Heads of terms stage “too early” to tell SRA about law firm mergers

Law firms should not have to tell the Solicitors Regulation Authority about upcoming mergers and acquisitions as early as the heads of terms stage, leading advisers have argued.

London law firm CM Murray, which advises other law firms, said any requirement to notify the SRA at that point would be impractical and would need strict confidentiality safeguards to avoid spooking clients, staff and partners.

The response, reported by Legal Futures, forms part of the SRA’s consultation on introducing a new regime of "prescribed events" that firms would have to report in advance.

The SRA wants early warning of major changes

The regulator has proposed that law firms notify it in advance about particular prescribed events. The first two on the list are mergers and acquisitions, and a firm beginning to hold or receive client money.

The idea is to give the SRA earlier visibility of developments that could affect regulatory risk, allowing it to intervene or ask questions before problems crystallise.

CM Murray accepted that a prescribed events framework could be workable, provided firms were given clear guidance on when the duty to notify is triggered and enough time to comply.

Why heads of terms is the wrong trigger

The problem, according to CM Murray, is that the consultation appears to assume heads of terms follow due diligence. In the firm’s experience, that is not how deals usually work.

"Due diligence usually does not start (and certainly not in earnest) until after heads of terms have been agreed," the response said.

Key commercial terms are often not settled in heads of terms and are only finalised "on the brink of exchange" or after due diligence. Some principles may only be agreed in the final documentation.

"As such, we feel that requiring notification at heads of terms stage is not workable in practice."

A later notification point

CM Murray suggested that firms should notify the SRA about M&As at the earliest of three moments: promptly after signing the merger or acquisition agreement, if more than 30 calendar days are expected to satisfy conditions and complete pre-completion steps; 30 calendar days before the expected completion date; or as soon as possible if completion is expected in less than 30 days.

The first point at which the parties can say with any certainty that a deal is likely to complete is when the agreement is signed, the firm argued.

That approach would give the SRA meaningful notice without forcing firms to disclose deals that may never happen.

Confidentiality is a major concern

The response also highlighted how sensitive M&A information is in practice.

Potential deals are usually kept highly confidential for a significant period, with only a small team aware of the details.

"If notification to the SRA was required before final terms had been agreed and announced, the SRA would need to assure firms that information about potential merger/acquisition would be kept strictly confidential."

Without that assurance, CM Murray warned that clients, staff and partners could "get spooked and undermine a potential transaction".

The SRA should only ask for what it needs

CM Murray raised concerns about the volume of information the SRA might request, ranging from turnover to the amount of client money held and the structure of the merged firm.

"We submit that information should only be requested if the SRA has a clear purpose for it and will use it to assess risk and act on that assessment."

The firm also suggested that notifications should include a free-text section allowing firms to add explanatory information to support their submission and pre-empt any concerns.

The Law Society agrees on flexibility

As Legal Futures noted, the Law Society’s response also disagreed that heads of terms was the most appropriate or proportionate trigger.

Instead, the representative body for solicitors called for a more flexible, risk-based approach to defining when notification should happen.

That suggests the profession is broadly aligned on the timing issue, even if individual firms may differ on the details.

What happens next

The SRA will now have to weigh the responses and decide whether to adjust its proposals.

The regulator’s aim — earlier visibility of risks — is unlikely to be abandoned. But the profession has made a strong case that requiring notification at heads of terms would create more problems than it solves.

For law firms involved in mergers and acquisitions, the message is clear: be ready to notify, but expect the trigger point to move closer to exchange or completion.

CM Murray managing partner Clare Murray will be speaking at the Legal Futures Regulation & Compliance Conference on 3 December in London.