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Key Considerations for a Successful Law Firm Merger – Part 3: Process and Implementation

As 2023 progresses, the trend for law firm merger activity seems set to continue. Whether you are two elite global law firms planning a transatlantic tie-up, or a well-established national firm looking to implement your growth strategy through the acquisition of successfully smaller practices, the process is remarkably similar. Remember, a merger is a means through which a law firm’s strategy can be achieved, not a strategy in itself. Firms should only embark on a merger if it is expected to promote their objectives.

In this article, first published by The Law Society Gazette, non-contentious partnership law Partner, Corinne Staves, considers the process and implementation for a successful law firm merger.

Overview of the Merger Process

1. Sign exclusivity and confidentiality agreements. Draft an emergency press statement in case of leaked information.

2. Negotiate heads of terms. These heads are high-level principles. Rarely binding, all fundamental points should be broached to avoid hiccups later. Key issues such as tax and regulation are often addressed too.

3. Due diligence. Each firm reviews information about the other, usually with a strong focus on finances and risk profile. Care is needed to respect regulatory obligations. Firms sometimes also now start preliminary discussions with key stakeholders, such as the bank and landlord.

4. Documentation. ‘Merger’ is a misnomer. Mergers are usually achieved by one firm transferring its business as a going concern to another. A new or updated LLP agreement for the combined firm is usually drafted.

5. Partner vote. The voting threshold and timing varies from firm to firm.

6. Signature and completion. Firms often allow for a period between signature of the merger agreement and the effective merger date, ideally with no/very few conditions to give everyone greater certainty. This period is used to undertake logistical and practical steps, including engaging with clients, transferring staff and other arrangements (including IT and premises).

7. Completion/effective date. This is when the business transfer occurs and the combined firm begins trading as the combined firm (for example, using its new name).

8. Integration. Arguably, integration is the most important stage of any merger process. Firms need a clear integration plan, including deadlines and designation of responsibilities, so that the combined firm can monitor its success against the original merger objectives.

Merger Agreement

A merger agreement is usually a business transfer agreement. The assets and liabilities of one (usually smaller) firm are transferred as a going concern to the other (usually larger) firm. Sometimes issues are identified during early discussions or due diligence which – depending on negotiating positions – are excluded from the transfer, such as an unusual liability. Property, pensions, annuitants and claims are common examples. If any such liabilities are ‘left behind’, the transferor firm still needs to deal with these, so often the merger agreement also excludes some assets from transfer. Even if the transferor firm is a shell post-merger, the merger agreement should address how it will be wound up (including allowing transferring partners/staff time and resources to devote to this). The agreement will address the transfer of client relationships, but clients cannot be forced to move. The transferor firm needs to invite each client to transfer their instructions and files to the combined firm and enter into new terms of engagement. If this is not agreed, the firms need to assist the client in instructing a new adviser if they prefer, or if issues (such as conflicts) preclude the combined firm from continuing to act. This takes time and effort from all partners, but can be a valuable business development exercise. Immaculate client lists and a history of closing archived files are both invaluable, and are a top tip for any firm which wants to be merger-ready.

The staff are usually transferred via TUPE, which requires adherence to proper process, but in addition to legal requirements the merger needs sensitive handling to avoid short- and/or long-term staff attrition. A law firm’s key assets are its people.

The merger agreement typically includes representations and warranties to manage risks associated with the assumption of assets and liabilities. If due diligence was thorough these may be kept to a minimum, and there is often a commercial recognition that the combined firm is unlikely to pursue a warranty claim against their new partners. Occasionally, therefore, this is addressed through adjustments to partner compensation, for example if a transferring team fails to meet forecasted figures.

There are a number of features that are specific to law firm mergers, in contrast to other business transfers. These include successor practice for professional indemnity insurance purposes, addressing partner current, capital and tax reserve balances (including partner capital loan arrangements) and how to value WIP and debtors. There may also be transaction-specific issues which emerged during due diligence which must also be addressed.

There may be a transitional period (e.g. two years post-completion) during which lock-in or heightened post-exit covenants apply. Sometimes the firms agree to reassess key points, such as WIP valuation or partner status and compensation, at the end of that period. This is intended to incentivise strong contribution post-merger, but this can reinforce the distinction between the two legacy firms which is unlikely to promote meaningful integration (assuming that is a merger objective).

The newly combined firm needs an LLP agreement. In a merger of equals, if that can ever be true, this is drafted afresh. More often, the transferee firm’s LLP agreement is adapted to accommodate the incoming business and partners. For example, to amalgamate two different governance approaches or compensation systems. This can be much more complex for a merger between international firms.

This article was first published by The Law Society Gazette.

If you are a partnership or LLP 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 our Corinne Staves.

Corinne Staves is recognised by Chambers and Partners UK 2023 as “Star Individual” in the field of Partnership (Non-Contentious) and “Spotlight Table” for Partnership (Large International Structures),and is described as being head and shoulders above everyone else and has incredible presence in the market.” She is also ranked by Legal 500 2023 as “Leading Individual” in the area of Partnership law and recognised her as a “standout partner”.

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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