How do you run a publicly listed law firm?

How do you run a publicly listed law firm? The answer is Gateley

Although law firm IPOs started in Australia, it is in the UK where they have taken off. Five public listings took place in the UK over 2017 and 2018. The largest occurred in 2019 with the listing of DWF.

The first in this batch was Gateley in June 2015.

The partners didn’t run away

One of the greatest risks for a legal business is a loss of fee earners. When partners leave a firm they will typically take their clients and fee revenue with them.

Upon listing, partners will take a cut in remuneration in exchange for shares from which they can earn dividends. If the dividends are low and the prospects of the firm are poor, then partners will leave. Why wouldn’t they, if they can take their clients with them and earn ‘partner’ remuneration in another firm?

In the case of Gateley, they stayed. Almost four and a half years after the IPO, 75 partners of the original 81 who were subject to the IPO terms were still with the firm.

Yes, there were financial penalties for partners leaving the firm(1). For example, they would be subject to a claw back of what they received upon selling their equity at the IPO. These lock-in provisions have proved to be successful and the firm extended them with new agreements in 2019.

On 17 October 2019, the partners agreed to enter into further lock-in arrangement in relation to their shareholdings. 70 partners agreed to be restricted to selling a maximum of 10% per annum of the aggregate number of the Ordinary Shares that they held on Admission for a period of five years from 8 June 2020.

Profitability

Locking-in or penalising partners cannot fully explain this retention. There has to be an underlying successful business to which they also want to stay connected.

The share price of the firm increased from 95 pence at IPO to 161.50 pence as at 22/10/19. This is an increase of 70%.

In its most recent financial year (30 April 2019) the firm generated an EBITDA margin of 18.47% and in the previous year 19.19%. The firm’s policy is to distribute 70% of profits in dividends.

The IPO was at market capitalisation of £100 million on Admission. Market capitalisation as at 22 October 2019 was £183.63 million.

Growth has not only been organic. The firm has made acquisitions along the way. These have added to revenue while profitability has been maintained.

Gateley looks like it has engineered the right model for converting a traditional partnership model firm into a publicly listed business.

Upon announcing the new lock-in arrangements in October 2019, Michael Ward, CEO of Gateley, said: “I am delighted with the overwhelming support Partners have shown in the Group in signing the New Agreement which continues to demonstrate their long-term commitment to the Group. I believe that the New Agreement secures the continuation of a stable platform from which internal and external shareholders can invest with confidence.”

(1) June 2015 IPO Lock-In Arrangements

1. CFE Lock-in Agreement

Under the CFE Lock-in Agreement, each Locked-in Shareholder has undertaken to the Company and Cantor Fitzgerald Europe, not to dispose of any interests in Ordinary Shares for a period of 12 months from Admission and, for a further 12 months thereafter (subject to certain limited exceptions) to deal in their Ordinary Shares only through Cantor Fitzgerald Europe for so long as they are broker to the Company, with regard to maintaining an orderly market in the Ordinary Shares.

2. Second Lock-in Agreements

Under the Second Lock-in Agreements, each Locked-in Shareholder has undertaken to the Company that over a period of up to five years from Admission they will be subject to claw-back and restrictions such that:

2.1 cash will be clawed back on the basis of 100 per cent. in the first year, 66 per cent. in the second year and 33 per cent. in the third year if a Locked-in Shareholder is a “Bad Leaver” or “Retiree” (as defined in the Second Lock-in Agreements);

2.2 Ordinary Shares will be clawed back at 100 per cent. discount to market price in the three years from Admission if a Locked-in Shareholder is a “Bad Leaver” or “Retiree” or at a 75 per cent. discount in the fourth year and a 50 per cent. discount in the fifth year for “Bad Leavers”;

2.3 sales of Ordinary Shares by Locked-in Shareholders who are not “Bad Leavers” or “Retirees” in the first year after Admission will not be permitted and thereafter will be restricted to 10 per cent. in any given year subject to a minimum hold; and

2.4 there will be no restrictions for any Locked-in Shareholders after 5 years from Admission.