Work-in-Progress: A National Legal Profession for Australia and the Slater & Gordon Experience* ANDREW GRECH & KIRSTEN MORRISON** On 21 May 2007, Slater & Gordon became the first law firm in the world to list its practice on the stock exchange. As this case study will illustrate, the process of listing raised significant ethical and practical issues that had to be considered. Established in 1935, Slater & Gordon is a consumer law practice employing more than 650 staff members 1 across 30 locations throughout Australia. Among Slater & Gordon s practice areas are: personal injury litigation, industrial and employment law, private client services (including family law, wills, estates planning, conveyancing, and estate litigation), business law, and commercial litigation and project litigation (including consumer and securities class actions). 2 Most personal injury litigation is conducted on a conditional fee basis (No Win No Fee ) with a strong track record of successful outcomes for clients. 3 The practice has strong historical and contemporary links with the trade union movement in Australia. I. MOVE TO A CORPORATE BUSINESS STRUCTURE IN 2001 Slater & Gordon incorporated as Slater & Gordon Pty. Ltd. on 27 June 2001. Formerly, Slater & Gordon operated as a partnership. This move was driven by internal business considerations which coincided with the introduction of a proposed set of uniform national provisions ( model laws ) governing the legal profession which were in part intended to facilitate legal practices to operate nationally. The model laws were first adopted in New South Wales in 2004 and have gradually been adopted in all but one of the Australian jurisdictions since that time. 4 * An earlier version of this article was first published by the authors in the Georgetown Journal of Legal Ethics Vol. XXII, No.2, Spring 2009. ** Andrew Grech LLB joined Slater & Gordon in 1994 and has worked as a litigator in most areas of the company s litigation practice. Andrew also spent three years in the then fledgling Sydney office between 1997 and 2000. Since he became Managing Director in 2000, the company has enjoyed substantial growth, expanding from seven offices in 2002 to thirty offices in 2009. Andrew has also successfully managed the acquisition and integration of thirteen smaller firms over the past two years. ** Kirsten Morrison was appointed General Counsel in June 2008 and Company Secretary in December 2008. Prior to that Kirsten was a commercial litigator with Slater & Gordon. 1 The staff of Slater & Gordon is comprised of approximately 250 lawyers and over 400 non-legally qualified staff. 2. Around seventy-five percent of revenue is derived from personal injury work with most of that work performed on a No Win No Fee basis where fees are paid on the successful conclusion of the client s matter. 3. Some examples of landmark cases where Slater & Gordon achieved successful outcomes for clients include: the Wittenoom mine asbestos cases of 1988 and 1989, resulting in the first group settlement in Australia; the first mass breast implant settlement against Dow Corning achieved worldwide in 2002; representing the Australian Council of Trade Unions and asbestos victim support groups in the James Hardie Inquiry in 2004, which resulted in the establishment of a trust in 2006 to meet asbestos claims and more recently establishing the Storm Financial/Commonwealth Bank of Australia (CBA) Dispute Resolution scheme, for customers of the CBA effected by the collapse of Storm Financial. For a further discussion of Slater & Gordon s case work, see Slater & Gordon s homepage, available at www.slatergordon.com.au 4. The provisions allowing incorporation of legal practices in the states and territories are as follows: Legal Profession Act, 2004, Pt 2.6, ss.135-164 (N.S.W.); Legal Practitioners Act, 2006, Pt. 2.6 (N. Terr.) (replacing Legal Practitioners Amendment (Incorporated Legal Practices & Multidisciplinary Partnerships) Act, 2003 (N. Terr.)); Legal Profession Act, 2004, Pt. 2.7.4-2.7.35 (Vict.); Legal Practice Act, 2003, ss. 45-74 (W. Austl.); Legal Profession Act, 2007, Pt. 2.7 (Queensl.) (provisions were originally inserted in 2003, but only came into effect when the 2007 Act commenced on July 1, 2007); Legal Profession Act, 2007, Pt. 2.5 (Tas.). Similar legislation is in progress in South Australia: Legal Profession Bill, 2007, Pt. 5 (S. Austl.) (third reading speech 26 Feb. 2008).
