CJEU: Financial independence vital
EU states may prohibit external investment in law firms, the Court of Justice of the European Union (CJEU) has held.
Restricting freedom of establishment and free movement of capital was justified by the objective of ensuring that lawyers practise independently and in compliance with their professional obligations, it held yesterday.
The CJEU was answering preliminary questions put by a German court dealing with a challenge to the decision of the Munich Bar Association to revoke the registration of the law firm Halmer. It had sold 51% of its shares to an Austrian company called SIVE.
German lawyers have long been able to form partnerships with members of certain other regulated professions.
Although in 2022 the scope of these multi-disciplinary partnerships was considerably expanded and now includes most liberal professions, law firms are still not allowed to take third-party investment.
Halmer’s articles of association were amended to prohibit SIVE from influencing the legal work. This indicated, the CJEU said, that the sole objective of investment was to “enable it to finance the development of an innovative legal model based on the new technologies”.
The court held that prohibiting “purely financial investors from having the capacity to influence the decisions and activities of a law firm” were “appropriate” to protect the sound administration of justice and the integrity of the legal profession.
Lawyers did not exercise their activities “purely for an economic purpose” and were required to comply with professional conduct rules, the court went on.
This required independence, including financial. “In the absence of such financial independence, economic considerations focused on a purely financial investor’s short-term profit could prevail over considerations guided exclusively by the defence of the interests of the law firm’s clients.
“In addition, the existence of any links between a purely financial investor and a client is also such as to influence the relationship between the lawyer and that client in such a way that a conflict with rules of professional conduct cannot be ruled out.”
André Haug, vice-president of Germany’s Federal Bar Association, said he was “very satisfied” that the ruling “fully confirms” its position – that “the ban on third-party ownership is justified in order to guarantee the independence of lawyers. And that is also the view of the overwhelming majority of lawyers in Germany, as the survey by the Federal Ministry of Justice has clearly shown”.
Matthias Kilian, a professor for legal ethics at Cologne University, told Legal Futures: “Yet to be assessed is the legal situation under German constitutional law now that the case will be referred back to the German courts
“Opening up law firms to multi-disciplinary practice was forced by Germany’s constitutional court, so this a red line the lawmaker cannot cross. The key problem are therefore shareholders who are not actively working but merely investing in a firm.
“While the black letter law appears to make exernal investment impossible, there is a grey area from which those who creatively bend the rules can still benefit. Policy-wise, allowing external ownership to some extent and regulating it properly would be the better approach.”
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