The Solicitors Regulation Authority has issued new guidance setting out what is permitted in firms’ negotiations with potential investors ahead of the licensing of alternative business structures (ABSs) in October next year.

The guidance stresses that non-lawyer individuals or businesses are currently prohibited from having any ownership in a law firm, or exercising any control over a law firm.

However, the SRA said that ‘within this framework’ it was ‘keen to enable firms to make appropriate preparations’ for the setting up of ABSs.

According to the guidance, appropriate preparations ‘can’ include:

  • discussions with potential business partners;
  • an agreement to enter into exclusive negotiations with a potential business partner;
  • a non-binding arrangement with a potential business partner for the setting up of an ABS (that is, an arrangement 'subject to contract');
  • certain conditional contractual arrangements to be activated once the regulatory requirements have been changed (that is, post-October 2011), and all necessary approvals have been granted by the SRA, such as an agreement to accept new non-lawyers, or an outside investor, into partnership;
  • practical preparatory arrangements such as discussions with banks, the registration of company names, the acquisition of domain names and so on;
  • joint planning;
  • public announcements; and
  • joint marketing, including meetings with clients.

The SRA said that whether or not these actions were permitted would be ‘heavily dependent on the detail of the arrangements being contemplated’.

The guidance emphasises that solicitors must be confident of the identity of any business partners with whom they are contemplating entering into arrangements, and they must be likely to be regarded as suitable owners or managers of a regulated body.

The new guidance also lists arrangements that may not be entered into without breaching SRA rules. It says these are any arrangements which would:The full guidance is available on the SRA website.

  • involve selling your ownership interest in the practice or any part of it (or any service company) before you have been authorised as an ABS, for example, you should avoid granting any option to purchase your interest in the firm for nominal value, in circumstances which would suggest that the ownership and/or control of the firm has already passed;
  • put your future business partner in control of material decisions about your business;
  • put your firm in the position of acting as a 'front' for another organisation;
  • put any outsider in de facto control of any votes in a meeting of the partners, members, shareholders or directors;
  • create a situation where a third party becomes a 'shadow director' of your firm with effective blocking power on decisions made by your firm; or
  • allow your firm to become, in effect, a subsidiary of an outside organisation – which could jeopardise the protections put in place for the clients of regulated law firms, as well as being contrary to the current law. By contrast, there is no objection to a firm adopting a common logo or branding style to link the firm's image with that of other service providers.