Law Firm Subsidiaries: Legal And Viable?

Law firms are increasingly branching out and forming subsidiaries to expand their services and compete in the growing market for alternative legal services. This trend is particularly prominent among American law firms, which face fierce competition from non-law firm service providers, consulting firms, and the Big Four accounting firms. These subsidiaries are wholly owned by the law firm and often run by one of its partners, serving both law firm clients and independent clients. Law firms create subsidiaries to provide specialized legal services, such as estate planning, and to collaborate with professionals from other disciplines, including consulting and accounting. This multi-disciplinary approach helps law firms meet the evolving needs and expectations of their clients, who increasingly seek efficient and effective legal services that intersect with business priorities, economic analysis, and public policy.

Law firms branching out

Law firms are branching out by forming subsidiaries, affiliates, and multi-disciplinary practices (MDPs) to meet the evolving needs of their clients and stay competitive in the legal services market.

Subsidiaries are consulting or service arms that are wholly owned by the law firm, often run by a partner in the firm. They can serve law firm clients or independent clients and may focus on a specialized area of law. For example, a St. Louis-based corporate law firm, Lewis Rice, formed a subsidiary law firm, TuckerAllen, for estate planning work. TuckerAllen offers packages that include wills, beneficiary deeds, medical directives, and powers of attorney at a fixed price.

Affiliates are typically used to refer to joint ventures with shared revenue and profit, while MDPs are practices that employ high-level experts from outside the legal profession to provide a fuller service option to clients. Law firms are increasingly adopting these structures to address the growing demand for efficiency, collaboration, and expertise beyond traditional legal services.

The expansion of law firms into these new business structures is driven by increasing competition, not just from other law firms but also from non-law firm legal services providers, consulting firms, and the Big 4 accounting firms, which have some of the largest law firms outside the U.S. Regulatory restrictions in the U.S. have prevented American law firms from entering into partnerships or financial relationships with non-lawyer firms or individuals, except in the District of Columbia. However, law firms in other regions, such as Canada, Europe, and Australia, have enjoyed more lenient regulations, allowing them to establish MDPs.

Despite the regulatory challenges, U.S. law firms are finding innovative ways to service their clients using multi-disciplinary talent and tools. This evolution in the legal industry demonstrates the changing dynamics of the profession and the increasing intersection of legal services with business, consulting, and other areas of expertise.

Multi-disciplinary practices

Law firms are increasingly branching out and forming ancillary businesses to meet the evolving needs of their clients. This expansion is driven by the growing demand for alternative legal services and the increasingly complex global regulatory landscape.

In the United States, regulatory restrictions have prevented law firms from forming partnerships or financial relationships with non-lawyer firms or individuals, except in the District of Columbia. However, there are at least 67 law firm wholly-owned subsidiaries run by law firms and primarily based in the United States. These subsidiaries are often founded and run by a partner in the law firm, serving both law firm clients and, in some cases, independent clients.

In contrast, law firms in Canada, Europe, Australia, and soon Africa, Latin America, and the Middle East enjoy more lenient regulations that allow for MDPs. These firms can collaborate with consulting and accounting firms or individual professionals to provide expertise that complements legal services.

The Solicitors Regulation Authority (SRA) in the United Kingdom provides guidance on the regulation of non-reserved legal activity within MDPs. The SRA takes a flexible approach, considering the risks posed by specific circumstances while adhering to their regulatory objectives and principles. They assess each case individually, determining whether to include or exclude certain activities from their regulated activity.

Wholly-owned subsidiaries

A wholly-owned subsidiary is a company that is entirely controlled and owned by another entity, known as the parent or holding company. This means that the parent company holds 100% of the subsidiary's shares, giving it full control over the subsidiary's operations, strategies, and finances. For instance, The Walt Disney Company owns 100% of Marvel Entertainment, making Marvel a wholly-owned subsidiary.

