In 2007 Australia's Slater & Gordon became the first law firm in the world to go public. But does this mean other firms will follow suit? Richard Lloyd reports

Among the mining companies, banks, and the rest of Australian corporate might on Sydney's stock exchange, it is easy to miss. The share price acronym, SGH, hardly gives the game away. But Slater & Gordon Holdings is a world first.

In May 2007 the Melbourne-based plaintiffs firm became the first law firm ever to go public. Overnight, the firm's seven senior lawyers – effectively the equity partners, although Slater & Gordon (S&G) ditched its partnership when it incorporated in 2001 – saw their stakes in the business converted into shareholdings worth between A$2.7m (£1.25m) and A$10m (£4.9m) at the A$1 offer price. Three of the most senior lawyers – managing director Andrew Grech, executive director Peter Gordon, and senior personal injury specialist Paul Henderson – made A$4.6m (£2.2m) that day by selling part of their stakes.

During the past 20 years S&G has gone from a law firm with an uncertain future to a public company with a market cap of about A$140m (£66m), its share price now hovering around the A$1.30 mark. It has profited from a radical overhaul of the legislative and regulatory framework in the Australian legal market that has enabled firms to form multidisciplinary partnerships with non-lawyers, to incorporate and, starting in 2004, to seek external investment. As such, the firm has been understandably viewed as a bellwether for the revolution set to sweep through the UK under the Legal Services Act, which will usher in full external investment in law firms by 2011. For the 21st century law firm, going public is suddenly an increasingly viable option.

"Once you allow it in one place, it's pretty hard to put it back in the box," argues Steven Mark, legal services commissioner for the state of New South Wales (NSW), who vetted the S&G prospectus.

However, the pace of change in Australia, at least in terms of law firm initial public offering (IPO), has been slow. In four years, just one other whole firm, Integrated Legal Holdings, has floated in Australia (at press time its stock price was around 14 Australian cents, far below its opening price of 50 cents). The country's large commercial law firms have shown little appetite for embracing the innovations in the legal market.

"There's no great push here to incorporate, let alone to float," says Gavin Bell, the chief executive of Freehills. "Besides, I couldn't think of a worse market to do it in."

According to the banker who advised S&G on its float, the recent market turmoil has led at least one other law firm listing to be shelved. The message from Australia is that even when the capital markets are opened up to law firms, do not expect an avalanche of listings.

There is little about Andrew Grech that says multimillion-dollar CEO. His corner office in S&G's Melbourne headquarters is a modest, cluttered affair, and his slightly crumpled, open-neck shirt hardly seems like the attire of someone sitting on a company stake worth almost £6m.

A litigator who joined S&G in 1994 from rival plaintiffs practice Maurice Blackburn, Grech diligently worked his way up S&G's managerial roster. He spent stints running an office in the Melbourne suburb of Footscray and the firm's small Sydney outpost before giving up full-time law practice in 2000 to become managing director. While senior lawyers such as Peter Gordon mastermind the cases that have kept S&G in the press, Grech has directed the firm's aggressive growth strategy. The aim has been simple: to transform the firm from a predominantly personal injury practice in the southeastern state of Victoria into a national business that handles cases across a variety of practices.

Founded in Melbourne in 1935, Slater & Gordon made its name and its money fighting the kind of companies it now sits alongside on the Australian stock exchange. Three-quarters of the firm's business still comes from volume-driven, relatively low-value personal injury cases. S&G has also built a practice focused on big-ticket tort litigation. These are long-term, high-profile and capital-intensive cases, often fought through class actions (Australia passed a class action law in 1992). In the mid-1980s, S&G established its reputation in asbestos litigation, notching up Australia's first successful claim for negligence in relation to an asbestos disease in 1985.

By the late 1980s, however, the firm was losing money, and its sole proprietor, Jonathan Rothfield, was looking to retire. A group of partners, including Peter Gordon, agreed to buy him out for just A$1m (£490,000), betting that they could turn the business around.

Those partners made good on their investment as major cases began to pay off in the 1990s. The firm landed a major settlement for 300 claimants who became HIV-positive after being given contaminated blood in childbirth and surgery. In 1996 it secured a settlement for 30,000 landowners in Papua New Guinea affected by waste dumped from a nearby mine owned by BHP Billiton. Then, in 1999, the firm won a landmark ruling for temporary dockworkers who sought compensation for asbestos-related illnesses.

With this burgeoning litigation track record, S&G decided to expand and diversify. First the partnership converted to a corporation in 2001, the initial step down the road to going public. "We were concerned that a partnership was an inefficient way of investing," Grech says. "You distribute all the profits in a partnership, whereas in a corporate structure you can retain earnings at a much more preferential tax rate."

For four years the firm picked up laterals by ones and twos and then, in 2005 and 2006, swallowed five smaller firms. In the process, S&G grew from 109 lawyers in 17 offices to 208 in 21 offices by early 2007. "Our acquisition strategy is focused on a broad plan to build competency and capacity in certain areas," says Ken Fowlie, one of the three executive directors on S&G's board and head of the New South Wales practice. Among the practice areas targeted have been family law, real estate and commercial law. Along with building its existing offices in Australia's commercial centres – Melbourne, Sydney, Brisbane, and Perth – the firm also wanted a network of outposts in smaller towns. "Our business works best when we're close to our clients," says chief operating officer Mike Feehan.

