UPDATE 2-Takeover shores up U.S. lobbying giant Patton Boggs

Fri May 23, 2014 10:29pm EDT

(Recasts throughout, adding details of takeover effort and voting, context and background)

By Casey Sullivan and David Ingram

May 23 (Reuters) - Troubled U.S. lobbying giant Patton Boggs avoided a financial cliff on Friday when a larger law firm agreed to acquire many of its partners and its name, which for decades was synonymous with influence in Washington, D.C.

The acquisition of Patton Boggs by Squire Sanders, a firm with roots in Ohio, followed furious talks that a day earlier appeared on the verge of collapse.

Late on Friday, the two firms announced they had reached a deal, concluding negotiations that had stretched back at least to February. They said they would begin operating under the name Squire Patton Boggs effective June 1.

Financial terms of the deal were not disclosed, but the combined entity would rank 23rd among U.S. law firms with more than $1 billion in revenue, according to financial figures in the American Lawyer and a Patton Boggs memo obtained by Reuters.

Patton Boggs was viewed by many in the legal industry, including former partners, as being in need of a rescue, despite a storied history of representing U.S. presidential campaigns, major corporations and governments around the world. Its revenues were slipping and its headcount had shrunk by about half since 2011, down to 300 lawyers.

The firm's problems included becoming entangled in a complex case in which Ecuadorean villagers sought to enforce an $18 billion pollution judgment against Chevron Corp. Once seen by the firm as a potential source of lucrative legal fees, the case became a liability and Patton Boggs agreed this month to pay the oil company a $15 million settlement after a court found the judgment had been obtained fraudulently.

Its problems also stemmed from the drying up of one major case, defending New York City against health-related claims by firefighters and emergency workers who responded to the Sept. 11, 2001, attacks on the World Trade Center, several former Patton Boggs partners said.

Its revenue dropped by 12 percent from 2012 to 2013, to $278 million, according to figures in an internal memo obtained by Reuters in January, and the firm hired restructuring advisers.

The firm also struggled under an outdated pay structure and a stagnant demand for lobbyists amid political gridlock, lawyers inside and outside Patton Boggs said.

With 1,300 lawyers from Sydney to Bratislava but few in Washington, D.C., Squire Sanders now stands to gain a stronger presence there. It is best known for its practices in bankruptcy, business litigation, tax, labor and employment and mergers and acquisitions.

The combined firm will consist of roughly 1,600 lawyers spanning 45 offices in 21 countries around the world, with 280 of the lawyers in Washington, D.C.

DOWN TO THE WIRE

As of Tuesday, the acquisition appeared to be headed for approval, with Patton Boggs partners casting their votes on the combination and remarking to colleagues they would be shocked if it were turned down. At Squire Sanders, insiders also expected smooth sailing.

On Thursday, however, the deal ran into a snag.

Squire Sanders halted its partnership vote after a motion was filed by a group of Ecuadorean villagers urging a New York federal judge to revisit a May 7 settlement resolving claims that Patton Boggs tried to enforce a fraudulent judgment against the oil giant on behalf of the Ecuadoreans. The motion was filed by Steven Donziger, a lawyer for the villagers, who has been an outspoken critic of the firm, claiming it abandoned its duty to its clients.

The merger between Patton Boggs and Squire Sanders was conditional on the resolution of the case between Chevron and Patton Boggs, and the late motion caused Squire Sanders to worry the case was not truly resolved, according to one source close to the deal.

Fear was spreading that the delayed voting process would mean Patton Boggs partners would become impatient and jump ship, disrupting the deal, according to three former Patton Boggs partners and another source close to the deal. A handful of Patton Boggs partners already had informed their colleagues that they planned to leave, according to two former Patton Boggs partners.

Patton Boggs moved quickly, employing prominent New York lawyer Elkan Abramowitz to request a speedy dismissal of the Ecuadoreans' bid to block the Chevron-Patton Boggs settlement. Abramowitz called it a "publicity stunt" that was aimed at casting a cloud over Patton Boggs.

Meanwhile, Patton Boggs held a special meeting on Thursday to reassure the firm's associates that Squire Sanders's decision to suspend the vote was temporary, according to a former Patton Boggs lawyer.

By 11:25 p.m. that night, Patton Boggs managing partner Edward Newberry sent a memo assuring the firm's partners that Squire Sanders had reviewed the Ecuadoreans' motion, planned to disregard it and had resumed voting.

By Friday, momentum for the deal had resumed. Newberry held a partners meeting via conference call at noon to reassure Patton Boggs partners, and the Squire Sanders vote concluded favorably at 4:30 pm.

DEEP WASHINGTON TIES

Not all Patton Boggs lawyers are joining the combined firm. Most prominently, James Tyrell, the partner who led the firm's representation of New York City in the 9-11 responder litigation and who brought in the Ecuadorean villagers as clients, will be left out of the deal. He did not respond to a request for comment.

In an email, Newberry did not respond when asked about Tyrell's departure but said the other departures were expected and were a "normal part of a major law firm combination."

James Maiwurm, chair and CEO of Squire Sanders, said in a statement that the combination "establishes us as the 'go-to' firm for public policy work."

Newberry said in a statement that the combination would provide "opportunities to access new markets" in Americas, Europe, Asia-Pacific and the Middle East.

Patton Boggs, which has long wielded influence in the corridors of Washington, honed its specialty over many decades. In 1962, lawyers from a well-known Washington firm, Covington & Burling, launched Patton Boggs. Although not one of the original founders, Thomas Hale Boggs Jr, a former economist for President Lyndon Johnson and the son of a powerful congressman, rose to become the firm's chairman.

Former U.S. senators, including former Republican Senate majority leader Trent Lott, are lobbyists at Patton Boggs. Benjamin Ginsberg, counsel to Republican President George W. Bush's campaigns in 2000 and 2004 and to Republican Mitt Romney's campaigns in 2008 and 2012, is a partner.

Patton Boggs's lobbying clients include governments worldwide that are seeking to influence U.S. policy, including China, Georgia, Libya, Saudi Arabia and South Korea, according to public disclosures filed this month.

But as political gridlock led corporate clients to spend less on campaigns lobbying for the interests on Capitol Hill, Patton Boggs's revenue suffered.

The firm had expanded geographically, opening offices in large legal markets such as New York and New Jersey, but they became part of its business problems. Patton Boggs acknowledged the "unprofitability" of those two offices in a 2013 internal memo obtained by Reuters.

Weighing down the firm further was a formulaic compensation system that created perverse incentives, according to sources inside and outside the firm.

Partners were paid based on three factors, sources said: origination of work, number of lawyers they supervised and hours they billed. As a result, partners were encouraged to keep lawyers on staff whom they did not need, and they got paid for work they brought in years ago even if they were not generating new business.

The firm changed the model in recent months so that its leaders had more discretion to reward partners.

Major U.S. law firms have faced strained finances for more than five years. Some did not survive, as when Dewey & LeBoeuf collapsed in 2012. (Editing by Noeleen Walder, Eric Effron, Grant McCool and Ken Wills)

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