Ownership of law firms

Many jurisdictions prohibit nonlawyers to have an ownership interest in law firms. This means that law firms cannot raise external capital through an IPO or private equity capital. As it currently stands, capital can only be raised through additional capital contributions from existing or new equity partners, or through taking on debt, usually in the form of a credit line secured by their A/R or by issuing a bond.

Alternative law practice structures are currently prohibited in every U.S. jurisdiction except the US District of Columbia (which permits lawyers to share a management and/or financial interest with nonlawyers in entities that are limitedto providing legal services). They are becoming more common, in foreign jurisdictions, such as the UK, Canada, and Australia.
American law firms doing business overseas are in a quandary over how to balance the more permissive rules on business structures in other countries and the more restrictive regulations in U.S. jurisdictions.

But see the ABA Rule 5.4 (Professional Independence Of A Lawyer):

(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:

(1) an agreement by a lawyer with the lawyer’s firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer’s death, to the lawyer’s estate or to one or more specified persons;

(2) a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of Rule 1.17, pay to the estate or other representative of that lawyer the agreed-upon purchase price;

(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement; and

(4) a lawyer may share court-awarded legal fees with a nonprofit organization that employed, retained or recommended employment of the lawyer in the matter.

(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.

(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.

(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:

(1) a nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;

(2) a nonlawyer is a corporate director or officer thereof or occupies the position of similar responsibility in any form of association other than a corporation ; or

(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.

ABA comment on this rule:

[1] The provisions of this Rule express traditional limitations on sharing fees. These limitations are to protect the lawyer’s professional independence of judgment. Where someone other than the client pays the lawyer’s fee or salary, or recommends employment of the lawyer, that arrangement does not modify the lawyer’s obligation to the client. As stated in paragraph (c), such arrangements should not interfere with the lawyer’s professional judgment.

[2] This Rule also expresses traditional limitations on permitting a third party to direct or regulate the lawyer’s professional judgment in rendering legal services to another. See also Rule 1.8(f) (lawyer may accept compensation from a third party as long as there is no interference with the lawyer’s independent professional judgment and the client gives informed consent).

This ABA rule was created to prevent conflicts of interest. The assumption is that a lawyer working in a firm owned by a private equity firm would be conflicted between a lawyer’s duties to the client and the courts and the expected short-term returns of the private equity firm. Similar conflicts are feared if the lawyer works for a publicly traded firm as s/he could be tempted to evaluate decisions in terms of their effect on the stock price and the shareholders.

As different jurisdictions around the world are changing their rules in favor of allowing nonlawyers to own law firms, it is still forbidden in the U.S.

The Legal Marketing Association provided this resource:

• June 29, 1905 Legal Services Act of 2007 https://www.legislation.gov.uk/ukpga/2007/29/pdfs/ukpga_20070029_en.pdf

• April 13, 2007 Slater & Gordon Prospectus https://www.slatergordon.com.au/files/editor_upload/File/prospectus/Prospectus.pdf

• April 30, 2007 Law Firms, Ethics, and Equity Capital: A Conversation Mitt Regan https://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=1000&context=cslp_papers

• August 3, 2009 Private Equity Considers Investing in U.K. Law Firms (Update1) Lindsay Fortado https://www.bloomberg.com/apps/news?pid=newsarchive&sid=asso5puZd5fA

• September 1, 2010 Law, the Investment Barbara Rose https://www.abajournal.com/magazine/article/law_the_investment/

• September 30, 2010 LETTER FROM LONDON: U.K. Law Firm Investment Countdown Enters Final Year Chris Johnson https://amlawdaily.typepad.com/amlawdaily/2010/09/lawfirminvestment.html

• October 28, 2011 Selling Pieces of Law Firms to Investors John Eligon https://www.nytimes.com/2011/10/29/business/selling-pieces-of-law-firms-to-investors.html?pagewanted=all

• December 2, 2011 Discussion Paper https://www.americanbar.org/content/dam/aba/administrative/ethics_2020/20111202-ethics2020-discussion_draft-alps.authcheckdam.pdf

• December 2, 2011 Initial Draft Proposal for Comment https://www.americanbar.org/content/dam/aba/administrative/ethics_2020/20111202-alps_choice_of_law_r_and_r_final.authcheckdam.pdf

