France’s Haeri Report and Alternative Structures (1 of 2): Je t’aime un peu

On February 2, 2017 French lawyer Kami Haeri submitted to the French Minister of Justice his report entitled The Future of the Legal Profession (L’Avenir de la profession d’avocat).

The Haeri Report totals 138 pages and covers a large range of topics. Any attempt (by me, at least) to communicate its contents in any comprehensive manner would be foolhardy. Instead, I’d like to examine the Report from one specific optic: alternative structures.

Before moving getting into that examination, if you are interested in some general background information about the Report – how and why it was commissioned, by whom and how it was prepared, a general description of its contents, and a selected list of its recommendations that are not related to alternative structures – you can access that here.

This is the fifth of series of eight posts relating to France and its move towards alternative structures. Links to the other seven in the series are provided below.

A quick reading of the Report would lead to the conclusion that its authors didn’t give a lot of thought to alternative structures and that, to the extent they did, their support of them was lukewarm.

Here’s what would lead to that conclusion:

The Report’s express discussion of alternative structures doesn’t even take up one (again, out of 138) pages. Here’s how that very short discussion goes:

First, the Report explains that the question of how to finance a law firm has become a “crucial subject” for young lawyers. Opening a law firm requires either entering into debt or borrowing from family members. The Report deplores this, stating that it both “accentuates social disparities” in the profession and slows the growth of firms. New structures such as SPEs, the Report continues, allow for members of different regulated professions to coexist under the same capital structure, but do not, except very indirectly, address the problem of how to finance a lawyer’s activity.

In the course of the commission’s consultations, the Report continues, a number of young lawyers expressed strong interest in the ability to benefit from minority investment in their firms. They envisioned varied profiles for such investors, each with the purpose of providing support for both opening the firm and the development of its activities. These young lawyers “consider that their independence would not be threatened by such an investment,” and that having a nonlawyer shareholder (be it a physical person or a company) would bring a different and innovative perspective to the management and operations of the firm.

It’s on this basis that the Report makes this recommendation:

The Commission considers that provided it remains a minority shareholding, there is no reason why the capital of certain kinds of practice structures – up to 49% – cannot be opened to a shareholder of another profession, including one that is not regulated.

And that’s it. In a document of 138 pages, that’s the entire direct and express discussion of nonlawyer ownership of law firms. It’s not exactly a ringing endorsement. “Tentative,” “hesitant,” “cautious:” those might be accurate descriptions.

When the commission considered this point, did it look beyond the comments of the “young lawyers” that the commission cited, to consider other information available with respect to minority nonlawyer ownership of law firms? Given the brevity of the relevant portion of the Report, it wouldn’t be unfair to conclude that the commission simply heard the requests of the “young lawyers,” didn’t disagree with their reasoning on its face, and so, without exploring the question any further, simply formulated a recommendation on that basis.

This conclusion seems more than plausible when you consider that the commission performed its work in a very short length of time: less than four months. (Compare that to David Clementi’s 18 months and the 2-year mandates of the American Bar Association’s Commission on the Future of Legal Services and the Canadian Bar Association’s Legal Futures Initiative). Given the large number of topics addressed in the Report and the high level of detail accorded to a number of those other topics, it wouldn’t be a surprise to learn that the commission accorded this specific topic only a (very) small portion of its time and attention.

If the commission had accorded more time and attention to the topic, here is what it might have discovered (for better or for worse):

1)         Minority shareholding of law firms by nonlawyers is, in certain places, a highly controversial topic

Most notably, this has proven to be the case in Ontario, Canada as well as in the United States.

As regards Ontario: The Law Society of Upper Canada is the principal regulator of lawyers and paralegals in Ontario. In 2014, the Law Society’s Alternative Business Structures Working Group issued a Discussion Paper in which it proposed for comment four models of alternative structures, two of which would allow for nonlawyer minority ownership of law firms and two of which would allow for nonlawyer majority ownership. The Discussion Paper triggered an avalanche of responses in which the large majority of respondents pronounced their opposition – vehement opposition – to all four models. A notable example is the Ontario Trial Lawyers Association, which, among a host of other arguments, stated “there is an inescapable tension and conflict in maintaining professionalism and ethics under [structures] that include nonlawyer equity shareholders, controlling or otherwise.”

Given the strength of the opposition to nonlawyer ownership of law firms in any amount (minority or majority), in September 2015 the Working Group decided that it would not further examine any majority or controlling nonlawyer ownership models. The Working Group did say that it would continue to consider whether minority ownership should be permitted, but there is no evidence that the Working Group has undertaken any further activity in this regard since September 2015.

As regards the United States: the American Bar Association (ABA) holds a de facto regulatory role for lawyers on a national level in the United States. The ABA has considered the question of minority as well as majority nonlawyer ownership of law firms on more than one occasion. The most recent was in April 2016, when the ABA’s Commission on the Future of Legal Services released an “Issues Paper Concerning Alternative Business Structures.” In the Issues Paper, the Futures Commission proposed essentially the same four models as those proposed by the Ontario Working Group in 2014. The Futures Commission’s Issues Paper triggered an even larger avalanche of responses (over 100) in which the overwhelming majority of respondents pronounced their also vehement opposition to all four models, in most if not all cases failing to make any distinction among them. Most notably, the ABA Section of Family Law succinctly wrote “WHAT PART OF ‘NO!’ DO YOU NOT UNDERSTAND?”

