California lawmakers have approved legislation that would significantly restrict private equity and other corporate investors from influencing the operations of law firms, potentially making the state the third in the US this year to impose new barriers on the strategy, according to a report by the Wall Street Journal.
The California Senate and Assembly passed Assembly Bill 2305 without opposition votes, although some lawmakers abstained. The legislation now goes to Governor Gavin Newsom, who has until 30 September to decide whether to sign it.
If enacted, the measure would prohibit private equity firms, hedge funds and other corporate investors from exercising control over the practice of law.
The legislation was introduced in February by California Assembly member Ash Kalra, who argued that existing rules contain loopholes that allow outside investors to exert influence over legal practices.
Kalra said the legislation is intended to ensure that decisions affecting clients remain with lawyers rather than financial investors.
Illinois and Colorado have already enacted similar measures this year, while other states have been examining the extent to which non-lawyer investors should be permitted to hold economic interests in legal practices.
The investment structures targeted by the new legislation have been adapted in part from arrangements used in healthcare.
Under these models, lawyers retain formal control over legal decisions and client representation, while outside investors take an economic interest and oversee business functions such as finance, technology, marketing and operations.
The approach is designed to comply with longstanding restrictions in most US states that prevent non-lawyers from controlling the practice of law.
Critics, however, argue that such structures can allow investors to exert indirect influence over legal decisions despite the formal separation between ownership and professional judgment.
