Key Takeaways
- • The Tennessee Supreme Court declined to lift the state's ban on nonlawyer ownership of law firms, so private equity cannot directly own Tennessee law firms.
- • Tennessee has not imposed additional restrictions on outside investment, unlike California, Colorado, and Illinois, which have moved to regulate such investment.
- • Capital is still flowing into legal services through management services organizations (MSOs), which allow investors to back the administrative operations of law firms.
- • Josh Porte, co-chair of Holland & Knight's legal services transactions team, says the state's approach has left private equity a route to participate in the sector.
Summary
The Tennessee Supreme Court has declined to lift the state's longstanding ban on nonlawyer ownership of law firms, meaning private equity and other outside investors cannot own a Tennessee law firm outright. According to Josh Porte, co-chair of Holland & Knight's legal services transactions team, speaking to the Nashville Post, the decision leaves Tennessee somewhat outside the national trend of formally regulating outside investment in law firms.
Unlike California, Colorado, and Illinois, Tennessee has not imposed additional restrictions on outside investment. As a result, the regulatory posture is comparatively permissive for investors seeking exposure to legal services, even though direct ownership remains prohibited.
Porte noted that "capital has nevertheless been flowing into legal services" through management services organizations. MSOs allow investors to back a law firm's administrative operations, such as back-office functions, without owning the legal practice itself. Through this structure, private equity can still acquire a economic stake in the business, according to the reporting.
The development is relevant to institutional investors and alternative asset managers tracking the intersection of private capital and professional services, as the MSO structure has become a primary vehicle for outside investment in law firms where ownership rules remain restrictive.
Unlike California, Colorado, and Illinois, Tennessee has not imposed additional restrictions on outside investment. As a result, the regulatory posture is comparatively permissive for investors seeking exposure to legal services, even though direct ownership remains prohibited.
Porte noted that "capital has nevertheless been flowing into legal services" through management services organizations. MSOs allow investors to back a law firm's administrative operations, such as back-office functions, without owning the legal practice itself. Through this structure, private equity can still acquire a economic stake in the business, according to the reporting.
The development is relevant to institutional investors and alternative asset managers tracking the intersection of private capital and professional services, as the MSO structure has become a primary vehicle for outside investment in law firms where ownership rules remain restrictive.
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