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The Global Regulation of Financial Markets

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Is it time we allowed non-lawyer equity investment in law firms in the United States?

The American Bar Association (ABA) toyed with a contentious idea earlier this year: non-lawyer equity investment in law firms.  As it stands today in the U.S., ethics rules prevent lawyers from sharing their profits with non-lawyers, ostensibly because these people are not subject to the same professional rules of conduct.  The ABA’s latest proposal was to allow non-lawyers who already work at law firms to own up to a 25% stake in the firm.  Unfortunately, the idea appears to have stalled (again), but it is still worth discussing.

This is not the first time this issue has come up.  In fact, the ABA put together a proposal as long ago as 2000.   Not only that, it isn’t even illegal everywhere in the country: Washington, D.C. voted to allow non-lawyer investment all the way back in 1980.  And it isn’t just being played out in ABA meetings and in business journals, it has reached the courts.  In March, New York law firm Jacoby & Myers brought suit challenging the constitutionality of the state’s ethics rule barring this practice.  Sadly for the firm, the court dismissed the action because Jacoby did not have the required locus standi to bring the suit.

And it isn’t that radical of an idea either.  Countries like the United Kingdom and Australia already allow this, albeit only recently.  The UK started the program on the idea that the capital raised would be used to invest in technology and other systems to bring down costs, with the goal of lowering the legal costs of consumers.  The downside to this is legal services may become commoditized, which would make them less attractive investments. 

Opponents of the idea worry that these outside investors would influence lawyers’ judgments and convince them to make unethical decisions, all in the name of maximizing profits.  The practice would affect the “core values,” such as confidentiality and loyalty to our clients, that we as a profession so value.  If non-lawyers are partners and are thus privy to confidential information, who will police what they do with that information?

There is also the issue of practicality.  Who is going to invest in these firms?  Individuals?  Maybe.  But for this to make any sort of meaningful impact, large dollars will have to be at play.  Private equity is an option, but there is one big problem: an ethics rule that prohibits lawyers from entering into agreements that limit their ability to practice law.  This underscores law firms’ biggest problem: their only assets can walk out the door at any time, never to return again.  That isn’t exactly a trait of the textbook private equity investment.

However, the benefits to law firms of outside investment are numerous.  It allows small firms easier access to capital.  Large law firms are able to use banks much easier, giving them yet another advantage.  Outside investment gives law firms a way to recruit and retain their top non-lawyers talent.  This is also especially helpful to smaller firms, which could bring on certain experts as partners rather than hire them on a one-off basis.  It especially makes sense given the rise of entrepreneurs (who need capital) in the law firm sector.  One could also argue financial investors could help firms maximize their profits by making operational changes that do not affect their representation of clients.

It is tough to say who is right in this debate.  Each side makes valid points.  But in a time when giant firms are going under because of crushing amounts of debt (see Dewey & LeBoeuf) and investors are constantly looking for new ways to put their money to use, maybe it’s time for the ABA to make a change.  After all, our country’s legal system developed largely out of British common law; we might as well import one of their newer ideas.

Written by: Jeffrey McIntosh

References:

http://online.wsj.com/article/SB10001424052702304750404577317761468323458.html

http://www.jdjournal.com/2012/04/17/aba-steps-back-from-proposal-of-non-lawyer-ownership-of-law-firms/

http://blogs.wsj.com/law/2012/04/17/aba-case-has-not-been-made-for-nonlawyer-ownership/

http://newsandinsight.thomsonreuters.com/Legal/News/2012/02_-_February/NY_bar_considers_allowing_non-lawyers_to_invest_in_law_firms/

http://kowalskiandassociatesblog.com/2012/02/07/private-equity-investments-in-law-firms-have-arrived-in-the-uk-and-have-largely-ignored-biglaw-what-will-happen-as-this-phenomenon-arrives-in-the-united-states/

Corporate Law Society Alumni Panel

Thursday, October 25th at 6:00pm

Event will take place in Room C40 with a Reception to follow in the Lobby.

The event will feature five Chicago-Kent Alumni practicing in the corporate law and transactional field. They will be discussing their career paths and day-to-day experiences. The Reception will be a great opportunity for students to network while having a few cocktails and appetizers! All students are invited to attend.

 

Please RSVP to ChicagoKentBLS@gmail.com

Attention to Detail: The Rise and Fall of Corporate Attorneys

Jakub A. Wronski and Joseph J. Basile, both corporate attorneys at the Boston office of Weil, Gotshal and Manges, recently published an article expounding the importance of minding the details in corporate law transactions. The article uses Besinger v. Denbury Res. Inc. (E.D.N.Y. Aug. 17, 2011) to illustrate their point. 

In Besinger, a merger between Denbury Resources Inc. and Encore Acquisition Company went afoul when Encore shareholders were falsely informed on multiple occasions that the formula for calculating the number of Denbury shares to be distributed to Encore shareholders as consideration for the merger was pegged to a weighted average share price of Denbury stock as of the date two days prior to the closing of the merger, which turned out to be Friday, March 5, 2010. In fact, the merger agreement pegged the calculation to the date of the second full trading day prior to the “effective time” of the merger, which, as that term was defined, turned out to be Monday, March 8, 2010. By using the March 8 date instead of March 5, Denbury paid less to the Encore shareholders (800,000 fewer shares to be exact), which resulted in the lawsuit.

