Does an ASX debut make sense for law firms?
The notion of listing and launching an initial public offering (IPO) is not lost on Australia’s corporate market. Every week we see businesses take their proposition public, inviting the likes of institutional and retail investors to come forth for their slice of the pie.
What’s less common however is the idea that these businesses be law firms. While inherently service providers of some kind - like their other-industry counterparts - law firms who list on the ASX are often subject to vast scrutiny.
In this cover story we examine those who have bit the bullet, and the trials and tribulations they’ve encountered along the way. We’ll also look into whether listing on the ASX will at some point in the future become the norm - and who’s likely to be next to join the stock market bandwagon.
Case in point
The concept of listed firms has plagued the legal profession since May 2007 when a decision was made by Slater and Gordon to float, declaring a $35 million IPO at the time, of which $15.4 million was dedicated to an acquisition program and marketing and advertising.
In making the move Slaters effectively became the first ever law firm to hold an ASX debut, presenting a different model to market than seen before.
Over the past decade we’ve seen a domino effect.
Shine Corporate Limited, the holding company of Shine Lawyers, joined the party in May 2013, raising $15 million by the issue of 15 million ordinary shares at an issue price of $1.00. At the time the Toowoomba-founded firm also transferred a further 30 million ordinary shares to successful applicants - also at a price of $1.00.
Next up were IP firms IPH Limited and Xenith IP Group Ltd who floated in 2014 and 2015, respectively.
IPH Limited, which is the parent company of Aussie-based Fisher Adams Kelly Callinans and Cullens, and Asia-Pacific IP firm Spruson & Ferguson, claimed last year that its ASX offering represents the largest Australian patent market share of 16 per cent, with the company employing more than 400 staff.
On the other hand, we have Xenith IP Group which holds Shelston IP Pty Ltd and Shelston IP Lawyers Pty Ltd as wholly owned subsidiaries, while also claiming companies such as Griffith Hack Pty Ltd and Griffith Hack Lawyers Pty Ltd, Watermark Intellectual Property Pty Ltd and Watermark Intellectual Property Lawyers Pty Ltd and Glasshouse Advisory Pty Ltd under its ownership.
IPH is currently in the midst of acquiring Xenith by way of scheme of arrangement, with this set to be implemented in August 2019, subject to the conditions of the scheme being satisfied.
Meanwhile, fellow IP firm Qantm Intellectual Property, who up until recently was going head-to-head with IPH in its own plans to merge with Xenith, floated on the ASX in 2016. In doing so it went so far as to acquire the long-standing Davies Collinson Cave (DCC) and patent specialist firm FPA Patent Attorneys (FPA) to complete its listed aspirations.
A mixed bag
What appears to be a common sentiment between those who have publicly listed is a desire to expand market reach.
These growth ambitions are what led Slaters to its IPO, who in 2005 - two years before the float - put a dedicated strategy in place to scoop up smaller outfits and ramp up concentrated marketing efforts in an attempt to nab more business than ever.
In order to continue its drive it needed to look beyond the law firm norms. This resulted in a decision being made by managing director at the time Andrew Grech, alongside senior partners Ken Fowlie, Cath Evans and Hayden Stephens, to engage the regulators and draft a prospectus.
This prospectus drew a line in the sand in including a reference that would clearly outline where Slaters’ priorities would lie following the float, and negate any prior conflict of interest concerns.
Primary duties to the court was tabled as the first priority, followed by clients and then shareholders.
“I don't think being able to operate your business sensibly means you have to sacrifice the quality of the professional work you do for your clients and the way you deliver those service to clients," Mr Grech said in announcing the firm’s debut, noting that transparency between all parties is paramount.
"Everyone profits from the law. I don't think that's going to be earth-shattering news, to be frank.”
Despite putting shareholders as third on the priority list, headlines that Slater and Gordon had become the first law firm to list received vast market endorsement and for a while there things were looking optimistic for the Melbourne-headquartered firm. Using its newfound status it went on to advise on some of the largest and most noteworthy matters, including British American Tobacco’s lung cancer debacle and CSR’s asbestos battle, and saw its share price soar. The ASX-listing also prompted Slaters to splash the cash and snap up approximately 40 smaller law firm outfits in both Australia and the UK, supersizing its jurisdictional command.
