On June 8, Gateley will float on the London Stock Exchange. It will be the first UK firm to list itself as a public limited company and has opened the doors to gaining new levels of finance previously off the table to law firms. But why would a firm would look to float, and what it could mean for the industry?
So what happens to a firm when it floats?
When a business enters the stock market, through its initial public offering (IPO) it is actually selling part of itself to outside investors. This happens when people buy shares in a company and the firm then becomes a public limited company (PLC).
This means that the company can raise large sums of money very quickly but is at that point owned by the people who own the shares. This means that the company is answerable to its shareholders, who can each vote on important decisions.
For law firms, such as Gateley, it is possible that much of the control of the business will remain with the current senior partners. This would occur through issuing shares to those currently in charge of the business during the company’s IPO.
What are the benefits of floating a firm?
The biggest benefit, as already mentioned, is that a firm can gain fast access to large amounts of capital that was previously unavailable to it. This allows the new company to develop its business in new ways – for instance, expanding through new acquisitions. Gateley has confirmed that part of the £10m it aims to raise will be used for future acquisitions. Slater & Gordon became the world’s first publicly listed law firm when it listed on the Australian stock exchange in 2007, allowing it to come to the UK and take over firms here. Expanding in this way would take much longer, if it happened at all, without the additional capital gained through floating.
Becoming a PLC also means that companies are able to reward staff by issuing them with shares as part of a remuneration or bonus packages. This can be used to motivate employees to reach certain goal or attract new talent to the company.
In the short term a firm’s IPO increases its publicity and may allow it to boost its branding and/or reputation.
Is there anything else a firm should consider?
Firms also need to consider which market they should enter. For UK firms the obvious choice would be to list on the London Stock Exchange but even then there is a choice to be made.
Some of the biggest UK companies are listed on the Main Market but in order to enter they must meet certain requirements. Such requirements include issuing above a set number of shares and the company holding a certain market capitalisation.
For those wishing to avoid these requirements, the Alternative Investment Market (AIM) may be the solution. AIM is designed for smaller companies and is more flexible in what it demands from those who join. This may have been one of the considerations for Gateley, which has chosen AIM over the Main. Listing on the larger markets also runs the risk of the company becoming a small fish in a big pond.
So why has it taken so long for a law firm to float?
Most law firms are set up as limited liability partnerships (LLPs). This means that the firm’s partners can inject capital into the business as a quick way of raising finance. Other forms of financing, including listing on the stock market, have historically been unavailable to law firms.
However, the Legal Services Act 2007 changed that by opening the doors for non-lawyers to own and invest in law firms that adopt an Alternative Business Stucture (ABS).
The ABS structure allows firms to be owned by other companies but also allows them to attract investment in the stock market. Although the ability for firms to list on the stock market has been available for some time, it has taken time for a firms to warm to the idea, especially after the financial crisis of 2008.
There are also financial implications law firms must consider should they decide to list on the stock market. Firstly, there is a huge cost involved with floating, which means that becoming an PLC is not suitable for every firm. Secondly, it is important for firms to be able to predict the amount of capital they are able to raise through by listing. If the prediction is inaccurate it could spoil its business plans as a result.
Many other firms have become ABSs without becoming a PLC. Some do this in order to promote non-lawyer staff into the firm’s partnership but others have the structure to attract new capital. This was the case for Simpson Millar, which was acquired by AIM-listed professional services group Fairpoint in June 2014. With the additional capital available, Simpson Millar has stated its plans to expand and make acquisitions of its own.
Should we expect more IPOs from law firms in the future?
Almost definitely. Irwin Mitchell is one firm that has considered flotation as an option but it has gone quiet on the subject recently. It is certain that many firms will be watching Gateley’s progress closely.
So what does this mean for Gateley’s partners?
Control of the firm is likely to remain primarily with the partners. This will be done be issuing the partners with shares in the company. This means that some of the high-ranking partners are soon to become very wealthy when this happens.
CEO Michael Ward, managing partner Peter Davies, London office head Paul Hayward and board member Brendan McGeever will each receive 3.12 per cent of the shares. While this might not sound like much, that 3.12 per cent will be worth £3.2m to each of them.
Not all partners will become as wealthy as this although it is likely that most partners will receive shares. All partners will begin to receive a salary, and those who hold shares may receive dividends if the board chooses to issue them.
And should I buy shares in Gateley?
While investing in Gateley would certainly demonstate commitment to the firm at interview, it might be interpreted as a slightly over-the-top way of getting a training contract. As for the potential long-term financial rewards, Lawyer 2B will steer clear of offering advice on this one.
20 Dec 13: Gateley granted ABS licence
11 May 15: Gateley plans first UK law firm IPO.
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