Key insights
- Several states are considering legislation to restrict private equity firms from acquiring law practices, raising concerns about non-lawyer influence and profit extraction. While deal activity in the sector is increasing, particularly in AI and consumer-facing firms, these regulatory efforts could dampen future investment and M&A activity in the legal sector.
Investing.com -- Lawmakers in California, Illinois, and Colorado are advancing legislation to restrict buyout firms and corporate investors from acquiring law practices. The legal response targets a burgeoning investment strategy that allows non-lawyers to influence legal operations through Management Services Organizations (MSOs).
An exclusive report by the Wall Street Journal confirms that in April, legislators in California and Illinois moved to cement prohibitions on non-lawyer control, while a bipartisan group in Colorado pushed similar measures through the House Judiciary Committee.
California Assembly Bill 2305 recently passed the state’s lower chamber, aiming to "close the loopholes" used by corporate investors.
Assembly member Ash Kalra, the bill’s sponsor, stated, "We have seen how private equity has operated in many different industries to extract profit and not reinvest in the long-term health of the industry".
He added that the measure ensures lawyers make decisions based on "clients’ best interests, not the best interests of their investors".
In Colorado, State Senator Lindsey Daugherty expressed similar concerns regarding out-of-state corporate investment. She stated, “I don’t want private-equity investment in law to have the same consequences we’re seeing in the healthcare industry”.
The Colorado bill includes prohibitions on law firms sharing revenue with non-lawyers. Meanwhile, the Illinois General Assembly has passed a bill barring private-equity interference, which is currently under consideration in the Senate.
Despite the recent bills, private-equity deal activity is increasing, particularly for consumer-facing firms and AI-focused startups. Blackstone has invested in the AI law firm Norm AI, while Uplift Investors recently backed a personal-injury firm in Louisiana.
Trisha Rich, a partner at Holland & Knight, noted she has completed 15 MSO transactions recently and is working on a hundred more. She suggested that bill supporters "say the goal is to protect the public, but they’re really worried about their competitors’ getting access to capital".