SRA issues M&A warning to law firm buyers and sellers


M&A: Regulatory responsibilities for both buyers and sellers

Solicitors have been warned by their regulator about undertaking adequate due diligence on mergers and acquisitions (M&As) and putting client interests first when striking the deal.

Treating client files as “a commodity that can be bought or sold irrespective of what the clients want to do or who they want to represent them going forward” and selling will banks without the testators’ knowledge or consent, were among the types of conduct it said could lead to action.

The new warning notice is the Solicitors Regulation Authority’s (SRA) belated response to the collapses of Axiom Ince, Metamorph Law and Kingly – all firms that grew rapidly through acquisition.

There have been questions about how proactive the SRA should be with M&A. In the year to 30 June 2023, the SRA recorded 114 mergers and acquisitions and chief executive Paul Philip said last autumn that “if we were to take more proactive before-the-event action [to check them], it would be a tonne of work”, increasing the cost of regulation.

At the same time, the risks associated with M&A and different business models forms part of the ongoing consumer protection review, while the SRA is conducting a thematic review of ‘growth strategies’ across the legal sector, with a particular focus on consolidator firms.

The warning notice aims to remind owners of both buying and selling firms that there are requirements they must adhere to during and after any deal.

Multiple acquisitions in a short period of time “can create challenges in respect of business integration, organisational culture, and maintaining standards of service to increased client numbers,” it said.

“Managers of a firm should always make sure that acquisitional growth does not lead to ineffective governance structures, systems or controls which could cause detriment to clients or undermine trust in the profession.”

Clients’ interests were “not always paramount” during transactions, it continued.

“We appreciate that it can sometimes be in clients’ best interests for a firm to seek a purchaser for a swift acquition, which ‘leaves nothing behind’, in order to avoid disruption or delay to their matters.

“On other occasions, it can be in clients’ best interests for the firm, for example, to arrange to transfer specific parts of the business or particular matter types.

“When these kinds of decisions are being made, it will be important to ensure that clients’ best interests are at the forefront of those considerations and are clearly documented.”

Making decisions “purely on the grounds of expediency or commercial reasons” would not be appropriate.

The notice stressed the need for adequate due diligence on the firm being acquired and the buyer considering whether they have “the competence, systems, staffing or capacity to do the work you will be getting”.

Sellers need “to investigate concerns about the acquiring firm’s competence, systems, staffing or capacity to act in your clients’ best interests”.

Other examples of the types of behaviour that could breaches SRA rules include not notifying the SRA promptly of any indicators of serious financial difficulty “and only reporting the acquisition of your firm to us at the last minute giving us little time to engage and ensure clients’ interests are being protected”.

The regulator also outlined concerns about solicitor managers not being appointed by administrators or liquidators when a firm entered administration or liquidation.

“This may be to save costs or because firms or their managers are unaware of the need for one. This potentially puts at risk client confidentiality and privilege. It might also lead to breaches of the SRA accounts rules in respect of the handling and management of client money.”

Mr Philip said: “There are some 100 mergers and acquisitions taking place every year. In many scenarios, there can be good reasons for mergers and acquisitions, and we do not seek to stand in the way of a healthy, competitive legal market.

“We have seen some firms making multiple acquisitions in a relatively short period of time which can create challenges in respect of business integration, organisational culture, and maintaining standards of service to increased client numbers.

“Managers of a firm should always make sure that acquisitional growth does not lead to ineffective governance structures, systems or controls.”




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