That is until a few years later saw Slaters post a series of less than favourable financial year results and of course embark on its now infamous 2016 acquisition of British legal business Quindell (now known as Watchstone), in a move that some say was the true beginning of its troubles.
At the time the $1.3 billion purchase was described by Grech as “transformative”, however just two months later the company Slaters bought was under intense investigation by the Financial Conduct Authority. Long story short, the acquisition quickly turned sour. Slaters suffered over a billion worth in losses, several shareholder class actions were launched and a recapitalisation was instated with Grech eventually stepping down from his post.
While the severity of Slater and Gordon’s woes cannot be understated, it is not the only listed firm to have its setbacks, with almost all experiencing considerable share price falls at one point or another.
In a development dubbed “catastrophic” by some market commenters, Shine Corporate suffered a 73 per cent share price drop back in 2016 after downgrading its EBITDA forecast for that year from $54 million to $26 million. The holding company of Shine Lawyers consequently lost $250 million in market capitalisation as a result of the downgrade.
This later spurred a $250 million shareholder class action filed against Shine in late 2017, with the firm leading the charge, Quinn Emanuel Urquhart & Sullivan, alleging Shine had misled investors in a series of representations regarding its FY14 and FY15 financial results, in breach of its disclosure obligations under the Corporations Act 2001 and ASX listing rules.
Fast-forward two years and Shine appears to have settled the no-win, no-fee action against it, the details of which are, at the time this feature was published, confidential and subject to court approval.
"The company has, throughout the course of the matter, denied liability for all claims made and continues to do so," Shine said in an ASX statement in May.
"The settlement is without any admission of liability."
The class action against it clearly hasn’t held Shine back, with the firm enjoying many wins since its float on the ASX.
Over the past few years it’s acquired boutique players, expanded its practice with the recruitment of several key industry figures, and advised on some of the most high-profile matters in the Aussie legal arena, proving that law firms listing on the ASX are clearly not “one size fits all”.
Arguably the most obvious question that springs to mind when one thinks about a listed law firm is whether such a set up presents a conflict of interest. After all, law firms at their core are client-centric businesses and the way in which they succeed relies on this approach.
So then what happens when a law firm decides to debut on the ASX and has to answer to external forces, such as shareholders? Is an ethical dilemma presented when that law firm now has a duty to shareholders in the maximisation of profits and dividends? Does this counteract the need to act in a client’s best interests?
For Attwood Marshall Lawyers partner and accredited specialist in Queensland’s personal injury law sector, Jeremy Roche, the concept presents more cons than pros, with his firm first-hand experiencing the aftermath that comes with clients getting caught up in the listed web.
“It is natural to question the motives of a legal firm under such sustained financial pressure and wonder if the client’s claims are being properly prosecuted,” Mr Roche penned on his company’s website back in 2017.
“The dilemma is particularly relevant to personal injury or compensation claims being handled by the ASX national legal firms and how these claims are being managed.
“Attwood Marshall have taken over many files from other listed legal firms in circumstances where the clients felt that their claim was being compromised or settled for an amount that was less than what they thought their claim would be worth.
“There was a feeling that their claim had been rushed and not properly prepared with a perception that the law firm wanted to settle their claim and get paid for their costs as soon as possible. This is a classic example of the ethical tussle between a listed legal firm having two masters – clients and shareholders!”
The rushed nature that listed law firms often deploy to their matters is also of concern, according to Mr Roche, who notes that the pressures felt by such organisations see them often not landing on the most appropriate client outcome.
“Whilst it is important to pursue a client’s claim for damages as quickly as possible, quite often in these types of cases a certain period of time must be left for the injuries to properly stabilise before proper medical evidence can be obtained that accurately reflects the severity of the injuries and the impact upon the client’s life/family,” he explains.
“In many cases, these issues cannot be rushed and careful thought must be given to appropriate medical experts who can provide reports and ensure that the maximum amount of compensation is achieved for the client. In most personal injury claims, the client only has one chance to bring their claim and it is vital that the best evidence is obtained on their behalf to make sure that their settlement is appropriate considering all of the circumstances of their case.
“WorkCover Qld and insurance companies as a general rule fiercely defend most claims brought against them and take any steps that they can to minimise the award of damages that are applicable to a claim. They are answerable to shareholders and Governments. It is unlikely that attempting to settle a matter as quickly as possible without properly preparing the case will result in a satisfactory settlement for the client.
