Ownership reforms boost capital to firms in Australia

Published on Wednesday 25 August 2010 17:24

ON 21 May 2007, Australian law firm Slater and Gordon became the first to float on the Australian Stock Exchange. At the end of the first day's trading, the firm had sold 8.2 million shares, and raised $35 million in new capital.

The historic transaction marked the culmination of a series of legal reforms that began in the 1980s and eventually saw lawyers in New South Wales permitted to surrender majority control of their firms.

New legislation, enacted in 2001 and 2004, cast aside previous legal reforms that allowed lawyers to form multidisciplinary practices with other professionals on the condition that at least 51 per cent of the new entity was owned by solicitors. It allowed solicitors in New South Wales to contemplate external ownership and the introduction of outside capital under new business models that could be described as "alternative business structures".

The legislation was introduced after concerns that existing legal rules were anti -competitive, and before it was enacted, sceptics in the profession voiced concerns that the logical conclusion of the changes would be that the Coles supermarket giant could begin to offer legal service to consumers.

The parallels with the debate on Scotland's own alternative business structures are clear, and with the drama over legal reforms that once threatened to split the Law Society now reaching its endgame, it may be that the outcome of comparable reforms in a jurisdiction such as New South Wales (NSW) could offer some guidance as to what the future has in store for Scottish firms.

Steve Mark, the Legal Services Commissioner for NSW, has been at the forefront of efforts to regulate and shape the NSW structures since their inception. He says the new regime met with a rather muted response in NSW - unlike the reforms underway in Scotland. "I think it was because it just wasn't well known, it happened without a lot of fanfare", he tells The Scotsman. "The profession wasn't necessarily consulted directly and when they were, the Law Society didn't have a major problem so there was no general outcry. Even if there had been, it probably would not have succeeded because the federal government had required states to embark on this to receive a distribution of tax dollars, so there was a pretty big incentive."

Mr Mark says the concern over Tesco law - or Coles law - was aired during the introduction of the legislation, but not to the same extent as in Scotland: "That was a concern raised by me in 1999 after we allowed for the unfettered existence of multidisciplinary practices, that this could lead to a Tesco law where Coles could open up law firms - and they were considering it," he says."Opening up storefront legal services in their supermarkets and virtually have them funded by the sale of cornflakes. The problem that presented was immense for law firms, but the supermarket chain looked at it and decided it wasn't a viable proposition, so they didn't do it."

More pressing in NSW at the time was the issue of how the new entities should be regulated - a discussion that presents further echoes with the ongoing debate in Scotland. Mr Mark explains that the issue of regulation of law firms was already on the radar of NSW authorities in dealing with multidisciplinary practices, even though the take-up for those new structures had, by 1999, been pretty low.

"These entities, which involved law firms, were completely unregulated as entities," he says. "The legal profession continued to regulate its lawyers in relation to their individual conduct, but because these practices were not incorporated our corporate watchdog was not looking at them, and the Law Society and my office only took complaints against individuals."

He adds: "That is one of the reasons that there was not such an outcry when incorporation came in, because it was regulating something that was previously unregulated."

The legislation governing the new incorporated firms centred their operation on one or more solicitor directors in an attempt to harmonise their duties as both members of the legal profession and directors of commercial corporations. This gave lawyers the freedom to incorporate almost any sort of practice provided they could demonstrate appropriate management systems to ensure high standards in areas such as conflicts of interest and supervision of staff. The inclusion of a solicitor director also stopped non-lawyer directors controlling the firm.

Mr Mark says the solicitor director introduction was "innovative". He added: "The vast majority of firms that incorporated were just law firms, so they might have all their partners as solicitor directors, or they might have just one, but they have to have one."

He adds: "One solicitor director has all the ethical duties that a lawyer has - under their ethical obligations to the court, to the profession and to their client. They are lawyers just like any other lawyer, but they also are directors, so they have all the requirements a director would have under corporation law. But they have an additional tranche of responsibilities under the Legal Profession Act." Those responsibilities include the requirement to disclose the legal work the firm is doing and ensuring that the other directors do not act in such a way that would contravene the profession's conduct rules.

"This initially gave rise to a great deal of concern in the profession. They said how dare someone like me - the Legal Services Commissioner - come in to tell a law firm how to manage itself.Because, ultimately, I would have to determine whether the solicitor director had ensured that the practice did have appropriate management systems."

Mr Mark introduced a regime that sees incorporated firms self-assess their compliance with the new rules, with the power of audit used when gaps are detected. But how do the new entities balance the unique duties that lawyers have, against the obligation to shareholders under Australian corporation law?

"Their primary duty is to the court, their secondary duty is to the client, their tertiary duty is to the shareholder," Mr Mark says, explaining that this precludes law firms from drawing out potentially lucrative cases to maximise profits and please shareholders.

Almost ten years after the inception of incorporated law firms, how does he judge their success? "A lot of the principal positions the legal profession has taken over these issues have not turned out to be relevant," he says. "We haven't seen an explosion of multidisciplinary practices, we haven't seen a problem with shareholder involvement, we haven't seen continuous disclosure problems. Law firms have become better."