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Everything You Wanted to Know About Owning a Law Firm, but Were Afraid to Ask
Though forward-looking Bruce MacEwen has been pondering the potential of publicly owned law firms for nearly two years, the issue barely merited a blip on the collective radar of the legal blogsphere until an Australian law firm, Slater & Gordon, made legal history by becoming the first firm in the world to list on the stock exchange. But how would a public law firm work in the United States, where ethics codes require lawyers to exercise independent judgment and prohibit nonlawyers from owning an interest in law firms? And why should investors risk putting money in firms when the partners can leave, and take their clients to another firm? Larry Ribstein responds to these and other questions in this article for American.com, titled "Want to Own a Law Firm?"
Ribstein hits the question about whether publicly owned law firms will potentially compromise lawyers' professional duties to act in clients' best interest, right out of the box, saying that firms have already crossed that line. Ribstein contends that law firms are businesses -- and they are beholden to the financial interests of equity partners rather than outside investors, as would be the case if the firm was public. Ribstein writes:
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.”
Ribstein also addresses the question of whether investors will "buy a firm whose assets can walk." After all, because ethics codes prohibit noncompete agreements for lawyers (except in limited circumstances), a firm partner can always leave with a bunch of clients. To this concern, Ribstein answers:
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.
Of course, there are other ethics rules that stand in the way of U.S. firms going public. As Ribstein points out, U.S. ethics rules prohibit nonlawyer owners of firms. But he suggests that if these deals are economically viable, "how long before lawyers change the rules?" And Ribstein also writes that lawyers may be able to offer nonlawyer investors noncontrolling interests to experiment with the idea of a publicly held firm, without changing ethics rules.
There are still plenty of questions that I have when it comes to a publicly held firm. Will confidentiality issues be treated similarly to proprietary business information and insulated from access by shareholders? Or will shareholders be able to demand that a firm reveal its legal strategy in particular matters -- which would compromise the confidentiality of attorney work product and strategy?
How about conflict of interest? Let's say that Company A wants to fend off a takeover by Company B, but the shareholders of the firm are part owners of Company B and would prefer a takeover to bolster the value of Company B stock? Would the law firm change its strategy to accommodate shareholders? Slater & Gordon says that its duties to its client trump those to shareholders, but I wonder how that would play out in reality.
And relatedly, what about potential malpractice liability? Many recent malpractice claims have arisen out of alleged conflict of interest, such as this case I blogged about a year ago. If a firm achieves a poor result due to competing shareholders' interests, will it be liable for malpractice? What if a client initially agrees to waive conflicts but changes its mind down the line? Will the firm spurn the client (after all, it probably won't be able to dump shareholders with competing interests)?
The bottom line with all of this, of course, is how clients feel about all of this? Will clients (as Ribstein suggests tongue in cheek) decide to simply stop complaining about fees and simply buy a chunk of their lawyers' firm to "roll in the gravy?" Or will they wonder whether they're paying high fees because the legal service is worth it, or simply to make shareholders rich?
Posted by Carolyn Elefant on May 30, 2007 at 06:11 PM | Permalink
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