Let Non Lawyers Own Law Firms
Some concern about non-lawyer ownership of Canadian law firms is understandable. I argue that we should let non-lawyers own law firms.
There’s no question the current model works and lawyers are comfortable with it. Why then are alternative business models needed and, more to the point, so desirable? Because, as my own experience and that of lawyers in Australia and the United Kingdom demonstrates, non-lawyer ownership generates new and often generous working capital.
Are Canadian lawyers right to be tentative about non-lawyer investments? Sure. Remember that Slater and Gordon, one of three publicly owned firms trading on the Australian Securities Exchange, was investigated for lying about its financials after launching an IPO. As of Aug. 1, its shares traded at AUS$0.08. It had a “reported” market capitalization of AUS$521.8 million
Any irregularity in financial reporting is extremely serious once a firm goes public. Alleged accounting fraud is among the most publicly feared outcomes. This is why the U.K. has agencies such as the Serious Fraud Office.
The SFO has launched an investigation to assure investors that the firm is practicing due diligence. Since Slater and Gordon is a publicly-traded company, the law firm is subject to heavy regulation. It will be forced to comply with the investigation.
Let Non Lawyers Own Law Firms
What happened at Slater and Gordon is concerning. However, it is not, to our knowledge, a lawyer issue. The scandal is one of potential accounting fraud. It Does not involve lawyers placing their own interests ahead of those of clients. According to investigators, none of the firm’s clients has been harmed.
Lawyers can also have accounting scandals and we all know of instances where lawyers have mismanaged trust accounts. This is why media and regulatory accountability are essential, whether a law firm is privately owned or allows non-lawyers to invest.
Why so tentative, Canada, when the United Kingdom has allowed law firms to solicit outside investors since 2011? Gateley Plc, for instance, trades on the London Stock Exchange as GTLY.
The firm raised US$45 million in an IPO and, as of this July, shares trade for £171, with a market cap of £176.89 million. Knights 1759, which also accepts private equity investments, credits going public with improving its financial capital and management structure.
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When this article first appeared, many lawyers contacted me and took the position that the law society should not let non-lawyers own law firms.
As Knights CEO David Beech told ABA Journal: “Having been in private equity, it seemed obvious to me that running a law firm through an equity partnership structure was dysfunctional and the potential opportunity was significant.”
Frankly, Law Society of England and Wales president Robert Bourns reports, U.K. regulators consider alternative business structures to be more innovative than traditional ways of delivering legal services.
As it has done for our firm and elsewhere, widespread adoption of alternative business models would invigorate Canada’s legal industry. I can honestly say, from my experience, that outside investors add value that enables innovation and growth. In our case, we use the resources external investors provide to invest in technology and adopt alternative billing structures, such as flat fee billing.
Since innovation, efficiency and being results-driven are central to our vision, we are able to use the working capital non-lawyer investors make possible to fuel continued growth.
That growth occurs through an independent management arm, which, similar to a business model common to the dental industry, enables us to raise capital to develop new markets. In this way, we are able to fund the firm’s operations during slow cash flow periods.
The Future Of Law- Non-Lawyers Owning Law Firms
Why are alternative business models crucial to the future of Canadian law firms? Because counting on your own lawyers to invest in your firm on the expectation they will become partners is risky. Your associates may opt to open their own practice and, realistically, the internal pressure to be a partner may influence their perceptions about your loyalty.
Not everyone wants to own a business and lawyers should be content to be associates, with full discretion over their billing and trust accounts, without feeling they have to invest to receive major files.
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Maybe, in fact, Canadians are being stodgy by avoiding change. We might expect millennials to want the legal industry to be dynamic. After all, while they’re not much different from generation Xers and baby boomers, they are the future. Like the generations before them, they bring their own aspirations to the practice of law.
So, how about it, Canada? Let’s adopt the lead of the U.K. and Australia, allow IPOs and let non-lawyers own law firms. Doing so will enable Canadian law firms to obtain the financial capital they need to expand, prosper and, ultimately, compete globally.
Are Alternative Business Structures the Future of Legal Service?
The UK parliament signed the 2007 Legal Services Act which allowed non-lawyers to invest directly into law firms. The person of the new legislation was to encourage more competition and to provide a new route for consumer complaints.
There are three main benefits of ABS:
1) It encourages more competition which puts downward pressure on price. In the alternative, if prices do not decrease, lawyer value must increase.
2) It encourages a diverse skill set in law firm management.
3) Increased funding options for managing partners
Most lawyers will say there are already too many lawyers. Why would the increasing competition be a good thing? There are a lot of bad lawyers out there, and I want more efficient law firms to replace them.
When ABS is allowed, non-lawyers will be able to evaluate the efficiencies of each law firm. Law firms that are doing a good job will grow by receiving capital, and law firms that waste clients’ money will perish.
Law firms will have to learn to reduce overhead (wasteful fancy offices) or to increase their internal systems (think technology.)
Diverse Skill Set
Lawyers are great at practicing law. They may not be good at accounting, marketing, and technology. Most lawyers have no idea how to get clients. Once they have clients, they have no idea how to communicate and manage the client relationship. Business people are experts in managing client expectations and improving customer satisfaction. Clients who need legal services should be the biggest pusher for ABS.
It is now time for non-lawyer ownership of law firms to open up all over the USA and Canada. Lawyers will always be responsible to manage their clients’ trust accounts, provide great legal advice, and keep their clients’ information confidential. Nothing about ABS changes any of those key lawyer values.
Prior to non-lawyers being able to invest directly in law firms, many law firms, including my law firm, ClearWay Law (www.clearwaylaw.com), raised capital into a management company instead. The management company would enter into an exclusive agreement with the law firm. Law societies and state bars do not regulate management companies.
Washington, D.C., was the only jurisdiction in the U.S. that allowed non-lawyers to take an ownership stake in a law firm, though other countries had begun to experiment with alternative law firm structures. A partial ownership stake in law firms in Australia, New Zealand, England, Singapore, Scotland, Italy, Spain, Denmark, and some eastern Canadian provinces is allowed.
Additional sources of capital may encourage legal service providers to take larger risks and innovate.
Let Non Lawyers Own Law Firms. How to get started?
Let’s lobby both the government, law societies, and state bars to encourage them to allow Canadian and US law firms to join other countries. We will face opposition from old school lawyers who want to fight change. But as was the case between Uber and taxi companies, we know who will win in the end.