By the turn of the new millennium, Slater & Gordon faced a number of challenges: legislative changes which made personal injury litigation increasingly more complex and increased the work being directed to specialist personal injury practitioners; the need to expand operations from a small ownership and capital base; historically high staff retention rates increasing the need to satisfy career advancement aspirations; and a need to expand and diversify the revenue of the firm. The company developed a strategy to deal with these issues primarily by undertaking aggressive growth, which required working capital and expansion capital funding. To facilitate this growth strategy, Slater & Gordon also evolved to a more corporatised management model. Former partners became employee shareholders in the company, and the board of directors was initially formed from among the new shareholders. II. THE DECISION TO LIST ON THE STOCK EXCHANGE By mid-2005, Slater & Gordon had a clearly defined growth strategy based on the acquisition of other practices in Slater & Gordon s core practice areas and organic growth accelerated by increased marketing and practice development activity. From 2005 through 2006, the company analysed options available to access capital to support its growth strategy. This analysis included extensive input from external advisors. The options examined for accessing capital for growth were: sourcing additional funding from existing and/or new employee shareholders; funding from existing cash flows; utilising a debt facility; accessing private equity; and issuing an initial public offering (IPO). From this analysis, it became clear that only an IPO or private equity would provide sufficient capital to support Slater & Gordon s growth strategy. The perceived advantages of an IPO over private equity were: potential higher valuation; stronger basis for succession planning (through the issue of shares in an employee ownership plan); ability of employee shareholders to crystallise their investment and provide a mechanism to manage the shift in ownership interests of longstanding shareholders in an orderly way over the medium to long term; easier accessibility of debt and further equity post listing; enhanced ability to offer shares as part of the consideration for future mergers; and creation of a viable alternative exit mechanism for principals of merged firms. On 21 May 2007, Slater & Gordon Ltd. offered an IPO of 35 million shares, attracting strong interest from both institutional and retail investors. The issue was over-subscribed. 5 As of 25 August 2009, approximately 36 percent of the company was owned by external shareholders, including some of Australia s most respected fund managers. The remaining 64 percent was held by 5. Data provided by the Company s share registry, Computershare Ltd. shows that applications were received for 50,484,000 shares.
employees of the company. Approximately fifty-five staff members participate in the employee ownership plan. Slater & Gordon is listed on the ASX and despite the volatility in equity markets worldwide has maintained a premium over its listing price of $1.00. 6 III. REGULATORY CHALLENGES AS A LISTED COMPANY The main potential disadvantage of incorporating and to a greater extent, listing on the stock exchange has been the increased burden of regulatory compliance. 7 The potential for conflicts of interest between duties to shareholders and legal professional obligations to courts and clients featured prominently in the company s thinking and planning. Slater & Gordon utilised a number of strategies to deal with these regulatory challenges, including: engaging regulators of the legal profession early to work through the challenges presented by potential conflicts of interest; taking the Australian Securities and Investment Commission (ASIC) and the Australian Securities Exchange (ASX) through detailed discussions concerning the primacy of the duties and obligations legal practitioners employed by the company have to courts and to clients; making the primary obligations to the court and clients clear in the prospectus, constitution, and shareholder agreement; adopting corporate governance policies to reinforce the primacy of professional and ethical obligations of legal practitioners within the company; 8 informing investors of the specific professional obligations of legal practitioners that may conflict with obligations to shareholders; obtaining a detailed understanding of the listing rules, particularly around continuous disclosure, in the context of duties to the courts and clients; and putting in place a strong corporate governance framework with the appointment of independent non-executive directors to the Board. 9 The legal professional regulatory framework requires all incorporated practices to implement and maintain appropriate management systems for the provision of legal services. Since incorporation, the practice has completed a self-assessment audit issued by the New South Wales Legal Services Commission (2007), the Queensland Legal Services Commission (2008), and, more recently by the Victorian Legal Services Board (2009). The company has found the audits a constructive exercise that has enabled it to test the robustness of its practice management systems against objective criteria. 10 6 As at 25 Aug. 2009 the closing price quoted on the ASX for Slater & Gordon ordinary shares was $1.65. 7. Examples of the increased regulatory burden include the requirement that incorporated legal practices must maintain an adequate practice management systems, see Legal Profession Act, 2004, c. 140(3), 670 (N.S.W.) (and parallel provisions in other Australian jurisdictions), and the requirement to keep the Australian investment market continually informed under the ASX Listing Rules (ASX Listing Rule 3.1). 