much of ‘Big Law’ the old dynamics of collegiality and loyalty have largely given way to a transactional culture: maximise profits or move on. Firms themselves frequently eject partners who underperform. The “made it for life” model has been replaced by a professional-sport standard in which you are only as good as your last quarter. The incentive is to move first.
In an interesting article Why Law Firms Collapse, Professor John Morley of Yale Law School argues that the partner structure is susceptible to creating the run dynamic, and that external investors could absorb losses and reduce the incentive to flee.
His point doesn’t resonate with me. A law firm has no permanent asset base equivalent to Amazon’s code or logistics network. Amazon lost money for years while building durable value; patient capital allowed it to survive. No law firm could endure that. Law firms tend to pay out most of their profits every year – they are maximising-profits-now structures.
UK vs US
Attractive as Morley’s argument is, most firms still operate on an hourly-rate, personal-exertion model. Bringing in outside investors would not change the Pareto reality (the so-called 80/20 rule) which holds that roughly 80 per cent of outcomes come from 20 per cent of people. In most firms a small number of partners generate most of the revenue. If those people leave, they leave a gaping hole in the firm’s finances. Top billers will not subsidise outside capital when they can cross the street to a traditional peer firm and keep a higher share of their own yield.
UK partnerships have historically enjoyed greater structural resilience than US firms because reasonable restrictive covenants and bad-leaver provisions in partnership agreements are more readily enforceable, and because UK insolvency law does not impose the automatic clawbacks that incentivise US partners to flee at the first sign of trouble. Culturally, my observation is that US firms seem to encourage the buccaneering ‘gun slinger’ spirit of the energetic rainmaker whereas UK firms tend to be somewhat better at institutionalising clients somewhat at the expense of a more dynamic US approach. Thus, UK firms make for a more stable environment. Even so, large UK commercial firms face intense pressure competing with US firms that have deeper pockets and operate in the world’s most profitable legal market. The bigger UK firms whilst remaining of top-notch quality have significantly lower partner profits and thus are vulnerable to the lure of higher compensation packages. Outside competition has engendered a similar loss of loyalty.
Faced with that competition, many UK firms have moved closer to the US model arguably at the expense of collegiality. Traditional lockstep, under which partners progressed largely by seniority, has given way to modified systems that award “super points”, for star performers. The shift rewards rainmakers and helps retain talent against US offers, but it also reinforces the transactional culture in which partners are only as valuable as their current contribution.
This makes the government’s proposals to restrict non-compete clauses a live question. The recent announcements focus on employment contracts and the need to support innovation and mobility. It remains unclear whether any legislation will be limited to employment contracts or will also reach LLP agreements and partnership arrangements. Genuine partners contract as co-owners rather than employees, so reforms aimed only at employment relationships may not affect them. Given Weil’s example the UK government would be wise to leave equity partners out of the proposed restrictions.
Weil’s collapse which is the biggest law firm failure in history offers a concrete warning. A highly profitable, debt-light firm still unravelled once partner confidence broke and high-billing lawyers walked. If the government extends any restriction to equity owners in professional firms, it will remove one of the few contractual tools that currently give UK partnerships greater resilience than their US counterparts. Do we really want the legal framework governing City law firm partnerships to move closer to the American model?
An explicit carve-out for partner and LLP members – or at least confirmation that the rules will not reach partnership agreements – would preserve the contractual scaffolding that keeps London’s professional services sector more stable. Without it, City firms could face the same hyper-volatile lateral dynamics that have just felled a storied American institution.
Yet even the best structure has limits. Whatever the ownership form or covenant architecture, if the partners do not like each other, cannot agree on fundamental strategy, or are on a losing path, no technical fix will save the firm. Structures can slow a run and cushion its effects; they cannot manufacture the underlying partnership that makes a firm durable in the first place.
Stephen Phillips is a partner at FreiLibertas Law and host of The Turnaround Podcast
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