The legal profession has often been criticized for being out of touch with the world of modern business, as well as the 20th century by some critics. This sparked debate for adopting Alternative Business Structures (ABS) in the U.S. A shift in sentiment regarding capital and its true purpose has taken hold within the legal community, which tends to view non-lawyers as dead weight. This raises the question: What’s in it for lawyers to raise funds from non-lawyer investors?
The ABS model proposes to redesign how law firms operate in two ways: it allows non-lawyers to acquire a stake in a law firm (Model Rule 5.4 currently prohibits that) and authorizes the formation of a multidisciplinary practice (MDP). ABS and MDP’s propose introducing non-lawyer capital into law firms to establish a core legal practice, while retaining the option to venture into other sectors of the economy. Washington D.C. and the state of Washington are among the first jurisdictions to allow any form of ABS to exist in the U.S. Overseas, ABS is already a proven working model in places such as the U.K. and Australia, countries that are common law jurisdictions.
With the option of selling equity to non-lawyer investors, law firms gain versatility and competitive advantages. Investment funds could be used for litigation funding, operational investment and expansion, restructuring, acquisition strategies, and diversification. There’s also the added benefit of monetizing goodwill. Retiring partners get the opportunity to sell their equity and reap the rewards of the business they helped create, versus closing shop and leaving money on the table. Most, if not all jurisdictions allow lawyers to sell their law practices, but the rules, as currently written, effectively bar or severely limit such sales in practice. In the end, the purpose of capital is to produce, yet prevent the total consumption of a business, a concept with which law firms are far too familiar. However, ABS isn’t promoting non-lawyers to practice law or to intrude in legal strategy.
State bars have historically opposed non-lawyer investment in law firms. They argue that ABS could impact the integrity and reputation of law firms. After all, some companies have a reputation of profiteering, eventually leading to legal proceedings with detrimental consequences. Nonetheless, when critics make this argument, should they blame shareholders?
The cases involving Enron, WorldCom, and Dewey & LeBoeuf, one of which lacked shareholders, held the executive leadership accountable for the actions of the company. The presence or absence of shareholders had no bearing on the internal operations of these businesses. If management at the C- level is unprincipled, then unfortunately that’s where the problem starts and ends. State Bars should not blame shareholders for something they were victims of. While shareholders may push for more profitability, they certainly don’t advocate for various types of fraud to get there. It’s the company’s executives responsibility to maintain a business that adheres to the rules and regulations set forth by its respective regulatory agencies.
Additionally, anxiety regarding the fiduciary duty lawyers swore to uphold should be put to rest. Shareholders will be limited to participating in the financial aspects of the business, and any attempt to override their role will be met with firewalls installed by the firm. For starters, designating an independent attorney who isn’t actively practicing law could be appointed as the head of investor relations. External controls may be another approach to regulate the relationship between non-lawyer investors and lawyers. Consider the relationship the Federal Reserve Bank has with banks and stress tests.
Furthermore, a company’s core operations don’t change drastically simply because shareholders are part of the equation. Any changes shareholders request are non-binding. The board of directors and executives of a company have discretion to fulfill or deny those requests. Likewise, lawyers are at the center of this structure. The burden to comply with the professional standards the ABA and state bars have deemed necessary lies on their shoulders.
The global economy isn’t static, rather it’s constantly shifting and reshaping into something new. Law firms must be dynamic and adopt to shifting trends to better position themselves for those changes. While the risks associated with implementing ABS are limited, a clear risk is present if it’s forbidden and no other alternative is considered: More Finley Kumbles. Lawyers deserve the ability to choose how they fund their operations, but a decision to do nothing and maintaining the status quo will garner more of the same results the past two centuries have offered.