The managing partner and 66.6% majority equity holder at L&L Partners, Rajiv Luthra, has made an offer to the firm that he would be willing to dilute his equity unilaterally and without the agreement or dilution of 33.4% co-partner Mohit Saraf under a 1999 deed, if the latter does not respond by 6pm today.

However, if Saraf agreed to dilute the same number of percentage points as Luthra, then Luthra would be ready to “go beyond any discussed dilution threshold” that had been on the table so far.

The email marked “Important!!!! Urgent” was sent just before 5pm last night (Sunday 4 October) to the L&L corporate firm’s partnership, which excludes the litigation, tax and intellectual property partnerships. The email was first reported on by Bar & Bench this morning, stating that “in line with his endeavour to build an inclusive institution based on shared success”, Rajiv Luthra was now “ready to kick-start dilution of his equity”.

We have reached out to both Luthra and Saraf with queries on the issues we have raised in this article.

Neither have responded for comment.

(We will update this article if Saraf responds to Luthra by 6pm).

Update 18:58: We understand that Saraf has responded to Luthra’s email, just before 6pm. More details to be updated.

Update 6 October 2020: We have now published a story with details of Saraf’s response.

Precluding oligarchies

In his email, which follows months of disagreements between the two co-founders of the 1999 firm succeeding Luthra’s sole proprietorship, Rajiv Luthra noted that he had never been opposed to diluting his equity but he wanted to “preclude the possibility of creating a self-serving oligarchy” at the firm, and was ready to “share details of one such substantive and appropriate step” to the direction.

He wrote:

I have openly committed myself to immediate dilution of my equity and have further expressed my readiness to go beyond any discussed dilution threshold in order to suitably include a large number of deserving candidates. The only condition on which all of this is premised is that all the present equity holders shall dilute proportionately which is not only the mandate under our present Partnership Deed but also a generally accepted norm across the industry, apart from being perfectly fair.

You know where and why my proposal on equity dilution has not been allowed to come to fruition.

As such, I have now resolved that I shall not be delayed any further and that I should go ahead and do whatever I can within the realm of the Partnership Deed to actualise my intent without waiting for the other equity holder to fulfil his part of the obligation.

The “other equity holder” that Luthra refers to above without naming him is Saraf, who had in previous negotiations spoken out against an equal dilution of both.

History of dilutions

For context, the rough path that discussion had taken over the last year, included Saraf proposing that both Luthra and himself should dilute to holding around 25.5% each, freeing up 49% for other equity partners.

Luthra then counter-proposed freeing a total of 16% of the equity for other partners, of which around 12.5 percentage points would come from him, and 3.5 percentage points from Mohit.

That eventually evolved to Luthra proposing he might drop to 40%, Saraf to 27% and the rest of the partners getting the remaining 33%.

Saraf’s counter proposal was that the Luthra could stay at 40% for several years, but he should eventually also join Saraf at around 25.5% as the managing partner inched closer towards retirement age.

Saraf’s internal argument amongst the partnership in favour of his plan had been that he had brought more to the table in recent years than Luthra, and he had also raised other objections to the 1999 partnership deed that would, in his view, not work in a more modern and professional partnership (see below).

Unilateral dilution: Building a multi-tier partnership?

Notably, Luthra now implied in his email yesterday that even without Saraf’s agreement, he would himself dilute an unspecified amount of his own equity unilaterally (though presumably a smaller amount), claiming that “it is possible for me to give away equity out of my share even if Mr. Saraf refuses to give away his equity”.

We understand that under the partnership deed, Luthra does indeed have the right to give away parts of his profit share (after discussion with Saraf but not requiring his consent), however, the accession of new partners to the deed needs to be agreed to by both.

Nominally that might not be an issue, since all current salaried partners call themselves partners at L&L, though it would preclude the new profit sharing partners from getting any voting, management or other rights in the partnership under the old deed, for instance.

While some might ask, ‘what is the point of ownership without power?’, it also wouldn’t be the first Indian law firm to operate many different types of pseudo-equity partnership with different tiers.

Apply here

Luthra has asked partners who are interested in the unspecified chunk of equity (and the correspondingly uncertain duties and obligations), and who meet a number of criteria he has set out, to apply to him within around 48 hours (by 6pm tomorrow, Tuesday, 6 October).

