“If I had another life, I would keep my company private,” Jack Ma (Alibaba Group)
From an initial public offering (IPO) to the more recently celebrated inception of a SPAC (special purpose acquisition company), a plethora of recently listed companies such as Palantir have revelled in the benefits of being publicly listed. Law firms have generally been slower on the uptake, preferring Limited Liability Partnerships (LLPs) or traditional partnership models. Why?
Conventionally, law firms have operated as LLPs, enabling partners to retain ownership and control, eliminating the need to report to shareholders, thereby also increasing public scrutiny, not to mention the need for increased governance and compliance. I don’t however think this is the only reason why!
Following the implementation of the Legal Services Act 2007, the discourse concerning the listing of law firms has precipitously expanded in the last decade. Dialogue and increasing sentiment in this regard remains poised to alter the legal hemisphere, especially considering reports by Thomson Reuters indicating that one-fifth of finance directors at major firms were considering an IPO.
In this fashion, several law firms have taken the plunge in going public, commencing with Gateley Plc in May 2015, indicating plans to list on the London Stock Exchange (LSE). In going public on the 8th of June 2015, Gateley raised £30 million, valuing the firm at £100 million. Thereafter, the firm Gordon Dadds floated in August 2017, which nearly doubled the market capitalisation of the firm by raising £20 million. Most poignantly, becoming the largest listed law firm in the United Kingdom, DWF went public in 2019, valuing the firm at £366 million, which crucially was large enough to be listed on the main board of the LSE. Recent further successful examples includes Knights Plc and Keystone, the latter being of special import, given that the majority of the lawyers in Keystone work on a virtual basis.
The Legal Services Act 2007
The catalyst for this growing trend in publicly listed law firms, as indicated above, is the implementation of the Legal Services Act 2007 (LSA). Prior to the LSA, law firms were unable to become public as they were LLPs, something which was redressed by the LSA by allowing firms to register as Alternative Business Structures (ABS). An ABS essentially provides a platform for non-lawyers, enabling them to partake in the ownership of law firms, going against the traditional model of only partners (being qualified lawyers) sharing the profits. In this light, an ABS licence, which was only issued from 2012 onwards, permits law firms in becoming publicly traded companies and issuing a sufficient number of shares to list on an exchange such as the LSE therefore allowing for members or partners to become business owners, regardless of being legally qualified. The Big 4 accountants have also taken advantage of the opportunities afforded by the LSA by opening their own legal arms and becoming further multiple disciplinary partnerships.
Stick or Twist: LLP vs Public?
Out of the hundreds of viable law firms able to be floated on a stock exchange, only six in the United Kingdom have done so. There cannot be one single explanation for the general lack of take up, though in some cases, it’s borne out of fear of public scrutiny, greater external accountability and an overall loss of partnership control. One undeniable asset of listing however is the influx of capital the firm receives through the sale of its shares, and the sudden influx of share capital. This share capital can be smartly used for R&D purposes, innovation and future proofing the corporate entity, in a way that traditional partnership models based on distribution of profits as equity, don’t.
DWF recently saw “overall revenue growth of 10.9% and organic growth of 2.0%”, resulting in an increase in share price by 23% in a single quarter (Sir N Knowles – CEO). Such was the market’s confidence in the increase in share price at dwf that private equity firm Cartesian Capital Group, acquired more than 3% of the total available share capital in DWF. Cartesian’s calculated decision to invest in DWF is arguably the largest differentiating factor for the firm from its competitors. This is due to the equity firm’s explicit confidence in DWF’s agile business model, focus on innovation and the firm’s ongoing desire to become legal disruptors, a legacy set by their former CEO Andrew Leaitherland (now of ARCH law).
The firm’s management of finances and aggressive acquisitions of other prestigious firms such as Rousaud Costas Duran, should instil further confidence in longer term investors. The detractors however argue that the share price of DWF is currently underperforming the market and that the firm’s debt on its balance sheet, when compared to other private firms such as Norton Rose Fulbright, is significantly higher. However, the majority of stocks, as to the time of this writing, have been adversely affected by the long overdue correction of the stock market and more substantially, the S&P 500 index, which was previously and dangerously inflated. Furthermore, one only needs to look at the rosy long-term forecasts articulated by a number of financial analysts on DWF’s future projected revenues, which will no doubt boost shareholder and investor confidence and drive growth in share value.
Not all law firms will possess the required capital and expertise in taking the correct measures to go public, and even if they do, it may not be a feasible or indeed desirable. In what often entails a long and arduous process, an IPO is costly in terms time and money. An alternative is the use of a SPAC, which offers a quicker and cheaper avenue to going public. SPACs, which are likely to increase in popularity following the recently successful deal between Churchill Capital and Lucid Motors, whose cars are as seductive as their relatively low share price, may represent the future for law firms in floating on a stock exchange. Irrespective of the overall lure of listing, it is unlikely that the Magic Circle or Silver Circle, alongside the established nationals, will go public, as they continue to drive growth more along traditional organic growth and aggressive lateral hiring. Through a combination of managing underperformance as well as natural wastage, LLPs can keep a fairly tight grip on Profits Per Equity Partner, which is still seen as the traditional barometer by which LLP success is measured, compared and recognised.
It remains too early to accurately articulate whether listing on a stock exchange remains a viable or strategically astute step for other law firms. Following its enviable tag of being the largest listed law firm, all attention will be deeply rooted on DWF, its progress in the coming decade and whether becoming publicly listed can be an effective model for other major firms may determine the course and fate of others.
There remains a plethora of advantages and disadvantages for any law firm seriously considering becoming publicly traded, with a whole host of other arguments outside the realm and scope of this article. The guaranteed cash injection which goes alongside floating, is likely to be more desirable for smaller to mid-sized firms, as depicted through the Gordon Dadds case study, offering ample opportunities to expand and diversify. Contrarily, for larger firms or those which are more cash flow positive, the idea of going public may not be worth the costs, risks or perils associated with floating, hence the hitherto resistance. It remains to be seen whether this peculiar relationship between legal firms and the stock exchange has fresh pastures on the horizon or will gradually diminish with a bittersweet ending.