Allen & Overy and Shearman & Sterling partners will vote as soon as next month on a merger, with pay among the top issues deciding the plan’s fate.
At least 75% of partners on each side are needed to approve the deal, according to Craig Annis, a Shearman spokesman. Votes are expected in June or July, he said.
The tie-up would create one of the world’s largest law firms, with $3.4 billion in revenue and 3,900 lawyers. Shearman would get a much-needed financial lifeline and Allen & Overy would win the US footprint the firm has long sought.
“The issue will be incentivizing” Shearman partners to stay with the merged firm, said Scott Gibson, a legal recruiter at London’s Edwards Gibson. Allen & Overy partners “may have to do some compromising, including on how much the UK lawyers might have to pay to keep the US lawyers.”
The firms plan to use a “modified lockstep” partner compensation system once the merger is approved, Annis said. The system—based in part on seniority, with exceptions for rainmakers and star partners—is similar to that already in place at both firms.
Major US firms have been taking London by storm in the last decade, poaching local dealmakers and increasing competition for clients.
Latham & Watkins now has roughly 500 lawyers in the city, including partners recently recruited away from Linklaters and Clifford Chance. Rival Kirkland & Ellis has grown to more than 300 lawyers in London, advising the likes of Bain Capital and Allied Universal in UK transactions.
The US encroachment has prompted some of the UK’s oldest top firms—dubbed “Magic Circle” operations—to move away from strict lockstep pay structures based solely on seniority. But profits per equity partner at those firms still lag behind the biggest players in the US.
The merger if completed would be noteworthy because of the trend of UK firms defending against onslaughts from US operations, Gibson said.
“The Magic Circle firms have been trying to break through in the US for years,” he said. “Provided A&O gets a deal done that works, this is a breakthrough.”
Shearman turned to Allen & Overy after merger talks with global law firm Hogan Lovells fell through. Hogan walked away from the discussions after expressing concerns about Shearman’s pension obligations and other issues, according to a source familiar with the situation.
Shearman, which has about one-quarter as many lawyers as A&O, tallied more than $1 billion in revenue last year and roughly $2.5 million in profits per equity partner, according to data from the American Lawyer.
Allen & Overy brought in nearly $2.7 billion in 2022 revenue and more than $2.4 million in profits per equity partner, according to the data.
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