“It is only through proper and thorough preparation of a personal injury claim that places you in a position to extract the best possible outcome from WorkCover or the insurance company involved. Prosecuting claims in this area is a stressful and emotionally draining exercise for the clients and it is important that they have faith in their lawyers to obtain the best result for them in their case.”
For Wrays CEO Robert Pierce, a firm listing on the ASX has the potential to sacrifice vital client relationships.
Back when Slaters’ was experiencing its fallout from Quindell, Mr Pierce spoke to Lawyers Weekly about the obstacles in the listed proposition, noting that law firms could risk damaging their client relationships by going public.
He said the shareholders of private firms – the partners – work closely with clients, whereas shares in listed firms are held by investors who often have nothing else to do with the company.
“It’s no secret that companies are required to generate returns for their shareholders. That’s the case for both public and private companies,” Mr Pierce said.
“I would say that shareholders of a private firm are actively engaged with clients and closely involved with the day-to-day running of the business, and that builds a connection to the client.
“I think advisers at private firms have an ability to perhaps focus more on the longer-term client experience. A publicly listed firm will certainly have different stakeholders to manage and expectations to manage, not least with share price fluctuations and what the market is doing, whereas potentially a non-listed firm can concentrate on its long-term strategic objectives and therefore the needs of its clients and people.”
Mr Pierce’s opinion was countered by Leon Allen, the managing director of listed IP firm Qantm, who told Lawyers Weekly at the time that the notion of listed law firms having an inherent conflict of interests just shows that the profession is unfamiliar with this new business model.
“I understand the apparent concern, but I do think it reflects the novelty of listed legal entities,” Mr Allen said.
“There are many forms of listed companies across industry sectors that operate in highly competitive environments. I think you would find that most, if not all, would say they have a responsibility to their shareholders but also to their customers or clients.
“I do not see any inherent contradiction in running a business or a practice which serves the interests of multiple stakeholders, and in this I would include employees.”
Of course Slater and Gordon - the guinea pig of law firm listing - has undoubtedly had its challenges, of which have been well documented in the press throughout the years.
Though while Slater and Gordon’s journey from ASX debut to recent times may have been been fraught with challenges, it’s not an argument against listed law firms, argues Mark Humphery-Jenner, associate professor of finance at UNSW Business School.
Mr Humphery-Jenner, who holds PhDs in law and in finance, has studied the listed law firm model extensively and says past failures exhibited by Slater and Gordon is not proof that law firms shouldn’t be allowed to list - a claim expressed by other players in the profession
“It turns out that SGH is not a case against law firms listing. Its failures arose because it did not maximise shareholder wealth, and this arose due to managerial decision making rather than the firm being listed per se. Nor did listing cause SGH to violate any duties to clients or to the court. Indeed, listing has brought its problems to light and highlights the importance of continuous disclosure obligations imposed on listed firms,” Mr Humphery-Jenner wrote in an opinion piece published by Lawyers Weekly in 2017.
“SGH’s failures arose because it did not maximise shareholder wealth. SGH’s accounting issues have been the subject of an ASIC investigation. While ASIC did clear SGH of deliberate accounting falsification, the wisdom of some accounting practices is in question. SGH’s acquisition decisions destroyed shareholder wealth. This manifests in the monumental write-down it took after acquiring Quindell. This destroyed it and placed SGH in its current predicament. So, shareholder wealth maximisation is not the problem.
“SGH’s shareholder wealth maximisation is not different from that of other law firms. All law firms seek to maximise profit, either for partners or for shareholders in an unlisted company. Maximising wealth for shareholders of a listed company is no different. This is obvious in the Corporations Act, which makes no relevant distinction in this respect between listed and unlisted companies: directors’ duties to act in shareholders’ best interests are the same in either case.”
Mr Humphery-Jenner explains being listed does not efface a law firm’s duties to the court, or, to clients that apply to all law firms.
Pointing to the Corporations Act, he says there are clear outlines which uphold that directors and officers are subject to other laws, which would include duties to courts and to clients.
“These duties do not stop because a firm lists. Even if listed firms ignored them, they are not the reason for SGH’s financial woes, which stem from accounting practices and takeover decisions, not ignoring its duties,” Mr Humphery-Jenner says.
