It now seems certain that law firms in at least two Australian states will soon be free to incorporate under normal company law, offer equity to investors, share profits with anyone and even trade their shares on the Australian Stock Exchange.
Legislation allowing incorporation in New South Wales (NSW) is currently before the State Parliament and is expected to come into force by early next year. It has been endorsed by both sides of the political spectrum. On the other side of the country, a similar scheme, in draft form, enjoys bipartisan support in Western Australia.
When incorporation becomes available in Sydney, which dominates the Australian market for legal services, it is expected to lead to one of the greatest upheavals in the structure of the Australian legal profession.
The big firms that operate in all Australian jurisdictions generally support the scheme, but have indicated they are unlikely to incorporate in NSW until similar legislation is in place in all six states. But those firms that operate entirely within NSW would not be affected by inconsistent regulations in other states.
As a result, small- to medium-sized firms are expected to be the first to incorporate. There is also speculation that big international firms could see advantages in establishing an incorporated entity in NSW in order to raise capital for a tilt at the Asian market.
One of the reasons behind the scheme's bipartisan support is the belief that it would reinforce Sydney's position as a regional centre for legal services and meet the challenge from Singapore, which permits a restricted form of incorporation.
The NSW Attorney-General, Bob Debus, says the scheme would make Australian legal practices more attractive to international firms and give local firms the ability to take advantage of the increasing globalisation of the market for legal services "rather than being somewhat helpless victims of that change".
He believes there is "a tremendously strong impetus" for Sydney to become a regional gateway for legal services for the South Pacific, just as it is regionally dominant in financial services, telecommunications, information technology, advertising and electronics.
Law firms in NSW are already free to form multi-disciplinary partnerships without restrictions on the amount of equity that must be held by solicitors. But incorporation offers greater choice of company structure.
Firms will still be able to practice in traditional solicitor-only partnerships, but if they incorporate they will be able to swap the unlimited personal liability associated with principals in partnerships, for the corporate veil enjoyed by shareholders.
There will be significant differences between incorporated legal practices and other companies. The corporate structure will be regulated by the companies watchdog – the Australian Securities and Investments Commission, which applies the normal company law.
But the practice of law within these entities will continue to be governed by the same regulators that police legal partnerships: the Law Society of NSW and the State Government's Office of the Legal Services Commissioner.
In order to be able to provide legal services to the public, incorporated practices will need to have a solicitor-director on their board who will be liable for the conduct of the company's lawyers. Consumers will be able to sue individual lawyers and their incorporated practices, but the shareholders – or former partners – will not be exposed to joint and several liability.
Incorporated practices will be required to make compulsory contributions to the Solicitors' Mutual Indemnity Fund and the Solicitors' Fidelity Fund. Both funds are run by the Law Society and will be authorised to make payments for losses caused by professional negligence or dishonesty.
An early version of the scheme had floated the idea of giving the society a statutory veto on every board member of incorporated legal practices – including those directors who were non-lawyers.
But this has been replaced with a technique that will require the Law Society to first seek rulings from the Legal Services Division of the NSW Administrative Decisions Tribunal or the normal courts.
Armed with such a ruling, the Law Society will have the power to discipline a solicitor-director who sits on a board with an 'unsuitable' director. It will also be able to seek court orders preventing individuals from managing a legal practice.
In May, the NSW Legal Services Commissioner, Steve Mark – a government official – said incorporation amounted to an ethical minefield for lawyers and a potential hazard for consumers.
But the bipartisan endorsement of the scheme is a major victory for the Law Society, which has been the scheme's main backer. It is also a clear win for the big national law firms which stepped up their support for incorporation after the scheme appeared to be in trouble.
The NSW legislation is called the Legal Profession Amendment (Incorporated Legal Practices) Bill 2000 and is available on the NSW parliamentary web site at: www.nsw.gov.au.
Chris Merritt is legal affairs editor for The Australian Financial Review.