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Commercial Awareness: Law Firms Floating on the Stock Market

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About The Author

Connor Griffith (Consulting Editor)

Connor is a law graduate from the University of Nottingham with a particular interest in intellectual property and corporate law. He is currently a trainee solicitor at a large national firm, sitting in the Real Estate department. Outside the law, he enjoys stand-up comedy and moaning about Brexit.

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An investment in knowledge pays the best interest.

Benjamin Franklin

The phrase ‘commercial awareness’ has, understandably, become notorious to those law students seeking to enter the legal profession. As Chris Bridges has examined for Keep Calm Talk Law, it can – at first sight – appear indefinable; its breadth leaves it something of an initially overwhelming catch-all provision. For this reason, the commercial awareness section of any training contract interview has caused apprehension to many aspiring solicitors.

However, this need not be the case. Careful, concise and considered analysis of several contemporary commercial issues can make a real difference to reaching an exemplary level of commercial awareness, whereby it is possible to understand a client’s area of work to the point that one can anticipate opportunities or threats that may affect that client in the coming years.

An example of such a contemporary commercial issue is the recent news that Knights Law became the fifth UK law firm to float on the London Stock Exchange (LSE), and that international firm DWF is strongly considering following in its path and becoming the sixth. Though somewhat intimidating at first glance, this article attempts to demonstrate that this topic is more accessible than it first appears, and represents a valuable area to understand for interviews. In this respect, it will explain what it means for a law firm to float on the stock market, precisely how this is done, and the advantages and disadvantages of doing so.

Partnerships v Public Companies

Law firms traditionally operate as limited liability partnerships (LLPs). Though nominally a partnership, this entity possesses two key differences from a traditional partnership: it involves the creation of an entity with a separate legal personality (akin to a company), and allows each partner to limit their liability (akin to shareholders in a company) to a prescribed amount. Nevertheless, unlike the shareholders of a company, the partners in an LLP have the right to manage the business directly.

In recent years, however, something new has emerged and shaken the fabric of law firms: their newfound ability to become a public company and obtain permission to be listed on the stock market. While most firms have so far been hesitant to make this switch, the pace of such conversions has increased rapidly in the last 12 months. This demonstrates the fascinating potential for change in an industry that has operated using partnerships for centuries. Indeed, research by Thomson Reuters found that in June 2018, one-fifth of finance directors at top-100 firms were considering an IPO. This is a major increase compared to 2017’s figure of one-tenth.

The growing trend of firms floating on the stock market can also be clearly seen by laying out a timeline of recent events. On 12 May 2015, Gateley Plc announced that it intended to become the first UK law firm to place its shares on the LSE. It then successfully floated on 8 June 2015, raising £30 million after placing 31,589,937 shares with institutional and other investors, valuing the firm at £100 million.

Following Gateley’s example, Gordon Dadds floated in August 2017 (raising £20 million), Keystone Law floated in November 2017 (raising £15 million), and Rosenblatt Solicitors floated in May 2018 (raising £43 million). On 4 June 2018, Knights Law indicated that it intended to place its shares on the stock market and was aiming for a valuation in excess of £100 million, the largest ever UK law firm float. Knights was subsequently valued at £103.5 million, with shares hitting a high of 175 pence and raising £50 million.

Then, on 15 June 2018, DWF published a statement on its website that it too was considering floating on the LSE, expecting to make up to £1 billion. As such, DWF’s float would be largest in the legal world – even if its £1 billion valuation raised some eyebrows, given the firm’s revenue in the 2016/17 financial year was just £199.3 million.

Floating on a Stock Market

What is the Stock Market?

Before considering how a firm can become listed on the stock market, it is worth considering exactly what the stock market is.

A company, which is a separate legal personality, is owned by its shareholders. Ownership of a company is split into shares, which are usually given to shareholders by the company in return for the provision of capital. These shares (depending on their type) may allow shareholders to vote on company decisions, and may entitle the shareholders to the distribution of the company’s profits by way of dividends.

The stock market is the platform on which stocks (a collection of shares in a company) can be traded between investors. Only the shares of companies which are ‘listed’ on the stock market may be traded there. In the UK, the LSE is the primary stock market. Located – unsurprisingly – in London, it actually consists of two principal markets on which a company’s securities (shares and/or bonds) are placed:

  • Main Market: This is itself made up of several sub-markets, such as techMARK and landmark, to allow investments in more specific industries.
  • Alternative Investment Market: This is for smaller and/or newer companies that may not be able to meet the more stringent requirements for the Main Market.

To have its shares traded on the stock market, a company must first obtain admission to the ‘Official List’: this is a list of all securities admitted to the stock market that is maintained by the Financial Conduct Authority. Being placed on the Official List, and having shares admitted to trading on the stock market for the first time, is known as the initial public offering (IPO) of those shares – otherwise known as the company ‘floating’ on the stock market.

The Legal Services Act 2007

Being listed on the stock market was an option previously unavailable to law firms, due to them being LLPs and not public companies. However, the Legal Services Act 2007 (LSA 2007) brought an important change to the law, allowing law firms (and other companies) to apply for Alternative Business Structure (ABS) licences.

