Unchartered Territory: Law Firm IPOs

Editor’s Note: The author of this post is a consultant to law firms.

By Richard Tromans, TromansConsulting.

What has happened?

On the 12th of May this year a medium-sized law firm from Birmingham, England, made legal history. It announced it would be listing on the stock market. According to its public statement, Gateley, which was founded in the 19th century, will list on AIM in London. Its partners will become ‘salaried employees’ and ‘ordinary shareholders’ of a newly created Public Limited Company (PLC). By doing so it will become the first English law firm to publicly list.

Slater & Gordon, the Australian listed law firm, also famously used some of its publicly raised capital to take over a series of UK law firms, but it is not listed in London. Meanwhile the listed British professional services company Quindell also took over a law firm in the UK by buying it for cash, but this PLC was not originally a law firm itself. Hence, the Gateley plan is an English first and makes it one of a very small number of law firms globally to take up this opportunity.

So, if you are also thinking about doing the same, or are just curious, here’s a couple of thoughts that might be worth considering.

The End of Partnership

Perhaps the most obvious point for any law firm contemplating an IPO in the UK is that it is the end of their partnership, at least on paper. Those who were once partners may still treat each other with the same deference one might expect, but they would in reality just be another employee.

Moreover, the partners-turned-employees would at some point be able to sell their shares in the PLC, so one might one day have a head of department who has no equity share in the firm and is no more a business owner than the receptionist. Former partners could also retire with their shares in the business, letting their colleagues work on while they collected their annual dividends from the poolside.

Senior associates, who perhaps had dreamed of one day coming home with a new business card with the word ‘partner’ written on it, may not fulfil their dream. Of course, a PLC firm could still use the title ‘partner’ if it really wanted to for senior lawyers, but such a title might ring a little hollow. That in turn might affect the recruitment of young talent. Though, for some, being able to progress without the dreaded ‘up or out’ partnership hurdle ahead of them might be a blessing.

You Own It, You Rule It

The first duty of any company board is to its shareholders. In a traditional law firm that is easy to figure out, the shareholders are your partners; they are the people who walk into and out of the building’s lobby each day.

In a legal PLC things will be a little different. External shareholders who you may never, ever, meet, will want their money’s worth from you regardless of your internal concerns. After all, they are not buying law firm shares for the novelty value. They want a healthy ROI. They don’t want to hear about why Bob in real estate isn’t happy about his remuneration package, or why you can’t cut your costs even lower.

But then, the employees will also want to be highly paid or they might leave. No skilled and loyal employees means the listed law firm has very little value. Does this create a potential management conflict? In short it does, but it is also a natural conflict that all public companies face. However, it is a governance issue few law firm managers will have ever faced before.

Growth and Expectations

One reason why any firm would list is in order to use the huge influx of fresh capital to go on an expansion drive. In other words: to greatly increase productive capacity. Another reason is to rapidly win market share in new regions of the country.

This especially makes sense in areas such as personal injury claimant work where there are often low margins and hence the need for high volume. The PLC firm can use its cash to buy up smaller firms, and perhaps more importantly their horde of unfinished cases, rather like an oil trader buying up unrefined oil. It can also invest in advertising to stir up more of this work to keep the claims ‘refinery’ running to capacity.

However, with work that is not so commoditised there could be a strategic challenge. When it comes to higher value, especially complex corporate matters, this volume formula does not operate quite so well. Large corporations can sometimes want an external adviser that can handle huge volumes of small matters, e.g. a bank that wants to conduct consumer debt collection all over the country. But, not every GC is focussed on volume. Many corporate clients are looking for knowledge and expertise they do not have inhouse, not just industrial might.

That could limit the types of work that building a very large publicly funded law firm would be able to capitalise on. And if you cannot turn your investments into greatly improved profits – and the most profitable legal work is often the most complex – then there could be additional pressure from external shareholders. As we all know, building a major firm that can attract sophisticated clients is no easy task, no matter how much capital one has at one’s disposal.

Public Brand and Publicity

Law firms are increasingly under the spotlight, for good or ill. Partners can sometimes become as much a part of the story as a client, especially when a judge makes a comment about their actions during a major trial. Law firms are now even targeted by pressure groups over what their clients do. Sometimes a PR team needs all the help it can get to protect the image of a law firm when it is under fire.

Now consider that the law firm is publicly listed. First the degree to which it must declare information about itself is as high as can possibly be for a business. Even the slightest whiff of appearing to hold something back can be seized upon not just by the press but by investors who are equally adroit with the use of blogs and Twitter. They can send your share price plunging with a single tweet.

Activist investors can keep on at you until management feels like it wishes it could just give up. No traditional law firm ever has to face such public scrutiny or media pressure. This adds a whole new dimension to legal PR and brand protection. Not everyone who goes into an IPO will be ready for this.

Conclusion

The issues above are just a small handful out of many issues faced by a law firm partnership becoming a PLC. However, it is worth remembering that other types of business that were traditional partnerships have also become listed companies and have prospered. There is no a priori reason listed law firms cannot do equally well. But, whatever happens, the lawyers that do this will be exploring unchartered territory.