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Question mark still hangs over incorporation

Question mark still hangs over incorporation

THE BENEFITS of incorporation to law firms are many and varied, but serious questions about potential conflicts of interest are yet to be answered. All eyes in the industry are on listed firms…

THE BENEFITS of incorporation to law firms are many and varied, but serious questions about potential conflicts of interest are yet to be answered.

All eyes in the industry are on listed firms Slater & Gordon and Integrated Legal Holdings as they test the waters of the commercial market.

Last week at an industry-based seminar hosted by ALPMA | NSW and QL, senior lawyers expressed concern about the possibility of a conflict of interest between a lawyer’s corporate responsibility and their duty to the court.

Legal Services Commissioner Steve Marks voiced similar concerns when incorporation was first introduced in 2001. And while fears about conflicting interests are being addressed directly by Slater & Gordon and Integrated Legal Holdings, the thorny issue is unlikely go away entirely.

As a listed firm, Slater & Gordon felt the potential conflict was real enough to warrant a mention in their prospectus documentation. Section 7 of the prospectus for shareholders states that Slater & Gordon lawyers have a primary duty to the courts, and may be “required to act against the interests of shareholders or the short-term profitability of the company”.

However, balancing any conflict between these duties in real terms could prove problematic, according to Ian Ramsay, the director of the Centre for Corporate Law and Securities Regulation at Melbourne University. Ramsay has also practised law with firms Sullivan & Cromwell in New York and Mallesons Stephen Jaques in Sydney.

“Interests of the company are typically defined by courts as a duty for directors to act in the best interests of the company. The courts typically define the interests of the company as the interests of the shareholders, not the company’s clients,” he said.

“So, in a theoretical sense, if this ever arose, if Slater & Gordon did have to act contrary to the interests of shareholders and its corporate responsibilities then there would be an issue for the law firm.”

Other routine conflicts will need to be managed as incorporated firms set about acquiring other legal practices, and in doing so, new clients.

“The one [conflict] that’s always been around for all law firms is the conflicts of interests between clients of the law firm. But what you’ll find with incorporated law firms is that there can be an ongoing process of integration. By integration I mean taking over other firms, and merging in other law firms in order to gain more clients,” Ramsay explained.

“The more you acquire other law firms — and of course we see that with Slater & Gordon — then the more there is the potential for more conflicts between clients of the law firm.”

An entirely new conflict arises from the public listing of law firms. The process of listing introduces new shareholders to the company. It is foreseeable that a shareholder could be on the opposite side of litigation against one of the firm’s clients.

“Again, that would be a relatively new development, if you like. I’m not suggesting that it can’t be managed. But it would be a new one in that sense,” Ramsay said.

The untested regulatory framework and the lag in academic research in the area means that these and other conflicts arising from incorporation and listing will have to be managed by law firms as they arise. It is a decidedly ad hoc approach in a profession unaccustomed to such unknowns.

Can an industry become more ethically sound as law firms move to incorporate? See our feature on page 24

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