8. See Board Corporate Governance Policy and Code of Conduct, available at www.slatergordon.com.au 9. For an overview of the structure of the Board of Slater & Gordon and the role of the independent directors, see the Directors Protocol, and 2006-2007 and 2007-2008 Annual Reports, available at www.slatergordon.com.au 10. The requirement to implement and maintain appropriate management systems is set out in sections 140(3) and 670 of the Legal Profession Act 2004. For a further discussion of the requirement, see Steve Mark, Notes on the Issue of Listing of Law Firms in New South Wales and the Incorporation of Law Firms, presented for the Joint NOBC, APRL, and ABA Centre for Professional Responsibility Program, Brave New World: The Changing Face of Law Firms and the Practice of Law from a Professional Responsibility Perspective (10 August 2007); Steve Mark, The
In general, the rigor of the due diligence process prior to the float and the increased transparency of being listed have positively impacted the company s approach to compliance. The IPO has increased the level of external accountability and, therefore, the internal focus on policies and procedures supporting compliance and moving beyond compliance to best practice. More recently the Company has completed a revision of its National Practice Standards which include an internal audit process and has also implemented an enterprise risk management process which among other matters requires regular reporting to the Board by legal practitioner directors on the Company s compliance with regulatory requirements. IV. THE IPO PROCESS The IPO process itself was a significant undertaking which required a substantial commitment of time by management over a 6 month period. With the assistance of the company s corporate advisors and external lawyers it was able to complete the IPO successfully with little disruption to day to day operations and service to its clients. The IPO process timeline is set out in Annexure 1. V. LIFE AFTER THE IPO Despite the headlines of 2007, 11 11 it has been business as usual for our legal practitioners and clients post-listing. The capital accessed through the IPO has allowed the company to support its growth strategy. Since May 2007, Slater & Gordon has acquired thirteen firms and has increased spending on marketing and advertising to support strong organic growth. 12 12 The employee ownership plan has also proven effective in assisting with staff recruitment, retention, career advancement, and succession planning. The key features of the employee ownership plan are: key staff allocated vesting, convertible, redeemable shares ( VCR shares ), which vest and convert upon satisfaction of a mix of short and long term financial and non-financial key performance indicators; the ability to offer all staff with equity on the basis of long term performance, relatively early in their careers and on an incremental basis throughout their careers; the ability of staff whose equity entitlements have vested to secure dividends and some restraints on sale of shares are lifted (typically three years post vesting) to sell shares and crystallise some of their investment during the course of their careers; and Corporatisation of Law Firms, presented at the Australian Lawyers Alliance National Conference 2007 (11-13 October 2007). Both papers are available from the NSW OLSC. Both papers are available on the OLSC s website, http://infolink/lawlink/olsc/ll_olsc.nsf/pages/olsc_speeches. These audits required the practice to report against ten key benchmarks of the appropriate management systems developed by the Legal Services Commission(s). 11 Marcus Priest, Slater & Gordon Listing to Make History, AUSTL. FIN. REV., 18 May 2007, at 60; Marcus Priest, Strong Debut for First Listed Law Firm, AUSTL. FIN. REV., 22 May 2007, at 15; Vanessa Burrow & Marc Moncrief, Legal Eagles Soar on Day One, AGE, 22 May 2007, at 1. The strong interest also was noted overseas, for example, A. Spence & J. Rossiter, Investors Give Thumbs Up to World s First Law Firm Flotation, TIMES ONLINE, 21 May 2007, http://business.timesonline.co.uk/tol/business/article1818722.ece. 12 Completed acquisitions include: McClellands, a prominent Sydney law firm with strong trade union referral relationships; Quinn & Scattini, Slater & Gordon acquired the professional negligence, commercial class actions, and personal injuries practices of this Brisbane firm; and Secombs, a Melbourne firm with a strong personal injuries component of their practice. For further details in relation to completed acquisitions, see Slater & Gordon s 2006-2007 and 2007-2008 Annual Reports, available at www.slatergordon.com.au.
minimum shareholding levels while share plan participants remain employees with strong incentives for long-term commitment to the company. The Slater & Gordon experience has shown that an IPO can be an effective strategy if a legal practice: has a sustainable business model; has the management capacity to deal with the increased regulatory burden; is not unduly concerned by increased transparency; and has a need for capital. It is of course not a strategy in and of itself and is simply an alternative means to the achievement of a strategy. As such it will not be an appropriate business structure for many legal practices. Overall, however, a publicly-listed, incorporated legal practice has proven an effective business structure for Slater & Gordon.
Annexure 1 The IPO Process Selection of Corporate Broker Structuring / Advisers Due Diligence Road Shows Institutional Allotment Lodge Prospectus Offer Period ASX Listing Prospectus Drafting Week 5 Week 20 Week 15 Week 10 November 2006 May 2007