Navigating a new landscape: How evolving regulations are shaping investor–law firm transactions

Private equity sponsors are increasingly evaluating opportunities in the legal industry as the sector continues to evolve. The total addressable market for partnerships with and investments in law firms and law-firm-adjacent businesses in the United States is estimated at nearly $400 billion. 

These transactions, however, are subject to long-standing professional-conduct rules as well as numerous newly enacted and proposed state laws. The evolving regulatory landscape may affect how investor–law firm arrangements are structured and evaluated, including the role that compliance considerations play in the assessment of different models.

Our prior alert focused on how investors are partnering with personal injury law firms. This alert discusses the evolving regulatory landscape governing these arrangements, including the American Bar Association (ABA) Model Rule 5.4, recently adopted state laws that may inform developments in other jurisdictions, and practical considerations for investors and law firms evaluating these strategic affiliations.

The ABA framework

ABA Model Rule 5.4, adopted by most states, bars lawyers from sharing legal fees with nonlawyers, forming partnerships with nonlawyers to practice law, allowing nonlawyers to direct or regulate lawyers’ professional judgment, and practicing in entities in which nonlawyers hold an ownership interest or control professional judgment.

Two principal models for law firms to partner with investors have emerged: the Alternative Business Structure (ABS) model and the Management Services Organization (MSO) model. The ABS model permits nonlawyer ownership and direct investment in law firms. It has seen limited adoption because it is available in only a handful of jurisdictions (e.g., Arizona, Utah, Washington, DC, and Puerto Rico). By contrast, the MSO model can be implemented in virtually any state and has gained traction because it resembles structures sponsors have used to invest in other regulated professional services, including medicine, dentistry, veterinary medicine, engineering, and accounting.

Notably, the MSO model contemplates an arm’s-length relationship between a law firm and an entity that supports the nonlegal, operational functions of a law practice. The arrangement is intended to protect lawyers’ professional independence from MSO control or undue influence. Lawyers must retain control over legal judgment, client selection, case strategy, and settlement decisions. Although a law firm may outsource certain nonlegal, operational functions to the MSO, fees payable to the MSO may not be tied to the law firm’s revenues or profits.

Despite these limitations, multiple strategic affiliations between private equity firms and law firms have recently been announced. At the same time, some states are enacting new laws intended to further preserve lawyers’ professional judgment, while other states are considering similar legislation.

Regulatory developments

Illinois: House Bill (HB) 5487 

Background and scope

HB 5487, enacted on August 10, 2026, is the first comprehensive state law regulating MSO and ABS models. Supporters have described the bill as a preventive measure intended to address “control creep” by outside investors before such relationships become more established.

HB 5487 broadly defines ABS organizations as entities that provide legal services while permitting nonlawyer ownership or decision-making authority. It defines MSOs as entities that provide operational, administrative, or business-support services to firms under contract. The bill applies only to licensed lawyers and law firms operating in Illinois that either have annual global legal-services revenue below $300 million or have derived more than 50 percent of their revenue from contingent fees in each of the preceding three calendar years. Although this scope appears to focus on plaintiff-side contingency practices and smaller firms rather than large institutional firms, HB 5487 could reach beyond Illinois because it may apply to lawyers “operating in Illinois” regardless of where a firm is headquartered. National MSO platforms serving Illinois lawyers or matters may need to evaluate their compliance obligations.

Key restrictions

HB 5487 imposes several restrictions on MSO and ABS relationships with covered law firms:

• Professional judgment: Nonlawyer investors and MSOs may not direct or interfere with lawyers’ professional judgment.
  
  
• Client records and communications: The bill restricts nonlawyer access to client records, attorney-client communications, and privileged information.
  
  
• Personnel decisions: Nonlawyer entities may not control the hiring or firing of lawyers.
  
  
• Fee structures: MSO compensation may not be tied, directly or indirectly, to the firm’s legal fees, revenues, or profits, including compensation based on contingent-fee recoveries, settlements, or case outcomes.

California: Assembly Bills (ABs) 931 and 2305

California is pursuing restrictions on outside investment in law firms through a comprehensive, two-pronged approach. Enacted AB 931 addresses fee sharing with out-of-state ABS entities. Pending AB 2305 focuses on corporate investors’ and lenders’ influence over litigation decisions through ownership, financing, and management arrangements.

AB 931: Fee-sharing restrictions (enacted)

Enacted in October 2025, AB 931 generally prohibits California lawyers from sharing legal fees, directly or indirectly, with a lawyer associated with an out-of-state ABS unless narrow conditions are met. Specifically, the California lawyer must be licensed in the ABS jurisdiction, and the underlying services must be performed in that jurisdiction unless a court has approved otherwise. AB 931 defines an ABS as an entity – excluding nonprofits – that provides legal services while permitting nonlawyer ownership or decision-making authority.

AB 931: Background and purpose

California Rule of Professional Conduct 5.4 prohibits direct or indirect fee sharing with nonlawyers or unauthorized organizations. Its commentary permits payments to nonlawyer third parties for goods and services but bars compensation “determined as a percentage or share of the law firm’s overall revenues” or “tied to the fees generated in particular cases or legal matters.” AB 931 was enacted to address circumstances in which California lawyers could otherwise share fees with ABS-affiliated entities through interjurisdictional arrangements.

