It was hard not to be impressed when LegalZoom’s shares opened 31 per cent above the company’s offer price on its Nasdaq debut earlier this month, valuing the online legal services company at $7bn (£5bn).
The private-equity-backed company helps users generate legal documents without lawyers in a range of areas such as estate planning, divorce, name change and residential leases.
As might be expected Legal Zoom’s largest market is in the US but even in the UK it has over 750,000 customers according to CityAM. The company is clearly foremost in the technology space but what of law firms listed on the stock exchange?
The first-ever law firm flotation occurred in 2007 when Slater and Gordon made history by going public in Australia.
In the United States, law firms are not permitted to be publicly floated. As explained here the main legal hurdle is the American Bar Association Ethics rule 5.4, which prohibits sharing of legal fees with non-lawyers, and prohibition of lawyers from forming law firms with non-lawyers.
Jason Lee, an Attorney practicing in the US writes, “Essentially, lawyers don’t want investors/business people to influence key decisions within law firms, and by extension, the profession. Although it sounds like a made-up claim, there is a genuine concern underneath because lawyers typically have duty of loyalty to their clients. Now introducing shareholders to this mix complicates things, because in a typical corporate setting, shareholders (owners) have more legal rights than customers (clients); for example, a widely accepted purpose of a corporation is to increase shareholder value.”
Gateley was the first UK law firm in 2015 to float on the London Stock Exchange. To date, only a handful of law firms are publicly traded in the UK, which might seem counter intuitive to those with professional expertise in Corporate and Commercial law.
- Gateley Plc, in May 2015.
- Gordon Dadds, in August 2017.
- Keystone Law, in November 2017.
- Rosenblatt Solicitors, in May 2018.
- Knights Law, in June 2018.
- DWF, in March 2019.
As reported in the Law Gazette, “Almost all the law firms listed in London took a hit in the early stages of the pandemic. At DWF, which floated on the main market in 2019, shares were riding at a record high in February 2020 before losing over a third of their value in a month. Shares continued to fall over the next two months, reaching a record low of 53p in early July. Since then, DWF Group shares have begun to climb but remain well below their 2020 peak, at 87.5p at the time of writing.
“The recovery followed drastic action: DWF replaced chief executive Andrew Leaitherland and announced job cuts and the closure or scaling back of operations in Cologne, Dubai, Singapore and Brussels.”
As a sector, trading in legal services firms is still – in stock exchange terms – relatively new. Unlike Drink and Groceries, the ‘Law’ is not a defensive stock which investors traditionally retreat to in a down turn. Notwithstanding, death and taxes invariably require the intervention of a lawyer at some stage which would imply that ‘Law’ might be a steady investment. Certainly, lawyers have been kept busy throughout the pandemic whether that be due to commercial restructuring work, divorce or probate.
One reason I would suggest there are still only a handful of law firms listed on the stock exchange is because the ownership structure of the shares is still in the hands of the lawyers working for the firms. Until more investors grow excited in the sector that could persist for some time to come.
Andrew Simms, Head of research at investment bank Arden Partners, is quoted here by Law Gazette, “As a relatively new listed sector, legal firms underperformed the broader stockmarket during the initial stages of the Covid lockdown, as the diversification and counter-cyclical parts of the business models had not previously been tested, while the recoverability of key receivables and WIP [work in progress] balances was unclear to investors.
“Through the second half of 2020, the firms had demonstrated good operational and financial management, seamless remote working highlighting the benefits of investing in technology, remaining strongly positioned and well capitalised to continue to execute on strategy. With strong organic growth returning, the share prices of the legal firms have also recovered and outperformed the stockmarket over the past six months, providing good validation of the investment case for this sector.”
At the start of the year journalist Alex Aldridge has bought £100 in each of the six legal stocks in the FTSE. You can track how his portfolio is performing through his regular updates, here.
In days of old one would have turned to the back pages of the Financial Times to learn how one’s share prices were performing. In case you’ve wondered why the FT is pink it made the change in 1893, to differentiate itself from its rival the Financial and Mining News. It was also marginally cheaper to print on unbleached, slightly pink paper at the time.
The colour has survived major changes to the print media landscape as the paper has bolstered its digital and social media distribution strategies in response to changing reader demands. The company’s website even features a pink background.
Oh to have a crystal ball to see how the legal profession will have evolved in another 100 years. Will we still be in the pink? I hope so.
David Little is a Partner at Bishop & Sewell in our expert Corporate & Commercial Team. You can contact him on 020 7631 4141 or you can email company@bishopandsewell.co.uk.
