Opening at $25 1/2 Is Big Firm U.S.A.: Why America May Eventually Have a Publicly Traded Law Firm, and Why Law Firms Can Succeed without Going Public
DeBuse, James R., Journal of Corporation Law
As you brew your coffee and sit down to read the Wall Street Journal before heading to work, you look for your major stock holdings. After all, you have never been keen on waiting to retire at age 65. Thankfully, you see your two newest stocks are performing well; Latham & Watkins is up, as is Wachtell, Lipton, Rosen & Katz. While this scenario is not yet a reality, the chance of public ownership of American law firms is rising dramatically. This is due to the world's first publicly traded1 law firm in Australia, and the United Kingdom's recently enacted Legal Services Act-which allows for public ownership of law firms.2
Every state in America currently has adopted an ethical rule that prevents public ownership3 of a law firm.4 Further, most states base their ethical rules on the American Bar Association's (ABA) Model Rules of Professional Conduct (Model Rules).5 Among other prohibitions, Model Rule 5.4 states: "(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if: (1) a nonlawyer owns any interest therein . . . ."6 Despite this absolute rule, the commission that proposed the initial version of the Model Rules in 1982 advocated a rule that would have allowed public ownership of law firms.7 Since the adoption of the Model Rules, scholars and lawyers have spent little time and effort considering the modification of the prohibition against public ownership.8
However, things are changing internationally. On May 21, 2007, a small plaintiff's firm in Australia became the world's first publicly traded law firm.9 Further, the United Kingdom recently enacted the Legal Services Act, which allows public ownership of law firms.10 The international movement toward public ownership of law firms leads one to wonder whether such a thing could ever occur in the United States.
Part II.A discusses the concept of the "legal profession," as well as recent trends and changes to the profession. Part II.B summarizes America's history of ethical rules regarding public ownership. Specifically, Part II.B.3.i discusses the ABA commission that recommended the Model Rules allow public ownership. Part II.B.3 also discusses two local variations to Model Rule 5.4 and, more recently, a failed attempt to amend Model Rule 5.4 to allow multi-disciplinary practices. Finally, Part II.C of this Note discusses the events in Australia and the United Kingdom and the path each country is taking toward public ownership.
Part III begins by analyzing conventional arguments for and against public ownership of law firms. Then, Part III.C discusses how to value a law firm seeking public ownership. Specifically, this Part discusses the simple method of using a price-earnings (P/E) ratio11 to value a company, and the advanced method that requires analysis of organizational capital and the invisible balance sheet. Finally, Part III.D summarizes the potential avenues for changing American ethical rules to allow public ownership, so that opponents of public ownership can better block any attempt to reform Model Rule 5.4.
Part IV recommends that firms ultimately should not go public and that jurisdictions should not modify their ethical rules to allow public ownership. Rather than seek public ownership, firms should mimic going public by going through most of the steps of preparing for public ownership. In particular, firms should value themselves with an eye toward the invisible balance sheet. By analyzing themselves as if they were going public, firms will force themselves to focus on long-term stability and organizational capital.
A. The Legal Profession and Recent Trends and Changes
Before embarking on an analysis of something as potentially revolutionary as public ownership of law firms, it is necessary to define "profession" and to understand the current state of the legal profession. …