Over the past several years, law firm mergers have become the new normal in the legal industry. It seems that, at one point or another, nearly every midsize or large law firm has either merged with another firm, or was at least rumored to be in talks with other firms regarding a possible merger.
While the reason for the increased merger activity may vary from firm to firm, all law firms are confronted with similar issues when actually effecting the merger. Rather than face unexpected and unnecessary risks later, many law firms will review the potential logistical issues created by a merger in addition to the business considerations.
Below are five common issues that arise during law firm mergers and that may warrant special attention.
The Effective Date of the Merger
Given the numerous issues to address before firms are ready to merge, some law firms treat the effective date of the merger as a moving target. However, because the effective date can be of critical importance for a number of reasons, it is usually helpful to establish an unambiguous date on which the law firms will officially combine.
For example, at the time of the merger date, the clients of each of the prior firms will be deemed clients of the single, combined firm. At that point, the merged firm can have serious problems if it has not yet addressed all of the potential conflict issues created by a new set of current clients and former clients. Instantaneously, the law firm may have multiple representations to consider.
The effective date is also important to other issues, such as tax obligations, insurance coverage, pension and retirement obligations, and legal obligations connected to the predecessor firm or firms. Specifying an effective date for the merger can help avoid uncertainty regarding the date by which all of these issues should be resolved.
Attorneys are notoriously slow to adapt to new technology and have often done things in a certain way for years or even decades. Accordingly, one of the most difficult aspects of a merger is that, in most circumstances, at least one of the firms will need to adjust to new systems and administrative processes.
To minimize the impact of a merger, law firms may be tempted to continue with multiple document management, expense or other types of systems. However, attempting to maintain different systems indefinitely within firm offices or by geographic location can lead to increased risks for ethics and legal malpractice issues.
Although it may cause some initial headaches, merging law firms may instead choose to commit to a single set of systems with accompanying practices, procedures,and protocols. The key to avoiding problems is to invest resources in training attorneys and staff regarding the new systems. Many law firms will also roll out the integrated systems in phases.
Insurance Coverage Gaps
Maintaining insurance coverage for both pre- and post-merger acts is another important consideration when two law firms decided to combine. Without proper planning, there could be a gap between the coverage for the predecessor firms and the coverage for the succeeding firm.
The steps needed to limit this risk may vary depending on the mechanics of the merger. For example, if a completely new law firm will replace the existing law firms, then the legal malpractice policy for the new firm may need to provide coverage for acts by the attorneys that pre-date the new law firm—preferably to the earliest retroactive date of either firm. The predecessor law firms can also choose to purchase an extended reporting period for any claims arising out of acts occurring prior to the termination of the old law firms. If the combination involves the acquisition by one firm (which continues) of the assets of the other firm (which will no longer exist), then other steps can reduce the risk of an uncovered claim.
Regardless of the structure, it is helpful to work with an experienced insurance broker to specifically address and confirm continuity of coverage for acts occurring both before and after the merger.
Real and Potential Conflicts of Interest
Once a merger occurs, conflicts issues may be more difficult to address. Thus, it is helpful to identify and resolve conflict issues prior to the merger. As an illustration of the conflicts issues that can arise in a merger, in 2015 the U.S. District Court for the Central District of California granted a motion to disqualify after finding that a merger of two law firms had created a concurrent representation of adverse clients. See Western Sugar Cooperative v. Archer-Daniels-Midland, 98 F. Supp. 3d 1074, 1082 (C.D. Cal. 2015).
Accordingly, to avoid the risks of post-merger conflicts and the corresponding financial, ethical, and legal consequences, it is helpful to obtain all documentation that may be necessary to resolve the conflict prior to the effective date of the merger. This documentation may include client consent supported by full disclosure in writing, or it could be the termination of a representation as reflected in a file closing letter.
Continue to Monitor for Problems
Regardless of how carefully planned a merger may be, it is inevitable that issues will arise. Many times, these issues are minor and can be addressed with simple corrective action. However, law firms can take steps to make sure that no issues fall through the cracks and then turn into much bigger problems down the road.
For example, law firms may choose to appoint a partner to have oversight of any ongoing issues relating to the merger. This partner can engage in outreach to attorneys and staff to identify any problems created by the merger and consider potential solutions.
By planning ahead and by ensuring that all post-merger issues are addressed, law firms can limit the risks associated with mergers.