Will ABSs soon be allowed across the EU?

Some still think of ABSs as a disastrous path, for instance associating them with the recent collapse of Axiom Ince. We have to wait for the official report into the regulatory events leading up to the SRA’s intervention into the firm to see what happened. But Axiom Ince itself was not an ABS, though it acquired the practices of two – Ince Gordon Dadds and Plexus Legal (each with a history of two insolvencies), in April and July 2023 respectively – before it closed.

Others see ABSs as the solution to their problems and have adopted the structure.

The ability of non-lawyers to practise and own law firms is spreading in the US, which has been seen as the bastion of lawyer-only law firms. In 2023, at least 10 US states and DC either considered or implemented programmes to allow non-lawyers to work as legal advocates or own law firms (tinyurl.com/k99jayrf). Two of the largest previously unregulated providers of consumer legal services in the US are the platforms Legalzoom and Rocket Lawyer, which are now regulated in Arizona and Utah respectively, allowing lawyers to participate in them directly.

All of this is by way of introduction to what is coming in the EU, which may also see a radical shift of direction.

Traditionally, ABSs have been frowned upon by European bars. In its response to the original SRA consultation on ABSs, the Council of Bars and Law Societies of Europe (CCBE) said: ‘The CCBE would advise, if this were the question put forward by the SRA, not to go ahead with the ABS project.’ This was despite the fact that, at the time (which was years ago now), some member states already permitted some multi-disciplinary partnerships under certain conditions, and Spain accepted external capital in law firms to a certain extent.

But there is a landmark case approaching in the Court of Justice of the European Union (CJEU) (pictured), which will decide the matter either way for all of the EU – Case C-295/23(tinyurl.com/bdzn3kps). The name of Halmer will trip off the tongue of legal regulators.

That is because the plaintiff in the case is Halmer Rechtsanwaltsgesellschaft UG, a law firm founded by Dr Daniel Halmer, a German lawyer and also founder and managing director of a legal tech company. After receiving its licence to practise law from the Munich Bar Association (RAK) in 2020, the Halmer law firm assigned 51 of its 100 shares to an Austrian limited liability company in 2021. The Munich RAK, which is the defendant in the case, then revoked the plaintiff’s licence to practise, because the Austrian limited liability company was not licensed to practise law either in Germany or in Austria and, under the German Federal Lawyers’ Act (BRAO), was not allowed to be a shareholder in a law firm as a mere financial investor. Although the BRAO has since been revised, none of the revisions related to third-party ownership have changed.

Halmer UG challenged the constitutionality of Germany’s so-called third-party ownership ban (Fremdbesitzverbot) before the Bavarian Lawyers’ Court (BayAGH), as well as the ban’s compatibility with EU law. The BayAGH then requested the CJEU to review the German ban on third-party ownership of law firms.

German regulations currently provide that financial investors may not hold any interest in companies for the joint practice of law (anwaltlichen Berufsausübungsgesellschaften), even if other legal provisions and the company’s articles of association ensure compliance with lawyers’ professional obligations and lawyer autonomy. Halmer UG argued that the German regulatory framework violates EU law, and the BayAGH, in turn, referred the legality of these regulations to the CJEU. It also referred the question of the legality of the German principle obliging professionals to be actively involved in their joint practice companies.

The CJEU will review whether these constraints violate the freedom of capital movement and the freedom of establishment as well as the Services Directive. The court’s decision will also affect any comparable restrictions applicable to other liberal professions.

There are cases which come along from time to time which change the lawyers’ regulatory landscape – for instance, Akzo Nobel (Case C‑550/07 P) (tinyurl.com/36ef5js8). This confirmed that only lawyers in private practice are granted legal professional privilege at European level (and so it is not granted to in-house lawyers, even if more member states permit in-house practice). Similarly, Morgenbesser (C-313/01) (tinyurl.com/5n8pu6pu) confirmed that law students are also allowed freedom of movement and can transfer their law studies to another member state (meaning that they are not obliged to start their studies over again).

It looks as though Halmer, whichever way it is decided, will be another of those landmark cases, deciding the question of ABSs in Europe for a long time.

Jonathan Goldsmith is Law Society Council member for EU & International, chair of the Law Society’s Policy & Regulatory Affairs Committee and a member of its board. All views expressed are personal and are not made in his capacity as a Law Society Council member, nor on behalf of the Law Society