Landmark decision by the European Court of Justice

The German ban on equity participation in law firms is in line with European Law and the legislative objective to ensure the independence of lawyers upheld.

The case relates to a German lawyer who transferred 51% of his shares to an Austrian holding company in 2021. An amendment to the articles of association was intended to ensure that any influence on the lawyer’s work was prevented.

The restriction of the freedom of establishment and the free movement of capital is justified by the objective of ensuring that the independent exercise of the legal profession remains guaranteed. In particular, the financial interests of financial investors are incompatible with the legal profession. In this respect, the restriction is justified by overriding reasons in the public interest.

The Grand Chamber of the European Court of Justice (ECJ) in Luxembourg has not followed the Opinion of the Advocate General. Although he had considered a restriction on equity participation by third parties to be possible in principle for the protection of general interests, he considered the German regulation to be unsuitable for achieving this objective because of its incoherence. However, the ECJ remains silent on the requirement of coherence in its decision.

On an international perspective, the decision is, in line with US law which in the vast majority of cases adheres to the prohibition of equity participation, yet at the same time completely contradicts the trend in the UK, where the obstacles for financial investors were removed, which nevertheless also harbours certain risks.

The debate on the right way to deal with third-party investors in law firms remains open.

The continued ban also impacts the insurance industry, in particular legal expenses insurers. A participation in law firms - that’s what legal expenses insurers had been pushing for recently, hoping for a clear message from the ECJ to the German legislature. In vain, as it now becomes clear. For the time being, participation in law firms remains a distant prospect for insurers. The insurers are now seeking an answer from the German legislature. Whether it will come? At present, this seems questionable. If the legislator does take action, strong resistance from the bar associations is to be expected.

The ban also has a huge impact on developments in the legal market with regard to the use of AI and legal technology, which are usually associated with high financial investments. It is not unlikely that there would have been dynamic development in these areas if the restrictions on equity investments had been lifted.