Navigating the challenges of international mergers
International law firm mergers require a comprehensive approach to address challenges in regulation, taxation, profit sharing, liability and more
An international merger can create a sensational headline when two prominent global law firms join forces or when two single-jurisdiction firms merge to expand their reach or safeguard their operations, such as IP firms seeking a presence in continental Europe after Brexit. Nonetheless, mergers entail more than simply a partner or team moving from one firm to another; they involve the integration of two entire businesses, or at least the majority of them.
While international law firm mergers share some similarities with mergers between two law firms based solely in the UK, there are notable distinctions and complexities that must be addressed to ensure a successful merger on an international scale.
All mergers, whether international or domestic, share a common trajectory:
Strategy: Both firms must first identify their own strategic goals. Will a merger achieve these? Will a merger with this proposed merger partner achieve these? If not, walk away and consider other options. Lateral hiring? Restructuring? A merger is not a strategy in itself.
Courtship: Both firms need to identify firms which will enable them to deliver their strategic goals. Usually this involves identifying the desirable features or characteristics of potential merger partners. For example, strong multi-disciplinary practice in a specific jurisdiction or corporate law strength in Asia. After that, a shortlist of potential targets can be prepared, ideally ranked in order of expectation of strategic alignment. At this stage, tentative informal approaches will start. Consultants often assist with this.
Heads of terms: If preliminary conversations are positive, firms will start discussing heads of terms. At this stage, confidentiality and exclusivity agreements may be signed, and a communications strategy and emergency press statements prepared in case of leaked information.
Due diligence: Both firms need to understand each other and this can be more involved in an international merger. Some key points are addressed below.
Merger agreement: Likewise, there will be a merger agreement but this is likely to involve greater complexity against an international backdrop.
Implementation and integration: Effective implementation and integration is key to the success of any merger. Integration should not be treated as a less important element just because it occurs after the merger date.
Ultimately, all these factors play pivotal roles in shaping the success and desired outcomes of the merger process. Below, a few key issues that often drive decision-making in an international law firm merger are outlined.
In most countries law firms and/or lawyers are regulated in order to provide legal services. It is vital therefore that a merger does not undermine or compromise the ability to provide legal services in the relevant jurisdictions. For example, following Australia’s lead, in England and Wales there is now a well-established system of non-lawyers having ownership stakes in law firms. By contrast, most US states remain steadfastly opposed to non-lawyer ownership of law firms.
It is worth remembering that for these purposes regulators usually consider lawyers qualified in a different jurisdiction to be ‘non lawyers,’ which adds further complexity.
Firms need to consider how to structure the combined firm in a way which complies with local regulation. This can often affect the way in which profits are shared and decisions are made locally, as well as how the lawyers from that jurisdiction participate in profits and decisions in the central firm vehicle.
Maintaining a consistent culture where firms are by regulatory necessity separate is the associated challenge. Sometimes a Swiss verein or similar structure can be used as an ‘umbrella’ organisation for the different entities within the global firm to be subject to the same code and rule book.
If a merger can be achieved, regulation will also influence the combined firm’s risk management and working practices. For example, managing conflicts of interest varies from country to country. Global firms need systems which identify and manage risks in all of their locations. This is not unique to international firms which are merging: it is an existing challenge for existing international firms, but care is needed to align two already sophisticated systems.
Taxation is another key consideration in a merger. When partners operate from many different locations there is a high risk that partners or the firm will be subject to tax in several different places. The tax advice needs to assess this and establish whether there are different approaches, structures or working practices which would work better. Tax advice should also explore other issues, including local taxes such as social security and treatment of intra-group payments.
Tax considerations can drive commercial decision making and therefore influence the culture of the firm. For example, should partners’ global compensation take tax into account? Often firms conclude not: those living in a high tax jurisdiction simply have a higher tax bill. By contrast if the firm requires a partner to relocate, should the same principle apply? Often firms conclude not: a partner should not pay more tax for agreeing to relocate for the firm, with the result that compensation is adjusted to relieve the impact of taxation.
Aligning profit sharing systems can be challenging. Changing systems may fundamentally change a firm’s culture, which could be undesirable and this may be further complicated with geographical variations. However, compensation systems are usually flexible enough that a workable solution can be found. The real challenge therefore is securing partner support.
Both firms will need a decision to proceed with the merger. This is often a decision of the partnership. Large international firms are usually centrally managed and management will seek a mandate from partners, usually subject to some key parameters, in order to avoid seeking a second partner vote. As a practical matter, powers of attorney are often used to support the process. Firms will need to know whether or not those powers are effective in each of the relevant jurisdictions.
Understanding the liability risks is vital to the feasibility of an international merger. Firms will want to understand where and how liability can be limited, and how effective that protection is.
In some jurisdictions it is impossible to practise law through a limited liability entity, or one of the merger partners may have chosen to do so. For example, Hong Kong introduced its LLP relatively recently and so a Hong Kong office may not yet have adopted the limited liability form. Equally, unlimited liability may have been a commercial choice, as is the case for some UK based firms. International firms often implement lifeboat covenants arrangements to protect individual partners who remain personally exposed.
Even if the legal services entities themselves are limited liability vehicles, another question is whether to offer cross-indemnities across the global group. Some firms decide not to, on the basis that limited liability should be the default position, while others argue that the firm’s culture dictates that the group should stand and fall as one.
It should be evident from the comments above that expert input, for example on tax and regulation, is vital before international firms can ascertain the implications of a proposed merger and then decide whether or not to proceed. Likewise ongoing input from all jurisdictions is vital as the merger document is agreed and local legal and practical issues are addressed.
Fortunately, law firms are in a stronger position than many other professional services firms because they can draw on internal resource. Firms should however calculate the internal costs of lost billable hours - at a time when a merger partner would be scrutinising performance - and potential internal conflicts of interest versus external advisers’ fees.
Many firms will also lack internal partnership and regulatory expertise and experience in negotiating a law firm merger; using third party specialist advisers can address this gap and also take the sting out of potentially difficult negotiations with future business partners.
It is important to have a central project team and core advisers to maintain momentum and to be accountable for progress. However, the team is staffed, the international merger process requires ambition, meticulous thought and sufficient time and resource.
Corinne Staves is a partner at specialist partnership law firm CM Murray and regularly advises on UK and international law firm mergers cm-murray.com