Firms cautious as Legal Services Bill is unveiled
Management issues have rarely been higher up the agenda than during May, when the Lord Chancellor, Lord Falconer, unveiled the Legal Services Bill (24 May).
Since Sir David Clementi began his famous review, the potential ramifications of what would be included in the subsequent bill have taken on epic proportions. The general consensus is that the new legislation heralds the biggest shake-up in the UK legal market for decades.
As The Lawyer (29 May) put it, the Legal Services Bill would “radically reform the way lawyers work, as it paves the way for both outside investment and multidisciplinary partnerships [MDPs]”.
It took only a day for The Lawyer to unearth the first firm to go on the record saying it would consider selling off a chunk of the business to raise funds. Taylor Wessing UK managing partner Michael Frawley said the firm’s plans for a new office may include raising funds via private equity. “Yes, we’re looking at it,” he said. “But we haven’t gone through it in any detail yet and it raises a whole lot of questions that need answering.”
The news confirmed what many in the market suspected – that a number of investment banks, accountants and consultants are already circling firms with a view to exploring opportunities for outside investment or IPOs.
One Scottish investment bank, Noble & Co, reported that it was “actively talking” to six mid-tier outfits, while another organisation, investment firm CB Equity, has drawn up a shortlist of 10 banks as potential funding sources for innovative law firms.
But as The Lawyer reported (29 May), many large firms are still cautious of coming out in support of outside investment or MDPs. DLA Piper Rudnick Gray Cary managing partner Nigel Knowles admitted that one of the best things he could do for Nigel Knowles would be to IPO DLA Piper, but argued that it was not necessarily in the best interests of his firm. “Would that be good for the firm?” he asked. “No.”
The Legal Services Bill itself broadly follows the proposals outlined in the October 2005 white paper on the future of legal services. It draws up a blueprint for the establishment of a single umbrella regulator, the Legal Services Board (LSB), and a single complaints-handling body, the Office for Legal Complaints.
The Legal Services Bill also sets out the framework for outside ownership, detailing the rules under which potential investors will have to be authorised by front-line regulators, such as the Law Society or the Bar Council.
However, it will be for the LSB to draw up more structured safeguards. As Lord Falconer put it when announcing details of the bill: “You can’t have Kenneth Noye or [Nicholas Van] Hoogstraten owning a law firm.”
Freshfields scraps all-equity partnership
Freshfields Bruckhaus Deringer finally proved last month that it was not afraid to tackle its Holy Grail of management issues when it agreed to ditch its all-equity status.
On Wednesday 24 May, the magic circle firm’s partnership council approved radical (for Freshfields anyway) plans to create fixed-share partners.
The move had been long expected. Freshfields, the only magic circle firm still with an all-equity partnership, is known to be hunting a US merger and additional competitiveness on profitability would be a given for any deal. The move also follows Freshfields’ decision in February to abolish its all-equity partnership model in the Far East.
The firm’s partnership will put the proposals to a worldwide partner vote by the end of June.
Earlier in the month, Clifford Chance had backed away from introducing a Freshfields-style all-equity partnership model.
THE MONTH of May also saw more end-of-year results emerge from firms in the top 100 and beyond. The biggest gasps of amazement were caused by Linklaters, which crashed through the £1m barrier for average profit per equity partner (PEP). The magic circle firm posted a PEP of £1.06m, the same as its top of equity in 2005.
Further down the profit league, a new benchmark of £500,000 began to emerge for the leading mid-market firms. Fladgate Fielder, Olswang and Taylor Wessing’s UK operation all exceeded £500,000, while Addleshaw Goddard and Osborne Clarke just missed the target.
Olswang chief executive Jonathan Goldstein said it was the combination of a strong financial performance and a tight control on costs that resulted in the firm producing its best-ever profit margin.
He says that £500,000 “really is becoming the benchmark by which the leading firms in this market are judged”.
If it is now the new yardstick by which firms will be measured, then in June, The Lawyer revealed a few of the tricks of the game that firms might use to help them achieve it. Heading the list was a technique used by an increasing number of firms – to shrink the equity.
Other handy hints for the firm that wants to make its figures look better included using the provisions for bad debts, dilapidations or pensions, capitalising any major expenditures, playing games with headcount figures or beefing up the paper profit with an FRS5 adjustment.
As The Lawyer put it (12 June): “We do realise that profit figures have become a brand-extension exercise.”