In this case, Denbury’s attorneys’ failure to pay close attention to the details in the Proxy and Registration Statements was the root cause of the error. Denbury misstated the merger calculation in both the Proxy and Registration Statements, and those misstatements are directly related to shareholder compensation. The Proxy and Registration Statements were materially misleading in violation of Section 11 of the Securities Act of 1933 and Section 14 of the Securities Exchange Act of 1934. Section 11 imposes liability for registration statements that, upon becoming effective, contain “an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”

The court denied Denbury’s motion to dismiss for failure to state a claim upon which relief may be granted, finding that Denbury misstated in several instances the precise formula that would be used to calculate the merger consideration and that such misstatements are not immaterial as a matter of law. In other words, failure to exercise greater care in drafting the press releases and Securities and Exchange Commission filings that publicly disclosed the merger gave Encore stockholders grounds for a viable, multi-million dollar claim against Denbury.

Wronski and Basile point out two key takeaways from this case. First, all public statements should follow the language of the underlying purchase agreement to the fullest extent possible; and second, lawyers should carefully review such disclosures to ensure that they comply with the truthful disclosure requirements of SEC rules.

“The Denbury transaction exemplifies how seemingly minor omissions or inconsistencies in drafting documents can significantly alter the economic expectations of the parties involved. Deal documentation—whether contracts, press releases, or regulatory filings—should always be carefully prepared and reviewed by legal advisers.” 

Whichever firm, corporation, or industry you find yourself practicing in post-graduation, it is imperative that you routinely remind yourself that attention to detail is arguably the most important responsibility of a corporate attorney. “When lawyers do not meet this standard, what follows are costly litigation, unhappy clients, and perhaps fewer invitations to weigh in on those ‘bet-the-company’ issues.”

As Four-star Navy Admiral Hyman G. Rickover once said, “the Devil is in the details, but so is salvation.”

For more information, visit http://www.law.com/corporatecounsel/PubArticleCC.jsp?id=1202574240924&Corporate_Attorneys_Must_Mind_the_Details_or_Catch_the_Devil&slreturn=20120911063215.

SEC “Conflict Minerals” Talk

On August 22, 2012, the SEC issued a Final Rule requiring supply chain tracking and reporting of the origins of tin, gold, tantalum, and tungsten, including when present in finished goods incorporating these materials.  Such “conflict minerals” originate from conflict-ridden countries in Central Africa, the mines of which are often controlled by militia groups using violence, forced child labor, and rape in connection with the extraction of these minerals.

 An origin review must be part of a manufacturer’s (or contractor’s) SEC report when a conflict mineral is necessary to the functionality or production of any of their goods.  The information must also be available on the company’s internet site.

 Click here for SEC Press Release, which includes a link to the final decision. (note this is over 300 pages) http://www.sec.gov/news/press/2012/2012-163.htm

Date:        Thursday, September 27, 2012

Time:          4:00 – 5:00 p.m.   Speaker Event

                   5:00 – 6:00 p.m.   Reception

Location:  Chicago-Kent College of Law – 10th Floor

Panelists:

Gwendolyn L. Hassan, Manager of Corporate Compliance at Navistar, Inc.

Eric Stovall, Principal at and Regional and Industrial Leader on Conflict Minerals for KPMG

Bartram S. Brown, Professor of Law and Co-Director of the Program in International and Comparative Law

Price:  Free for Students; $20 (Members); $35 (Non-Members)

Sponsors:

– Organization of Women in International Trade, Chicago Chapter (OWIT),

– International Law Students Association at Chicago-Kent (ILSA), and

– International & Foreign Law Committee of the CBA’s Young Lawyer Section

If you’re happy at your bank, raise your hand

If you’re unhappy with overdraft charges or upset with the fact that you had to buy all new checks when your bank went under, you’re suprisingly in the minority.  An online survey by Digital Insight reported by Pacific Business News revealed that people are happy or very happy with their current bank.  The results were reached by polling both individuals and small businesses.  On a whole, people and businesses felt secure in their current bank’s stability.  Maybe people feel secure and content is because they have no choice in where they can bank.  Continue reading

The Creditors Strike Back

georgefinalCreditors are taking back the power they lost with the recent economic meltdown.  Specifically, Starwood Capital Group is acting on its own behalf in dealing with the June bankruptcy filing of Extended Stay, Inc. The Wall Street Journal reported that the investor group, Starwood Capital, is proposing to buy the $4.1 billion first mortgage of Extended Stay Inc.  The investors are willing to make such a large  investment because they are existing creditors of Extended Stay, Inc.  With Extended Stay’s proposed reorganization plan, the creditors stand to lose much of their initial investment. However, by potentially purchasing the first mortgage for $3.5 billion in commercial-mortgage-backed securities, the creditors are striking back.

With their proposal, the creditors would be able to devise their own plan restructuring that would allow them a better recovery.  The bondholders and of course the bankruptcy court would need to approve Starwood’s plan for it to pass.  Also, bankruptcy law gives Extended Stay Inc. the exclusive right to form their own restructuring plan during the “exclusivity” period following filing of bankruptcy. The exclusivity period can last as long as eighteen months.

Despite the obstacles for Starwood’s plans implementation, it  is significant insomuch as it is shows how creditors are turning their bad luck into good fortune.  Starwood may lose money on the deal overall but they are making an investment which will serve them well in the future.  Starwood has already bought distressed hotel assets and invested in commercial property debt.  Buying Extended Stay, Inc.’s first mortgage is just another business opportunity for investors like Starwood which serves the double purpose of protecting their investment and planning for the future.

Although not uncommon for creditors to propose their own restructuring plan, it will be interesting to see if the trend becomes for the creditors to take control of their own destiny in the way that Starwood’s plans to.  As businesses continue to feel the effects of the economy and financing becomes available, more groups like Starwood might emerge and strike back .