The companies that are listed on the London Stock Exchange (LSE) span a range of industries, and now this extends to the legal industry: after a change in the law, law firms are now being floated. In short, this means that shares can be purchased in the firm, enabling it to raise capital and ensuring that it has an easily quantifiable value.
The LSE is effectively a marketplace where company shares can be bought and sold by traders; having existed for over 400 years, it’s one of the oldest exchanges in the world. Many of these will be blue-chip companies, familiar across the world, while others will be less well-known but still capable of significant growth in their own right. There are almost 3,000 companies on the LSE that can be traded on. Together, they have a collective value of over £3bn.
Once the decision is made, there are a number of steps that must be undertaken in order to prepare a company to be floated on the LSE. As can be expected, there are a range of rules and regulations that must be reviewed and complied with, which will often require the engagement of professionals and advisers to assist with the financial and legal aspects of the process.
It’s necessary to make an application to the LSE, providing three years of accounts, working capital during a specified trading period, and proof that the company is properly incorporated within the industry of the work it carries out. In terms of financial requirements, it’s necessary for the minimum market capitalisation to be met, which is £700,000 equity and £200,000 debt. A minimum of 25% of the firm’s shares must be made available to be traded and held by the public.
All of these requirements and more will apply to law firms that are seeking to be included on the LSE in the same way that they would to any other type of company. None can be bypassed and failure to provide the correct information can lead to the application being rejected. It’s not merely necessary to collate all the information required—it’s also essential to consider how this will affect the partners of the law firm.
LLPs vs PLCs
The traditional management structure of an LLP creates an aspirational career path for many a solicitor—offering the ability to contribute to the running of the firm and an attractive remuneration package, there’s good reason for a solicitor to want to become a partner. However, when a law firm is floated on the LSE, this not only changes the payment structure, but also the way in which the law firm is run. Rather than the partners being able to discuss matters between themselves to decide how to develop the business and only being responsible to fellow employees, they will need to give shareholders due consideration.
Companies fall into one of several types, such as sole trader, public limited company (PLC), limited company (LTD) or limited liability partnership (LLP); most law firms tend to fall into the latter category. Once a company is floated on the LSE it becomes a public limited company or—simply put—a public company. Stock in the company can be traded on publicly.
A public company has qualities that differ from other company types, mainly in relation to how it is run and who runs it. However, the overarching difference relates to whether or not it is funded through the availability of shares that can be traded.
An LLP differs from a general partnership in that the liability of the partners isn’t the same; as the name suggests, the liability of the partners is limited, with none of them being responsible for the actions of another. This gives the partners a sense of security, leaving them sure of their position and ensuring that their personal wealth will not be at risk as in other types of company—where partners will be responsible for the actions of the other partners, whether good or bad.
A change in the law
Being in the City alongside many law firms, it may seem strange to some that the LSE has not always been home to these companies. However, the two highly-regulated industries of stock trading and practising law were kept separate until the implementation of the 2007 Legal Services Act.
The Act regulates many aspects of the way law is practised in England and Wales and, after it came into force in 2011, it provided for Alternative Business Structures (ABS) under which law firms could be run. The ability to change the status of the business means a significant difference to what was previously permitted, which affects every part of the business.
Part 5 of the Act is an important one for law firms considering floating on the LSE, as it specifically deals with ABS and the licensing requirements in any given situation. The implementation of the Act provided far more flexibility in the way that law firms are run and outlined the rules under which they could change the status of their business. As a result, law firms have the means to make an application to turn their LLP into a PLC and create a new stream of income.
Putting the law into practice
When the change in the law was announced, many finance experts predicted that there would be a deluge of law firms seeking to float themselves. But it has turned out to be more of a steady trickle.
In 2015, Gately became the first UK law firm to float directly on the LSE in order to “acquire, incentivise, differentiate and, where sensible, diversify” the firm by way of the Alternative Investment Market (AIM), which is a sub-market that allows smaller companies to get in on the act alongside the expected vast multinationals.
The chief executive of Gately, Michael Ward, explained the desire to change the status of the business: “These opportunities for growth will undoubtedly be most accessible as a PLC and we want to be the first to be able to take advantage of them.”
At the time they decided to sell shares, Gately had six offices that were home to almost 400 fee earners. With profits of over £20m in the year 2014-15—an increase on the previous year—no one can claim that the firm wasn’t already successful. However, once the firm was floated, it immediately raised £30m and was valued at £100m.
This is certainly not a figure to be sniffed at and could have been sufficient to encourage other law firms to follow suit—which they did, slowly.
Law firm Gordon Dadds followed Gately’s path onto the AIM, though not until 2017. By opening at 140p per share, they sought to raise £20m after having spent over £3m on taking over several smaller firms in the Gordon Dadds Group UK and creating a back-office platform to support the additional work. The chief executive of the firm, Adrian Biles, stated: “We now have the necessary capital to support the group’s next stage of development, which will enhance the group’s profile with clients and potential target firms.”
Meanwhile, law firm Knights had an acquisition ready before it had even been accepted onto the AIM. Though the firm, which earned a profit of over £6m for the 2017-18 financial year, already had several household-name companies as clients, it still sought to raise funds in order to grow the business enough to accommodate over 200 fee earners, as well as clear some of its debt.
To truly understand the potential consequences of law firms floating on the LSE, it’s necessary to look to Australia. In 2007, Slater and Gordon—which specialises in personal injury—became the first law firm in the world to float on the Australian Stock Market.
A blissful beginning saw the firm selling shares and acquiring several smaller law firms in Australia and the UK, which enabled it to integrate successfully into the UK market. It also took over Quindell, an insurance-claims company that earned itself a Financial Conduct Authority investigation into its financial statements only a couple of months later.
In addition, the UK’s laws relating to personal injury—Slater and Gordon’s bread and butter—changed soon after they entered the market; this saw limits put on the amount of compensation that could be claimed for certain minor injuries, which negated the ability to recover legal costs. This certainly didn’t help the firm’s position. Its share price—which had previously reached heights of $8—crashed to as low as eight cents.
Slater and Gordon’s acquisitions had already left the firm in debt, and the change to personal-injury law and FCA investigation only intensified this. The firm had to explain a massive loss in revenue to shareholders, and meet with creditors. It also led to the separation of UK and Australian services, so that they could concentrate on the Australian business.
As offices closed, many partners and the group managing director walked. It’s only possible to speculate whether potential fee earners would be willing to look past the firm’s history and join to develop the business as they originally intended. Similarly, many partners may automatically assume that selling shares in the firm will mean that they are due a generous pay day, but clearly there are other factors to take into account.
Some would argue that this is just an inevitable result of turning the law into a money-making industry by allowing firms’ entry onto the LSE. This is debatable, but what is clear is that there’s no guarantee of a pot of gold at the end of the rainbow.