October 23, 2012

Developing Down Under and Across the Pond: Publicly Held Law Firms

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October/November 2007 Issue | Volume 33 Number 7 | Page 14

Trends Report

Developing Down Under and Across the Pond: Publicly Held Law Firms

Will U.S. firms feel the impact of developments overseas?

For almost 20 years (long before I began writing this column) I’ve been covering trends in the legal profession, not only in North America but also around the world. Regardless of how far they spread, most of the trends have been started by U.S. law firms. Now, however, developments on two other continents could mark the beginning of a trend that is hardly on the radar in the United States. I’m talking about publicly held law firms.

Late last May, Slater & Gordon, a personal injury firm with 21 offices throughout Australia, made a modest initial public offering and became the first publicly traded law firm in the world. And next year, the U.K. Legal Services Bill (also known as the Clementi Reforms) will take effect, deregulating certain rules governing the U.K. legal profession and permitting firms to seek outside equity investments—in other words, they may become publicly held corporations.

Comparing U.S. Rules to the Changes Abroad

At present, of course, it is not possible for U.S. law firms to become publicly held, although ironically, when the ABA adopted its Model Rules of Professional Conduct in 1983, early versions of the rules did not prohibit outside ownership in a law firm. Model Rule 5.4 was later added, specifically forbidding lawyers from forming partnerships with non-lawyers or allowing them to have an interest in a law firm. This rule has been adopted or adapted by many state bar associations. Notably, the District of Columbia Bar subsequently changed its rule so that non-lawyers could be part of a law firm, although this has not resulted in any law firms there becoming publicly held—at least not yet.

So what are the reasons behind the rule changes in Australia and the United Kingdom? After all, the practice of law does not demand major capital expenditures, like manufacturing or the aviation industry does. In Australia, some experts believe the reason may be to enable firms, supported by the infusion of capital from other than just the partners, to take on both high-risk cases and more low-income clients. While that may also be one reason for the change in the United Kingdom, there’s probably another, more significant one.

U.K. firms face considerable competition, not only at home but also throughout the European Union. And much of this competition comes from U.S. firms that are better capitalized and earn greater profits per partner. Therefore, U.K. firms need considerable additional capital if they are to survive.

The Debate Finally Begins

Until just a few months ago, these two developments had barely been discussed in the States—although lawyers throughout the rest of the world have been watching them closely, and for a very good reason. As Ed Wesemann, an American management consultant who works exclusively with law firms, stated in the May 2007 Of Counsel, this is likely to have a “monumental impact on legal marketplaces around the world.” After all, the practice of law is not only a business but, in many substantive areas, it is also an international business.

The first reaction from many people is to question why anyone would invest in, or buy stock in, a law firm, since the partners divide up the profits among themselves. The most frequently raised objection is that it could influence lawyers to put financial considerations ahead of the needs of the clients. Some opponents also believe that it will raise even more ethics issues. However, Bruce MacEwen, publisher of the blog Adam Smith, Esq., says, “If you were a publicly held law firm, the stupidest thing you could do would be to put other interests ahead of your clients because, without your clients, you’ve got nothing.”

There may also be ways to structure the IPO—as Slater & Gordon has tried to do—so that firms insulate themselves from the pressure of public ownership.

Georgetown University’s Center for the Study of the Legal Profession is taking a careful and comprehensive approach to addressing the issue. It has already published a paper titled “Law Firms, Ethics and Equity Capital: A Conversation,” which discusses whether U.S. ethics rules should be changed to permit outside equity investment in firms. Next April the center will sponsor a symposium on “The Future of the Global Law Firm,” to address the financial, organizational and ethical issues of outside investment.

So what effect will this trend have on U.S. law firms? For some, little or none. For others, particularly the international firms and those with international ambitions, it could have a “monumental impact.” And for potential investors, perhaps you should alert your financial advisors to be on the lookout.