“The need to satisfy duties to clients and courts is implicit in directors satisfying their duties to shareholders. Directors must manage the firm to continue as a going concern. This includes acting with due care and diligence as relevant to a corporation in “the corporation’s circumstances” (per Corporations Act 2001 (Cth) Section 180). If the firm undermines duties to courts or to clients, it can impinge its legal practice, which undermines shareholder wealth.
“Being listed also exposes the firm to additional scrutiny, which could in fact be beneficial. A listed firm is subject to ASX continuous disclosure requirements and governance guidelines. It is vulnerable to shareholder class actions, and regulatory discipline, if it allegedly violates these.”
Additional scrutiny imposed on listed law firms also brings to light governance concerns and enables shareholders to discipline managers for poor decisions, according to Mr Humphery-Jenner, who notes unlisted firms need not meet such stringent obligations.
“Thus, being listed could in fact benefit governance in law firms by enabling outsiders to detect and discipline misconduct,” he says.
“Together, these factors indicate that listing is not per se a problem for law firms. Listed law firms still owe duties to clients and to the court. Slater and Gordon’s difficulties did not arise because it listed. They reflect managers’ decisions. Being listed allowed shareholders and regulators to scrutinise them. Thus, SGH’s situation does not militate against other law firms listing on the market.”
When all is said and done, what does the future look like for listed law firms?
Despite many seeing some dire times throughout the years, it’s not been enough to see a complete collapse of any of the aforementioned firms, suggesting that if done appropriately such aspirations can be a viable business strategy.
As far as what to expect from this space, it’s truly anyone’s guess. Share prices go up and down all day every day, new business is gained and lost, and the market reacts accordingly.
In terms of law firms, will there be more to list? Definitely.
For one we’ve got Australian Family Lawyers who officially launched its IPO in early June, after announcing its intention to list on the ASX via a reverse takeover of mining company Navigator Resources Limited earlier this year.
By doing so it becomes the nation’s first ever ASX-listed family law firm, providing an indication of what that will look like for outfits practising outside of IP and injury law, the likes of which we’ve seen through Slaters’, Shine’s, IPH’s, Xenith’s and Qantm’s float.
“Currently our market is worth $1.1 billion in revenue per annum and in contrast to personal injury law, there is no dominant or national player despite the fact [that] the markets are of a similar size,” Australian Family Lawyers’ proposed new chairman Grant Dearlove said.
“This represents a significant opportunity for AFL.”
Thomson Geer has also previously considered listing, as has Sparke Helmore Lawyers.
Speaking to Lawyers Weekly back in 2017, two years after it was confirmed that his firm was toying up whether to go public, Thomson Geer chief executive partner Adrian Tembel said the move could be an effective staff motivation and retention strategy.
“We are, piece by piece, step by step, transforming the organisation into an organisation that could be fit and ready for a listed environment at some point in the future,” he said.
“We’re a few years into that process. It’s still got time to run but it’s a long-term plan, and it’s absolutely consistent with our strategy because our strategy is to remain a very strong domestic law firm that will invest further in supporting services or allied services that will diversify our offering and further entrench the strength of our legal offering.”
Aside from the key benefit of greater access to capital, Mr Tembel said listing would enable the firm to distribute equity beyond the ranks of its partnership and create greater engagement among all its people.
“It’s always inherent in great businesses that there is long-term thinking, long-term planning, and therefore to make that work you need long-term incentives,” Mr Tembel said.
“So the idea of creating capital gain opportunities for all of our people, not just our partners or our up-and-comers, over the longer term, we think, would drive the optimal behaviours and give us competitive advantage.
“One of the great aspirations of our plan is that we would open up equity ownership way beyond our traditional partners to a broad range of our people, with the capacity to invest, stay invested, stay longer, build true capital value, which would be a reflection of a stronger law firm.”
Whether or not Thomson Geer or Sparke Helmore Lawyers will revisit their previous plans to list remains to be seen, however what these two, and others, demonstrate is that going public on the ASX is something law firms have an opinion on, with some very seriously weighing up the pros and cons.
We at Lawyers Weekly will be watching how such movement continues to play out, and examining whether taking the business of law to the next level will involve the unveiling of more listed entities.