Legal and accounting firms: hunter becomes prey

The 1990’s saw some of the largest accountancy practices set up law firms;
but is the time now approaching when accountants become the prey of lawyers? The
passing of the Legal Services Act 2007, which received Royal Assent on 30
October 2007, has made this a distinct possibility.

It makes a number of changes as to how the legal profession is regulated, but
of most significance and interest to many law firms, and members of other
professions, is that it enables lawyers to participate in new forms of
multi-disciplinary practice.

The Act is designed to improve the quality and choice of legal services on
offer to consumers by deregulating the legal services market and opening it up
to new entrants.

At present solicitors may only practise in firms wholly managed and owned by
other solicitors. But two new types of legal practice will be permitted once the
Act comes into force. Legal disciplinary practices (LDPs) will be firms
providing legal services involving different kinds of lawyers but which may have
up to 25% non-lawyers as partners or equivalent managers. Alternative business
structures (ABSs) will be able to carry on other services as well as legal and
may be managed and owned in whole or in part by non-lawyers.

The ABS regime is unlikely to be available before 2011 or 2012. In advance of
the introduction of ABSs the Solicitors Regulation Authority can authorise LDPs
and these are likely to be available from early 2009.

There has been much discussion in the legal press that the Act will allow law
firms to raise external finance from sources other than banks and will be able
to float on the Stock Exchange or take in private equity investment.

Following a similar change in Australia the legal world saw the first
flotation of a law firm. Slater & Gordon is a volume personal injury firm
and the funds raised, as well as being destined for the vendor shareholders,
have been used to reduce existing debt facilities and fund the acquisition of
further practices.

Although the Act is a few years away from being fully in force, a head of
steam is building up in the UK and a number of law firms (particularly mid-tier
ones) have confirmed they are considering or indeed preparing for a flotation or
private equity investment.

Already the number of traditional partnership structures for solicitors is
declining, with the number of incorporated practices trebling in the last five
years. Most incorporated practices are LLPs which many see as a step on the road
to company status.

Those that wish to raise external finance will do so for a number of reasons,
whether it be international or domestic expansion, gaining critical mass or
simply to incentivise existing and new staff.

Over recent decades some law firms have put a toe in the water of
multi-disciplinary practices, setting up investment management arms including
personal tax compliance work. It is likely that some will wish to take advantage
of the new regime to acquire accountancy practices to enhance their offering to

Some question whether accountants will want to sell their firms. Unlike most
law firms, many accountants attribute a goodwill value to their practices. Many
retiring partners sell their goodwill to their continuing partners on
retirement. Smaller firms are often sold to competitor or larger firms.
Accountants such as Tenon and Vantis have floated, enabling them to acquire a
number of smaller practices, primarily funding these acquisitions with paper
rather than cash.

Merger will be another option. Selling to or merging with a law firm will not
be that different to selling to or merging with another accountancy practice.
Whether the sale is to an LDP or an ABS, the partners in the accountancy firm
will be able to become partners or directors in the law firm.

Safeguards are being put in place to protect clients and the public, however.
First, non-lawyer managers and shareholders must not be able to compromise the
professional ethical duties of lawyers. Second, ABSs must be regulated by the
same standards and principles as other service providers. And finally, access to
justice must not be reduced (see below).

For accountancy firms wishing to sell, serious planning needs to be carried
out to make themselves attractive. A new era in which there will be well-funded
law firms on the acquisition trail may not be that far off.

Specific measures in the act

  • Any firm with non-lawyer partners, directors and shareholders must be
    licensed as an ABS.
  • All non-lawyers in an ABS have a statutory duty not to cause or contribute
    to a breach of legal professional duties by a firm or anyone within it.
  • ABS regulators can ban defaulting non-lawyers from any future involvement in
    ABS firms, and even fine and revoke the licences of an ABS.
  • Any shareholder, including a partner or director, wishing to own 10% or more
    of an ABS must be certified as fit and proper by the regulatory body.
  • ABS regulators can attach conditions to investors, or even divest them of
    their shares, if they fail to meet the prescribed standards.
  • In licensing ABSs, the regulators must give consideration to access by the
    public to justice and a wide range of legal services.
  • All ABS regulators must meet common standards.
  • All bodies licensing ABSs must be authorised as an approved regulator of
    legal services.

Chris Langridge is a partner in the partnerships and
professional practices group at solicitors
Cripps Harries Hall

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