Law firms thinking about listing have many obstacles to overcome before taking the plunge
Some may ask why it is that the much-heralded legislation that allows law firms to be listed public companies has not resulted in a wave of activity. Many believe that sooner or later firms will start to come to market. However, these businesses are not inherently capital intensive so it will only be for specific types of expansion or capital investment (new buildings, IT, foreign offices) that a case for ’money in’ will be justified.
The anticipation, rightly, is that the markets are unlikely to have much appetite for funding ’money out’ IPOs, with partners cashing in their goodwill or selling the firm’s future revenues. The market is unlikely to prize low-growth strategies very highly, so only firms with significant growth plans need generally apply.
One of the more interesting questions is what the appetite of institutional investors will be. Further, little work has been done to understand fully the clients’ attitudes to the idea of their law firm being listed. Anecdotal evidence suggests that they are likely to be unconcerned one way or the other.
ndeed, one of the more compelling potential arguments for an IPO would be the profile and (hopefully positive) recognition that it would bring.
It is certain that firms that want to go public will have much work to do in thinking about governance structures, the roles of leadership and management and upgrading internal systems. However, by far the biggest, most controversial and potentially divisive subject will be how to take existing partner compensation/remuneration systems and put them into a shape that will be acceptable to the market and that will leave some profit for incoming shareholders. Because, to state the obvious, at the moment that profit belongs to (and is almost certainly distributed annually to) the equity partners.
Listed firms will need to offer partners a package of a basic salary, some kind of bonus arrangement, options and committed, hard equity. The question will be how do you get from where firms are at the moment to that type of structure? There is a need to make sure that older partners are sufficiently compensated for having contributed to the value of the goodwill of the business while also sufficiently incentivising those younger partners whose huge earning power is vital to the valuation and future of the business.
Further, decisions will need to be made about how to allocate whatever opportunities exist for cashing in (or out) at the time of the IPO or subsequently. What restrictions should there be on partners disposing of equity for a period following the IPO or indeed at any time while they remain partners? Should they be obliged to offer it first to other existing partners, possibly at a discount to the market value, so as to give the market comfort that a certain percentage of the equity will remain in the hands of those who are active in the business?
And what about the possible participation of non-equity partners, associates, staff more widely and even retired partners? None of these are likely to have existing legal entitlements to participate in the equity.
I do not mean by setting out some of the challenges as I see them to imply that all firms will find them insurmountable. But it is clear that the challenges that law firms thinking about taking the plunge will need to address are considerable indeed.