The Legal Practice Board of Western Australia has taken the unprecedented step of publicly criticising the planned stockmarket float of Integrated Legal Holdings Ltd, which plans to acquire three Perth law firms.
The Legal Practice Board of Western Australia has taken the unprecedented step of publicly criticising the planned stockmarket float of Integrated Legal Holdings Ltd, which plans to acquire three Perth law firms.
The board's public criticism follows seven months of behind-the-scenes haggling, after ILH released a prospectus for a $14 million initial public offering last October.
It comes just a few days ahead of the expected release of a revised prospectus.
The main promoter of the float, Brett Davies Lawyers' partner Brett Davies, told WA Business News the Australian Securities and Investments Commission had no objections to its revised prospectus, which would be released this month.
The board, which is chaired by Freehills partner Steve Penglis and includes Mr Davies as an elected member, said it continued to have serious concerns with the proposed IPO.
It said that 59 per cent of ILH's total assets of $11.1 million were said to be goodwill.
However it does not accept the sum of $6.5 million reflects goodwill in accordance with the long established legal definition of that concept.
It also noted that goodwill represents only three per cent of the assets of Melbourne law firm Slater & Gordon Ltd, which issued its own prospectus last month for a $35 million public share offer.
The board also expressed concern about the total consideration to be paid to the foundation partners for the sale of their businesses.
It said ILH planned to pay $400,000 for Durack & Zilko, up from $343,000 quoted in the original prospectus and more than an independent valuation provided to the board by ILH's solicitors.
ILH plans to pay $804,000 for Brett Davies Lawyers, up from $604,000 in the original prospectus and, once again, above the independent valuation.
The board's statement did not refer to Talbot & Olivier, which was to be purchased for $2.2 million, according to the October prospectus.
While ILH planned to pay more for the law firms, the amount it planned to pay for information provider Law Central has been nearly halved to $3.3 million.
The board noted that the foundation partners will also receive salary payments, entitlements to a bonus pool and 'competitive shares' issued at a small fraction of the public offer price.
A statement from the Legal Practice Board is pasted below:
In response to media enquiries, the Legal Practice Board of Western Australia ( Board ) makes the following media release:
The Board continues to have serious concerns with the proposed IPO of Integrated Legal Holdings Limited ( ILH ).
The first ground of concern is that the pro-forma balance sheet as at 31 December 2006 states total assets of $11,150,998, of which 59% ($6,586,543) is said to be " goodwill " . That " goodwill " is not the aggregate " goodwill " of each of the businesses to be acquired by ILH, but, as the draft prospectus now states, is the merely arithmetic difference between the cost to ILH of acquiring the businesses less the net fair value of ILH ' s identifiable assets, liabilities and contingent liabilities.
The Board does not consider the sum of $6,586,543 to therefore reflect " goodwill " in accordance with the long established legal definition of that concept.
Compare this, for example, to the Slater & Gordon prospectus where the pro-forma balance sheet for 31 December 2006 shows total assets of $114,392,603 of which " goodwill " represents only 3% ($3,435,083).
The second ground of concern relates to the total consideration to be received by the Foundation Partners (and their related entities) for the sale of their businesses to ILH. On the information available to the Board:-
(a) the consideration payable for Durack & Zilko has increased from $343,000 to $400,000. An independent expert report provided to the Board by ILH ' s solicitors values the business at between $308,000 and $384,000;
(b) the consideration payable for Brett Davies Lawyers has increased from $604,000 to $804,000, notwithstanding the independent expert provided to the Board by ILH ' s solicitors values the business at between $520,000 to $704,000;
(c) the consideration payable with respect to Law Central was previously a cash payment of $4,040,464 and the issue of 3,980,004 shares. This is now reduced to a cash payment of $2,700,000 and the issue of 1,258,096 shares (the later having a deemed value of $629,048). That gives rise to a total consideration of $3,329,046. The independent expert report provided to the Board by ILH ' s solicitors puts the value at between $1,495,000 and $2,525,000.
In addition, the Foundation Partners will each receive: (i) a salary of $100,000; and (ii) entitlement to a 20% Bonus Pool Amount (as that term is defined in the prospectus); (iii) competitive shares in ILH at 0.00001 cents per share, being the same shares that the public will be able to subscribe for at 50 cents per share.
Taking one of the businesses to be sold to ILH as an example, the net effect of all the above is that the two legal practitioners who are the sole equity partners of that business together own a business which is said to be valued at somewhere between $308,000 and $384,000.
In addition, as equity partners, they receive annual distributions arising from the firm ' s annual profit. The documents provided to the Board indicate that this presently totals $394,622.
Under the proposed IPO, the two partners will together receive: (a) a cash payment of $400,000; (b) shares having a deemed value of $1,555,100; (c) a combined annual salary of $200,000; and (d) participation in the 20% Bonus Pool Amount.
After two years, both parties will be free to leave and commence (together if they wish) a firm in competition with their existing firm (subject to certain restraints).
The Board has referred its concerns to the Legal Practitioners Complaints Committee.