Equity would only be available to lawyers who were “eligible to practice law in India and must have submitted his credentials in this regard to L&L Delhi”, who have signed the “latest version of the Retainership Agreement (by whatever name called) with L&L Delhi”, and who were “a professional of at least 16 years standing at the Bar, and on a fair assessment, would be seen as an important contributor to the Firm”.

Prima facie, the 16-year-requirement alone might exclude a large number of L&L’s partners who may have worked abroad, in other professions or in-house without technically having “standing at the bar” for 16 years.

And when compared to equity partnership at many rival firms to younger partners, a PQE limit of 16-years appears particularly arbitrary.

“If however, anyone who does not meet the criteria but feels they have compelling credentials, to also receive equity at this stage may also write to me stating clearly the reasons asap. ( One page please),” Luthra’s email added, perhaps in a concession to the vagueness of the rules, while also retaining an unlimited amount of discretion.

On the other hand, it could just be an easy way to hold an official straw poll of who amongst the partners stands with Luthra and who might stand against him.

Old deed, new wine?

On the other hand, Luthra’s offer does not go into whether it would come with any of the other potentially deal-breaking strings attached as under the 1999 deed between him and Saraf, which had been a continuing sticking point since discussions about equity started again in October 2019.

Luthra admitted in his email that there were “a handful of issues that we are going to address in the course of further strengthening and reinvigorating our Firm”, he added that “the question of granting equity to deserving candidates is among the most prominent of them”.

While Luthra said he wanted to “preclude the possibility of creating a self-serving oligarchy within the firm”, some of the contentious points from the 1999 deed that Luthra did not raise in his email include:

• Luthra’s retirement age of 80 years,
• that after his retirement the firm would continue paying him a sizeable pension,
• that in the event of his death, 90% of the previous year’s revenue of the firm would be paid to his heirs one time, and
• his ability to effectively appoint a family member who could succeed him in the firm.

Saraf had internally argued in partner meetings that it had not been possible to attract and retain lateral (and homegrown) talent to the firm without equity, and that keeping such restrictions on the new and wider partnership, would hamstring profitability and growth of the firm.

Tactical gambit

We have spoken to a number of L&L partners about the latest salvo in the civil war at Luthra, and one partner we spoke to interpreted this as a “tactical move” from Luthra to put the pressure back on Saraf after the infamous Zoom call convened by Luthra at short notice, which had been an unprecedented disaster of internal and external communications.

However, the main problem the majority of partners we had spoken to expressed to was that Luthra’s proposal was so thin on details as to be impossible to really give an opinion on. The outlined criteria for equity partnership appear to be entirely arbitrary, while the decision of whom to give equity to or not appears to be entirely at the discretion of Luthra, without any real transparency.

Luthra admitted as much in his email: “I know for sure that there are other people… who may not immediately meet the criteria I have laid out above, but have a legitimate expectation of being inducted in the equity partnership.”

He added that more “comprehensive criteria”, including “analysis of the actual contribution any given individual has made to the overall growth” of L&L would be rolled out later, but that this was a “fair basis to start the process”.

Luthra said he hoped that this would hopefully result in Saraf also releasing equity at a later point “proportionately”, adding: “What I am trying to do through this step is to set the ball rolling and to start giving equity to more people. I am sure, once the process starts, it is a matter of time (very short, I presume), when it will reach its culmination.”

But the question on everyone’s mind is: equity discussions have taken place and promises have been made for more than 10 years now (as we had first reported in 2009), including luxury cars having been gifted to high-performing partners in 2011 (but never any equity).

So why is the ball suddenly starting to roll on such a “very short” time scale? And once it has started rolling and comes to rest, will it be anywhere the wider partnership will want to be?

Planning a resilient equity partnership is not easy: you need a model that actually contributes to the growth of a firm, acts as both a carrot to growth and a stick against partners who do not perform.

And to make ownership in an organisation attractive, it also requires robust management structure, with a modicum of democracy to go along with it.

Arguably, by handing out equity first and promising to figure out the details later, Luthra risks putting the cart before the horse.