Law Business Structures – Challenges in ASEAN

by Hanim Hamzah, Regional Managing Partner, ZICO Law

In 2014, the IBA commissioned a mammoth report on Global Cross Border Legal Services that comprehensively covers information about over 90 countries and 160 jurisdictions on the regulation of domestic and cross-border legal practice. What the report confirms is the transformation of legal practice, and thus legal businesses, following the 21^st century globalization of industries and services.

For the ten Association of Southeast Asian Nations (ASEAN) where ZICO Law operates – comprising four common law based systems, three on civil laws, and another three are hybrids of both common and civil law – the ideal of ‘one legal framework’ to find single common ground remains a considerable challenge. Under the ASEAN Framework of Services Agreement (AFAS) in 1995, member countries undertook commitments not to enact regulations that restrict trade in services – but note the obligation is a negative rather than a positive one.

For example, today, nearly 24 years since AFAS was signed, Brunei, Cambodia, Indonesia, Malaysia, and the Philippines still require law businesses to be formulated in pure law firm partnership structures owned by licensed local legal practitioners. While Singapore, Thailand and Vietnam allow for a variety of structures, including ownership of law businesses by non-local legal practitioners, certain restrictions including protection in practice areas such as conveyancing and litigation remain in place. At the end of the spectrum, we have Laos and Myanmar that permit non-legal practitioners to establish and provide legal services.

Why is this important?

1. Increased sophistication in client requirements:  Arguably, as clients continue to demand sophistication in legal services, regulation allowing robust ownership structures for law businesses enables them to grow and acquire investment for effective legal technology and best practices.   Ultimately, and as confirmed by the IBA report, governments and bar associations play catch-up, and are often slow in getting the necessary law and regulation changes in place.
2. Owner vs manager dilemma: The traditional law firm structure (where the equity partner plays the dual role of owner and manager) becomes problematic if the manager role must take a back seat to the owner actor, or vice versa. This can result in a negative bias with regard to the opening of new offices, large investments in technology, and the hiring of expensive talent. Instead, owners will most likely focus on other, directly impactful investments that are both conservative and ‘economically-justifiable’.
3. Go-to market financing terms:  Having the ability to obtain best financing arrangements is vital to the survival of an increasingly dynamic and competitive legal services industry.  For the traditional structures, the deployment of funds requires considerable time and engagement before fruition.  Without the reporting requirement commercially required from most common business structures, there is no financial transparency for credit ratings. Thus the traditional route of partners’ equity injection and banking overdrafts may result in funders taking on debt based on non-transparent data and under-performing services.
4. Talent acquisition and retention strategies: Legal practitioners of today may not have the patience to withstand 8 to 10 years of long hours working over weekends-type of grueling practice for the climb to the top of the partnership ladder. A more flexible and resilient legal business structure will allow more accelerated, performance-based talent acquisition and retention strategies.

Conclusion

Given the difficulties in navigating different regulatory and legal systems in ASEAN, some countries will be ahead when it comes to the liberalization of legal services. Law businesses must be astute about the needs of their clients who are crossing borders and require good legal representation. Rather than waiting for governments to play catch-up, we must be open to networks and collaborations built on solid legal foundations on the provision of access to justice.

Ultimately, the success of any law business will not only depend on efficient structures, but also understanding and preparing for business challenges in terms of supply, demand and talent.