US Behind the Times as Overseas Law Firms Go Public
When Slater & Gordon in Australia became the first law firm in the world to go public last month, it turned up the heat on lawyers around the world to do the same.
U.K. lawyers may be poised to follow Australia when a bill that would allow British firms to list shares is voted on by lawmakers later this year. American lawyers say they're watching to see if the law gives their rivals an edge.
``If the English firms can sell stakes in their law firms publicly, that will then give them an advantage,'' said Ralph Baxter, the chief executive officer of the 924-attorney San Francisco-based firm Orrick, Herrington & Sutcliffe. ``If the rules were to change, we would then examine what's in our best interest to do.''
Law firms, which need capital to expand and fund cases, are grappling with public offerings in the same way another industry once dominated by private partnerships, investment banks, did 30 years ago. Financial pressures mounted after Merrill Lynch & Co. listed its shares in 1971 until Goldman Sachs Group Inc. became the last major investment bank to make the change in 1999.
Many U.S. lawyers say it's too early to consider such a move when no major law firm has released plans to sell shares.
``Among the top 10 issues that I worry about, that's not in the top 100,'' said H. Rodgin Cohen, the chairman of New York's Sullivan & Cromwell, the leading legal adviser for mergers and acquisitions the last three years.
Like law firms, investment banks resisted going public, said Charles Geisst, the author of ``100 Years of Wall Street.''
``They were hesitant; it took awhile,'' Geisst, a professor at Manhattan College in Riverdale, New York, said of the investment banks.
``Law firms could go public for the same reason that the investment banks had to go public. The number of the transactions were increasing and it required them to have more capital and the partners couldn't provide it.''
Slater & Gordon
The 140-lawyer Melbourne-based personal injury firm Slater & Gordon Ltd. became the first law firm in the world to trade shares on a stock exchange last month to finance new lawyers and offices. It raised $35 million ($29 million) in its May 21 IPO.
British law firms may be able to sell shares by 2010 under the Legal Services Bill that is expected to pass later this year, said Jeremy Black, associate partner in the professional practices group at Deloitte & Touche in London.
``Firms are quite interested in it. There are certain firms that are further down the track,'' Black said, declining to identify clients who have inquired about going public. ``I'd say there is some interest across the spectrum.''
The biggest hurdles to U.S. lawyers even considering selling shares are state laws and legal association ethics rules that prohibit non-lawyers from owning stakes in law firms.
`Perpetual Conflict'
Stock sales might force lawyers to put shareholders above clients and create conflicts between the attorney-client privilege and Securities and Exchange Commission disclosure requirements.
``It's a perpetual conflict, at least potentially, with non- lawyers controlling a law firm,'' said Steven Krane, the chair of the American Bar Association's ethics committee and a partner at New York's Proskauer Rose. ``There's very little interest in changing the rules.''
`Behind the Times'
Another Australian firm, Perth-based Integrated Legal Holdings Ltd., intends to set a schedule for their IPO in the next few weeks, said Brett Davies, a partner at ILH, in an e- mail.
ILH has been approached by 89 law firms, most with a range of eight to 32 partners, to discuss mergers, he said.
``I'm surprised the USA is so far behind the times,'' Davies said in the e-mail. U.K. law firms are likely to follow Australian firms because their laws are changing, he said.
``We are going there next,'' Davies said of the U.K. ``Then we are coming to the USA. Get ready. There are a lot of opportunities in the USA for our business model.''
New York legal consultant Bruce MacEwen said that if U.K. firms begin going public, U.S. firms may push for similar changes ``within two to three years.''
``You will see pressure here in the U.S. for the regulators to permit it,'' said MacEwen, who is also editor of the Adam Smith Esq. Web site that focuses on the issue of law firm economics.
In the U.K, mid-size firms may be the first to go public, raising equity to acquire competitors, Black said. The ``Magic Circle,'' the five largest U.K. law firms, are unlikely to follow right away, he said.
High Street Firms
The smallest practices, or High Street firms, will face pressure to consolidate and sell shares because another part of the U.K. law allows supermarkets and banks to offer wills, divorces and other legal services.
``Suddenly there's going to be some enormous corporate competing with them who have a significant brand,'' Black said. ``To compete, they'll have to consolidate.''
As small and mid-size firms consolidate, larger firms will be affected by competition for attorneys and clients, Black said.
``People have said it's difficult to see why the Magic Circle firms would want to list given that they have quite good access to funds if they need to borrow them,'' but the IPOs of smaller and mid-size firms ``may well affect them,'' Black said.
Sullivan & Cromwell's Cohen said law firms don't have the same need to raise capital that investment banks face.
``Some of the major investment banks that I admire that have gone public were in a different situation,'' said Cohen, whose clients include Goldman Sachs, Merrill Lynch and Barclays PLC. ``We don't need capital. We grow only at a certain pace, so equity-raising isn't important to us.''
Still, as law firms look to open new offices and hire a constant stream of first-year lawyers with salaries that have shot up from $100,000 to $160,000 since 1999, finding sources of funds is an issue. Baxter said that the option to offer lawyers stock would allow firms to attract more talent.
``Anyone that's been a leader of a law firm has thought about how we raise capital,'' Orrick's Baxter said. ``It takes millions and millions of dollars.''
If U.S. law firms were to look at going public it would change more than just the ownership of the firm, it would require a culture shift on a giant level. Putting shareholders above individual partners would cause many lawyers to run screaming from the building.
The concept of marketing, business development and sales (which few firms really embrace, although many give lip-service) would need to become real inside a law firm that was publicly traded. No longer could the partners discredit the marketing and biz dev teams, as these roles would rise to high levels (like they are in all other public companies).
I don't think public offerings will happen any time soon in U.S. law firms, but if it did....it would be the best thing to happen to the professional staff...who would become elevated in stature because of their contributions. The senior marketing staff would have to have a "seat at the table" and real power to effect firm policy.
Also, lock-step salary increases would give way to performance based compensation. This too would upset the current apple cart in the way that firms opperate. It will be interesting to see how this plays out in Australia and the UK.