Buy stock in a law firm? There's talk again

Globalization of the legal industry and intense competition for business and legal talent have renewed debate over proposals to permit law firms to raise capital as publicly traded companies, much like Ford and General Motors.

Much of the recent impetus comes from legislation likely to be enacted this year in the United Kingdom to allow law firms to sell shares to investors. In Australia, the firm of Slater & Gordon went public in April, and its stock is trading nearly 70 percent above its initial offering price.

No one expects the U.S. legal profession to soon abandon its centuries-old model of partnerships barring outside investment. Each state bar would have to sign off, and resistance is strong.

One obstacle: Most state bar associations allow lawyers to take their clients with them when they jump to another firm.

The rule permits top lawyers to function much like football and baseball superstars, selling their services to the highest bidder. Experts on the economics of the legal industry say the rule would serve as a powerful disincentive to investors.

Even so, events in the United Kingdom and Australia and the rapid expansion of U.S. firms overseas have helped trigger a discussion about how the U.S. legal business might be reshaped if outside investors had a stake in law firms.

"I personally would welcome a dialogue on nonlawyer ownership of law firms," said Mark Alderman, chairman of the Wolf, Block, Schorr & Solis-Cohen L.L.P. law firm in Philadelphia. "And I would welcome a dialogue on noncompetes for lawyers. Those are two rules that still may have important purposes, but may have become a bit anachronistic."

Alderman said the down side of not acting could be that firms in Britain or other international markets might gain access to capital markets. "We could find ourselves potentially at a competitive disadvantage."

Sheldon Bonovitz, chairman and chief executive officer of Philadelphia-based Duane Morris L.L.P., said one potential attraction of outside ownership was that partners could convert some of their own interest into cash.

"I think that conceptually it is something that could make sense in the future; and the reason is, there are several firms now with well over $1 billion in revenue. You become very institutionalized and corporate, and you create a value in the franchise," he said. "You can see firms in the next five years having $2 billion in revenue, and you ask, how do owners really cash out their value? You do it by bringing in other investors."

Bruce MacEwen, a New York-based consultant to law firms in the United States, Britain and Canada, said the largest British firms, the so-called magic-circle firms, might eventually use their access to investor capital to crack open the U.S. legal market.

"If a magic-circle firm were to . . . go public and have access to the deep pool of capital, they could use it to build their practices in New York, and the first thing you would hear out of the mouths of managing partners is 'we need a level playing field,' " MacEwen said.

Much of the resistance to the idea of publicly traded law firms in the United States is based on the idea that the law and lawyers play a special role in a democracy and that making them more like traditional businesses would undermine service to clients. A generation ago, law firms rarely raided one another for partners, and stuck by gentlemen's agreements not to poach one another's clients.

But those days are long gone, as the vibrant competition among firms to hire away high-producing partners amply attests.

"It's pretty clear right now that law firms are for-profit businesses," said Larry Ribstein, a law professor at the University of Illinois College of Law and an expert on law-firm economics. "And the only difference really between a law firm and any other business is that law firms don't have the same flexibility to choose a financial structure that is more conducive to its long-term interests."

Britain began its own restructuring of the legal industry several years ago with the appointment of a commission aimed at encouraging more competition. Among the recommended changes was a proposal to permit outside investment.

Proponents suggested at the time that such financing structures would encourage creation of large retail-oriented law firms, a kind of legal Wal-Mart providing affordable services to the middle class.

Tony Williams, a principal in Jomati Consultants L.L.P., a legal-consulting firm based in London, said he expected a number of midsize British firms to take advantage of the financing options once the new system takes effect, probably in 2010 or 2011.

While that might in turn spur efforts in the United States, huge obstacles remain.

Chief among those, according to Mitt Regan, a law professor at the Georgetown Law Center and a codirector of its Center for the Study of the Legal Profession, is the ability of lawyers to leave a firm with their clients.

"Running a law firm can be like managing a baseball team made up totally of free agents: Your entire starting lineup can move to another team," he said. "Such partners are the equivalent of short-term shareholders who won't hesitate to seek a better return elsewhere. When they leave, the firm loses both capital and business assets."

Most lawyers like it that way.

"If you are a free agent, you like your free-agency status," Alderman said. "But not if you are trying to run a law firm."