On 19 December 2024, the Grand Chamber of the Court of Justice of the European Union (the “CJEU“) delivered a judgment in Case C-295/23, concluding that Member States may, through national legislation, limit or prohibit the participation of purely economic investors in the capital of law firms (the “Judgment“).
The judgment answers a question referred for a preliminary ruling in Germany, where an Austrian company acquired shares in a German law firm for purely financial purposes, in breach of German law which prohibits the transfer of shares to purely financial investors who are not engaged in professional activities related to the practice of law.
The Austrian company took the view that the German legislation was contrary to European Union law, which led it to bring proceedings before the German courts, giving rise to the abovementioned question referred for a preliminary ruling.
Although this restriction limits fundamental principles and freedoms of the European Union, such as the freedom of establishment and the free movement of capital, the CJEU concludes that such restrictions are proportionate and adequate to protect the essential principles of the legal profession, in particular the professional independence and professional ethics of lawyers.
In relation to Spain, we consider that the Judgment should not have a significant impact, given that both Law 2/2007 on Professional Partnerships (the “LSP“) and the General Statute of the Spanish Legal Profession (the “EGAE“) allow the presence of equity partners in law firms, with the sole exception of “collective firms”, which are limited to legal practitioners practising collectively in a non-corporate form in accordance with Article 42 of the EGAE.
The grouping of professional partnerships is covered by the LSP, but under a series of requirements designed to maintain a balance between capital participation and professional autonomy. Thus, the regulations establish that the majority of the shareholdings must be held by professional members, who, in addition, must have predominant control over the company’s decisions.
The Explanatory Memorandum of the LSP stresses that the fundamental objective is to ensure that these companies operate as the centre where the rights and obligations arising from the legal relationship with the customer are imputed under the company’s corporate name. In this way, a company is defined in the strict sense, expressly differentiating it from media companies, the purpose of which is to share infrastructure and distribute costs. This regulatory design, which allows for the participation of equity partners, emphasises that, despite the economic involvement of these partners, the autonomy of the professionals is preserved.
Compared to the CJEU’s position, other countries have adopted much more flexible approaches, allowing for deeper integration of investors in the legal sector
In particular, the report published by the Sapere Research Group in February 2023 under the title “Alternative Business Structures and Multi-Disciplinary Practices” (the “Report”) is illustrative. The Report analyses in depth the impact of various regulations on the business structures and possible multi-disciplinary practices through which the legal profession is structured in different jurisdictions.
The Report refers to the UK, and specifically to the Legal Services Act of 2007, which introduced the possibility of Alternative Business Structures (ABS), which are organisational models that allow lawyers and non-lawyers to collaborate and share ownership and profits. This reform even allowed law firms to be listed on the stock exchange, promoting competition and innovation in the sector, and facilitating access to external capital. Will we ever see a law firm listed on a Spanish stock market?
In Australia, according to the same source, these innovative reforms began in the late 1990s, and over the years measures such as the ability to group into multi-disciplinary practices and the possibility of investment by non-lawyers in law firms have been implemented. Finally, regulation has been harmonised across the Australian states, creating a regulatory framework that allows for both legal and non-legal services to be provided within the same firm, as well as access to external investment and listing on the stock exchange.
On the other hand, and following the Report, in the United States, most states prohibit business structures with equity partners, following American Bar Association (ABA) Rule 5.4. However, some states have begun to implement significant reforms. The District of Columbia, Utah and Arizona have adopted more flexible approaches, allowing shared ownership between lawyers and non-lawyers. These reforms are aimed at encouraging technological innovation, attracting investment and reducing costs to consumers, while maintaining compliance with the profession’s ethical standards.
Finally, Scotland starts from an approach more similar to Spain, where partnerships between lawyers and non-lawyers have been allowed since the Legal Services (Scotland) Act 2010 with restrictions on ownership, requiring lawyers to own at least 51% of the firm. However, in 2022 the Scottish government recognised the need to further liberalise the market and measures are in place to allow ABSs to adapt.
The position adopted by the CJEU, which prioritises the protection of the professional independence and professional ethics of lawyers, underlines the importance of these principles within the European legal framework.
We believe that it is essential to protect both professional independence and professional ethics.
Notwithstanding the above, the decision finally adopted by the CJEU may constitute a barrier to the modernisation and competitiveness of the legal sector, especially in a global context where other markets are adopting more flexible models adapted to contemporary needs.
At PLA Litigation Funding, we believe it is important to debate the legal model that is desired for Europe based on a position that respects the essence of the profession: independence and technological rigour, which should not be at odds with innovation and economic progress.
While the protection of professional independence is crucial and essential, we understand that it is also necessary to find a balance that allows law firms to adapt to the demands of an increasingly competitive and globalised market. The introduction of more flexible business structures could be a way to encourage innovation and ensure the sustainability of the legal sector in the future, which has at its disposal Legal Finance solutions that remain unknown to the vast majority of law firms.
We conclude with a thought-provoking question: do such decisions contribute to widening the already existing gap between the most and least competitive countries?
Jesús Rodrigo Lavilla – CEO.
Juan Vázquez Uribarri – Junior Legal Analyst.