IF YOU ARE A LAW FIRM PLANNING TO BUY, SELL OR MERGE IN 2024 CONSIDER THIS
Many smaller firm owners are considering an exit against the backdrop of post covid culture changes, economic headwinds and what is considered to be an increasingly draconian SRA approach to regulation. Many owners are not looking for significant exit value (because it is not available) and the deal process relies upon them being able to “head off into the sunset” having left their liabilities parked up with the acquiring firm. To be effective there are things which must be considered which are set out below:
If you are a purchaser your PI Insurers will expect you to have undertaken some file due diligence on client matters in addition to the firms financials. That process needs to be recorded so that your Insurers can obtain some comfort around the inbound firm and its risks.
Crucially, you will need to carry out “a drains up” review of any matters which might give rise to a claim further down the line, and this needs to include a specific instruction to each fee earner, who should then report back any matters for consideration. Any matter for consideration, should then be notified to the outgoing Insurer of the vendor firm well in advance of sale, because the Insurer will need to confirm that they accept the claim/circumstance, in order for both parties to receive comfort that losses are not going to be flushed out in the new owners tenure, which might affect their Insurance costs and record going forward.
Fee earners should sign to say that they either have nothing to report or itemise the matters which they wish to report (QPI can share a precedent specifically for this purpose).
For vendors, if they fail to do this, they could end up being liable to pay the excess attached to the purchaser firms claim, as of course, most purchasers will require an indemnity clause as part of the deal process that stipulates that any past losses flushed out post sale will require this.
Most Insurers will also be looking specifically at who in the vendor firm is staying and who is going. The reason for this is because they want to ensure that if senior staff are exiting there is a plan to backfill their supervisory duties in an office with someone of equal seniority who will be present full time.
The purchasers legal team will usually seek proof that Insurers are able to provide coverage for the inbound firm before the deal goes ahead.
Successor practice rules can sometimes cloud who will be responsible for liabilities going forward, and it is essential to be cognisant of what the rules say before agreeing terms.
Directors and Officers Liability Insurance can provide valuable protection for partners/directors on both sides of the deal, including for employment practices claims arising from restructures, redundancies and staff changes.
The firms PI policy will only protect against past client liabilities, and anything relating to business aspects, commercial agreements including leases, and service providers, are outside of the coverage, so separate arrangements are required for these.
We are able to assist with due diligence processes as a stand-alone exercise so please do get in touch to ensure you have all aspects covered and protected.
QPI November 2023
Value, Service, Integrity