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PARTNERSHIP: An Introduction to UK-wide

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Chambers 2020

Partnership Introduction 

By Fox Williams LLP

Market Conditions

Despite the economic storm clouds, professional service firms look set to achieve another year of solid growth. The UK’s top 100 law firms increased fee income by an average of 7% in 2018/19 and the first half of 2019 saw the UK legal industry hit record turnover. There is an expectation that the accountancy sector will again achieve record aggregate income. A marker of the confidence of future prospects in the legal sector is the increasing number of staff being promoted to partner. In many firms the number of promotions are on a scale not seen since before the 2008 financial crisis. There is no single driving force behind this success but opportunities offered by litigation funding continue to grow. Market-leading firm Burford Capital raised USD250 million and other funders have launched ever larger funds. Burford announced that it has committed over USD1 billion to investments with current clients. There were a number of cases claiming, at different times, to be the largest ever class action case brought in the UK.

Regulatory Environment

The Institute of Chartered Accountants in England and Wales (ICAEW) lost its appeal against the rejection of its application to become a regulator of reserved legal activities. The ICAEW already regulates probate activity, along with other regulators of legal services. The proposal by the ICAEW was to restrict its authorisation reach to legal services involving tax work. This was anticipated to be a way of putting accountants on the same level as solicitors in relation to legal professional privilege in the conduct of tax litigation. The High Court was unable to overturn the surprising decision to refuse an extension of the ICAEW’s regulatory scope.

Better news for the accountancy sector was the decision by the Competition and Markets Authority that the state of competition in the statutory audit market did not require an investigation by the competition authorities because this would only delay reforms to that market. The "Big Four" accountants account for 97% of FTSE 350 audits. There were more record fines against the large accountancy firms relating to deficient audit work.

More regulatory change from the Solicitors Regulation Authority (SRA) will make it easier for solicitors to work for businesses which are not regulated for legal services. There has also been the introduction of the freelance solicitor. Both moves are intended to increase competition in the legal services market. With a few exceptions, the deregulation of legal services in the UK has not been a development which overseas regulators have been willing to adopt. The State Bar of California is to vote on proposals to lift the restriction on allowing lawyers to share profits with non-lawyers (which is the essence of the UK deregulation). This could be the first major change by a leading state in the US. The State Bar in California regulates more lawyers than there are in the whole of the UK.

Mergers

After the recent relatively slow merger activity in the professional services sector, there has been a return to frequent transactions as part of normal sector activity. The transactions covered the whole range of traditional mergers, acquisitions by listed law firms and private equity-funded deals. On the traditional side, Cripps and Pemberton Greenish combined to produce a new top 70 firm and the Bircham Dyson Bell merger with Pitmans created a firm with the top 60 in its sights. Transactions involving listed law firms included Gordon Dadds entering into a pre-pack administration acquisition of Ince & Co. for £27 million and Knights acquiring Oxfordshire firm Brookstreet des Roches in a £10 million deal. Private equity firm Palomon Capital Partners acquired My Home Move to combine it with existing business the Simplify Group to create the biggest conveyancing business in the UK. The number of law firms involved in conveyancing dropped below 4,000 for the first time.

There was also significant activity in the accountancy sector. BDO acquired five UK offices of Moore Stephens in a move which is likely to elevate it to the top five spot behind the Big Four, overtaking Grant Thornton in the process. Other notable activity involved Cogital Group, with group company Blick Rothenberg acquiring Hazlems Fenton and with Baldwins continuing its acquisition of firms throughout the UK. Baldwins will soon have over 100 offices in the UK if the current acquisition rate continues. No other business in the professional service space is pursuing the same strategy with the same ambition as Cogital.

Large team moves involving ten or more partners (usually as an alternative to a merger) have not been a major feature of normal activity for some time. Single figure partner numbers moving with a team of associates is now more common. One firm to buck this trend was KPMG. 145 lawyers left Fidal to create KPMG’s new French legal arm, following a relationship between KPMG and Fidal going back many years.

Law Firm IPOs

2019 saw the first UK law firm to list on the main market of the London Stock Exchange. DWF which had undertaken a programme of rapid international growth listed with a value at the lower end of expectations of £366 million. This marks another listing where the shares are concentrated in the hands of a small management team. More millionaires were created on this listing than on the others but this was still a very small proportion of the partners. Having greater access to capital has made it easier for listed firms to pursue an acquisition strategy. Being listed on a public market is not all plain sailing, however, as dramatic fluctuations in share price can be an unwelcome development, as seen with Gordon Dadds and Burford Capital.

Personnel

In the last edition there was a brief reference to the #MeToo movement. The cultural change in the treatment of harassment has led to publication by the Big Four of their history of recent partner departures for inappropriate behaviour (including sexual harassment and bullying), with a total of 37 leaving within the last four years. The FRC has changed its rules so that the largest accountants (the top six) now have to report bullying, harassment and substance abuse. There has not been a similar unified disclosure by the biggest law firms. The number of reports of harassment to the SRA has increased by around 500% from historical levels. An IBA international survey of law firms found bullying and harassment at alarmingly high levels and that the level in the UK was higher than in many other European countries, including France and Germany.

AI and Technology

A dispute referred to the Online Civil Money Claims Court had failed to settle after three months of negotiation and was heading for a court hearing. The dispute has been settled by parties after agreeing to use a settlement software tool which uses algorithms to determine the parties' commercial position and settlement intentions and then coaxes them towards a settlement. The settlement was reached in less than an hour. This is claimed to be the first instance of proceedings in the court system being settled by technology: it will not be the last.

Fox Williams LLP