Only two law firms in the world have listed on a stock exchange, and they are both based in Australia. Justin Whealing examines why they did it and why the majority of law firms are so reluctant to move away from the partnership model.
|FAILURE TO LAUNCH?: Titles and taxation prove to be significant reasons as to why law firms are hesistant to embrace incorporation.|
Andrew Grech, the current managing director of Slaters, was also the firm's head when it became a public company four years ago. He said that back then, which was in the midst of the pre-GFC boom times, listing was seen as the best way to fund its growth strategy.
"We had a set of objectives as an organisation, which were mainly centered on trying to put ourselves where we could create the best possible opportunities for our people and our clients," he says down the phone line from his Melbourne base. "We soon identified that we needed capital to execute that expansion strategy, and that listing turned out to be the best option for us."
It certainly has.
In 2007, the firm had 20 offices and around 400 staff. It now has around 50 offices and service centre locations, with its headcount having more than doubled to close to1000 staff members.
Much of this growth has been achieved by raising additional funds through the share market in order to acquire other firms.
"It is certainly true that generally speaking as a listed organisation, you don't want to be raising capital in the share market when your share price is unrealistically low"
Andrew Grech, managing director, Slater & Gordon
Last year, Slaters took over the Queensland based personal injury litigation firm Trilby Misso for $57 million, of which $40 million was raised through an additional capital raising offer. Slaters' $25 million acquisition of Keddies later in 2010 was also partly funded in shares.
"I have no doubt that listing has been pivotal in our ability to execute our growth strategy," says Grech "It was primarily the access to capital, both debt and equity, and our status as a listed organisation, that enabled us to come through the GFC relatively unscathed."
Grech added that the "governance structures, disciplines and processes required of a public company... gave assurance to banks that we are a credit worthy organisation".
Of course, while the reporting requirements of listed companies means that much of its financial information is a lot more transparent and accessible to the public when compared to law firms that are still structured along the lines of a traditional partnership model, the downside is that by being a listed company, you are left open to the whims of the share market.
August has been a particularly volatile month on world share markets, with Slaters share price dropping from $2.37 at the start of August to $2.16 when Lawyers Weekly went to press on Friday 12 August.
Grech says that by having strong internal processes in place, publicly listed companies can cope effectively when the share market turns south. He also says that given that Slaters is a plaintiff law firm, its source of work and revenue is not as dependant on fluctuations in the business cycle as many private practice law firms.
"The main thing we focus on in times of volatility is to remain focused on the execution of our strategy effectively," says Grech. "Our business in itself is pretty well insulated, because we don't operate in areas of practice which are cyclical to any great degree."
While Slaters might be able to safeguard itself to some degree from the perils of the financial markets by virtue of its client base, when she share market does become volatile, it makes it harder for any listed entities to go back to the market to raise further funds.
"It is certainly true that generally speaking as a listed organisation, you don't want to be raising capital in the share market when your share price is unrealistically low," says Grech. "We have been fortunate during the GFC and the general re-qualification of the market that we have been well supported by our institutional shareholders, our internal shareholders and our retail shareholders, so that we have not had the wild fluctuations [in share price or financial performance] that perhaps other organisations have had."
"There is a certain status to being a partner that isn't replicated when you are a senior employee of a listed company"
Philip Diviny, partner, Middletons
Following quickly on the heels of Slater & Gordon in listing on the stock exchange was Integrated Legal Holdings Limited (ILH) in August 2007.
ILH has a unique structure, in that it has four law firms - Argyle Lawyers, Civic Legal, Law Central and Talbot Olivier Lawyers, under its umbrella.
Argyle Lawyers managing principal Peter Bobbin says that all four member of ILH still operate independently, but by being part of a listed entity, they have the opportunity to raise funds for future growth and to offer employees ownership of the business, which has become a key part of the firm's recruitment and retention strategy.
This month, Argyle purchased the Sydney firm PLN Lawyers in a deal that was funded by ILH.
"We have begun a three-year vesting share plan, where over performers can get rewarded with shares," says Bobbin. "The nature of the shares vest, so if we can have an environment that is intellectually stimulating, collegiate, friendly, and with employees knowing that if they leave before their shares have become fully vested, then our ability to not merely attract but to also retain talent becomes vitally important."
Given the high-profile success and expansion of Slater & Gordon in particular, why haven't more law firms followed the path to incorporation?
