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Want to Own a Law Firm?

Wednesday, May 30, 2007

An Australian firm’s decision to go public raises some fascinating questions.

Around when the Blackstone IPO was announced, in March, I participated in an exchange with Bruce MacEwen and Georgetown Professor Milton C. Regan, Jr. in which, among other things, we wondered if a law firm might go public, too. At that time a law firm IPO was only a theory, and many were skeptical it would ever happen.

It didn’t take long. On May 21, the Australian personal injury law firm Slater & Gordon, with 21 branches in Australia and over 20,000 clients, went public and listed on the Australian Stock Exchange, becoming the world’s first full-fledged publicly-traded law firm.

Can society afford to let lawyers sell out to the highest bidder, just like a common for-profit firm?

So now it’s surely time to think more seriously about the prospect of publicly traded law firms. Will this catch on? Should it?

Many kinds of firms are public, including firms that, like law firms, mainly sell expert services: consulting (LECG), investment banking (Goldman Sachs), “private” equity (Fortress and soon Blackstone).

But this is a law firm. Can society afford to let lawyers sell out to the highest bidder, just like a common for-profit firm? Shouldn’t lawyers keep themselves apart as a profession, maintaining the conceit that they work for client betterment rather than directly for themselves?

I think law firms have crossed that line already. One benefit of law firms being publicly traded is that this would make it harder for lawyers and law firms to deny that they really are businesses. Instead of driving out the last vestige of professionalism, going public will clarify professionalism’s role in the business of law practice. S & G’s prospectus says that their “duty to the Court will prevail over all other duties; and the duty to the client will prevail over the Company’s other corporate responsibilities and duty to shareholders.” In other words, shareholders are their last priority. But surely they would want long-term profit maximization. By contrast, law firm consultant Bruce MacEwen wonders whether the interests of non-lawyer shareholders are likely to be “more powerful or motivating than the [existing] profit-maximizing desires of full equity partners in a private firm, who collectively distribute 100% of the spoils at year-end… If the problem, in other words, is the collision between ‘professionalism’ and ‘profitability,’ I suggest Slater & Gordon has just ameliorated, not exacerbated, it.”

Why would a law firm, of all businesses, need the money from a public offering? Their standard business model, after all, is to distribute money to the partners, not retain it. They’re the quintessential partnerships, not capital-intensive corporations. S & G, with its nationwide network of offices serving individual clients, plans to use the money to expand by acquisition and to build its brand through advertising. But how many other law firms would this apply to? The firms catering mainly to individual clients are generally smaller, single-office, shops. Top tier law firms don’t advertise, at least in the conventional sense. They trade on their reputations with well-informed corporate executives and inside corporate counsel. Many corporations are turning to smaller “boutiques” for specific types of advice because they can research particular lawyers and don’t need the assurance provided by a big firm’s brand. Class action firms sell themselves to institutional investors and courts, again on the reputation of the individual lawyers. That’s why Milberg, Weiss survived an indictment that destroyed Arthur Andersen.

The top five Australian firms would each have a market valuation of upwards of A $2 billion if they went public

But there are many firms in the middle of the pack that might gain from swallowing their smaller competitors and becoming dominant national or regional brands. They could use a capital infusion to buy the sort of reputation it takes to compete with the big guys. Or, like S & G, they might unite the fragmented legal profession at the lower end by leveraging their brand into multiple clients and services. S & G’s prospectus says the firm has developed its “National Practice Standards” as a way of “embedding a culture where the ethical and professional responsibilities of lawyers are given primacy.” Indeed, when the UK recently authorized publicly held law firms, it acted on a government report entitled “The Future of Legal Services: Putting Consumers First.”

Anyway, law firms don’t have to need money in order to go public. Blackstone’s impending public offering will provide a currency for its aging leaders’ estate planning. The Australian Financial Review has said that, at the S & G price-earnings multiple, the top five Australian firms would each have a market valuation of upwards of A $2 billion if they went public. Numbers like that—probably much bigger for the largest US firms—might be enough incentive to get lawyers thinking about a public offering.

Of course none of this speculation about whether law firms would want to go public should affect whether they can do so. If there’s no sound reason for preventing it, as I believe, then let’s not bar the doors. If law firms could choose their ownership structures, we might be surprised about their choices. Free markets do all kinds of unpredictable things.

Would you buy a firm whose assets can walk? Similar thoughts must be running through the minds of investors thinking about buying into Steve Schwarzman & Co.’s Blackstone or, for that matter, any firm whose value depends on a high-profile leader. Slater & Gordon builds in some protection by restricting share sales of the main owners for five years after the offer, giving them a strong incentive to stay. More importantly, the point of the S & G offer, and presumably of any law firm offer, is to help build a stable brand that exists independently of the individuals in the firm.

If just about every other type of business is going private these days, why on earth would law firms want to buck the trend? We hear a lot about the rising scrutiny and regulatory and litigation costs of being public. There may be more problems for law firms. For example, they’ll need to reconcile securities law disclosure requirements with confidentiality obligations to their clients. Surely lawyers, of all people, understand the legal risks.

But while we’re learning that the benefits of being publicly held are increasingly on the margin, public ownership still offers powerful advantages, including the market’s ability to value firms. The stock exchanges aren’t about to shut down. Even Blackstone, after years of touting the advantages of being private, is taking the plunge.

Can it happen here? Not yet, at least not like Slater & Gordon. Unlike in Australia, U.S. ethical rules prohibit non-lawyer owners of law firms. But if this sort of deal is economically viable, how long before lawyers change the rules? While lawyers wouldn’t jeopardize their livelihoods for the sake of the wealthy few, a broad spectrum of the profession may see the benefits. And lawyers might find some maneuvering room in existing rules, as by offering non-controlling interests.

And if the above doesn’t convince you, think about this: The publicly traded law firm can at last offer comfort to those who complain about high legal fees. Just buy a chunk of your lawyer’s firm, and you, too, can roll in the gravy.

Larry E. Ribstein is the Mildred van Voorhis Jones Chair at the University of Illinois College of Law. He blogs at Ideoblog.

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