Illinois lawmakers have passed legislation governing management services organisations (MSOs), structures increasingly used by US law firms seeking outside investment.
Legal services consultant Crispin Passmore said the law should be viewed as an endorsement of properly structured MSOs rather than a threat to the model.
Illinois lawmakers have passed legislation aimed at curbing the influence of private equity investors in law firms, in a move that could have implications for Chicago, one of the largest legal markets in the US.
The bill mainly targets management services organisations (MSOs), a structure that can allow law firms to spin out non-legal, back-office operations into an MSO which can be owned by outside investors.
Under the legislation, entities not owned by lawyers would be barred from interfering with lawyers’ professional judgement, controlling hiring decisions or charging fees linked to a law firm’s fees, revenue or profits. The current bill, however, only applies to firms with less than $300 million in annual revenue, raising questions over how far it would affect Big Law.
Because most US states prohibit non-lawyer ownership of law firms, MSOs have emerged as one of the main routes for external investment into the legal sector.
Interest in the model has grown in recent years. Last year, reports emerged that Chicago-headquartered McDermott was exploring a transaction involving an MSO structure, and that New York firm Cohen & Gresser was also exploring external investment.
The model differs from the UK's alternative business structure (ABS) regime, which permits non-lawyers to directly own and invest in regulated law firms subject to regulatory approval.
Time to act
State Senator Michael Hastings, a Democrat who sponsored the bill, said: “Private equity companies are starting to get creative with how they influence law firms. It is time for Illinois to act decisively and shut down this loophole that is being abused.”
The bill will now progress to the governor of Illinois for further consideration. Illinois is among a growing number of states seeking to regulate MSO structures, with similar legislation under consideration in California and Colorado.
Arizona and Utah are the only states that currently allow non-lawyers to invest and own legal services through an alternative business structure.
A matter of principle
Crispin Passmore, founder and chair of legal consultancy Passmore & Oliver Partners, said the legislation largely restates existing ethical obligations rather than creating new restrictions.
"It is already common ground that in an MSO structure, attorneys remain in control of the law firm and the practice of law, there can be no fee sharing between the law firm and the MSO, and the independence of the lawyers must not be interfered with,” he said.
According to Passmore, any properly structured MSO should already comply with those principles.
Rather than deterring external investment, he believes the legislation could provide greater certainty for firms considering the model.
“My view is that any US law firm wanting to seek external capital to accelerate growth can still do so,” he said. “Rather than see this as a threat to the MSO model, I see it as an endorsement of a properly structured approach.”
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