As a result, the lines between companies and partnerships were blurred: many non-legal companies were able to offer legal services alongside their other areas of business – notably resulting in the ‘Big 4’ accountancy firms increasing competition in the legal market, as discussed previously for Keep Calm Talk Law by Keir Baker – while law firms were able to create non-lawyer management roles and seek investment from the public.

Acquiring an ABS licence has therefore allowed law firms to become public companies by issuing a sufficient number of shares to the public that permits (with the satisfaction of other requirements) their admission onto a stock exchange market.

Given that the issuing of ABS licences only began in 2012, it is understandable why many firms have been hesitant to take advantage of the opportunity it presents. However, as the Financial Times has noted, this initial hesitation to become listed has been ‘slow even for Britain’s legal profession’, particularly because speculation from observers that the LSA 2007 would see partners adapting their firms to ABSs, and pocketing millions before leaving for another industry.

The Pros and Cons of Floating

As with any large decision that affects the core of a firm, there are a number of advantages and disadvantages for partners to examine when considering whether to remain an LLP or to become a public company and float on the stock market.

Advantages of Floating

The primary advantage of listing – and, presumably, the main reason for doing so – is the injection of capital that the firm will receive through the initial offer of its shares. This capital will allow the firm to undertake expansions or pay debts that it otherwise would have had to do from its partners’ capital or using debt financing from a lender. Knights Law, for example, hoped to raise enough capital to pay off debts, land three acquisitions and hire 200 additional fee earners by 2020; likewise, DWF has stated a float would ‘enable it to invest further in information technology and connected services’.

Secondly, given the novelty of the approach, the firm issuing the shares will likely receive considerable press coverage about the issue, raising awareness of the firm and potentially attracting new clients. However, there is – of course – no guarantee this press coverage would be positive, particularly if the listing does not reach its targets.

That said, a listing may result in an improvement of the reputation of the firm: becoming listed demonstrates that the firm has satisfied the rigorous due diligence process required before a company can become listed. Continuing to remain on the Official List thereafter proves that the ongoing obligations are consistently being met. The satisfaction of these obligations brings an assumption of financial health of the firm, potentially attracting more investors and new clients.

Disadvantages of Floating

Unsurprisingly, listing involves considerable costs, both in terms of time and money. The process can be extremely lengthy and involves the recruitment of many other parties to succeed: notably, investment bankers, solicitors, reporting accountants, and underwriters (parties that guarantee to purchase shares at the issued price, providing a guarantee in case the float does not go as well as expected, charging a commission and fees for doing so) will need to be hired to proceed with the listing.

Secondly, there are very high levels of regulation that must be met before admission is granted (and continue to be met post-floatation), particularly for a premium listing, which must adhere to the demanding Listing, Prospectus, Disclosure & Transparency Rules. Specifically, an in-depth prospectus (or listing particulars) must be produced containing such information as is necessary to enable investors to make an informed assessment about the firm’s assets and liabilities, financial position, profits and losses, prospects, and the rights that will be attached to the available shares. These can be incredibly lengthy and costly to make due to the high levels of due diligence required and any incorrect information contained within the prospectus may result in criminal charges being brought against those responsible for it.

In addition, as shares in the firm are likely to be sold to external investors, the level of control enjoyed by the partners over the firm could become diluted. This can result in the overarching nature of the firm itself changing: many small-to-medium firms pride themselves on having an atmosphere of community – something that is difficult to maintain as firms become bigger – and this spirit could be lost if the firm becomes a vehicle designed solely to make shareholders profits.

Finally, there is no guarantee that the float will be successful, or that the money acquired from the float will be put to good use. The tale of the once-great Australian firm Slater & Gordon, which became the first law firm to float on the Australian Stock Exchange in 2007, demonstrates this perfectly. Following a successful IPO, Slater & Gordon spent more than half a billion dollars acquiring 40 smaller firms in Australia and the UK. However, Slater & Gordon’s price share collapsed in 2015 following its $1.3 billion acquisition of insurance claims processor Quindell, which came under investigation by the Financial Conduct Authority two months after Slater & Gordon’s acquisition. As a result, Slater & Gordon’s share price –  which had peaked at $785 in April 2015 – dropped to just $2.91 by June 2018.

Conclusion

There are many advantages and disadvantages for law firms to consider before a decision of whether to float can be made. For small or medium sized firms in need of cash injections, floating may seem highly desirable; after all, it can represent an almost-guaranteed opportunity to expand. Gateley, for example, was valued at £100 million at the time of its 2015 float, but now – after considerable growth in a short period of time – boasts a market cap of around £190 million.

On the other hand, for large firms that are not in need of cash injections and possess a consistent and valuable pool of clients, floating does not seem necessary or worth the risks and costs – perhaps this is why there has yet to be a float of any Magic Circle or Silver Circle firm.

The intention of this article was to introduce the reader to the stock market and the potential for law firms to float on it. Naturally, looking at the London Stock Exchange’s website can be incredibly intimidating. However, it is hoped that this pit-stop tour of the issue will leave aspiring solicitors among the readers of Keep Calm Talk Law more confident about their chances if required to discuss the floatation of law firms at an interview. Given the recent increase in the number of firms choosing to float – and the dramatic change to the legal industry that this would represent – this is certainly an area to keep an eye on.

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Tagged: Commercial Awareness, Commercial Law, Company Law

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