Alternative business structures: Australia

Posted: 12/27/2012

In 2001, New South Wales (NSW) became the world’s first common-law jurisdiction to allow law firms to pursue alternative business structures (ABSs) as multidisciplinary or incorporated practices.

Perhaps it was the influence of Australia’s remote and rugged Outback that influenced the legal profession in the country’s most populous state to be adventurous.

They had already been allowed to form multidisciplinary arrangements since 1990 when law firms could form such partnerships as long as lawyers retained at least 51 per cent of the net income.

But in 1998, the Australian government decided to review legislation regarding competition in every jurisdiction and determine whether barriers existed.

The 51-per-cent rule in NSW was found to be non-competitive.

“With the stroke of a pen, multidisciplinary practices became totally unfettered under amendments to the Legal Profession Act (LPA) enacted in 2001,” explains NSW’s Sydney-based Legal Services Commissioner Steve Mark, who has held the position since its creation in 1994.

The law gave legal service providers the ability to register as a company with the Australian Securities and Investments Commission, which oversees compliance with the country’s Corporations Act, 2001.

For the first time in Australian legal history, law firms could now incorporate, share receipts and provide legal services either alone or with other legal service providers who may or may not be lawyers.

However, an incorporated law firm has to appoint at least one lawyer as director, responsible for both managing legal services and ensuring those services comply with the professional obligations of lawyers under the LPA, regulated by the Office of the Legal Services Commissioner (OLSC).

About 20 percent of the legal profession – or over 1,200 law firms – are incorporated in New South Wales, which is home to nearly 30,000 lawyers – more than half the number across the country.

About 20 percent of law firms throughout Australia are now also incorporated after all the other states, except for South Australia, followed NSW with their own legislation.

Law firms can also obtain external investment or have non-lawyer staff participate in the ownership.

“Initially, there was a fear that multidisciplinary practices would proliferate and we’d end up having accounting firms becoming law firms and taking over the legal profession and drowning it,” Mark explains.

“There was also a fear that there would be all kinds of weird conglomerations of financial services merging with real estate agents and law firms – and indeed that did happen, but not anywhere near as much as what was expected.”

He says the one-solicitor-director rule for law firms wanting to change from a partnership or multidisciplinary practice into an incorporated body ensured that the legal profession did not lose control in NSW.

“The solicitor-director has all the duties a lawyer has to the court and the client, as well as to the corporate regulator that any director would have.

“But as solicitor-directors under the Legal Profession Act 2004, they have several additional duties, one of which is the requirement that the solicitor-director ensures that the incorporated legal practice has appropriate management systems to meet compliance of the legal ethics required of all lawyers.

“Trouble is, the amended LPA did not define an appropriate management system, so overnight I also became a management consultant,” says Mark.

“I have to determine whether solicitor-directors have maintained their requirements, have complied with the Act, and have ensured there are management systems involved in the practice.”

The OLSC, in collaboration with several partners including the Law Society of NSW, developed a checklist for incorporated legal practices to self-assess their management systems and rate their compliance.

Failure to comply can amount to a finding of professional misconduct for the solicitor-director.

The management systems have proven to be enormously helpful for incorporated legal practices in New South Wales, most of which are small law firms, says Mark.

“They’ve become more profitable, better managed and more ethically based,” he explains.

“The legal profession has become more ethical and more professional because of this system.”

Australia’s two publicly listed legal practices, Melbourne-based Slater & Gordon – the world’s first publicly traded law firm – and Integrated Legal Holdings, have also stated in their prospectuses, constituent documents and shareholder agreements that their primary duty is to the court; their secondary duty is to the client; their tertiary duty is to the shareholder; and that where there is a clash between legal profession regulation and the Corporations Act, 2001, the former will prevail.

As Mark explains, the legal services director of an ABS firm in NSW must ensure that all employees, whether they’re licensed legal practitioners or not, act as if they had the ethical duty of a lawyer, and that the firm itself must also have an ethical profile.

“If the solicitor-director fails in that, I can remove that person’s practising certificate and the firm has seven days to replace that person or they go into involuntary liquidation,” he says.

“And I have audit powers. I can walk in any time and audit their business, which doesn’t just mean financial audits but also practice reviews that look at their behaviour – how they handle their clients, file management, disclosure requirements for fees – to help them improve their behaviour so we don’t get more complaints.”

A study conducted in 2008 by the University of Melbourne’s law school on over 600 incorporated legal practices in collaboration with the OLSC, found that by simply becoming incorporated and undergoing the self-assessment process regarding appropriate management systems, the number of complaints launched against them dropped by two-thirds.

Furthermore, the OLSC received fewer complaints against law firms this year than when Mark was appointed Legal Services Commissioner 18 years ago and he says there are now more than two times the number of lawyers in NSW compared to some 12,000 in 1994.

Mark says that while Australian law firms incorporate for various reasons, such as obtaining tax breaks, liability protection or for income splitting, their prime goal should be to improve management, which he points out has been the biggest ramification of the ABS trend down under.

“They likely become more profitable, better run and attract fewer complaints, so everybody benefits.”