A leading adviser to law firms has described as ‘unworkable’ key elements of SRA plans to require advance notification of mergers and acquisitions.
CM Murray, a specialist regulatory law firm, today published its response to a consultation on a broad-ranging new rule that would require law firms to tell the regulator about key financial events. The change is part of the watchdog’s efforts to move towards proactive and intelligence-led regulation, after a series of firm closures caught the the SRA on the back foot.
The consultation paper suggests that the regulator ought to to be notified at the heads of terms or equivalent stage of an M&A. CM Murray disagrees, proposing that notification to the SRA should instead (depending on circumstances) come soon after the M&A document is signed, 30 days before completion, or as soon as possible if completion is expected in less than 30 days.
The adviser points out that due diligence does not usually start (at least in earnest) until after heads of terms have been agreed. Potential ’dealbreakers’ are not always addressed until later and heads of terms are in any case non-binding.
It adds: ’Agreed principles evolve and are only finalised when the final documentation is agreed. It is conceivable therefore that firms wishing to avoid the notification obligations (in our view, a small non-compliant minority) could leave heads of terms unsigned and/or argue that the terms were never sufficiently finalised to represent some form of ”agreement” for the purposes of notification. As such, we feel that requiring notification at heads of terms stage is not workable in practice.’
CM Murray also points out that the consultation paper does not define a merger or acquisition, and urges the SRA to provide clarification. Transferring 100% of a firm’s business would obviously qualify, but the situation ’can quickly become less clear’, it says.
The adviser cites the examples of a transfer of part of Firm A’s business to Firm B (such as one or a few offices or practice areas), adding: ’And how does such an acquisition differ from a team move, where a team of partners decides to leave Firm A and joins Firm B, and some of Firm A’s staff and clients transfer to Firm B as a result of the partners moving?’.
Likewise, a significant lateral hire by Firm B could involve the movement of a large number of Firm A’s clients and their files to Firm B ’but it is unlikely that anyone would currently consider that to be an “acquisition” by Firm B’. CM Murray notes that this example could arise often in the context of consultancy model firms such as Keystone and gunnercooke, where it is common for experienced partners to move with an established book of business and client list.
CM Murray goes on to stress that firms will need clear reassurance that the SRA cannot delay or block a transaction following notification.
The Law Society, meanwhile, said in its response to the consultation that it supports the SRA’s intention to identify risks earlier, but is concerned about unnecessary administrative burdens that these new requirements may impose, especially for smaller firms.
In particular, Chancery Lane says that time and resources could be taken up which reduce those available for client services. The Society pointed out that significant amounts of information are already requested from firms and the regulator should be make full use of the existing data.
Society president Mark Evans said: ‘While we accept that having timely information about M&As and firms beginning to hold client money could be helpful, the information needs to be used effectively. We therefore encourage the SRA to conduct evidence-backed consultations on any additional notification requirements, demonstrating how they will improve regulatory outcomes without imposing unnecessary burdens on firms.’
The SRA’s consultation ended earlier this week. Any changes would require the approval of the Legal Services Board.
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