Listing a law firm on the stock exchange

I saw in The Australian today that law firm and personal injury specialist Slater & Gordon had incorporated and listed on the Australian Stock Exchange.

Most law firms are partnerships. The partners fall into two groups. Equity partners own part of the firm itself. They have a say in the way in which the firm is run, and who receives promotions and who gets a salary rise. They are entitled to a hefty share of the firm’s profits. This is in contrast to salaried partners, who receive the rank of “partner”, and a salary reflecting that achievement, but they do not gain a share of the profits of the firm. Salaried partners want to become equity partners, because, as this US article indicates, it is much more profitable.

I presume that upon incorporation, the partners of a firm become majority shareholders instead. As majority shareholders, they will still have a say in the way in which the firm is run, but they will be paid dividends as shareholders.

The advantage of floating a law firm on the stock exchange is that it will allow a firm to raise funds by issuing more shares. Apparently, in the case of Slater & Gordon, the money raised from the float will be used to purchase other small personal injury firms, and expand business into other states. Former equity partners and some employee solicitors will also do very well from the deal.

Is it a good idea? Well, I certainly don’t claim to be a stock market expert. But as far as I can see, there are two interesting and controversial points raised by the listing of Slater & Gordon.

1. Slater & Gordon is a firm which has a reputation for bringing class actions on behalf of “little guys” against large corporations. Now it will be listed alongside many of those corporations. Somehow that just seems ironic to me.
2. In law firms, there is a tension between (a) making a profit from one’s client and (b) doing the most efficient job possible for the client. As I have explained in one of my very first posts, because solicitors bill by six minute units, one doesn’t want to be too quick and efficient, otherwise you won’t be able to charge the client much. It seems to me that by adding shareholders to the mix, the firm will be pulled in three ways instead of two – (a) profiting from one’s client, (b) doing the most efficient job possible for one’s client and (c) keeping one’s shareholders happy. And I haven’t even mentioned the lawyer’s duty to the court (which is supposed to be our primary duty)! Apparently Slater & Gordon’s company constitution explicitly confirms that its primary duty is to the court, then to clients, and then to its shareholders, so it is trying to manage this aspect.

I wonder whether this will catch on elsewhere? I suppose we’ll just have to watch and see whether it is a success and whether other firms follow suit.

Update

I recommend a couple of other commentaries on this issue:

• John Flood has offered a comprehensive and thoughtful post (as usual)
• Professor Mitt Regan is intending to publish an interesting discussion in the Georgetown Journal with Bruce McEwen and Professor Larry Ribstein – it takes a while to read, but it is worth it.
• Blawgs.com has also posted a small piece – I wonder whether there will be any responses?

Update 2

On further conversations with colleagues, more questions occur.

What happens if Slater & Gordon are running an action against a particular individual who is very well-resourced, and that individual buys a substantial number of shares in Slater & Gordon and then demands that the action against him cease?

I note that the prospectus is very clear that one of the risks of investing in the company is that it may be required to act against the interests of the shareholders, and that the corporate governance policy reiterates this (documents available here).

Secondly, what is the standing of the firm in a legal action? Is a public company a valid form for a law firm? Thirdly, does the fact the firm is a corporation limit the Law Institute’s ability to regulate the firm? I note that the prospectus says that investors must be aware that the Law Institute will have disciplinary powers over lawyers who do not meet practicing standards.

I don’t know the answers to these questions – I’m just putting them out there for consideration.