2) As controversial nonlawyer minority ownership of law firms is in places like Ontario and the United States, in other places nonlawyer majority ownership is neither prohibited nor controversial

To the contrary, it is allowed and even encouraged. Two obvious examples are Australia, on the one hand, and England & Wales, on the other. New South Wales (Australia) has allowed nonlawyer majority ownership since 2000 and most of the other Australian states followed NSW’s example soon thereafter (and, as discussed below, NWS allowed nonlawyer minority ownership before 2000). England & Wales has allowed  nonlawyer majority ownership since 2011. Going even further, both countries today boast publicly listed law firms (Slater + Gordon, Shine, IPH Ltd., Gateley).

In proposing minority ownership of law firms, the Haeri Report raises the issue of lawyer independence, and suggests restricting nonlawyer ownership to no more than 49% should be sufficient to protect lawyer independence. In Australia as well as England & Wales, rules are in place to protect lawyer independence in the case of any level of nonlawyer ownership – minority or majority. There is no evidence to suggest that these rules are not effective. (Indeed, to the contrary, there is evidence that that they are effective, for example, here and here).

In fact, the Haeri Report’s commission would be hard-pressed to refute the ability for rules to protect lawyer independence, regardless of the percentage of nonlawyer ownership. This is because of arguments the commission makes in a different section of the Report. In that section, the commission rejects a common assertion that an in-house counsel’s economic dependence upon his/her employer precludes him/her from exercising intellectual independence from that same employer. The commission refutes this argument in two ways: Firstly, it rejects it on its face, simply maintaining that an in-house counsel’s economic dependence on his/her employer does not preclude intellectual independence. Secondly, the commission states that the independence of in-house counsel can be controlled by “contract.” Not only can it be but it has, the commission reminds us, given that Association Française des Juristes d’Enreprise (AFJE, or French Association of In-House Counsel) has already adopted a Code of Professional Responsibility that affirms the independence of in-house counsel. Of course, in this manner, in-house counsel exercise their intellectual independence from companies that are majority owned by nonlawyers.

3) In the few places that have permitted nonlawyer minority – but not majority – shareholding of law firms, it has had only limited to no success

The first example is New South Wales (Australia), which permitted nonlawyer minority ownership of an incorporated legal practice during a period of six years, from 1994 to 2000. More specifically, lawyers had to retain the majority of voting rights and 51% of the net income. According to Susan Fortney of Hofstra University and Tahlia Gordon then with the Office of the Legal Services Commissioner of New South Wales, these restrictions were unattractive and as a result the structure was little used (that is, as noted above, until 2000, when the restrictions were lifted and nonlawyer majority ownership was permitted, at which time the structure became widely used, especially among newly-formed firms).

The second example is the District of Columbia, in the United States. In contrast to the 50 states, the District of Columbia has allowed for nonlawyer minority ownership of law firms since 1991. While no statistics are kept on the number of firms that have taken advantage of this possibility, it is believed that the number is low. Because no data has been collected, no one can be sure exactly why this is the case, but one of the explanations typically offered is the rule’s restrictive nature: On the one hand, the rule requires that the firm provide legal services only (multidisciplinary practices are not allowed). And, on the other hand, the nonlawyer shareholder must provide professional services for the firm (he/she may not be a passive investor).

Even if few firms have taken advantage of DC’s different rule, it does not mean that none have. This website, for example, contains in-depth interviews with two people, one a lawyer and one not, who have formed such firm in DC. You can access those interviews here and here.

One thing that can be said is that since 1991, no disciplinary actions have been brought against any lawyer in connection with his/her partnership with a nonlawyer. In other words, DC’s different rule has not led to any known compromise of any lawyer’s independence. Is that because these types of structures haven’t raised the types of issues that would lead to disciplinary actions? Or is it because so few DC firms actually take advantage of the possibility to have nonlawyer minority ownership? No one knows.

Again, it is unclear if the commission made its recommendation regarding nonlawyer minority ownership of law firms with any or all of the above in mind. It is also unclear the extent to which any of the above may or may not have influenced the commission’s thinking. All that is clear, based upon a quick reading of the Report, is that the commission expressed lukewarm support of allowing law firms in France to open a minority of their share capital to ownership by nonlawyers.

Again, this is based upon a quick reading of the Report. Could a careful reading lead to a different conclusion? That is, could a careful reading suggest that in fact, the Haeri commission’s support of alternative structures is more than lukewarm?  That’s the next post.

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Links to the other seven posts in this series:

  1. There’s Something About France
  2. A Big Happy (French) Family
  3. A Little More Liberté
  4. France’s Haeri Report on the Future of the Legal Profession: Intro
  5. France’s Haeri Report and Alternative Structures (1 of 2): Je t’taime un peu
  6. France’s Haeri Report and Alternative Structures (2 of 2): Je t’aime, moi non plus
  7. France and Alternative Structures: Putting the Pieces Together
  8. Alternative Structures: Why is France Succeeding While the US Continues to Fail?

All eight posts, regrouped, can be viewed at this link: Regroup of posts on France

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