AB 931: Scope, carveouts, and penalties

AB 931 is operative from January 1, 2026, through January 1, 2030 and applies only to contracts entered into on or after January 1, 2026. It focuses on contingent-fee arrangements and exempts fixed- and flat-fee arrangements. This distinction is consistent with payment structures used by MSOs operating in California in other professions, including medicine, dentistry, and veterinary medicine. An MSO arrangement with a California law firm that involves payment of a flat fee in exchange for defined services could comply with AB 931.

Fixed- or flat-fee arrangements may create challenges for private-equity-backed MSOs whose investment thesis includes supporting a law firm’s growth. Some market participants have explored structures that include prospective adjustments to MSO fees based on specified milestones or incremental expenses. 

Penalties for noncompliance may include a fine of $10,000 per violation or treble actual damages, whichever is greater, as well as injunctive relief, reimbursement of attorneys’ fees, and mandatory State Bar discipline.

AB 2305: Corporate investment in litigation practice (pending)

Where AB 931 addresses permissible fee arrangements, AB 2305, if enacted, would restrict corporate influence over litigation through ownership, financing, or management arrangements. Its stated purpose is to ensure that lawyers and litigants retain “full autonomy over litigation decisions and strategies, free from improper control or interference from corporate investors, private equity firms, hedge funds, or other nonlawyer entities whose primary interest is financial return rather than the interest of the injured individual.” 

The bill would bar corporate investors from interfering with or controlling litigation functions. It would also prohibit corporate lenders or their controlled entities from contracting with a litigation practice in a way that would enable such interference and would void contract terms that permit or facilitate it. If enacted, the bill would apply only to contracts entered into on or after January 1, 2027.

Colorado: HB26-1421

Background and scope

Formally titled the “Colorado Legal Practice Integrity and Fee-sharing Prohibition Act,” Colorado HB26-1421 took effect on August 12, 2026 and addresses a broad range of financial and contractual relationships between lawyers and nonlawyer entities. 

With respect to Colorado-related legal services, HB26-1421 prohibits lawyers and law firms from:

• Providing portions of legal fees or revenues to nonlawyers or ABS organizations
  
  
• Entering into financial or contractual arrangements with ABS entities relating to legal services
  
  
• Forming legal-service entities with nonlawyers
  
  
• Practicing in professional companies in which nonlawyers hold ownership interests or exercise control over professional judgment
  
  
• Compensating administrative or nonlegal service providers unless the compensation is neither a percentage of legal fees or revenues nor determined by recoveries, settlements, or outcomes

Enforcement and remedies

HB26-1421 creates a private right of action, allowing affected parties to sue to enforce its provisions. Depending on the facts and judicial interpretations of the statute, potential plaintiffs may include clients, opposing counsel, or competitors. Available remedies include disgorgement of improperly shared fees and revenues. The statute’s broad language could present extraterritorial compliance considerations for national MSO platforms serving Colorado lawyers or matters. 

The legislation includes a three-year sunset provision, scheduled for September 1, 2029, after which it will expire unless extended or replaced by subsequent legislative action. During its operative period, however, covered parties remain subject to its enforcement provisions.

Conclusion

The regulatory landscape for private equity investment in law firms in the US continues to evolve across jurisdictions. Illinois, California, and Colorado have enacted legislation or advanced bills restricting outside investment. Texas and South Carolina have issued advisory ethics opinions along similar lines, although no legislation has been enacted or is currently advancing in either state. Other states may consider comparable approaches. 

A handful of jurisdictions expressly permit some outside ownership or investment, including Washington, DC, Arizona, and Utah. The Washington Supreme Court has approved a pilot program on nonlawyer ownership, and Puerto Rico approved changes to its professional conduct rules permitting nonlawyer ownership in 2025. The ABA has likewise acknowledged in formal opinions that fee sharing with nonlawyer-owned ABS firms does not necessarily violate the Model Rules and that passive ABS investment may be permissible under certain conditions.

Practical considerations for investors and law firms

Against this backdrop, investors and law firms considering private-equity-backed MSO transactions may consider:

• Conducting state-by-state regulatory analysis. Regulatory requirements can vary by jurisdiction, and transactions that are permissible in one state may be treated differently in another.
  
  
• Evaluating fee structures. MSO compensation arrangements are often evaluated based on whether they are tied to legal fees, revenues, case outcomes, or recoveries. As recent legislative and regulatory developments have focused on restrictions relating to fee sharing and compensation arrangements tied to law firm performance, fixed- and flat-fee arrangements may be relevant in certain jurisdictions. 
  
  
• Preserving professional independence. Regulatory frameworks frequently focus on maintaining law-firm control over professional judgment, client selection, case strategy, settlements, trust accounts, privilege, conflicts management, and lawyer hiring and firing.
  
  
• Maintaining corporate and operational separation. Distinct governance structures, separate financial arrangements, independent personnel relationships, and arm’s-length contractual relationships between an MSO and a law firm can be relevant considerations in evaluating the degree of separation between the entities.
  
  
• Assessing governance and control rights. Board composition, veto rights, information-access provisions, referral and lead-generation arrangements, and replacement rights under management services agreements can be evaluated for “control creep” risk.
  
  
• Monitoring compliance continuously. Given the evolving regulatory environment, stakeholders may wish to implement ongoing compliance monitoring, periodic review of MSO fee terms and service agreements, and assessment of applicable requirements across relevant jurisdictions.

For more information, please contact the authors.