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To Be (Listed) or Not to Be

Issued: April 19 2018

Going public may increasingly figure in law firms’ consideration as they contemplate the options of new business models and alternative business structures (ABS), and in some cases, going public. After Slater and Gordon became the first law firm in the world to go public and listed shares on the Australian Stock Exchange in 2007, other Australian firms have opted for “to be”: Integrated Legal Holdings in 2007, Shine Lawyers in 2013, and IPH Limited Group in 2014. On the other side of the globe, Gateley became the first U.K. law firm to list shares following the Legal Services Act of 2011 that removed non-lawyer ownership restrictions.

While law firms in Washington are allowed part-ownership by non-lawyers due to the high percentage of senior members being non-lawyers engaged in lobbying work, the American Bar Association’s Commission on Ethics 20/20 had in 2013 decided against recommending an expansion of the D.C. exemption. Currently, major jurisdictions that allow varying degrees of ABS and possibility of going public include Australia, the U.K., some states in Canada, and Singapore.

Why Be…

“The biggest argument in favour of going public revolves around the fact that instead of having partners or principals provide equity for day-to-day running of a law firm – which can be withdrawn when they leave or retire – when firms go public and receive funding from outsiders, they have access to cash which can be invested in new areas such as better training and technology,” says Andy Mukherji, a partner at the privately-held, boutique IP practice Michael Buck IP in Brisbane.



Law firms, especially smaller and more cash-strapped ones, would be able to use the funds to hire more staff, expand abroad more quickly, pay for research and development of new technologies and services, and even pay for artificial intelligence and other legal tech solutions that is so enshrined to be the next big threat for the industry. “We already saw in the 1980s how access to America’s deepening credit markets paid for Big Law to expand to Japan and Europe. Share capital is different than bank capital though – it doesn’t necessarily have to be paid back. This has historically been shown to encourage more risk taking,” says Bryane Michael, a senior fellow at the Hong Kong University Faculty of Law.

Such risk-taking could help many firms break out of the limbo of status quo to better navigate the changing tides of the legal industry. “It is otherwise very difficult for an organization to ask its employees – as opposed to investors – to sacrifice current compensation in the hopes of an increased future compensation, especially when the organization cannot offer the employees any mechanism to ensure that they capture the resulting long-term value,” says Jonathan Molot, chief investment officer of the London-based legal investment firm Burford Capital.

Going public also means freeing law firms from the rigid partnership model and traditional lock-step compensation, which often translate to less incentive for senior and near-retirement partners to train new talent and champion innovation, as well as misalignment of business performance and remuneration. A more corporate management approach could help the legal industry bring in high flyers against increasing competition from tech companies, consultancies and other lucrative opportunities, enticing them with performance-based pay instead of the time-consuming traditional partnership track.

Others have pointed out that going public may be more beneficial for some practices of law than others, as well as some firms more so than others. Michael conducted research on the potential gains in the Hong Kong legal industry should smaller, local law firms be afforded increased capital access through going public. He estimated an additional 6,000 in lawyer headcount generating an extra US$5 billion in revenues that skew largely towards non-foreign firms, arguing that allowing law firms to list can help the Hong Kong legal sector grow as well as levelling the playing field between small, local firms and large, international firms.

“Smaller firms would obtain a huge advantage,” says Michael. “The law firm with the next hot idea, business process, or approach would be able to finally compete with Big Law. They would be able to better serve clients – sometimes without worrying about recovering costs in the short-run.”

In terms of practice areas, practitioners and investors alike have pointed to potential consolidation of work that is more high-volume and commoditized, practices that could benefit from increased capital for “roll up” – the business strategy of consolidating a fragmented market and extracting synergies and economies of scale.

Just as banks like Citi and Wells Fargo had tried to dictate the practice areas that its law firm debtors focused on, as alleged by Duane Morris partner Jonathan Armstrong and New York lawyer James Duffy at a New York State Bar Association conference back in 2012, Michael predicts the shareholders of today’s listed law firms will steer business growth to commercial practices like compliance work, professional indemnity, conveyancing, insurance products, and intellectual property, especially patents.

In fact, Australia seems to testify to this trend: the three publicly listed companies have acquired nine of the largest patent and trademark attorney firms in the region in recent years, beginning with IPH’s acquisition of Fisher Adams Kelly, Pizzeys, Callinans, Cullens, as well as AJ Park in New Zealand, since listing in 2014. Shelston IP publicly listed as Xenith IP Limited in 2015, and then acquired Watermark and Griffith Hack in 2017. In August 2016, Davies Collison Cave and Freehills Patent Attorneys publicly listed under the holding company Qantm IP. This could be a boon for IP practitioners and clients alike as consolidating could mean transferal of know-how, streamlining of services and lowering of costs from economies of scale.

