Key Takeaways:
Illinois is set to become the second state this year to restrict how private equity firms invest in law firms, targeting a loophole critics say allows outside investors to control legal practices.
Illinois lawmakers on Saturday passed House Bill 5487, sending the legislation to Democratic Governor JB Pritzker for a signature or veto within 60 days. The bill, which passed the Senate 39-19 and the House 75-39, targets management-services organizations, or MSOs — structures that private equity firms use to provide capital to law firms while skirting state bans on non-lawyer ownership.
"Private-equity companies are starting to get creative with how they influence law firms. It is time for Illinois to act decisively and shut down this loophole that is being abused," state Senator Michael Hastings, a Democrat and the bill's chief sponsor, said in a statement.
The legislation would prohibit entities not fully owned by lawyers from interfering with attorneys' professional judgment, controlling hiring decisions or accessing confidential client documents. Such entities would also be barred from charging fees tied to a law firm's revenue or profits. The bill applies to lawyers and firms with less than $300 million in annual revenue or those that derived more than 50% of revenue from contingency fees over the past three years. Firms above those thresholds face fewer restrictions.
The Illinois bill reflects a growing state-level backlash against private equity money entering the legal industry, a trend that has accelerated as law firms seek capital for technology upgrades, artificial intelligence investments and operational expansion. Under the MSO model, a law firm spins off its non-legal operations — human resources, marketing, accounting — into a separate entity that can accept outside investment. The firm pays the MSO a fee from its revenue, avoiding the direct fee-sharing that state ethics rules prohibit.
A Spreading Regulatory Trend
Colorado lawmakers passed a similar bill in May, though Governor Jared Polis has not yet acted on it. A proposal also advanced in California in April but has not cleared the full legislature. The three states represent some of the largest legal markets in the U.S., and their actions could set a precedent for other jurisdictions considering limits on outside investment in law firms.
The Illinois bill was backed by the Illinois State Bar Association, which has about 30,000 members, along with the Illinois Trial Lawyers Association and Illinois Defense Counsel. The Illinois Venture Capital Association opposed the measure, though lobbyist David Stricklin said the bill had "improved significantly from its introduced versions and provides a roadmap for investors who may have an interest in working with law firms in the future." Stricklin said it appeared "likely" Pritzker would sign the bill given the margin of legislative support.
What's at Stake for Private Equity
Private equity firms have been exploring law firm investments through MSOs with increasing frequency. Dallas-based Trive Capital is backing Los Angeles law firm Massumi + Consoli through an MSO, Bloomberg reported Friday. In late May, an MSO backed by Uplift Investors announced a deal with Hughes & Coleman Injury Lawyers, following an earlier agreement with a Louisiana personal-injury firm. Blackstone has invested in legal startup Norm Ai, which uses artificial intelligence for legal workflows.
Larger firms have also considered taking on private equity capital. McDermott Will & Schulte and Cohen & Gresser have both explored such arrangements, according to Financial Times reports. The prospect of artificial intelligence reshaping the legal profession has driven demand for outside capital, as firms seek funding to build or acquire AI-powered tools.
If signed into law, HB 5487 would require lawyers to disclose any MSO agreements to their clients. The International Legal Finance Association, which opposed the bill, declined to comment. Pritzker has until late July to decide whether to sign or veto the legislation.
This article is for informational purposes only and does not constitute investment advice.