But the S&G war chest was limited, so in 2006, convinced that the firm needed more cash to fuel its growth ambitions, Grech and the rest of S&G's management began to look seriously at going public. The firm spoke with investment bankers and private equity funds to examine the pros and cons of raising money from outside investors.

Jonathan Tooth, head of corporate finance at Austock Group, a mid-market Australian corporate finance house, met with S&G's management to brainstorm over an IPO. "We had never looked at listing a law firm," he says, "and when you don't have a peer group, it makes it hard [to set a price], but we felt comfortable with the company and its background." The nature of S&G's practice made it an easier business to come to grips with, Tooth says. "It's quite different from major commercial firms like Freehills," he says.

"Personal injury is a relatively straightforward business. It's all about systems and processes for dealing with claims."

S&G also considered selling a stake in the business, but ultimately opted against the buyout route. Management was concerned with how much autonomy the firm would have to give up and just how much of a contribution a private equity fund would make in return for a stake. "We looked carefully at private equity but, ultimately their exit is a float, so we saw it as an intermediate state," Grech says.

Before issuing its prospectus, the firm consulted with legal market regulators, including Mark, the legal services commissioner for NSW. As the Australian state with the most lawyers, NSW has been a pioneer in regulatory reform of the legal profession, the first state to implement many of the changes that paved the way to a law firm IPO. Mark gave S&G guidance on how they could become a public company and still uphold the ethical standards of the profession. Among his recommendations: a clause in the prospectus that specified that the firm's duties were first to the courts, then to its clients – and finally to its shareholders.

With a team from Austock, led by Tooth, acting as underwriter and the lead manager of the offer, the firm issued its 100-page prospectus in early April 2007, revealing, among other things, revenues and profit forecasts for 2007 and 2008. S&G lawyers say they were unfazed at releasing details of the firm's finances and inner workings. With a history of high-profile cases, they were accustomed to seeing the firm's name in the Australian press and, since the mid-1990s, S&G has run television and radio advertising campaigns to bolster its brand. "A lot of our business is in the public domain," chief operating officer Feehan points out. "It's not that scary."

Grech conducted a series of investor roadshows, meeting almost 40 institutional investors to explain the mechanics of the business and the case for investing. His pitch steadily improved over the course of the road show, Tooth says.

"People didn't really understand the business," says Tooth, "but Andrew is very good and could articulate the vision of the firm."

Grech evidently managed to assuage many investors' doubts. On the day of the IPO, S&G's shares opened at A$1.32 – more than 30% higher than the offer price – and closed at A$1.40.

Of 108 million shares, just under a third were offered on the market, raising A$15.4m (£7.5m) for acquisitions, A$17.3m (£8.43m) for the firm's seven equity partners, and A$2.3m (£1.1m) to cover the costs of the IPO. Just over half of the firm's shares, 55.9% of the total equity, stayed in the hands of about 20 of the most senior lawyers and staff, including the seven equity partners, practice area and office heads, COO Feehan, and chief financial officer Wayne Brown. Grech, with just over 10 million shares, has the largest holding, ahead of Gordon, who has just less than 10 million.

The remaining 11.6% of shares were reserved for the employee ownership plan, which enables more junior lawyers and staff to buy shares in the business. The traditional 10-year partnership track no longer exists at S&G, in part because the 2001 incorporation had already abolished the partnership. Instead, under the employee ownership plan, senior associates with five or six years' qualification who meet certain standards are given the opportunity to buy shares with an interest-free six-year loan from the firm. From a firm where the equity was held by just seven lawyers – mostly by Grech, Gordon, and Paul Henderson – approximately 60 lawyers and staff now own stakes in the business.

The employee stock purchase plan has its drawbacks. When the first tranche of shares in the plan were released to the market – these shares vest once a year at a set date – the price was at A$1.74, close to the market high of A$1.80. By early November 2008, the price was back down to around A$1.35, meaning paper losses for the employee shareholders. "Obviously it's [a concern] for all of us that the price has moved around," Grech concedes. "We've been careful to tell people that they can look at the share price every day if they want, but the best way of changing the price is by focusing on your work and contributing to the business."

Although the share price has fallen since last year, the business has continued to grow. In September 2008 the firm announced that revenues had grown by 26.7%, to A$79.7m (£38.8m), while profits had risen by 41.8%, to A$15m (£7.3m). Given its heavy, countercyclical litigation caseload, S&G would appear to be a good bet in the current global downturn.

Grech insists that he does not spend a lot of time reading commentary on the firm, and he declined to comment on whether the share price fully reflects the countercyclical nature of the practice. However, recent turmoil in the financial markets has reportedly caused several other Australian law firms – principally personal injury firms – to delay or cancel IPOs. Austock's Tooth says that his firm was working on another law firm public offering before it was shelved as the market collapsed. An upturn in the market will likely lead more plaintiffs firms to go public.

