Investing in a law firm? Don’t risk delaying your completion deadlines

Changes in ownership and management of a law firm, whether a partnership or a limited company, will have regulatory implications. The SRA approvals can take several weeks to process, so plan your applications in good time. No change in ownership can take place until approvals have been granted.

SRA regulatory matters are often considered supplementary to the negotiation of the transactional documents and financial arrangements. However, buyers (and sellers) of a law firm (however that vehicle is structured), should be aware that pursuant to Rule 9.1 of the SRA Authorisation of Firms Rules, all managers and owners of an SRA regulated entity must be approved in advance of admission or acquisition.

Investors are well advised not to underestimate the length of time required for the application, and approval, to be processed. Not only must SRA approval be a completion condition, but it would be most undesirable for the regulatory aspects to cause a delay to the transaction,

For this purpose, an ‘owner’ is an investor holding an interest of 10% or more of the capital or participation rights of the authorised firm. For a corporate investor, the SRA will also require owners with indirect ownership rights to be approved; where the investor company is part of a corporate group, approval of parent companies and ultimate shareholders may also be required.

In the case of ultimate shareholders, it is important to consider any amalgamated interests too. This can involve a complex analysis of the investor group structure. Further complexities arise in ownership analysis of a publicly listed company, whose shares are traded on a stock exchange, with the result that ownership interests (and thus percentages) are continually shifting.

Where the corporate member is a non-SRA regulated entity, the law firm will need approval as a licensed body. If the law firm has the status of a recognised body prior to the investment due to full lawyer ownership, a separate approval of this new regulatory status will be required.

Where a corporate investor in a law firm is to be admitted, the requisite application forms are straightforward, and unlikely to prompt further examination unless the SRA’s screening process raises any concerns that the owner’s potential interest could compromise statutory obligations of an authorised legal services body, or that it would contribute to or cause a breach of the regulatory regime by any of the managers.

Flashpoints arise in the case of dual-regulated entities who have previously been investigated by their own regulator in the past, owners whose subsidiaries have become insolvent or financially unstable, or which are resident in other jurisdiction, particularly those identified as being of high risk. If any investigation is in prospect, it is important to identify these areas in advance and prepare materials and submissions which the SRA are likely to request to minimise any potential delay. Where issues are certain to arise, investors are well advised to meet these head on at the first application stage.

Specific issues arise in the case of multi-disciplinary practices e.g. mergers with accountancy firms, resulting in a business with parallel regulation by the SRA and ICAEW. Supplementary reports to the application will be required, and certain waiver applications may also be needed, which can add to the length of the application and approval process.

For the purposes of pre-completion approval, a “manager” of a law firm, includes a member of an LLP, partner in a partnership or director of a company. Should the corporate investor look to place an individual as a member, director or partner in order to represent its interests in day-to-day management matters, the process will be expedited where that individual is a lawyer (a broader group than just solicitors). If this is not possible, the appointed individual, will also require authorisation both as a member of the regulated firm and for money laundering purposes. The considerations identified in relation to the application for the corporate owner itself, will be equally applicable here. Historic convictions and cautions (other than minor driving offences), without time limit, must also be disclosed and evidence as to the good character of that individual submitted to rebut the presumption of unsuitability.

A number of these issues can be considered at a very early stage of the transaction. Parties should bear in mind that although the application forms can be straightforward, some level of preparation will be required, and sufficient time for the approvals to be received must be incorporated into the completion timetable