The decision to allow fee sharing with non-lawyers paves the way for companies to invest in law firms and provide services.

Mark Smulian asks which practices can expect to benefit

Will the corporate world of rebellious shareholders, obstreperous non-executive directors and outside accountability come to law firms after the Law Society's decision to allow fee sharing with non-lawyers (see [2003] Gazette, 23 October, 1)?

This opens the door to arrangements where, for example, capital can be introduced to a firm as an investment, rather than a bank loan or overdraft, with the lender taking a share of the profits in the same way as would a shareholder in any other business.

Services could also be provided - for example, an IT company might supply equipment in return for a profit share.

Under the Society's proposed rule - the detail of which will be considered at its council meeting starting on 17 December - the agreement reached with an investor must not influence or constrain the solicitor.

There is no limit on the level of fees that can be shared, but draft guidance says solicitors should assess whether what is agreed endangers their duties to act independently and in clients' best interests.

The Society will be able to ask for details of any arrangement reached and for this risk assessment.

A Society spokesman says the new rule will 'significantly help solicitors secure the necessary capital to develop their businesses'.

So, will venture capitalists be beating a path to the door of every high street firm?

Not according to Nick Jarrett-Kerr, a consultant at London-based Edge International and chairman of the Society's law management section, who helped to pilot through the change.

He anticipates that this will be a facility mainly for the largest firms.

He says: 'There is demand, but from what I understand, [a firm] needs to have a turnover of about 10 million to interest anyone in venture capital and there are therefore only about 150 firms in the country in which venture capitalists are likely to be interested.

'If a high street firm can persuade someone's rich aunt to invest, they can now do so, but that is probably all.'

Firms that do get into deals with venture capitalists are in for a surprise, he says: 'The big learning curve will come if the venture capitalist wants to insist on seats on the board.

That would be quite a rude shock for most law firms, which would have to behave in a more corporate and commercial way than they are used to.'

Mr Jarrett-Kerr, a former chairman and chief executive of leading west country firm Bevan Ashford, who since last year has worked as an adviser on the management of law firms, says: 'Anything that levels the playing field with competition outside is to be welcomed.

'Many [non-practising] people pursue quasi-legal services which are law based but do not require a practising certificate.

This change is helpful if lawyers are going to compete.'

He maintains that venture capital will appeal in particular to large firms that need to compete against external operations.

'For example, the RAC is saying that it wants to recruit 150 lawyers.

It has recourse to almost unlimited investment and if a law firm is going to compete, it has got to take in outsiders.'

The change will relieve a situation in which law firms have been constrained in a way that other professions have not, Mr Jarrett-Kerr suggests.

'Accountancy firms can call themselves accountancy firms so long as 51% of their partners are accountants, but for law firms it is 100% and I suppose this is one way to free that up,' he says - and, of course, multi-disciplinary partnerships are potentially on their way via the Clementi review.

Although there are, in Mr Jarrett-Kerr's view, many under-capitalised practices which would be happy to receive outside funds, they may need to consider hard the terms investors demand because of the need to generate enough profit to pay outside investors on top of other commitments.

'A lot of firms are not nearly profitable enough to interest investors, and would partners accept the excess going to someone else?' he asks.

He says partners earning 70,000-80,000 a year might decide that they could take a cut in their pay to allow for payments to investors whose money would in the long term expand their firm.

But a partner who enjoys that sort of remuner-ation is probably in one of the top 100 or so firms, he points out.

'If you are earning 40,000 a year and the outside investors come in and then you take home only 30,000, most partners then are going to decide to struggle on as best they can without,' he says.

'I'm advising some firms that are looking at outside investors.

But the profession's house must be in order or it will not be attractive to outside investors.'

However, it may not only be the largest firms that look to exploit this opportunity.

Andrew Holroyd, a partner at Liverpool firm Jackson & Canter and chairman of the Law Society's standards board, who piloted the change through council, says: 'City firms have shown a lot of interest, but anyone seeking an outside investor will look at it.

'Some small firms have very big ideas and some sole practitioners are very entrepreneurial.' There are, he explains, 'sole practitioners and sole practitioners; I know of one who employs about 600 people doing bulk work'.

Mr Holroyd concedes that it is 'difficult to know how this will go and how many people will pursue it.

The strategy of the Law Society is to allow solicitors to provide services in a free way as long as it does not conflict with their duties as solicitors'.

Giles Rubens, of London-based legal consultancy Hildebrandt, says each firm would have to make a judgement on whether the benefits of attracting outside capital would outweigh the constraints it would place on it.

'The obvious things are things such as IT firms providing equipment and in return taking some cut,' he says.

'We may see that arrangement but I slightly question the demand for it.'

Mr Rubens says law firms have been unhappy about taking on large amounts of debt because of their uncertainty about servicing in the long term.

Areas where fee sharing might apply are those such as bulk conveyancing, 'if you needed heavy investment in technology where the service is as much about the technology as the legal service and is moving away from the traditional law firm', he speculates.

Another possibility is that IT partners might invest in 'some very high-value on-line services'.

Indeed, the opposite might happen where an IT firm sets up a service 'and then needs some lawyers to run it', as fee sharing widens competition generally.

Mr Rubens says: 'The way is open for new forms of competition.

The most interesting thing about this is competition really opening out.'

Nonetheless, he remains sceptical about the demand from law firms for external funds.

'It is a possibility for a firm with a very large amount of work in progress involved, like in a personal injury firm, where there is a cash-flow issue,' he says.

'But are there advantages in equity investment rather than other ways of funding? I'm not terribly persuaded.'

If venture capital companies are interested in fee sharing, what of the traditional source of law firm loan capital - banks?

William Arthur, the director of professional practices at Barclays, says it is unlikely banks will be very interested in fee sharing.

He says: 'Banks make money from banking, although the venture capital arms of banks might take stakes.'

He points out that there are disadvantages to taking on investment through fee sharing.

'I think firms will think very carefully about fee sharing because equity investment is more expensive than any other type of capital,' he says.

'If things go wrong, it is the last thing that gets paid back after bank debt and charges, hence it comes at a price.'

However, he acknowledges that firms looking for a capital injection to fund expansion or specific projects will think of using it.

Tim Roberts, a partner at London-based law firm Plexus, which specialises in working with the insurance industry, calls fee sharing 'good news but only a small move'.

He was particularly looking for action on referral fees, where the Society has decided against reform.

'Lord Falconer talks about opening up the legal profession but fee sharing is a very small part of that because I don't think the banks and lenders are there for what law firms need,' he says.

Large law firms may be about to have a windfall of external money.

It remains to be seen if this wind also blows cuckoos into their nests.

Mark Smulian is a freelance journalist