…and Why Not Be

Conflict of interest may be the first fault most people find in listing law firms. Case in point, some Australian firms under the same listed entity continue to operate as separate IP firms and can represent opposing parties in a legal dispute, all the while answering to the same shareholders and governed by the same board of the parent company.

This is increasingly problematic not only from an ethical but also from a client retention point of view. Some 40 percent of all patent applications filed in Australia originate from the U.S., where some practitioners have observed concern among U.S. corporate clients over handling client matters by publicly listed firms.

Floating the firm can also cause some seasickness in the form of fluctuating stock price, exposing a professional services company to risks the industry has rarely had to deal with before. Many fear the pressure to keep up with investor pressure will eventually drive listed firms to pursue merger and acquisition (M&A) deals that are not efficient nor suitable. Many equity research analysts have pointed out that Slater and Gordon may have fallen to the trap of bolstering the balance sheet at the expense of sustainable growth, commenting on how the firm saw a 2.7-fold increase in share value between 2013 and 2015, culminating in a peak share price of A$807 (US$630) on April 29, 2015, followed by a plunge to being worth just A$1.81 (US$1.41) per share on February 27, 2018. (At press time in early March, the per share price had recovered slightly to around A$3.)

“To remain viable in the public markets, these firms will have to continue to grow and to perform against the rigorous scrutiny of the public markets and its regulators. I question the wisdom in putting professionals through this type of performance pressure,” says Stephen Moss, chairman at Sydney-based Eaton Capital Partners, a corporate advisory and M&A firm specializing in the legal services industry.

Internal pressures also abound. While law firms may be able to attract younger and more diverse talents, the lure of the hefty paychecks may be no more, especially as some commercial and high-volume services become more commoditized. “One of the dangers of listing is the exposure to market forces, which drives down salaries and makes it more difficult to recruit talented lawyers,” says Moss.

In fact, despite the promise of performance-based compensation, the talent issue may more complex than at first sight. “An important reason for the lack of success of the listed attorney firms in Australia is the loss of large numbers of senior attorneys,” Mukherji points out. “The holding companies have used the currency of shares and hefty payouts to entice privately-owned firms to sell. But for non-equity partners, and senior attorneys who had partnership aspirations, the takeover has meant that these attorneys have had to reassess their options.” In other words, if you’re a senior associate in a firm that went public, you’ve lost a sure pathway to equity.

With all that pressure to consolidate and chase growth, might answering to shareholders’ interests eventually translate into a loss for legal clients? Overconsolidation could reduce competition and drive up prices eventually. For example, the consolidation of Australia’s attorney firms has markedly reduced choice if not costs for clients. Back in 2016, IPH’s acquisition of Brisbane’s three largest IP firms brought over 50 percent of the city’s registered attorneys under the same listed parent’s roof.

As this article is being written, three brands previously acquired and housed under IPH – Fisher Adams Kelly Callinans, Cullens and Spruson & Ferguson – will reportedly operate under the Spruson & Ferguson brand from April 2018. Pizzeys Patent & Trade Mark Attorneys and New Zealand firm AJ Park, the other patent and trade mark attorney businesses in the IPH Group, will not be affected, Spruson & Ferguson announced in a press release.

“Now imagine those companies five years later. Investors want a high return on their investment. Analysts are breathing down these companies’ CEOs’ necks. But they now have a very large market share. With less competition, they can raise their prices. Who can compete against Google for ads? Who would be able to compete against a Dragon Law, if they are the go-to company for tech-enhanced legal services?” asks Michael.

Bumpy Road Ahead and Alternatives

While the debate on listing law firms is for the moment settled in the U.S., the issue is likely to see updates in a few jurisdictions.

Mukherji points out that the coming two years may present more headwinds for Australia’s listed law firms. “Sales of shares by the original equity partners of the various listed firms, especially in the next two to three years when the lock-in imposed at the time of acquisition comes to an end, will be an important factor. Many of these partners might want to sell their shares and start their own practices, or join competitors,” he predicts.

Both internal and external regulatory hurdles will also pressurize listed companies in Australia, once looked up to as the poster child of IPO success for law firms. With the domestic IP market growing at a modest 3 to 4 percent annually, listed companies hungry for growth would naturally look to Asian markets like China and Singapore. Asian operations of these firms, if structured as a wholly foreign owned entity (WFOE), are prohibited from filing patent applications directly with the State Intellectual Property Office in China and therefore must rely on a local agency, limiting their growth potential in one of the largest and fastest-growing IP markets in the world.

