The primary assets (and therefore value) of a law firm (knowledge, experience and reputation) are usually inextricably linked with its people (both partners and employees). ‘People’ will usually be at the heart of any merger and it is vital that firms have a clear strategy and plan to deal with issues relating to their partners and employees when considering a merger.
In this article, first published by The Law Society Gazette, non-contentious partnership law specialist, Zulon Begum, considers the issues relating to people that firms need to be aware of throughout the merger process.
Securing partner approval
A key hurdle for parties in a potential merger is securing the requisite approval of the deal by partners on both sides. It is imperative that both firms have an eye on this from the outset and factor this into the process and timetable as far in advance as possible. Firms should review their respective partnership agreements at the outset to ensure: first, that management has sufficient constitutional authority to initiate and progress merger negotiations; and second, that the requisite number of votes to approve any merger will be achievable in practice (is a 90% majority realistic and does any partner have a veto?). If not, changes may need to be introduced to facilitate the merger and prevent it being blocked by influential dissenting partners.
Even where the constitutional partner approval threshold can be achieved, a merger will only be successful if partners (especially rainmakers or key influencers) are ‘invested’ in the merger strategy and vision for the merged firm. Securing partner buy-in is therefore as much a ‘hearts and minds’ exercise as it is about ensuring the strict partner approval threshold is met. This requires skilful and sensitive leadership by the senior management team and an effective partner communication and consultation strategy.
Retaining partners and goodwill
The initial period following a merger can bring with it a degree of uncertainty (and therefore instability). It is in the combined firm’s interests to ensure that it has adequate protections in the merger agreement and/or its partnership agreement to impede (as far as possible) partner departures and to protect the firm’s goodwill – for example, enforceable restrictive covenants, appropriate notice periods, a ‘waiting lounge’ which restricts the number of partners who can resign in a certain period, and garden leave provisions. We also commonly see merging firms agreeing a moratorium on partner resignations for a transitional window (for example, within one year following a merger), which can provide much-needed stability for a newly merged firm. Where consideration is paid as part of a merger – which is becoming increasingly common in ‘asymmetric’ mergers, such as bigger firm acquiring a smaller one – deferred consideration and good/bad leaver provisions can be effective at retaining and incentivising partners.
Retaining key employees
A major risk associated with any merger is the potential loss of key employees. While employees, unlike partners, will not have a direct say in whether or not a merger takes place, it is important they feel engaged about the merger plans so that they are not left feeling incentivised to leave. Uncertainty around their role and benefits is a common driver for employees to leave a firm about to merge, as are concerns about incompatibility of management styles and/or a lack of trust in new management. A well-planned and carefully executed communication strategy (potentially alongside any information and consultation process under the Transfer of Undertakings (Protection of Employment) Regulations 2006, which may apply if there is a transfer of business, assets and employees from one firm to another as part of the merger) is likely to be key to allaying employee concerns and retaining their loyalty before, during and after a merger.
Dissenting or ‘surplus’ partners
It is not unusual for one or more partners to disagree with a merger. If the merger is approved by the requisite majority of partners, dissenting partners usually have no choice but to accept the decision or resign. In some cases, the firm may wish to exit dissenting partners as they will likely lack commitment to the merged firm.
As part of the wider review of the business and partnership that firms often undertake when contemplating a merger, a merging firm may also identify partners that they think will not be a good fit for the newly merged business (for example, partners in practice areas or offices that the merged firm wishes to discontinue or close). Mergers can also be a catalyst (and opportunity) for firms to deal with chronically underperforming partners. In each case, firms should be careful that the selection criteria for such partners are not discriminatory and do not disproportionately affect partners in certain groups with protected characteristics.
Firms should have a clear strategy in mind for negotiating exit packages with dissenting or surplus/underperforming partners. If mutually acceptable terms cannot be agreed, partners could be forced to leave with or without notice by the firm – but only if the partnership agreement contains effective compulsory retirement or expulsion provisions. Again, careful thought needs to be given to whether the firm has the necessary constitutional powers to remove such partners as part of the firm’s initial merger planning.
We also recommend including garden leave and suspension provisions in the partnership agreement to ensure that any outgoing partner does not have the opportunity to damage the firm before they leave. Such provisions can prevent the partner from attending meetings and voting on the merger deal and from communicating with (and potentially negatively influencing) others in the firm.
This article was first published by The Law Society Gazette.
If you are a partnership or LLP and are considering a merger and would like to find out about how we can support you through the process, or if you have any other queries arising from this article, please contact non-contentious partnership law specialist, Zulon Begum.
Zulon Begum is recognised by Legal 500 UK 2023 as a ‘Next Generation Partner’ in the field of partnership, and has substantial partnership law experience: “Zulon Begum is knowledgeable, pragmatic and commercial. Best of all, she is unflappable.”
CM Murray LLP is Ranked Band 1 and Tier 1 for Partnership Law by Chambers and Partners UK and Legal 500 UK, and is recognised as “one of the legal world’s strongest offerings in this area.”
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