Partner Article

Alternative Business Structures (ABS) - Innovation or Necessity

With a view to liberalising the legal profession in the UK, the Legal Services Act 2007 introduced Alternative Business Structures (ABS). For the first time, non- lawyer management can conditionally invest and own 10% or more share of a law firm engaged in legal activities.

The aim of an ABS is to make businesses more flexible as lawyers and non-lawyers can share the management and control of their business and diversify. In addition, firms can attract external investment and ownership while an ABS can offer multiple services to clients, as well as legal services from within the same entity, known as a multidisciplinary practice. The following are reserved legal activities restricted to authorised or exempt persons only: a) the exercise of a right of audience, b) the conduct of litigation, c) reserved instrument activities, d) probate activities, e) the administration of oaths, and f) notarial activities.

The ABS model enables reserved legal activities to be carried out by an ABS firm. The ABS business model is becoming more widely accepted as 40 ABS licences were granted in the first year and approximately 200 were granted in year two. Now in the third year, it will be interesting to see if these numbers continue to grow, or if the ABS trend will start to fizzle out. The geographical spread of ABS registrations is wide. The first two years have seen around 21% of registrations issued to businesses in the north west of England, with a diverse mix of smaller and larger firms adopting the framework.

Ernst & Young is applying for ABS status following the lead of PricewaterhouseCoopers which in January received ABS status. This proves that the Legal Services Act is resonating with larger businesses in the sector. Becoming an ABS means conglomerates like PwC can provide a ‘one-stop shop’ for accountancy and legal services, a sought-after convenience that has now become a reality. The Big Four accounting firms already so dominant in many other industries now have their sights firmly fixed on entering the legal sector.

The introduction of the ABS model combined with a period of unprecedented consolidation in the legal industry is resulting in much larger law firms. As a direct result of the recession, increasing regulation, compliance and associated costs, it is likely that larger businesses will continue to seek ABS status and subsequently, the ability to provide “reserved legal activities”.

What is the attraction of ABS?

For non-lawyer applicants, the proposition of offering legal services in addition to existing services or the ability to enter the legal market is appealing for many reasons. For law firm applicants, ABS will likely broaden the service offering of the law firm and the possibility of attracting external investors.

Winning clients is the biggest challenge many law firms face. Once a good client base is established, it is not surprising that many firms consider how their client base can be carefully leveraged beyond the provision of traditional legal services.

However, the question remains: will the legal industry follow suit, or are alternative business structures just an option suited to specific markets? Having sought comment from a member of my colleagues in Globalaw an international network of law firms, they expressed the view that their home nations would disapprove of or prohibit similar ABS style structures.

David Amiach of Ngo Cohen Amir-Aslani stated that France opposes “the implementation of such structures” and refuses to “recognise them as law firms”. This sentiment was echoed across both Denmark and Italy. Roberto Sporano of Carnelutti in Rome, mentioned that “one year ago a draft law that provided the possibility to have non-lawyers participating in law firms with up to 10% ownership was not approved. Also, in Hong Kong, Richard Healy of Oldham Li & Nie said there isn’t even a possibility of a multi- disciplinary partnership being formed and “doesn’t see any imperative to change this situation anytime soon.” Member firms in USA, Poland, Bulgaria and Spain all emphasised there is no sign of change as members of firms need to be qualified members of the bar, except in Spain, where it is possible to have non-lawyer partners that have a minority share capital as part of the administration body.

Whilst many jurisdictions do not show any sign of alternative business structures encroaching on their existing legal systems, Australia is seeing an approach more in line with liberalisation of the law firm structure. Richard Sandover, managing partner of Jackson McDonald in Perth commented: “In Australia, we have incorporated practices with two firms listed on the Australian Stock Exchange. Slater & Gordon has achieved superior results and a rising share price. Eight months since entering the UK market, Slater & Gordon has become one of the UK’s larger plaintiff injury firms. The firm’s ability to raise capital disassociated from their partners has been the means by which the firm has been able to quickly roll out across the UK.”

Slater & Gordon’s publicly listed model has worked well for firms that particularly rely on commoditisation, substantial revenues, low net profit margin and intensive use of innovative technologies.

It is clear that ABS is changing the landscape of the UK legal industry and so it is now more imperative than ever for legal firms keep up with these changes in order to avoid being squeezed out of their traditional market. Although the model hasn’t yet been widely adopted abroad, Australia is a clear example that a more liberalised approach to the legal sector can in fact benefit firms through collaboration of legal and non-legal expertise and a more corporate structure. More work needs to be done by UK law firms, particularly smaller ones, to understand how they can embrace the ABS framework as it is clearly here to stay. It is likely that law firms which have mostly successfully adapted to evolving legal and business landscapes for centuries will continue to do so as more business platforms and structures such as ABS continue to be introduced.

Michael Hatchwell is an international corporate lawyer at Gordon Dadds and Immediate Past President at Globalaw, the international legal network of 112 law firms in 88 countries around the world.

This was posted in Bdaily's Members' News section by Globalaw .