Merger talks between Bryan Cave and British firm Berwin Leighton Paisner (BLP) have been held up as the pair wrangle with tax issues relating to their desire for full financial integration.
Sources at the two firms, which had been targeting a January date to complete their proposed union, confirmed that a vote on their deal had been pushed back as the pair continue to address the tax complications of a fully integrated U.K.-U.S. merger.
Some partners had initially expected to vote on the deal, announced in mid-October, by the end of 2017. But BLP partners have said that no vote date has been communicated to them by the firm’s management, which previously saw tie-up talks with Greenberg Traurig end in early 2016.
BLP and Bryan Cave have publicly stated their intention to pursue a fully integrated merger, rather than the looser Swiss verein or company limited by guarantee structures that have been adopted in many other recent transatlantic combinations.
“I think we are hoping to hear more [about the tax situation] before the end of the month,” said one BLP partner, who requested anonymity when discussing internal firm matters. “It should be imminent. People want to get on with it.
A source at Bryan Cave also said that the firm expected to hear by the end of the month about the status of its discussions with BLP.
Tony Williams, a former managing partner at Clifford Chance and now a founding principal at London-based legal advisory firm Jomati Consultants, speculated that given the size of the proposed combination between Bryan Cave and BLP, the tax bill associated with a full financial integration could run into the tens of millions.
“The basic problem that arises on this type of law firm combination is that in the U.K., firms have to operate using accrual accounting, where the U.S. work on cash accounting,” Williams said. “Converting one to the other has a significant cost element and a U.S. firm will probably want to stay on cash accounting to avoid taking a tax hit. It is a very significant issue, which is why the vast majority of mergers—even when they have one profit pool—tend to have the U.S. still operating on a cash basis.
BLP posted gross revenue of £272 million ($376.3 million) in 2016-17 against profits per equity partner of £630,000 ($871,574). Meanwhile, Bryan Cave’s gross revenue for 2016 stood at $608 million, as the firm’s profits per equity partner came in at $865,000.
“You are probably talking between 20 percent and 25 percent of turnover being uplifted and that being subject to whatever the U.S. tax rate is on that,” added Williams. “That may be negated on accruing further expenses, but you are comfortably looking in the tens of millions.”
A partner at one transatlantic firm, who requested anonymity in discussing a potential rival, noted that it’s not unusual for tax issues to create a snag in cross-border combinations.
“Tax regulation often slows these things down because the U.K. firm becomes liable for U.S. tax if you go for a consolidated approach,” the partner said. “It is a one-off hit, but it normally creates a liability of many millions of pounds that you have to find out of the current year, and partners will have to swallow that.”
However, one BLP partner maintained that the two firms still wanted to push ahead with the one-firm structure referenced by Bryan Cave chair Therese Pritchard, who assumed leadership of her firm in 2014, when the talks were confirmed late last year.
“None of the other [transatlantic mergers] are really fully financially integrated,” the BLP partner said. “With all of the other people who have tied up, the plumbing isn’t quite right.”
Global accounting giant Deloitte has been retained to advise both firms on the tax structure of their proposed merger.
Earlier this month, BLP announced an earlier-than-usual round of partner promotions. Typically, the firm’s new partners are confirmed in April or May, but this year’s promotions were brought forward as a result of the merger talks with Bryan Cave.
Bryan Cave declined to comment on its talks with BLP. The latter claimed that tax liability estimates in the tens of millions were incorrect, and added that “we will not comment any further on what are confidential discussions.”