On the afternoon of May 22, 1969, Dan Lufkin, the 36-year-old investment banker and co-founder of Donaldson, Lufkin & Jenrette, a small research-focused investment banking and brokerage firm, or DLJ as it was known, walked into his first board of governors meeting at the august New York Stock Exchange. He was carrying with him a copy of a document that he had filed two hours earlier with the Securities and Exchange Commision. It was the first step in the process that would transform DLJ from a 10-year-old private partnership, with its stock owned by the firm’s partners and their friends, into a public company with shares that could be bought or sold by anyone willing to do so.
This process, of course, would also allow DLJ greater access to more affordable and badly-needed capital than its partners would otherwise be able to provide—to allow older partners to cash out of the partnership with liquidity events, and to provide a younger generation a series of financial incentives, like stock awards, to stick around the firm. DLJ “is the first member corporation of the New York Stock Exchange to offer its equity securities to the public,” the firm proclaimed on the cover of its I.P.O. prospectus.
DLJ’s decision to sell a portion of its equity to the public—the firm was hoping to raise $24 million—was a direct challenge to a nearly 200-year-old NYSE rule that prohibited member firms, like investment banks and brokerages, from selling stock to the public because the NYSE had to approve all stockholders of a member firm. Obviously, with a public company’s stock being bought and sold nearly every hour of every day, the NYSE would no longer be able to approve, or not, the DLJ stockholders. Lufkin’s move was, in a word, radical.
DLJ was immensely profitable, its competitors soon discovered after devouring the prospectus. In 1969, the same year as the country was being rocked by political protests over the Vietnam war, DLJ earned $14 million in pretax income on revenue of $30.4 million, a pre-tax profit margin of a whopping 46 percent. Lufkin knew that going public was against the NYSE rules and that DLJ could be kicked out of the NYSE club, which, of course, could materially damage its business prospects. The firm hoped that the board of governors would somehow see the situation its way and allow it to remain an NYSE member and also go public.
To try to see if he could ease a path forward for DLJ’s public offering, Lufkin had dinner the night before the board of governors meeting with Bunny Lasker, his close friend and the NYSE board chairman, at Lasker’s Park Avenue apartment. As Lufkin recounted to me a few years ago, Lufkin told Lasker about the plan for the I.P.O., which until then had been a carefully guarded secret. “You’re crazy,” Lasker told him.
“I hope not,” Lufkin replied. “Well, Bunny, we’ve been studying this thing for five years and nothing’s getting done, so nothing is changing about that conclusion, but it’s time we get something done.”
Lasker replied, “Well, I can’t support you. If it comes up at the meeting tomorrow, I’m just going to say, ‘We’re fortunate to have Dan Lufkin, who will be able to explain this.’ That’s all I’m doing.”
The next day, a very nervous Lufkin distributed the I.P.O. documents to the assembled governors. DLJ’s prospectus landed with a thud in the NYSE’s ornate board of directors conference room. Board chairman Gus Levy, who was also the senior partner at Goldman Sachs, was irate, as was Felix Rohatyn, the Lazard rainmaker who was also on the NYSE board. They asked the requisite questions about what could possibly have possessed Lufkin and his partners to make such a rash decision. Lufkin, for his part, explained how DLJ needed a permanent source of capital to grow, to make acquisitions, to redeem the stock of partners looking to leave the business, and to be able to attract new partners. It all made sense, but it was absolute heresy.
After many twists and turns along the way—including getting the NYSE to amend its rules—DLJ succeeded in going public on April 10, 1970, raising $12 million in fresh equity capital from the public.
Will the Revolution Be Legalized?
Wall Street would never be the same. Soon enough, Merrill Lynch went public—front-page news in The New York Times at the time—and one after another, the big Wall Street investment banks followed suit, including Morgan Stanley, Bear Stearns, Lehman Brothers, and eventually Goldman Sachs, in May 1999. Even my old firm, Lazard, bit the bullet and went public in May 2005 and now has a market value of $4.3 billion.
Could the same I.P.O. fever that came to most Wall Street investment banks over the course of a generation, starting with DLJ in 1970, soon descend upon private law partnerships? That’s the thinking of Chris Bogart, the C.E.O. of Burford Capital, the former general counsel at TimeWarner whose firm is one of the leading providers of third-party capital to law firms, including for sharing litigation risks and for buying at a slight discount the unpaid client bills. Bogart thinks Big and Little Law will eventually start a trek to the public markets.
“You’re certainly starting to see the very early glimmers of people, especially on the more entrepreneurial end of the law segment, starting to say, You know, gee, I’ve got a lot of trapped equity in this law firm. I’ve been here for 30 years. I don’t have any good way to exit that equity value. Right now when I retire, I basically just sort of leave it to my partners. It would be interesting if we can follow what the investment banking partnerships did a couple of decades ago and actually equitize the value of the firms. You’re starting to see some green shoots around the concept,” he told me recently. “To me, it’s sort of the natural progression of what’s happened over the last 15 years, which is that law firms are starting to figure out how to use capital intelligently.”
