Academic journal article Texas International Law Journal

Do U.S. Firms Need External Equity Investments to Remain Competitive?

Academic journal article Texas International Law Journal

Do U.S. Firms Need External Equity Investments to Remain Competitive?

Article excerpt


Introduction ........559

I. A Brief U.S. History on Nonlawyer Investment ........560

II. Arguments on External, Nonlawyer Equity Investment .........563

A. Arguments for Allowing External Investment ........563

B. Arguments Against Allowing External Investment........ 567

C. Case Study: Investment Banks .........570

III. External, Nonlawyer Equity Investment in Practice .............572

IV. Do U.S. Firms Need External, Nonlawyer Equity Investment? ....576

Conclusion 580


Traditionally, law firms, as partnerships, do not look to outside equity financing as a source of capital. Until recently, regulations in many countries prohibited law firms from securing outside equity financing. In the past ten years, however, these regulatory restrictions have been relaxed in several countries, mainly Australia and the United Kingdom. Many of the foreign jurisdictions implementing these regulatory changes cite increased competition as one of the main desired outcomes. Proponents of allowing external investment argue that these structural changes ultimately encourage firms to be more business-like, which produces the benefits of more efficient, management-minded, and competitive firms. The opponents of external, nonlawyer investment frequently caution that shifting to a more businesslike (i.e., profit-driven) focus could result in increased ethical violations and an overall deterioration of the legal profession.

In this Note, I analyze the arguments for both sides of the external, nonlawyer investment debate. While the arguments for allowing external, nonlawyer investment (including publicly-traded law firms) point out some enticing benefits, the potential ethical problems must still be considered. In order to determine the best course, the two must be balanced. I argue that the current environment within the U.S. legal profession does not exhibit the same concerns and needs that prompted changes abroad. I also argue that the desired increased efficiencies and competitiveness that external investment is designed to encourage abroad are already present in U.S. firms based on those firms' responses to changing market pressures. Because the U.S. legal market is already realizing and implementing many of the desired benefits that structural changes allow abroad, introducing such a substantial regulatory change at this time would not create sufficient benefits to offset the potential ethical costs.

In Part I, I provide a brief history of the prohibition against nonlawyer investment in the United States as well as an overview of the current state of the rules. In Part II, I analyze the arguments both for and against allowing external, nonlawyer equity investment. I will also use the widespread change from partnerships to publicly-traded companies in the investment-banking world as a case study. In Part III, I discuss the structural changes in practice in Australia and the United Kingdom, specifically focusing on the Australian firm Slater & Gordon, the world's first publicly-traded law firm. In Part IV, I argue that U.S. firms are responding well to the changing market conditions caused by the recession and other changes within the profession. U.S. firms, in their response to the changing market and its needs, are already implementing the business-like benefits, such as increased efficiency and an increased managerial focus, that foreign firms are gaining by allowing external investment.

A Brief U.S. History on Nonlawyer Investment

The American Bar Association (ABA) has never been a proponent of external, nonlawyer investment.1 Model Rule of Professional Conduct 5.4 (Rule 5.4) prohibits lawyers or law firms from sharing legal fees with nonlawyers and from forming partnerships with nonlawyers if the "activities of the partnership consist of the practice of law."2 The Model Rules are not binding on individual state bar associations, but most states have adopted rules that mirror the Model Rules. …

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