An Alternative ABS Structure for Better Legal Business

Alternative Business Structures (ABS) is all the debate right now in Ontario, with a current discussion paper released by the law society. Over 40 responses were received from various organizations and stakeholders. The interim report presented to convocation in February included a wide range of views on ABS, from strongly for it to staunchly opposed.

The incentives for adopting ABS appears to primarily be for the purposes of attracting capital and promoting access to justice. The report references an alternative to plain ABS called ABS+, to focus specifically on how this capital could be harnessed to address those living in poverty. Without this explicit focus, some have noted that ABS has the potential to make access to justice worse and accentuate the problems in the legal system,

…ABSs risk only providing trickle down benefits to Ontarians living in poverty because when their legal needs are distinct from those of paying clients, ABS innovations will not serve them, and may even widen power imbalances between the most poor and others experiencing civil needs.

The discussion paper presented 4 different models of possible ABS structures for Ontario:

• Model #1 – Business entities providing legal services only in which individuals and entities who are not licensed by the Law Society can have up to 49 per cent ownership.
• Model #2 – Business entities providing legal services only with no restrictions on ownership by individuals and entities who are not licensed by the Law Society.
• Model #3 – Business entities providing both legal and non-legal services (except those identified as posing a regulatory risk) in which individuals and entities who are not licensed by the Law Society would be permitted up to 49 per cent ownership.
• Model #4 – Business entities providing both legal and non-legal services (except those identified as posing a regulatory risk) in which individuals and entities who are not licensed by the Law Society would be permitted unlimited ownership.

However, the issue of how to accomplish ABS+ may be less about the specific model of ABS employed and ownership concerns than the regulatory constraints provided upon any of these structures.

A corporation is a legal fiction, a creation of statute. A democracy chooses to allow the creation of corporations because they presumably provide some social function [unless one subscribes to the body politic doctrine]. William Blackstone stated in his 1765 Commentaries on the Laws of England,

…it has been found necessary, when it is for the advantage of the public to have any particular rights kept on foot and continued, to constitute artificial persons, who may maintain perpetual succession, and enjoy a kind of legal immortality.
[emphasis added]

Corporations in Canada are not provided an entirely free hand in the free market, and are subject to significant regulation. Concerns about corporations suppressing market forces date back to at least Adam Smith’s The Wealth of Nations in 1776, and are not unique to the legal industry.

The Task Force to Modernize Securities Legislation in Canada stated in their 2006 report,

Regulators should only intervene in the capital markets to address existing market failures or to address anticipated market failures.

The Task Force goes further and states that market forces themselves are usually effective in promoting behaviours and conditions by penalizing behaviours which harm the market, a conclusion which is largely suspect and certainly not one which regulators would blindly adopt following the 2007 crisis. But the recommendation of the Task Force on regulation includes what could be called a continuous quality improvement approach towards anticipatory problems in a market,

The Task Force recommends that rules that are enacted in anticipation of a market failure should be revisited on a regular basis to determine whether market forces continue to be unable to address the issue in the absence of regulatory intervention.

The anticipated concerns about ABS, which include lack of confidentiality, diminished professionalism, conflicts and market consolidation, all can be addressed by the limitations imposed upon the business structure adopted. In other words, if ABS+ is the only approach which justifies the law society’s mandate to serve the public interest, then all of the profession’s concerns can theoretically be protected through proper regulation and an explicit focus on Corporate Social Responsibility (CSR).

Skeptics may still wonder why capital would choose to allocate itself along the lines of an ABS+ model, if the focus of any such corporations is to ultimately serve the public interest. The growth of Socially Responsible Investment (SRI) and search for ethical funds demonstrates a clear market demand for corporate enterprise with some returns, but with an altruistic goal.

ABS+ allow for lawyers and even law firms to own part of these entities (an opportunity perhaps some in the legal community overlook), but also allow others to align themselves with the much maligned legal system. This is perhaps the best way that Canadian lawyers can work to help change their image. Accountability of these corporate entities is enhanced, as it is generally in corporate law, through a separation of ownership and control. And this is the reason why control features so prominently in the 4 models proposed by LSUC.

According to the 2014 Eurosif report, what appears to inhibit the growth of SRI globally is the concept of the fiduciary duty. Imprecise regulation in the U.K. interpreted fiduciary duty to maximize financial returns, and business ethics are assessed only in the context of long-term sustainability. The U.K. Law Commission concluded,

The law does not prevent trustees from taking a long-term view when setting investment strategies. They are free to take account of Environmental, Social and Governance issues or ethical factors where they are financially material or where the tests we have set out are satisfied.

Canada has more legal flexibility than the U.K. or the U.S. in this regard. The 2008 decision in BCE Inc. v. 1976 Debentureholders clarified that the duty of the directors is to the corporation. Where the interests of stakeholders conflict, the duty reverts back to the corporation itself. The best interests of the corporation can include shareholders, employees, creditors, consumers, governments and the environment.

Where a corporation is created specifically to enhance access to justice, it may be possible that this priority and these stakeholders take priority as the interest of the corporation above all other stakeholders, especially if this corporation is subject to oversight from the law society. This corporate “person” would be subject to all of the same ethics and obligations of natural persons governed by the same regulator. Corporations do not earn profit through goods or services, but only for goods and services that provide value to the consumer. The competency and contribution that an ABS+ provides to society, and to the legal community, is central not only to its creation, but its ongoing existence.

This possibility, of a CSR type of ABS+, was one I introduced to the student body at UBC Law this week in a class on access to justice. The corporate entity is a means to an end, not the end of itself, and ABS+ may be the means through which many of the challenges facing the legal community are addressed. In other jurisdictions these types of structures have been employed successfully, albeit outside of the legal sector. The German Aktiengesellschaft (GA) has a two-tier board structure with 50 per cent worker representation on the upper-tier supervisory board.

What is clear in this sharply divided debate is that ABS+ will not operate properly or at its optimal value to the legal community and society at large without proper support from licensees. As much as these structures will have the public as their primary stakeholder, they will still depend on lawyers as a whole to participate fully in these structures, including in unpaid roles. Voluntary initiatives typically generate a higher level of compliance than regulatory instruments alone, and provide corporations greater flexibility to meet social needs. This will include lawyers who may offer pro bono services through these structures, and the many unpaid lawyers who will assist with regulating and scrutinizing their activities.

The vigorous debate around ABS actually comprises of a voluntary public service to ensure that if these structures are launched in Canada they are done so with the public interest in the forefront, and without any compromise to the values of the profession. Whether this can be practically executed is yet to be determined, but the answer is not necessarily in the type of structure that ABS employs, but rather for the purpose for which it is created. That purpose, which will only be found in the theoretical regulations enabling such structures to exist, is what the debate is really about.

Note: Although I am a member of the Ontario Bar Association’s working group on ABS, these comments are my own and do not reflect that of the organization or the committee.