Outliers, The Story of Success
4.
The old-line W all Street law firms had a very specific idea about what it was that they did. They were corporate lawyers. They represented the country's largest and most pres tigious companies, and “represented” meant they handled the taxes and the legal work behind the issuing of stocks and bonds and made sure their clients did not run afoul of federal regulators. They did not do litigation; that is, very few of them had a division dedicated to defending and filing lawsuits. As Paul Cravath, one of the founders of Cra vath, Swaine and Moore, the very whitest of the white-shoe firms, once put it, the lawyer's job was to settle disputes in the conference room, not in the courtroom. “Among my classmates at Harvard, the thing that bright young guys did was securities work or tax,” another white-shoe partner remembers. “Those were the distinguished fields. Litiga tion was for hams, not for serious people. Corporations just didn't sue each other in those days.”
What the old-line firms also did not do was involve themselves in hostile corporate takeovers. It's hard to imagine today, when corporate raiders and private-equity firms are constantly swallowing up one company after another, but until the 1970s, it was considered scandalous for one company to buy another company without the target agreeing to be bought. Places like Mudge Rose and the other establishment firms on Wall Street would not touch those kinds of deals.
“The problem with hostile takeovers is that they were hostile/' says Steven Brill, who founded the trade magazine American Lawyer. ”It wasn't gentlemanly. If your best buddy from Princeton is the CEO of Company X, and he's been coasting for a long time, and some corporate raider shows up and says this company sucks, it makes you uncomfortable. You think, If he goes, then maybe I go too. It's this whole notion of not upsetting the basic calm and stable order of things."*
The work that “came in the door” to the generation of Jewish lawyers from the Bronx and Brooklyn in the 1950s and 1960s, then, was the work the white-shoe firms disdained: litigation and, more important, “proxy fights,”
* The lawyer and novelist Louis Auchincloss, who very much belongs to the old WASP-y white-shoe legal establishment in New York, has a scene in his book The Scarlet Letters that perfectly captures the antipathy the downtown firms felt toward takeover law. “Face it, my dear, your husband and I are running a firm of shysters,” a takeover attor ney explains to the wife of his law partner.
He continues: “Nowadays when one wishes to acquire a company that doesn't wish to be acquired, one's counsel bring all kinds of nuisance suits to induce it to change its mind. We sue for mismanagement by the directors, for unpaid dividends, for violation of the bylaws, for improper issuance of stock. We allege criminal misconduct; we shout about antitrust; we sue for ancient and dubious liabilities. And our opponent's counsel will answer with inordinate demands for all our files and seek endless interrogatories in order to enmesh our client in a hopeless tangle of red tape It is simply war, and you know the quality that applies to that and love.”
which were the legal maneuvers at the center of any hostile-takeover bid. An investor would take an interest in a company; he would denounce the management as incompetent and send letters to shareholders, trying to get them to give him their “proxy” so he could vote out the firm's executives. And to run the proxy fight, the only lawyer the investor could get was someone like Joe Flom.
In Skadden, the legal historian Lincoln Caplan describes that early world of takeovers:
The winner of a proxy contest was determined in the snake pit. (Officially, it was called the counting room.) Lawyers for each side met with inspectors of elections, whose job it was to approve or eliminate questionable proxies. The event was often informal, contentious and unruly. Adversaries were sometimes in T-shirts, eating watermelon or sharing a bottle of scotch. In rare cases, the results of the snake pit could swing the outcome of a contest and turn on a single ballot.
Lawyers occasionally tried to fix an election by engineering the appointment of inspectors who were beholden to them; inspectors commonly smoked cigars provided by each side. Management's lawyer would contest the proxies of the insurgents (“I challenge this!”) and vice versa Lawyers who prevailed in the snake pit excelled at winging it. There were lawyers who knew more about the rules of proxy contests, but no one was better in a fight than Joe Flom...
Flom was fat (a hundred pounds overweight then, one lawyer said...), physically unattractive (to a partner, he resembled a frog), and indifferent to social niceties (he would fart in public or jab a cigar close to the face of someone he was talking to, without apology). But in the judgment of colleagues and of some adversaries, his will to win was unsurpassed and he was often masterful.
The white-shoe law firms would call in Flom as well whenever some corporate raider made a run at one of their establishment clients. They wouldn't touch the case. But they were happy to outsource it to Skadden, Arps. “Flom's early specialty was proxy fights, and that was not what we did, just like we don't do matrimonial work,” said Robert Rif kind, a longtime partner at Cravath, Swaine and Moore. “And therefore we purported not to know about it. I remember once we had an issue involving a proxy fight, and one of my senior corporate partners said, Well, let's get Joe in. And he came to a conference room, and we all sat around and described the problem and he told us what to do and he left. And I said, 'We can do that too, you know.' And the partner said, 'No, no, no, you can't. We're not going to do that.' It was just that we didn't do it.”
Then came the 1970s. The old aversion to lawsuits fell by the wayside. It became easier to borrow money. Federal regulations were relaxed. Markets became internationalized. Investors became more aggressive, and the result was a boom in the number and size of corporate takeovers. “In nineteen eighty, if you went to the Business Roundtable [the association of major American corporate executives] and took surveys about whether hostile takeovers should be allowed, two-thirds would have said no,” Flom said. “Now, the vote would be almost unanimously yes.” Companies needed to be defended against lawsuits from rivals. Hostile suitors needed to be beaten back. Investors who wanted to devour unwilling targets needed help with their legal strategy, and shareholders needed formal representation. The dollar figures involved were enormous. From the mid-1970s to the end of the 1980s, the amount of money involved in mergers and acquisitions every year on Wall Street increased 2,000 percent, peaking at almost a quarter of a trillion dollars.
All of a sudden the things that the old-line law firms didn't want to dohostile takeovers and litigationwere the things that every law firm wanted to do. And who was the expert in these two suddenly critical areas of law The once marginal, second-tier law firms started by the people who couldn't get jobs at the downtown firms ten and fifteen years earlier.
“[The white-shoe firms] thought hostile takeovers were beneath contempt until relatively late in the game, and until they decided that, hey, maybe we ought to be in that business, they left me alone,” Flom said. “And once you get the reputation for doing that kind of work, the business comes to you first.”
Think of how similar this is to the stories of Bill Joy and Bill Gates. Both of them toiled away in a relatively obscure field without any great hopes for worldly success. But thenboom!the personal computer revolution happened, and they had their ten thousand hours in. They were ready. Flom had the same experience. For twenty years he perfected his craft at Skadden, Arps. Then the world changed and he was ready. He didn't triumph over adversity. Instead, what started out as adversity ended up being an opportunity.
“It's not that those guys were smarter lawyers than anyone else,“ Rif kind says. ”It's that they had a skill that they had been working on for years that was suddenly very valuable.”*