Incorporated law firm shareholding
On reviewing Part 1 of the Lawyers and Conveyancers Act 2006 concerning the incorporation of legal practices, I was amazed to see that there is no express provision permitting family trusts to hold non-voting shares in incorporated legal practices.
The concept of allowing relatives (for example, children) to hold non-voting shares directly does not make any sense at all given that, from a prudent family/estate planning perspective, it is inappropriate for young children to hold shares directly in an operating company. Certainly, as lawyers we would be foolish to suggest such a strategy to clients who are proprietors of trading companies. Yet, thanks to this legislation, it appears we are being compelled to go down that path.
Whilst the act does not expressly permit a trust to act as a shareholder, it may have been possible to achieve this outcome if all the trustees, as legal owners of the non-voting shares, were "relatives" as defined. However, to add insult to injury, the draft "incorporated law firm regulations" (drafted by the New Zealand Law Society itself) expressly provide that "a shareholder in an incorporated law firm must hold his or her shares in his or her own right and not in trust for any other person" (regulation 5).
It is my understanding that chartered accountants operating through incorporated practices are entitled to have family trusts holding shares in their practices (even voting shares) with consequent benefits. Why is it that the accountants managed to negotiate such a favourable outcome, yet a professional body comprised of advocates seems to do a mediocre job of looking after the interests of its own members?
John Hart
Barrister, Auckland
NZLS response
The NZLS did, in fact, make strenuous efforts in relation to the issue of incorporated law firm shareholding raised by Mr Hart and these have been referred to in various communications with the profession.
In the Lawyers and Conveyancers Bill as introduced, only lawyers actively involved in an incorporated law firm could be shareholders. The NZLS pressed hard for a relaxation of this to enable non-voting shares to be held by relatives of the lawyers concerned and also by qualifying family trusts (namely, trusts established primarily for the benefit of relatives of actively involved lawyers).
The select committee accepted the first limb but not the second.
The following points can be made in relation to Mr Hart's third paragraph:
• Regulations relating to incorporated law firms will not now contain an express prohibition against shares being held in trust.
• However, there is a reasonable inference that the reference to shareholders in the definition in the act of an "incorporated law firm" extends to beneficial ownership as well as legal ownership. The NZLS has an opinion from senior counsel confirming this.
• This is not an area where boundaries should be pushed, as the consequences of an incorporated legal practice ceasing to come within the definition of an "incorporated law firm" could potentially be very serious.