Mergers and acquisitions (M&A) between law firms are nothing new. Over the last 15 years there have been a number of strategic international, transatlantic and UK domestic law firm mergers which continue to morph the UK domestic legal landscape and create an increasing footprint for the provision of legal services in a truly global environment. Law firm M&A activity has continued to dominate the legal press in 2024 for both good and bad reasons. Law firm M&A most typically represents strategic moves that can help law firms expand their market presence, diversify their service offerings, and enhance their competitive edge. However, these transactions are complex and require careful planning and due diligence. For law firms in England and Wales, the Solicitors Regulation Authority (SRA) provides critical guidelines to ensure compliance and ethical practice. In their latest ‘Mergers, acquisitions and sales of law firms’ Warning Notice (opens a new window), there is a key message from the regulator for firms to ensure that clients’ interests are central in mergers and acquisitions.
Whilst the legal press is quick to discuss the successful law firm M&A transactions and was particularly active in the lead up to the recent A&O Sherman merger on 1 May 2024, the case of Axiom Ince is a cautionary tale which highlights the potential pitfalls in law firm M&A transactions and underscores the importance of thorough preparation and adherence to regulatory standards.
This article outlines the key considerations law firms should address during M&A, with a focus on SRA regulations and lessons that can be learnt from the Axiom Ince situation.
1. Strategic fit and objectives
Before entering an M&A transaction, law firms must carefully evaluate whether the merger or acquisition aligns with their strategic goals. At a very high level this involves:
Assessing the potential for market expansion.
Strategically managing the initial discussions and messaging around an integration transaction.
Determining how the combined firms' practice areas complement each other and are able to co-exist in an integrated environment.
Evaluating the cultural fit between the firms to ensure smooth integration.
2. Due diligence
Thorough due diligence is essential to uncover and mitigate any potential risks and liabilities. This process should include, but is not limited to:
Reviewing the target firm's financial health, including debts, profitability, tax returns and revenue streams.
Reviewing corporate documents and legal information to include article of association, shareholder agreements, directors’ meeting minutes, shareholders’ meeting minutes where applicable.
Evaluating the target firm's client base, ongoing cases, and client satisfaction levels (including client feedback).
Assessing any potential conflicts of interest that may arise from the merger or acquisition.
Ensuring compliance with SRA regulations, particularly in terms of client confidentiality and data protection.
Reviewing any certifications and quality standards the firm may have achieved and when these are due for renewal.
Considering media/press review to analyse any negative reviews/press articles and reputational issues that could jeopardise the transaction.
Considering any potential regulatory and or other investigations of any board members / partners / staff members.
Reviewing the target firm’s claims history to assist in assessing the potential legal and financial risks associated with past and ongoing claims. This ensures the acquiring firm is not blindsided by unexpected liabilities. The claims history can provide a complete picture of the target firm’s past performance, reputation, and reliability. Claims can have significant financial consequences for law firms and knowing the claims history can assist with analysing the true financial health of the target firm. The target firm’s history of claims can impact the reputation of the acquiring firm. Frequent or high-profile claims might indicate systematic issues that should be looked at in greater detail and could tarnish the acquiring firm’s reputation if not addressed.
Reviewing the professional indemnity insurance arrangements of the target firm to ascertain what level of cover is in place, to ensure it is “adequate and appropriate”, a requirement set out by the SRA (opens a new window). A review of these arrangements can also assist with understanding any potential financial liabilities. Ensuring that there is no gap in coverage is crucial. A lapse in coverage during the transition period could leave the new entity exposed to risks. Reviewing the target firm’s insurance allows the acquiring firm to integrate and harmonise the insurance policies, ensuring consistent and adequate coverage across the newly combined entity.
Considering different insurance options during your due diligence process, whether this be as a successor practice of the target firm or triggering run off of the acquiring firm’s policy. For more information consider reviewing a recent article by Joe Bryant, Partner, Beale & Co and Lockton’s Brian Balkin (opens a new window) giving an overview of liability issues when law firms consider merging.
Early engagement with third party advisors is key and including your insurance brokers will assist in the points raised above.
The failings of Axiom Ince illustrate the consequences of inadequate due diligence. In 2023, the SRA intervened in the firm due to suspicions of financial irregularities and misuse of client funds, highlighting significant lapses in oversight and risk management.
3. Regulatory compliance
The SRA plays a pivotal role in overseeing legal practice standards. Law firms must ensure:
Adherence to the SRA Principles and in particular - Principle 2 - act in a way that uploads public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons. - Principle 5 - act with integrity. - Principle 7 - act in the best interests of each client.
Compliance with the SRA Code of Conduct for Solicitors, Registered European Lawyers (REL’s) and Registered Foreign Lawyers (RFL’s) and the Code of Conduct for Firms (opens a new window), which outlines responsibilities for managing risks, client care, and business arrangements.
Proper handling of client monies and ensuring that the firm's accounts comply with the SRA Accounts Rules.
Axiom Ince's failure to comply with these regulations resulted in severe repercussions, including the freezing of accounts and loss of client trust, demonstrating the importance of regulatory adherence.
4. Client communication and retention
Maintaining client trust and continuity of service is crucial. Law firms should:
Communicate transparently with clients about the merger or acquisition, addressing any concerns and explaining the benefits.
Ensure that clients' matters continue to be handled without disruption.
Seek client consent where necessary, particularly if the merger or acquisition results in significant changes to their representation.
5. Staff integration and management
Successfully integrating the staff of the merging firms involves:
Developing a clear plan for merging different teams and practice areas.
Communicating openly with employees about the reasons for the merger and its expected impact.
Providing training and support to help staff adapt to new systems and processes.
Axiom Ince's challenges included significant staff turnover and dissatisfaction, further exacerbating operational difficulties, and impacting client service.
6. Operational and technological integration
Merging firms should integrate their operational systems and technologies to function as a unified entity and this includes effective post-merger strategies. Key areas include:
Developing a detailed integration plan with clear timelines and responsibilities.
IT integration of systems and geographical locations, including standardising case management systems and document handling procedures.
Ensuring IT systems and cybersecurity measures are compatible and robust.
Harmonising billing systems and financial reporting mechanisms.
Monitoring progress and addressing any integration challenges promptly.
Continually assessing post-merger, the impact of the merger or acquisition on firm performance and client satisfaction.
7. Financial and tax considerations
M&A transactions have significant financial implications, requiring careful planning and management:
Evaluating the financial structure of the deal, including any necessary financing arrangements.
Understanding the tax implications for both firms and structuring the transaction to minimise tax liabilities.
Ensuring compliance with accounting standards and SRA financial requirements.
Axiom Ince's financial mismanagement serves as a stark reminder of the need for rigorous financial oversight and transparency in M&A activities.
Contact us (opens a new window), or visit the Lockton Solicitors page (opens a new window) for more information.
