PARTNERSHIP: An Introduction

Market Conditions 

After recent exceptional results, the financial performance of the professional services sector has seen steady growth. Revenue at the Top 50 UK law firms has grown by 8%, but many reported a drop, and for some, a significant drop in profits. This reflects in part higher fixed costs. There is generally a slow down in merger and acquisition activity which may have a further impact in the year ahead. Notwithstanding the predictions of more challenging market conditions and that layoffs may be expected following recent recruitment of lawyers to meet unexpected client demand, firms are generally optimistic about future prospects.

Mergers 

There has been little merger activity between larger firms in either the legal or accountancy sectors. The one exception is the predicted transatlantic merger between law firms Shearman and Sterling from the US and Allen and Overy from the UK. Both firms have previously sought merger partners from the other’s jurisdiction. The merger will create a firm with combined revenues of USD3.4 billion and have about 3,900 lawyers and about 800 partners across 49 offices. When the merger is approved by partners, this may put pressure on other magic circle firms to follow suit to expand their US capability. Private equity investment in firms continues in the smaller end of the market, often adopting a consolidator approach, which historically has proved difficult to get right. Azets has led the way for this kind of model and acquired Baker Tilly Ireland and the delightfully named Gorilla Accounting in 2023. The change in ownership of Azets represented the major transaction in the accounting sector. A new private equity investor, PAI Partners, joined Hg Capital as co-owner of Azets.

Listed Firms 

While Knights continues to acquire further law firms, there is no exception for professional service firms in the general downturn in IPO activity. The last significant listing was DWF in 2019, which acquired Canadian law firm Whitelaw Twining in an innovative transaction for a Canadian firm in 2022 for around GBP27 million. Less than a year later, DWF had agreed its sale to private equity investor Inflexion for around GBP340 million, fairly close to its GBP366 million valuation at IPO. That outcome was far more favourable than the exit of 150-year-old firm Ince from the public markets. Ince joined listed firm Gordon Dadds in 2018 to offer a brighter future, but went into administration in 2023. Its hopes of landing at a safe home with new owner Axiom DWFM and those of Plexus Legal, another firm acquired out of administration by Axiom DWFM, were dashed when the new owner was beset by regulatory suspensions of its three principal directors and ensuing litigation.

Team Moves 

The market for lateral hires at partner level remains buoyant and a notable development has been the movement of practice heads. The larger-scale team moves included the London office of Dickson Minto joining Milbank. The team included seven partners, around 20 associates and all London staff. Dickson Minto was a corporate boutique operating from London and Edinburgh, well-known for its private equity practice. The move represented a significant expansion of the UK offering for US firm Milbank. National firm Shoosmiths engaged on a strategic disposal of a 41-strong private client team to Rothley Law, which received acquisition finance from litigation funder Harbour. On a smaller scale, the London office of US firm Boies Schiller Flexner hired a six-lawyer team focussed on art law from Constantine Canon, continuing to rebuild after significant departures in 2022. The remainder of the team at Constantine Canon found a new home at Fieldfisher.

Regulatory Environment 

Regulation of the audit market has been the subject of continual review in recent years. No further action is expected ahead of the next general election. EY seemed to be ahead of the curve in addressing the independence issues in providing both audit and non-audit services when announcing a proposal to split its audit business from its consulting and advisory business. That kind of decision needed partner approval, involving more than 10,000 partners based in over 140 countries. Despite all the planning, at a cost of hundreds of millions of dollars, partner approval could not be achieved, and the plans were cancelled. Perhaps the only way in which this kind of split can be put into practice is if it is imposed on the industry by regulatory change.

In the legal sector, changes to the licensing regime for overseas law firms in Saudi Arabia and India is expected to generate more competition for local firms. India in particular is a potentially huge legal market in which it has previously been difficult for overseas firms to operate.

Technology 

For decades, academics and commentators have predicted that technology will have a permanent and fundamental impact on legal services. The current predictions are that the developments in artificial intelligence mean that time has arrived. There may not be a uniform approach. There is certainly a big difference between the judge in Columbia who submitted questions to ChatGPT to assist in producing a ruling and the US attorneys who were fined for submitting a court brief generated by ChatGPT which included fictitious case citations and when challenged, maintained that the case citations were accurate. A product backed by ChatGPT has passed the US Uniform Bar Exam, with a score in the top 10%. Some UK firms are already using artificial intelligence products backed by Chat GPT. The technology is not yet perfect but it seems it will be able to replace many of the activities currently undertaken by junior lawyers.

Culture 

The provision of legal advisory services to Russian clients has become subject to sanctions. Services can be provided if they are within the terms of the government’s general licence or an individual licence is granted. The debate about the ethics of acting for Russian clients has been narrowed down to whether firms are comfortable in providing services under the terms of the government licence.

Following the Solicitors Regulation Authority, the main regulator of lawyers in the UK, issuing guidance to firms to look after their staff’s wellbeing and to protect staff from bullying, harassment, discrimination and victimisation, the regulator went a step further and introduced specific requirements in the Codes of Conduct for lawyers and law firms. Lawyers and firms now have a duty to treat colleagues fairly and with respect and a separate duty not to bully, harass or discriminate. Managers (partners or directors) have an additional duty to challenge behaviour which does not meet those standards. The purpose of these new rules is to address the toxic culture which the regulator has identified in some law firms. Whilst many firms will list inclusivity, respect and open communication as central to their culture and value, the reality often does not match the vision.