At S&G competitor Maurice Blackburn, chief executive Greg Tucker says his firm considered going public after the S&G offering but decided against the move.

"Except for the lure of a significant lump of money, why would you float and hand control to others who may not share your vision?" Tucker says.

S&G's answer can be seen in how it has invested its IPO proceeds. Drawing on the A$15.4m earmarked for acquisitions, S&G has acquired 10 small firms since the 2007 float, raising its lawyer count to 220. "People don't give you capital for it to sit in the bank, you've got to show how you're going to make it work," Grech stresses. Typically the takeovers are modest deals involving practices with fewer than 10 lawyers in which the handful of senior lawyers in the target get a mixture of S&G shares and cash. Today, as a result of steady geographic diversification, more than 40% of S&G's revenues come from outside Victoria.

Being able to offer shares in a listed business, Fowlie insists, makes it easier to put a value on a firm to be acquired and, ultimately, to integrate it. "We can say to them, 'Your practice is going to be worth 5% of Slater & Gordon, here's a 5% stake,' " he says. " In smaller partnerships, you may have someone who has run their firm for 20 years, and it can be hard to say you won't be an equal partner [in S&G]."

For now at least, going public is purely a plaintiffs play. Australia's big commercial firms, including the six generally seen as market leaders, largely remain unconvinced that going public would benefit them. "I don't think it will happen at the major firms," Freehills' Bell says. "There's a sense that you're selling the family jewels. You have to become much more transparent, and we don't need the capital." Robert Milliner, managing partner of Mallesons Stephen Jaques, sees just one clear motive for tapping the public markets: "The only way you can justify floating is if you're doing something transformational to your business, like S&G," he says.

Grech concedes that listing is not a sensible option for all firms, especially since not all firms have a need for capital to fuel growth. However, he warns that too many firms dismiss the idea of an IPO.

"In the early days people were a lot more prepared to dismiss going public, and I think that's foolhardy," Grech says. "To be frank, in our early meetings with regulators and other lawyers, a lot of people were pretty condescending."

S&G may not have spawned a host of imitators, but the condescension is gone. Last April, The Australian, a national newspaper, tipped S&G as one of the 10 "survival shares for investors marooned in a sea of trouble".

If S&G continues to prosper, some of that opposition to floating just may drift out with the tide.

How Australia's big bang compares to the Legal Services Act

Australia may boast the world's only publicly-listed law firms at the moment, but that could soon change in the UK thanks to the Legal Services Act. The Act boils down to four significant provisions. First, it creates a new regulator, the Legal Services Board, to act as the ultimate overseer of the separate regulatory bodies for lawyers. The Act also establishes the Office for Legal Complaints, an independent body to handle all consumer complaints about legal services.

But it is the final parts of the Act that have the most far-reaching potential implications for law firms. This provision will allow firms to form legal disciplinary practices (LDPs), firms that can be owned and managed by a variety of lawyers, including barristers and solicitors, and non-lawyers. It also clears the way for alternative business structures (ABSs), giving firms the right to sell off parts of their equity to private investors, or even go public. LDPs are expected to be introduced in March 2009, and ABSs could be introduced as early as 2010.

As in Australia, the early movers seeking capital from private investors or the public markets are likely to be volume-driven plaintiffs firms – practices that need cash for capital-intensive IT systems or for acquisitions in a still-fragmented market segment.

Irwin Mitchell has publicly stated that it is preparing for the changes in the market. Expecting more non-lawyer competition within the legal marketplace, it has called for the UK Government to move faster on establishing an ABS regime.

For the City's largest international firms, the attraction of outside capital is less clear – besides the obvious lure of a multimillion-pound payday for equity partners.

Many City firms have made significant investments in their international networks, and the individual regulatory regimes in different countries could make accessing external capital difficult. In Germany, for instance, lawyers cannot be in partnership with non-lawyers – a restriction that would rule out external investment for UK firms with large, financially integrated German practices. A Freshfields Bruckhaus Deringer or Clifford Chance would effectively have to move to separate profit centres, undoing previous efforts to build a global network on one lockstep compensation system.

For predominantly domestic firms or those firms whose overseas offices are not fully integrated, going public or selling a chunk of the firm to a private equity house would be more straightforward. Still, the issue comes down to why a firm would need the capital.

Although no top 30 UK firm has been as open as Irwin Mitchell in preparing for the new regulations, the new options for law firms are getting attention. For Olswang, the most immediate attraction lies in forming an LDP and admitting non-lawyers into the partnership. Michael Frawley, managing partner of Taylor Wessing (pictured), says that his firm is keeping an open mind on seeking external investment, but is not yet convinced.

He suggests that the greatest impact of the reforms may be indirect: "Change will come because firms will be forced to reflect on how they operate, and they may be forced down a more corporate route to become as efficient as possible."

Investors are also showing interest. One private equity house, mid-market player Lyceum Capital, has established a supervisory panel that includes former Clifford Chance managing partner Tony Williams to help assess opportunities in the legal market. Australia's Big Bang is starting to resonate far and wide.