Is your firm considering a merger?

Is your firm considering a merger?

Law firm mergers are common in today's legal landscape. Whether a merger is appropriate for a law firm depends on many factors, including the law firm's goals and the climate. There are, of course, pros and cons to consider.

On the pro side, mergers can offer firms a variety of benefits, including rapid growth, higher gross revenue and larger footprints nationally and internationally. They can lead to diversified practice areas, a stronger marketing position and the ability to address client demands and expectations. On the con side, mergers may involve unexpected risks, compromises regarding culture and values, client concerns over billing rates and relative importance, as well as heightened financial demands.

History proves there is no one-size-fits-all for mergers and acquisitions. Some of the largest and most profitable law firms in the world are the products of rapid growth through steady mergers and acquisitions. And some of the largest firm failures in the world occurred following mergers that did not work out.

While the headlines focus on mega-mergers, those are not the only types of mergers occurring. The deals actually range from small firms merging for the purpose of adding a practice group or office in a new city to large firms combining to create megafirms. Given this trend, it is likely that all firms - no matter their size - will be faced with at least the possibility of considering whether to merge with, acquire or be acquired by another firm? This decision should not be taken lightly.

If the resulting course of action is to merge or acquire, each firm and every attorney involved should have a strategy and comprehensive road map for addressing major issues. Obviously, there are many factors involved in such an important decision, many of which do not involve finances, footprints or even legacies. No matter how a merger is packaged, it inevitably comes down to a series of personal decisions for partners who have invested their lives in their law practice.

Other issues that should be considered as part of meaningful due diligence for any merger or acquisition are conflicts of interest, partnership agreements and insurance coverage.

Assessing Potential Conflicts

Even mergers that seem the most logical "no-brainers" can be impossible if irreconcilable conflicts of interest exist. Before expending enormous energy and risking irreparable damage to personal relationships by moving toward a merger, the first step is to identify and address any potential conflicts of interest.

There are two types of conflicts that merging firms may face: legal conflicts and business conflicts. A legal conflict arises under the applicable rules of professional conduct - which in most cases involve rules from multiple jurisdictions.

Under California law, conflicts arising under the Rules of Professional Conduct may be potential or actual conflicts. Rule 3-310 addresses both situations. A potential conflict consists of an issue that must be addressed before the merger may move forward. Under Rule 3-310(C), the potential conflict must be resolved through the written informed consent of the firms' clients - current or former - at issue. An actual conflict is one where the merger may not go forward without losing clients and, in most situations, the attorneys that work with them. An example of an actual conflict is where the merging firms represent opposing parties in a lawsuit.

Business conflicts arise when a client is unhappy with the merger and feels there is a conflict because the other firm represents an entity the client considers a rival or competitor, and the client will withdraw its business if the merger goes through. While these types of conflicts do not necessarily arise from the rules of professional conduct, they can have an equally debilitating impact on a merger.

Both of these types of conflicts can function as deal breakers for a potential law firm merger. The best time to identify them is upfront, not after firms in merger discussions have invested a lot of energy, resources and goodwill in pursuing a venture that has little chance of success without costly client or attorney losses.

Evaluating

Partnership Agreements

Partnership agreements vary among different law firms in virtually every respect imaginable. Some can be reconciled into a single merged partnership agreement accommodating the nuances of differing partnership agreements. Others, however, cannot. This is especially true for multijurisdictional or international firms.

The new merged firm can attempt to meld the partnership agreements, create an entirely new partnership agreement, or adopt one firm's partnership agreement as the model and address the differences. Obviously, if a new agreement is used, the firms must agree on the provisions to be included. It is recommended that law firms considering a merger review issues of governance so that both parties can understand their potential future partners.

Confirming

Insurance Coverage

Another key issue to address early is legal malpractice insurance. The malpractice insurance for the new merged entity should provide seamless coverage that protects the new firm not only moving forward, but also related to past acts of the individual firms.

Like the partnership agreements, firms exploring mergers should carefully review and analyze the legal malpractice policies for the existing firms to determine the best option moving forward.

California professional liability policies are generally claims made and reported policies. The most significant risk with a merger is a gap in coverage. There are several ways to address this risk. One firm's policy can be expanded to provide coverage for the successor firm. Or the new firm can acquire new coverage that includes coverage for prior acts by any partner in the successor firm while giving notices under the expiring policies for known or potential claims.

In today's market, exploring the options is good business ? so long as the new firm is fully protected. The most important thing, however, is that coverage under both the new policy and the old policy is completely seamless, without any time gap between effective dates or differences in conditions or terms creating coverage gaps.

In addition, it is important that merging firms closely review the terms and conditions of the policies they each currently hold and identify any differences. Sometimes these differences are easy to identify. Sometimes they require parsing with a fine-tooth comb. Even a subtle difference can make a big impact depending on the context of a malpractice claim. Merging firms then need to address how to manage the risks associated with those policy differences.

These are just a few of the issues merging firms must address. The key is to address them early in the process because they can directly affect whether a merger will come to fruition and whether it is successful.