Back home in Australia, changes to the Code of Conduct for Patent and Trade Mark Attorneys came into effect in February 2018 to impose new obligations on attorneys working in firms owned by publicly listed corporations. Attorneys in such firms are obliged to provide all end clients with information pertaining to business structure including ownership and identity of all the firms owned by the parent company. Firms within the same ownership group, despite being independent, can also no longer act for clients on opposite sides in adversarial matters without obtaining the informed, written consent for each client.

Although China currently does not allow non-lawyers to become partners at law firm, nor can non-IP lawyers own an IP practice, there have been several attempts at innovating the ownership model for law firms. Chofn, a Beijing-based law firm and IP service provider listed on the National Equities Exchange and Quotation (NEEQ, also known as the “New Three Board”), tells Asia IP that its listed status is part of “an experiment through Chofn, a special arrangement” on the Chinese government’s part to innovate its relatively young IP field.

The NEEQ provides a platform for public non-listed companies with more than 200 shareholders to issue and trade stocks and bonds separate from the main board, under the oversight of the China Securities Regulatory Commission (CSRC). “Although we keep our shares under control and absolutely most of our shares are owned by our own employees, we have the capability to attract huge investment if needed in the future,” says Tingxi Huo, managing partner of Chofn, although he stops short at detailing the arrangement that enabled Chofn to issue shares on NEEQ and potentially include non-lawyer employees as shareholders/owners.

Along with Chofn, another known “listed” Chinese firm is DeHeng Law Offices. The Shandong-based full-service law firm is listed on the Qingdao Blue Ocean Equity Exchange, a regional equity market (also known as the “New Four Board”). Unlike the NEEQ, which is national and regulated by the CSRC, the regional equity market is regulated by the local government and sees more restrictions such as the maximum number of shareholders and frequency of trading, in trade-off for less disclosure requirements.

In essence, the New Three Board and New Four Board listings are not the initial public offerings (IPO) that most laymen and debaters of the to-list-or-not-to-list issue refer to. This is because the issuance of stocks is not public, but rather limited to specific private investors; and in the case of Chofn and Deheng, their employees. It is, however, a form of ABS that is the prerequisite for law firms to truly float on the stock market.

How and What to Be

Without having to go fully public, law firms can still reap the benefits of ABS and revamp the outdated partnership model, suggests Mukherji. “[A possible option] could involve allowing partners to keep their capital in the firm even after they retired. In such a scenario, the retiring partners could continue to own stock in the firm even after they have retired. While the retired partners would no longer draw a salary or performance bonus, they would still earn dividends. Such a system is likely to incentivize older partners to help build a vibrant business that would benefit them even after they have retired.”

Law firms can also instill performance-based remuneration, bonuses and dividends, and other corporate governance mechanisms to align incentives and encourage innovation. Salary can be paid in part as shares in the firm or as a function of earnings, and such arrangement can be extended to non-lawyer employees such as marketing, business development and other supporting functions to better align interests. In essence, the same tenacity to answer to shareholders’ interest can be worked into growth initiatives without having to take the firm public.

“I would advise firms to put the emphasis on strategically expanding the mechanisms they have at their disposal to invest in their businesses, versus simply expanding for the sake of expanding,” says Molot.

“The investment may involve building a new practice group, establishing a new technology platform that will make lawyers more efficient, or offering clients alternative billing arrangements with lower current billings but the promise of greater revenue for the firm over the long term,” he continues.

Indeed, the question of ownership and how open it is, is but one option under the umbrella of ABS. Alternative law firm structures and business models that don’t necessarily challenge ownership can still greatly liberalize traditional legal service delivery.

“The shift from a partnership structure – in which partners can remain owners only for so long as they are employees – to a more conventional corporate form with permanent equity has the power to transform loose associations of economically motivated free agents, who seemingly just happen to practice law under the same roof, into holistic corporate entities,” Molot tells Asia IP.

Especially in jurisdictions that allow non-lawyer ownership in law firms, another way to maintain competitiveness without faring the stock market tides is to diversify business offerings into other corporate services like compliance, risk management, company restructuring and even management consulting, attracting nonlegal talents by offering the potential of partner/equity track. Law firms could even themselves become legal tech companies, a development already happening at firms like Chofn and Pinsent Masons, in a story covered in Asia IP’s January 2018 issue.

Although still in nascent stage, allowing law firms to adopt ABS and even go public is a welcome change in Asia, according to Huo. “Traditional firms enjoyed monopoly in the old days. Facing increasingly fierce competition, they should increase their marketing capability and share their wealth with the employees to foster loyalty. Otherwise, all they end up doing is training up good professionals who leave for the newly emerging and more innovative firms,” says Huo.



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