Non-lawyer ownership laws in UK allow some firms to thrive

By: Victor Li

While the debate over non-lawyer ownership of law firms continues to rage in the United States, several lawyers in the U.K. seem to be pleased with the way outside investments have helped their firms.

Two UK firms have thrived since a 2011 law went into effect allowing law firms to solicit funding from outside investors, according to an article in The American Lawyer.
The first such firm in the UK to allow non-lawyer ownership, Knights Solicitors, has experienced rapid growth in both revenue and headcount, according to chief executive officer David Beech. He says the firm is bringing in five times as much revenue and 10 times the profit as it did before instituting its alternative business structure in 2012. In 2013, Knights Solicitors acquired the Chester office of leading UK law firm Hill Dickinson, before doubling up its headcount by swallowing up Darbys Solicitors earlier this year, the article said.

Beech told the ABA Journal that the firm made the decision to accept outside investments so partners could run the firm as a business. “Having been in private equity, it seemed obvious to me that running a law firm through an equity partnership structure was dysfunctional,” says Beech, “and the potential opportunity was significant.” Beech says his firm’s equity partners took the longest to get on board with the changes, but that, eventually, they accepted the fact that they were working in a business “as employed partners” and that they needed to “embrace a new team culture.”

Meanwhile, another UK firm, Gateley, took the step of going public. In June it became the first UK firm to be listed on the London Stock Exchange, and raised $45 million in its initial public offering. Earlier this year the firm acquired Capitus Ltd., a tax advisory company, to complement the firm’s real estate practice. In July, Gateley announced that, during its first year as a publicly traded company, the firm made 11 million British pounds in profits and posted a 10 percent increase in revenue.
According to Robert Bourns, partner at TLT Solicitors and president of the Law Society in the UK, of the approximately 10,000 law firms in the UK, about 450 of them are alternative business structures. “It is still in the early days,” says Bourns. “[But] alternative business structures are cited as being more innovative than traditional law firms and therefore our regulators are looking at ways to encourage more into the market.”

Bourns notes that small firms have been quicker to embrace ABS, pointing out that they tend to have simpler management structures that are more easily understood by outside investors.
“The largest and most profitable firms continue to rely upon traditional means of financing: partner capital, banks, tight management of working capital,” Bourns says. “Most recognize that a third party will require a return on their capital, which will likely have an impact on profit shares for those employed in the firm.”

Bourns says he rejects the notion that ABS firms are anathema to the practice of law. However, he cautions that increased competition could have a deleterious impact on clients.

“I am determined that solicitors should not be regarded as lacking in innovation or the acumen necessary to promote successful and innovative law firms,” Bourns says. “I do not see ABS as necessarily conflicting with professional standards or ethos. I do have concerns that a determination to promote competition at all costs could impact standards. Ultimately clients will determine whether they discern value in the service they receive, whether from an ABS or traditional law firm.”
But the beleaguered Australian firm Slater & Gordon is “Exhibit A” that outside investments are not the panacea for the legal industry’s woes. The firm posted a loss of 1 billion Australian dollars ($740 million) for the second half of 2015 and recently made a A$840 ($635 million) refinancing deal with its lenders. The firm has already had to close one office in the UK and is looking at shuttering others.
Beech says he is not concerned that what happened to Slater & Gordon could happen to Knights. “Care will be taken as to which firms we acquire,” he says.

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