In the context of law firms, a wholly-owned subsidiary refers to a consulting or service arm that is wholly owned by the law firm. These subsidiaries are often founded and run by a partner in the law firm. While clients served are mostly law firm clients, some subsidiaries also serve independent clients.

From an accounting standpoint, a wholly-owned subsidiary is a separate legal entity, and thus, it maintains its own financial records, bank accounts, and tracks its own assets and liabilities. The financial results of a wholly-owned subsidiary are reported on the parent company's consolidated financial statement. This allows the parent company to present a unified financial position while maintaining distinct financial operations for each subsidiary.

Regulatory roadblocks

Law firms are facing regulatory roadblocks as they attempt to innovate and adapt to meet evolving client needs. These regulatory challenges are particularly prominent for American law firms, which face restrictions on forming partnerships or financial relationships with non-lawyer entities. This stands in contrast to the more lenient regulations in other parts of the world, such as Canada, Europe, Australia, and soon Africa, Latin America, and the Middle East, where multi-disciplinary practices (MDPs) are permitted.

One significant regulatory roadblock for American law firms is the restriction on ownership structures. Law firms are typically organized as professional corporations or limited liability companies, and they face limitations on owning interests in other entities. For example, Rule 1:21-1A does not expressly grant a professional corporation the power to own an interest in a limited liability company, creating challenges for firms seeking to form subsidiaries or affiliate with other businesses.

Another regulatory challenge relates to the ethical considerations of lawyer-client relationships. Law firms must navigate concerns about confidentiality, undivided loyalty, and potential conflicts of interest when exploring alternative ownership structures or forming subsidiaries. To maintain the integrity of the lawyer-client relationship, it is crucial to disclose the ownership/subsidiary relationship in all subsidiary advertising, marketing materials, and initial client interactions.

Additionally, regulatory roadblocks can hinder law firms' ability to innovate and adapt to changing market demands. With the increasing complexity of legal issues and their intersection with other areas like business priorities, economic analysis, and public policy, law firms recognize the need for multi-disciplinary approaches. However, regulations may limit their ability to collaborate with experts from other fields or integrate new technologies, potentially impacting their ability to meet client expectations and remain competitive in a rapidly evolving legal services market.

Despite these regulatory challenges, some law firms have found creative ways to structure their businesses and meet client needs. For example, the concept of wholly-owned subsidiaries has emerged, where a law firm establishes a separate legal entity to provide specialized legal services or explore new practice areas. This approach allows law firms to expand their service offerings while maintaining ethical standards and regulatory compliance.

Client expectations

In the context of a law firm as a subsidiary, client expectations of loyalty and confidentiality may be impacted by the structure and relationships within the organization. For example, if a law firm is a subsidiary of a parent corporation, it is crucial that the law firm maintains its independence and does not allow its legal advice or actions to be influenced by the parent corporation's interests. The law firm must ensure that it acts in the best interests of its clients and not solely in the interests of the parent corporation.

Additionally, clients expect that any confidential information shared with the law firm subsidiary will be protected and not shared with the parent corporation or other affiliates without their consent. This expectation of confidentiality extends beyond the immediate lawyer-client relationship and includes interactions with the law firm's constituents, such as officers, directors, employees, and shareholders.

To meet client expectations, law firms operating as subsidiaries should implement ethical walls and conflict-checking procedures to identify and mitigate any potential conflicts of interest. They should also be transparent about their ownership structure and ensure that clients are aware of any relationships with parent corporations or other subsidiaries.

Furthermore, clients expect that their lawyer will not simultaneously represent their litigation adversary, even in unrelated matters, as this could compromise the level of trust and confidence in the lawyer-client relationship. Clients expect their lawyer to obtain informed consent if a potential conflict of interest arises and to withdraw from representation if necessary to protect the client's interests.

In summary, client expectations of a law firm operating as a subsidiary focus on maintaining the duty of loyalty, preserving confidentiality, avoiding conflicts of interest, and obtaining informed consent when necessary. Law firms should be transparent about their structure and diligent in ensuring that their clients' interests are protected.

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