Nothing is particularly imminent, he told me. Bogart doesn’t believe law firms are on the “cusp” of filing I.P.O. prospectuses, but he thinks they are on a “trajectory” to making that happen at some point in the not-too-distant future, just as investment banks were decades ago. And he sees similarities between law firm partnerships today and the private investment banking partnerships of yesteryear. They are biggish, profitable businesses, and have been for years, with EBITDA margins as high as 60 percent (or higher) for the best firms—the kind of conservative, steadily profitable income statements that equity investors love.
They are also involved in more firm-to-firm mergers and don’t have an easy way to determine relative value. A public equity security, trading in the public market, would make mergers between law firms much easier to consummate. And then, just like with DLJ, a public currency would give retiring partners in a law firm a way to cash out (they could just sell their shares in the market) and offer associates and younger partners an additional form of compensation that would help bind them to their firms, which could be especially useful during the long grind and the punishing hours of a Wall Street lawyer’s life.
In the meantime, bizarre institutional barriers exist, particularly in the form of state bar associations, which currently prevent law firms from going public. Just as the New York Stock Exchange had a rule that it had to approve of all the equity partners at an investment bank once upon a time, Bogart noted that the state bar associations in 49 of 50 U.S. states prevent third-party equity ownership of law firms. But, he said, that may be changing now that Arizona, of all places, has changed the rules and will allow outside ownership of law firms with an office in the state. The change in the Arizona regulation was approved by the Arizona Supreme Court in August 2020 and went into effect in January 2021.
The idea behind the change, supposedly, was to “make it possible for more people to access affordable legal services and for more individuals and families to get legal advice and help,” according to a statement issued by the chief justice of the Arizona Supreme Court. “The new rules will promote business innovation in providing legal services at affordable prices.” And, although it was unsaid, allow law firms with an Arizona nexus to go public.
Bogart told me that, thanks to Arizona’s move, he’s starting to see a modest amount of activity that may result in a law firm, with ties to Arizona, going public. He said he didn’t think the most prestigious Wall Street law firms, such as Cravath or Wachtell or Weil Gotshal or Paul Weiss, would be creating a nexus with Arizona anytime soon just so they could go public. Rather, he said, he thought a smaller, more litigation-focused or plaintiff’s law firm, with a tie to Arizona, might be the first to test the I.P.O. market. He suggested that a big litigation firm, like, say, Quinn Emanuel, might be an early mover. (Although Quinn Emanuel does not have an Arizona office.) “What I assume is going to happen next is somebody somebody sizable, but not blue chip, is going to use the Arizona loophole,” Bogart said. “Maybe a big plaintiff’s firm, for example, one of the contingency fee plaintiffs firms that doesn’t care about the fact that people might say, ‘Oooh you used the Arizona loophole,’ [to go public]. But once that gathers a little bit of momentum, I have to believe the partners [at other firms] will start to say to their state bars, ‘Hey, you know, why not? What’s wrong with me being able to take my equity off the table?”
For some reason, which is not exactly clear, law firms in the U.K. have no such restrictions, and several relatively large law firms there have tapped the public markets. (Bogart’s firm has provided capital to U.K. law firms.) In March 2019, DWF Group plc, a global law firm based in Manchester, England with some 4,000 employees and with 31 offices around the world, went public in a £95 million I.P.O., valuing the firm at £366 million, making it the largest publicly traded U.K. law firm. (Since then, its stock is down 43 percent; its valuation is now £245 million.) Keystone Law Group, also in the U.K., went public in 2017. It has a market value of around £170 million. In April 2021, an even larger U.K. law firm, Mishcon de Reya, with some 600 attorneys and more than 220 partners, voted to go public in what was expected to value the firm at something like £750 million. The firm hired JPMorgan Chase to advise on the I.P.O. But in January 2022, the firm put off its plans for the I.P.O. due to “market conditions,” the firm said, although it did not rule out the I.P.O. happening at some point in the future.
“The Evils of Money”
Ironically, even though top lawyers at the top Wall Street law firms have been raking in the dough lately—paying them as much as $4 million a year, or more—Bogart said he thinks firms have been dissuaded from using the Arizona loophole on account of, as he put it, “the evils of money.” He explained the thinking: “Lawyers are not about the money”—I spit out my tea, but okay…—“Lawyers are higher than the money. They’re about the nobility of the profession. And once you introduce grubby money into the mix, then ‘Oh my goodness, you’ll change the incentives.’”
But as the largest capital provider to the legal industry, Bogart said it’s just a matter of time before U.S. law firms follow the route paved by their U.K. brethren and their investment banking cousins. “As there’s demand for equity capital, just like we provided it in the U.K., we will happily provide it here,” he said. “And there are lots of investors who are interested in exposure to the legal industry. It’s relatively low risk. It’s pretty low vol. And it is pretty high margin.” So, he concluded, it’s just a question of when, not if. “But these are lawyers,” he said. “So don’t don’t hold your breath for right now. Don’t hold your breath for an avalanche tomorrow.”