The Solicitors Regulation Authority has rejected calls to create a ‘safe harbour’ for law firms to strike formal investment deals ahead of full implementation of the Legal Services Act 2007 reforms. The news came as the Gazette learned that a number of commercial law firms have taken the first major step to putting themselves up for sale by submitting information memoranda to private equity houses and other potential investors.

Information memoranda are documents typically used by publicly listed companies to attract external investment or a takeover, and present potential buyers with a list of the key selling points of a business. Some commercial law firms have distributed a small number of information memoranda ahead of the introduction of alternative business structures in 2011, by which time they would be permitted to accept external investment, sources involved with the dealings said.

But the SRA has warned law firms not to go too far with their preparations. It issued a guidance note in January warning firms that they ‘must not… create what would amount to an ABS until the regulatory structure which will give proper client protection is in place’. The SRA said that it is investigating some firms for potential breaches of independence rules.

Law firms, the Law Society and potential investors in law firms are lobbying the SRA to set up a safe harbour, allowing firms to develop formal investment plans under the SRA’s gaze, but without risking a breach of independence rules.

However, the SRA told the Gazette that it cannot create such a safe harbour because there is too much potential for rule changes in the period leading up to ABS implementation. A spokesman said that the SRA’s ethics guidance team can advise on non-binding investment plans. ‘All sorts of people could try and get their foot in the door, but it’s important that they are properly vetted in order to protect consumers,’ he said.

In the July guidance, the SRA said that it ‘encourages appropriate preparations for the setting up of ABSs,’ but warned that it ‘cannot turn a blind eye to firms which attempt to gain an improper advantage’ by ignoring relevant legislation.

Last year, banking giant Citi revealed that it had brokered meetings between the UK’s biggest private equity houses and senior management at leading law firms in a bid to strike investment deals (see [2008] Gazette, 3 July, 1). Several private equity houses have expressed interest in investing in law firms.