Last week I wrote about private equity courting law firms with “let’s move into together” messages, using the recent case of a California firm contracting with a Boston-based private equity (PE) firm.  That blog explored the management services organization (MSO) agreements for such deals, which allow a non-lawyer investor to own the billing and software of a law firm as long as the “lawyering part” continues to be done by licensed lawyers — and how that squares with the ethical considerations for lawyers.  The blog anticipated some issues and assumed a wait and see approach.

As it turns out, this week there is more to see.  Just days ago, the Governor of California signed a proposed law that came to his desk on the subject.  It seems that the legislature in CA has taken a dim view of the MSO arrangement when it comes to law firms, and so has the Governor.

The new CA law, which covers all contracts entered into on and after January 1, 2027, bars business entities from attempting “to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision.”  It also carries some hefty damages for violation and associated fees and costs, and it joins jurisdictions like Colorado and Illinois in passing such a law.  However, CA is a huge legal market and appears to be the big kahuna in the fight so far.

The salient issue appears to be the definitions of “legal control, and “litigation decisions,” and that could take a while to resolve.  A reasonable interpretation of the CA bill seems to be that PE must have hands off when it comes to determinations about what cases a firm takes, which clients it signs, and if and when and for how much it agrees to settle a case.  Those all look like money issues to little old me, and isn’t PE all about making money?  Isn’t that the motive for the pitch?

Law firm practitioners — especially those who are looking for quick influxes of money to improve bottom lines — should keep a close eye on this.  And there are a few of those firms — very prestigious firms, in fact — that are picking up the phone when PE calls.

There is sure to be more.  Stay tuned!

Yes, you read that right. Private equity (PE) has its eyes on law firms these days, and has reeled in a pretty big fish. As reported by Above the Law recently, a California-based insurance defense firm has signed a letter of intent to sell a piece of the firm to Charlesbank Capital Partners. You may not be familiar with that equity bank, but all you have to know is that it took off in the business by managing Harvard’s endowment. Not too shabby.

The law firm, Wood Smith Henning & Berman, has more than 500 lawyers with offices spread across 35 states and London, and its size and revenues position is very close to Biglaw. The firm has founders still active in the business, who are presumably ready to take the cash and retire, a fact that was cited by a merger advisor in the ATL article. That could sweeten the deal for them.

At this point, you are saying, “Wait a minute. There are ethical considerations that prevent this hook-up.” And you would be right. In almost all U.S. jurisdictions, it remains prohibited for non-lawyers, including private equity firms, to directly own law firms, and Rule 5.4 of the ABA Model Rules of Professional Conduct prohibits fee-sharing between lawyers and non-lawyers, creating more than just caveats for law firm participation in conventional acquisition models.

But the sales pitch for this deal is what is known as a management services organization, which allows a non-lawyer investor to own the billing and the software of a law firm at the same time that lawyers continue to control the “lawyering part” of the business. And some jurisdictions like DC, Arizona and Utah allow that arrangement under certain circumstances. On the other hand, the legislatures of California, Illinois and Colorado recently advanced legislation to restrict or regulate PE investment in law firms. So, it is a bit of a toss up, which means that the litigators are standing by.

If this management services organization model sounds to you like hard to pull off, you may be on to something. Like me, you may recall when PE moved into doctor’s offices and other healthcare, and the pros and cons of that are still being debated. Private equity also is behind the demise of neighborhood shopping centers and restaurants that are now vacant properties. The financial model of PE, simply stated, is based on high management fees which can strangle businesses and leave the corpses by the wayside.

So, is this a good idea for law firms? Will it spread to other deals or is it a one off? We don’t know. But keep an eye open because the Financial Times reports that Paul Weiss, Quinn Emanuel and Proskauer are among firms to have had conversations with PE groups or bankers to consider taking outside capital. So, this may only be the beginning of the story.