California
Attorney Ethics Counsel

December 28, 2015

5 Issues to Analyze When Your Law Firm is Considering a Merger

Law firm mergers are a fact of life for modern law practice.  News of law firm mergers, or news of merger discussions, are a daily staple of practicing law.  If your firm is considering a merger with another firm, you should independently analyze how the merger may impact your clients and your practice, and how to resolve any issues that arise.  From a legal ethics perspective, law firm mergers are extremely complex, and fraught with inherent ethical dilemmas.  These issues can, and often are, resolved; sometimes with beneficial effects on partners, sometimes not.

If you are not actively involved in the management of your firm, you may not know all of the details about the merger discussions, or even know about a proposed merger deal, until late in the process.  Don’t rely on your firm’s analysis, or the other firm’s analysis.  When you learn about merger discussions or about a proposed merger deal, you should independently analyze 5 issues regarding how to protect your clients during the merger discussions and how the merger would impact your clients, and your practice.

1. What works for your clients? The first, and most important, aspect of your analysis of a potential merger is how it will impact your clients’ interests.  Is the new merged firm a good match for the type of practice your clients need and expect?  Or will the merged firm be focusing on other practice areas, with potentially significantly different rate structures, that may not work for your clients?  Most mergers produce much larger firms than their component firms.  Consider whether that is something that will be advantageous to your clients, or a mismatch.

2. Client conflicts. A related, but much more technical, question is whether the merger will create any actual or potential conflicts for your clients and, if it does, how these will be resolved.  This analysis will be a part of the merger discussions, of course, but in many mergers these issues are not analyzed until late in the process, and it sometimes derails the best-laid plans.  From your perspective, even if you have only limited information about specific conflicts with a proposed merger partner, you should independently analyze whether there are likely conflicts with your clients, whether they are the type that can be resolved with informed written consent, or whether they are insurmountable.  You may have an obligation to disclose actual or potential conflicts to clients as soon as you learn about them.  And if conflicts with your clients cannot be resolved, consider whether that is a signal to you that your practice is not a priority at the merged firm.

3. Client confidentiality. Any merger discussions will necessarily involve sharing information about each firm’s practice.  Consider whether the confidentiality of your clients’ information is being properly protected.  Depending on the nature of the practice of the merger partner, client confidentiality may not be a concern.  But if the merger partner practices in your area, with similar clients, you should identify detailed steps to ensure that your clients’ confidential information is adequately protected in the process and, where appropriate, that any such disclosures are made only with your clients’ knowledge and consent.

4. Pending claims. As a partner, you may inherit the professional liability history of your firm’s merger partner.  Are there pending claims against the firm, either legal malpractice claims, fee disputes, motions to disqualify the firm, or similar issues?  How will these issues be resolved once you, and your partners, are defending them in the merged firm? Once again, your firm is certain to analyze these issues in the merger discussions.  But will they may not be managing these issues with your clients in mind.  If there are pending issues at the merger partner, how will your clients view them?

5. Management of the other firm. Similarly, consider the management of the merger partner and whether that is a match for your clients and your practice.  Many firms come to the table in law firm mergers because they are experiencing management difficulties, and even firms with sterling client lists may not be well-run firms.  Recent examples of such firms easily come to mind, and the effects of bad management typically cannot be overcome by a merger alone.  Poorly managed law firms are minefields for legal ethics problems, and bad business.  More generally, you should analyze whether the management of your firm’s merger partner is a match for your client’s interests and expectations, for your practice, and for your style of lawyering.

Some of these questions are technical—conflicts and confidentiality—and some are pragmatic—whether your practice area is a priority for the merged firm—but they all lead to the same place.  You must protect your clients’ interest during the merger discussions, and after.  But you should also independently determine whether the proposed merger will work for your clients and for your practice and, beyond that, whether it is good for your clients and for you.  If not, it’s better to know that sooner rather than later.