Anthony E. Davis of Hinshaw and Culbertson LLP in New York sent me details of the $125 million bond issue by Dewey and LeBoeuf, which is over-subscribed. Now in the US there is nothing like the Legal Services Act 2007 that enables external investment in law firms. In fact the professional rules expressly prohibit non-lawyers having an interest in a law firm.
Anthony then asked: "Can somebody explain to me why this is different (or should be differently regulated) from raising equity capital?" (ie. as envisaged in the Legal Services Act.)
Well, I suppose the obvious answer is there's no equity. But that's not satisfactory. Imagine if the firm defaulted and had to be restructured. Who would own what, then? Would there be a debt-for-equity swap? Hardly.
The bondholders must be very confident. But then only a handful of firms have gone bankrupt...recently.
I think Anthony is right, Dewey and LeBoef has put itself in hock to outsiders. But as one colleague has said, "Debt be debt and equity be equity. Would it be any different if a firm defaulted on a loan?"
3 comments:
If I were a law firm and have the right to issue bonds and the attractiveness to interest institutional investors, in the present climate I would! Three reasons:
- I avoid [clever] banks who will impose severe restrictive covenants on me
- If I have pre-existing debts, a bond issue will help me better cover these debts.
- Bond holders are not banks and are easier to deal with; terms are usually better than debt terms.
Being beholden to people who fund me (bond holders, investors, banks, shareholders, partners) has to be part of my cost-benefit analysis but if I am large, famous and successful (as a law firm, of course) I would find it hard to say no to "easier" money.
Comment by Anthony E. Davis: The point of my rhetorical question is that it's a matter of degree, not principle, as to the loss of independence to a lender, in the event of a default, or an equity investor unhappy with ROI. Accordingly, it makes little sense in principle for one to be permitted (as it has been historically) and the other prohibited.
I entirely agree (re the distinction made in regulatory approach) as a matter of principle; though it seems to me that the question of loss of independence could be overstated especially when there is over-subscription. How significant the risk of loss of independence would surely depend on:
- how big the offering is
- whether bondholders act collectively (practice seems to show that this does not happen often)
- whether bondholders will change a tradition of a lifetime and give up their arm's length approach to their "investment".
But perhaps current "realities" (which might change) should not dictate a "principle-based" regulatory approach? Nes't ce pas?
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