Surprisingly, a major reason for the reluctance of law firms to change their structures is to do with the cachet that comes of being able to call yourself a law firm partner.
At Slater & Gordon, for instance, senior lawyers could be referred to under a myriad of titles - such as principal lawyers or practice group leader, while at ILH, they have the title of principals.
"Law firms are a little bit idiosyncratic in the sense that many partners would see the status of being a partner as being very important," says Middletons partner Philip Diviny, when asked why more law firms have not listed on the ASX.
Diviny, a well regarded tax expert, nominated what he sees as these "psychological and historical factors" above tax concerns in explaining the reticence of Australian law firms to embrace a public company structure.
"There is a certain status to being a partner that isn't replicated when you are a senior employee of a listed company. People work extremely long hours in order to try to achieve partnership, so if you put yourself into a structure where partnership will never be achieved, maybe it doesn't justify, in the employees mind, the hard work that is necessary with being a junior lawyer in private practice."
Mallesons chief executive Robert Milliner agrees that any move to go down the incorporation route where senior lawyers could not be referred to as partner "could potentially change internal motivations".
"While you can incorporate as an incorporation, there are significant tax and stamp duty implications, and it is really those stamp and tax duty implications that have stopped firms from doing that"
Robert Milliner, chief executive partner, Mallesons Stephen Jaques
However, he thinks that the best way to get the best of both worlds would be to follow what is common practice in the USA, where law firms can be structured under the lines of a limited liability partnership (LLP). This is very similar to a form of incorporation, where law firms that adopt this model have specific tax and documentation requirements, but typically, as is currently regulated in the USA and United Kingdom, can't list on the stock exchange.
"I think if there was demonstrable benefits to it, then we would prefer an LLP structure where you could still have people called partners rather than directors and so on," says Milliner. "I think there is a certain way in which society and the profession recognise these things. I have no doubt that aspiring and existing partners would prefer to be recognised by the title 'partner', which, if you are in an incorporated business, you can't."
A tale of two firms: The share price history of Integrated Legal Holdings and Slater & Gordon
While the philosophical debate about the internal titles in law firms has played a part in the reluctance of Australian firms to embrace incorporation and to list on the stock exchange, the biggest barrier to law firms wanting to list is money. In particular, the type of taxes that are levied on listed entities.
Milliner readily concedes that corporate models have many possible advantages for law firms. These include the management of risk and liability, the chance to offer different entitlements and rewards to staff members, the reduced personal liability provisions that come with being a staff member as opposed to a partner, and the chance to generate capital from different sources.
"The reason why all large law firms haven't gone down that route - and we identified this in feedback to the Attorney-Generals Department in the taskforce on National Legal Profession reform, is that firstly, we don't have the right model for incorporation in Australia," says Milliner. "We don't have a limited liability partnership model which is available to many other firms in common law jurisdictions. And while you can incorporate as an incorporation, there are significant tax and stamp duty implications, and it is really those stamp and tax duty implications that have stopped firms from doing that."
Diviny says the tax and reporting burdens are quite onerous for any private practice law firm looking to become incorporated.
"To move to being incorporated, there are many regulatory and tax steps that need to be negotiated," he says. "From a tax perspective, I can go from being a no-gooodwill partnership to an incorporated practice, and that is fine. But one of the conditions for being able to do that tax free is that all of the equity holders are in fact individuals practicing in the practice. By definition, once I list on the stock exchange, I am looking to have shareholders that are working outside the practice, and therefore, my concessions are unwound."
Peter Bobbin has a different slant on the financial and reporting obligations that go with being a listed entity.
He says that it is "dumb" to go down the incorporation route for tax reasons, especially with the associated payroll tax costs that will be borne. However, he says it also shouldn't be seen as the main factor for any law firms looking to list.
"My base prime legal area is tax law, and I have always expressed the view that you should never let tax drive a decision. Rather, always make a good decision and then tax-test it."
Bobbin says that since Argyle Lawyers joined ILH, the internal reporting processes and accounting standards within the firm have become more rigorous and transparent, and that is attractive to clients.
"The legal ethics and professional standards, duty of confidentiality, duty of utmost discretion, is in fact enhanced," he says. "It is part of the auditing process to ensure we are adhering to professional standards."
While the philosophical argument might be interesting to debate, in the long-term, the decision about whether law firms will want to incorporate and list comes down to money and client perceptions, the basis of most decisions within private practice.