Some consternation about non-lawyer ownership of Canadian law firms is perfectly understandable. There's no question the current model works and lawyers are comfortable with it. Why then are alternative business models needed and, more to the point, so desirable?
Some consternation about non-lawyer ownership of Canadian law firms is perfectly understandable.
There's no question the current model works and lawyers are comfortable with it. Why then are alternative business models needed and, more to the point, so desirable? Because, as my own experience and that of lawyers in Australia and the United Kingdom demonstrates, non-lawyer ownership generates new and often generous working capital.
Are Canadian lawyers right to be tentative about non-lawyer investments? Sure. Remember that Slater and Gordon, one of three publicly owned firms trading on the Australian Securities Exchange, was investigated for lying about its financials after launching an IPO. As of Aug. 1, its shares traded at AUS$0.08, with a “reported” market capitalization of AUS$521.8 million
Any irregularity in financial reporting is extremely serious once a firm goes public and alleged accounting fraud is among the most publicly feared outcomes. This is why the U.K. has agencies such as the Serious Fraud Office, which has launched an investigation to assure investors that the firm is practising due diligence. Since Slater and Gordon is a publicly traded company, the law firm is subject to heavy regulation and will be forced to comply with the investigation.
What happened at Slater and Gordon is concerning. However, it is not, to our knowledge, a lawyer issue. The scandal is one of potential fraud, not of lawyers placing their own interests ahead of those of clients, and, according to investigators, none of the firm's clients has been harmed.
Lawyers can also have accounting scandals and we all know of instances where lawyers have mismanaged trust accounts. This is why media and regulatory accountability are essential, whether a law firm is privately owned or allows non-lawyers to invest.
Why so tentative, Canada, when the United Kingdom has allowed law firms to solicit outside investors since 2011? Gateley Plc, for instance, trades on the London Stock Exchange as GTLY. The firm raised US$45 million in an IPO and, as of this July, shares trade for £171, with a market cap of £176.89 million. Knights 1759, which also accepts private equity investments, credits going public with improving its financial capital and management structure.
As Knights CEO David Beech told ABA Journal: "Having been in private equity, it seemed obvious to me that running a law firm through an equity partnership structure was dysfunctional and the potential opportunity was significant.” Frankly, Law Society of England and Wales president Robert Bourns reports, U.K. regulators consider alternative business structures to be more innovative than traditional ways of delivering legal services.
My firm, Hart Management Inc., has been recruiting non-lawyer investors for Hart Legal in Victoria, B.C., since 2012. In that time, Hart Legal has opened 17 new offices in four provinces and in California. As it has done for our firm and elsewhere, widespread adoption of alternative business models would invigorate Canada's legal industry.
I can honestly say, from my experience, that outside investors add value that enables innovation and growth. In our case, we use the resources external investors provide to invest in technology and adopt alternative billing structures, such as flat fee billing.
Since innovation, efficiency and being results driven are central to our vision, we are able to use the working capital non-lawyer investors make possible to fuel continued growth. That growth occurs through an independent management arm, which, similar to a business model common to the dental industry, enables us to raise capital to develop new markets. The Law Society of British Columbia, where our firm is based, does not regulate management companies and, in this way, we are able to fund the firm's operations during slow cash flow periods.
Why are alternative business models crucial to the future of Canadian law firms? Because, counting on your own lawyers to invest in your firm on the expectation they will become partners is risky. Your associates may opt to open their own practice and, realistically, the internal pressure to be a partner may influence their perceptions about your loyalty. Not everyone wants to own a business and lawyers should be content to be associates, with full discretion over their billing and trust accounts, without feeling they have to invest to receive major files.
Maybe, in fact, Canadians are being stodgy by avoiding change. We might expect millennials to want the legal industry to be dynamic. After all, while they're not much different from generation Xers and baby boomers, they are the future. Like the generations before them, they bring their own aspirations to the practice of law.
So, how about it, Canada? Let's adopt the lead of the U.K. and Australia, allow IPOs and consider alternative business models. Doing so will enable Canadian law firms to obtain the financial capital they need to expand, prosper and, ultimately, compete globally.
Alistair Vigier is vice president of business development for Hart Legal, a Victoria, B.C.-based boutique litigation firm, and president of The Wealthy Franchise. You can take a look at his firm profile here.