• December 2, 2011 Ethics 20/20 Edges Toward Decision on Endorsement of Versions of Alternative Law Practice Structures James Podgers https://www.abajournal.com/news/article/ethics_20_20_edges_toward_decision_on_endorsement_of_versions_alternative/

• December 6, 2011 ABA Inches Closer to Vote on Nonlawyers Owning Stake in Firms Joe Palazzolo https://blogs.wsj.com/law/2011/12/06/aba-inches-closer-to-vote-on-nonlawyers-owning-stake-in-firms/

• January 20, 2012 More major law firms assess plans to join ‘Tesco law’ revolution Sofia Lind https://www.legalweek.com/legal-week/news/2139883/major-firms-assess-plans-join-tesco-law-revolution

• February 3, 2012 Poster child for Tesco law in Australia heads to UK- Race for the consumer legal market begins with news that Australia’s Slater & Gordon is to buy Russell Jones & Walker Neil Rose https://www.guardian.co.uk/law/2012/feb/03/slater-gordon-russell-jones-walker-abs

• February 6, 2012 Firms flock to take up ‘Tesco Law’ status Caroline Binham https://www.ft.com/intl/cms/s/0/c046c44a-50e8-11e1-8cdb-00144feabdc0.html#axzz1nR3XLSXs

• February 10, 2012 Continental Breakfast: Three U.K. Firms Ink External Investment Deals As Legal Services Shakeup Starts Chris Johnson https://amlawdaily.typepad.com/amlawdaily/2012/02/ukexternalinvestmentdeals.html

• March 9, 2012 Judge Rebuffs Challenge to N.Y. Ban on Non-Lawyer Firm Ownership Mark Hamblett https://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202544898642&slreturn=1

• March 23, 2012 Does Nonlawyer Ownership of Firms Threaten the Independent Judgment of Lawyers? Emily Fisher https://hildebrandtblog.com/2012/03/23/does-nonlawyer-ownership-of-firms-threaten-the-independent-judgment-of-lawyers/

• April 1, 2012 Trailblazer: A Harvard MBA goes where no nonlawyer has gone before https://www.law.com/jsp/tal/PubArticleTAL.jsp?id=1202546740816

• April 2012 April 13, 2012 blog post Stephen Mayson https://stephenmayson.com/

• April 17, 2012 Joe Palazzolo https://blogs.wsj.com/law/2012/04/17/aba-case-has-not-been-made-for-nonlawyer-ownership/

• April 17, 2012 ABA Panel Abandons Nonlawyer Ownership Proposal Sara Randazzo https://amlawdaily.typepad.com/amlawdaily/2012/04/aba-firm-ownership-nonlawyer.html

 

According to Silvia Hodges, “some say the market already has moved beyond the bar’s restrictions….
As practice changes, financing changes, governance in other countries changes, the U.S. has to consider the
impact on those practicing law in the U.S. It is not something the U.S. can ignore: If external money (from capital
markets) funds law firms from other countries that U.S. law firm compete with or oppose them, it would very likely
have an impact on what firms can do for their clients. If the law firms themselves can’t have outside investors, the
market will continue to chip away at every part of a law firm that is not the pure provision of legal advice. Anything
that can be provided legally by a third party will be.”

Law professor Larry Ribstein, associate
dean for research at the University of Illinois College of Law, says: “The question used to be: ‘Will the ABA change
Rule 5.4?’ The question now is, ‘Who cares?’ If the ABA wants to continue to regulate a tiny fraction of the legal
market, they can keep their rule.”

In https://www.abajournal.com/magazine/article/summer_job_ethics_20_20_commission_shelves_nonlawyer_ownership, James Podgers writes that the ABA Commission on Ethics 20/20 has decided not to develop a proposal on whether nonlawyers should be allowed to have some form of limited ownership interest in U.S. law firms.

“After the close of the commission’s two-day meeting in early April 2012, co-chairs Jamie S. Gorelick and Michael Traynor issued a statement (PDF) confirming that the commission agreed to shelve plans to submit a proposal on nonlawyer ownership for consideration by the association’s policymaking House of Delegates in February during the 2013 ABA Midyear Meeting in Dallas.

Gorelick and Traynor indicated that feedback from other bar associations and individual members of the profession did not suggest a groundswell of support for revising the ABA Model Rules of Professional Conduct to permit a limited form of nonlawyer ownership. The Model Rules, which are the direct basis for professional conduct rules in all states except California, do not permit nonlawyer ownership.”

Author: international