Our prohibition on using equity to raise capital for law firms is premised on the notion that lawyers in thrall of stockholders will be likely to do things and take chances that may disadvantage their clients. I don’t buy it.
I saw an announcement the other day that the first English law firm has gone public. The firm, Gately, has 380 lawyers in six offices in England and an office in Dubai. Its promotional material notes that its work is concentrated in banking, financial services, corporate and employment. According to the offering materials, the firm grosses something in the nature of 100 million pounds annually. That’s about $160 million.
It will apparently use some of the money it raises to hire new talent, expand its offices and acquire other firms that will help it grow. Part of its plan is to add nonlawyer services, such as trust work, financial consulting, regulatory advice, compliance and professional training. Its management team will be led by a lawyer but will include several nonlawyers experienced in business and finance. It anticipates distributing approximately 70 percent of its net operating profit as shareholder dividends.
All this makes perfect business sense to me. Firms now raise money to fund operations by using debt (lines of credit, bonds) instead of equity because U.S. ethics rules prohibit practicing law and sharing legal fees with nonlawyers. But debt financing has its drawbacks. It can add to overhead. It requires a steady cash-flow stream, which does not mirror the ebb and flow of most law practices. When things dry up for a time at firms heavily leveraged with debt, bad things happen. Witness Dewey Ballantine, Thelen and many other big firms that have imploded in recent years. Reading about law firm bankruptcies is now pretty routine.
Of course, equity has its drawbacks, too. You lose part of your company and can only retrieve it if you buy it back. That can be a problem if you are successful, as you may have to pay a premium to reacquire ownership. Debt is considerably less complicated than equity as a capital-raising tool. Selling shares is a regulated business, enforced both civilly and criminally. And shareholders can be a cranky bunch.
But I disagree with the notion that lawyers beholden to stockholders will be more likely to do things that may disadvantage their clients. In fact, I think a lawyer who only has to answer to shareholders might be much less likely to put his own interests ahead of his clients than one who has to service a large debt. Clients and work in progress are not easily pledged, so many lawyers and firms who finance using debt are required to pledge personal assets to secure the loan. If an equity firm has a bad quarter or two, shareholders don’t get dividends. No one loses their homes.
Gately will only sell a minority share of itself to those outside the firm. This will obviate the risk that disgruntled shareholders will seize control of the firm and start practicing law without a license. Lawyer independence will be guaranteed.
There is a hoary battle cry we always hear when having these discussions: “practicing law is a profession, not a business.” That started in the late 19th century when lawyers began to establish a professional identity and adopted the Victorian scheme of professionalism from England. At its core was the tension between the ascendant commercial classes and those who considered themselves better than merchants and above the fray. Many of them practiced law as a gentlemanly profession, but relied on their family money to pay the bills. Few of us today have trust funds. If we don’t bill, we don’t eat. That sounds pretty commercial to me.
Some naysayers warn that client confidentiality may be compromised if firms begin to operate like true businesses. Well, I have seen some of the disclosures that firms routinely ask of lawyers during lateral hire talks or in merger discussions. There aren’t many secrets.
Ditto the worry that ethics issues will take a back seat to profits. From what I understand, the lawyer regulators in the U.K. believe that shareholders will be more likely to disapprove those who threaten the long-term viability of the company by engaging in ethically inappropriate conduct than those who try to make too much money.
I am very sure that selling shares is not going to be the answer for most firms and lawyers. But for some, access to equity capital may be just what they need to adapt and grow in a time of rapidly shifting business trends. We can wait and watch the U.K. experiment and see if the sky falls. That’s not likely. Most probably, U.S. firms will find ways of associating with U.K. firms which have access to equity capital. Where there’s a will, there’s a way. •