Thought leader

By Giles Murphy, national head of assurance and business services, Smith & Williamson

Over the years, the partnership structure, enshrined in law by the 1890 Partnership Act, has served the professions well. In recent times, however, we have seen traditional businesses with a partnership structure incorporate their organisations as limited companies in order to list their shares on the stock exchange. The reasons for listing a professional business are varied, but often the justification is to realise the capital value of the business which, in most cases, is not recognised in a traditional partnership structure.

Many types of traditional professions have floated their businesses, included surveying practices, accountants, engineering consultants and recruitment firms. But this has not been possible for UK law firms because the Solicitors Act prevents the sharing of profits with non-lawyers. However, once the Legal Services Bill is enacted and becomes operative in the UK, this restriction will be lifted.

With the advent of the new Bill, there has been much press debate about whether law firms will take advantage of the ability to list. There have also been questions about whether it would be possible to list a legal firm successfully, given the nature of the services provided. But this debate has now been superseded by events in Australia.

On 21 May 2007, Slater & Gordon became the world’s first listed law firm. The business chose to list on the Australian Stock Exchange following a change in Australian legislation that allows for non-lawyer investors. This legislation is similar to changes that will come into force in the UK with the Legal Services Bill.

The relatively modest size of Slater & Gordon (it wouldn’t appear in the league table of the top-80 UK law firms) may surprise some, as it has been assumed that critical mass is key to the successful float of a UK firm. Look closer though, and it becomes clear how the nature of the practice perhaps makes the business more appropriate for listing.

A consumer law firm, Slater & Gordon employs over 400 staff in private client, employment and litigation work. The latter includes asbestos and personal-injury litigation, and the firm has earned a strong reputation for winning landmark litigation cases.

Slater & Gordon’s annualised results for the period up to 31 December 2006 show a fee revenue of £24m, and its profit before tax was £5.3m or 22 per cent of fee revenue. The firm issued 35 million shares at the equivalent of 42p, approximately 32 per cent of the enlarged share capital of the business. With a strong position in Victoria’s personal-injury market, one of the rationales for Slater & Gordon’s listing was the opportunity to pursue an acquisition programme. On 28 May 2007, the firm announced its first post-float acquisition with the purchase of a Brisbane-based specialist military compensation firm for the equivalent of £1.15m (payable in cash and, crucially, shares).

Of perhaps more interest to some will be the performance of Slater & Gordon’s share price over the coming months. For instance, having issued shares at AU$1, the price closed on 5 September 2007 at AU$1.80, placing the company’s value at the equivalent of £80m. This equates to over three times Slater & Gordon’s fee revenue – around 15 times profit before tax.

Once the Legal Services Bill is enacted, it is conceivable Slater & Gordon could inspire a number of law firms here to explore alternative business models and outside investment.

Giles Murphy is national head of assurance and business services at Smith & Williamson. He can be contacted at giles.murphy@smith&williamson.co.uk