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Successor Practice Rules: pitfalls and premiums

In these tough financial times, law firms are considering mergers and acquisitions in order to consolidate their position in the market.

In these tough financial times, law firms like other businesses are considering mergers and acquisitions in order to consolidate their position in the market, or for some, as a means of surviving the economic downturn. Unhelpfully though, for those caught unaware, the Successor Practice Rules can create unwieldy and unfair results, and firms can find themselves taking on more than they bargained for! 

To help understand the Successor Practice Rules, we have set out below some example scenarios:

Where Barnaby & Co intends to be the Successor Practice to ABC Lawyers and incorporates their name and takes on their files, clients as well as staff, then there is of course no issue.

Where five of the seven partners in Allen & Co decide to move to Bell & Co taking their files and clients with them, then of course, Bell & Co becomes the Successor Practice to Allen & Co.

The outcome of some mergers and acquisitions may not however be as straightforward as the above examples.

Successor practice issues may well arise even if the majority of partners have not moved but one or more of the following occurs:

  1. Allen & Co’s name is used and/or incorporated into Bell & Co’s name (holding out);
  2. Bell & Co operates from the same premises as Allen & Co;
  3. Bell & Co acquires the goodwill and assets of Allen & Co;
  4. Bell & Co has assumed Allen & Co’s liabilities;
  5. Allen & Co’s staff transfer to Bell & Co.

Holding out “trumps” all other conditions. If another firm ‘holds’ themselves out as a successor practice to Allen & Co (and Bell & Co don’t) then the other firm will be the successor practice!

This can lead to some potentially unfair results…

Dodgy & Co, a five partner firm, decide to cease trading and the partners all agree with Bell & Co that Bell & Co will acquire the name of the firm, its files and clients, which turn out to be very unprofitable. At the same time, the senior partner in Dodgy & Co decides to retire. The remaining four partners of Dodgy & Co decide to go off and form an entirely new firm, Lawyers R Us.  

Any claims arising from the business of Dodgy & Co will fall to be dealt with by Bell & Co’s insurers, notwithstanding the fact that all the remaining former partners in Dodgy & Co are still trading.

Furthermore, when a sole practitioner, Mr Andrews (trading as Andrews & Co), decides that as he is approaching retirement he will close his business and take up a part-time consultancy position with Bell & Co., Bell & Co. will be the successor practice to Andrews & Co, notwithstanding the fact that Mr Andrews is not even a partner in Bell & Co but an employee.

Whilst it is insurers who will normally, save for fraudulent circumstances etc, pick up the majority of the bill, there is of course the excess to consider. Whilst indemnities can of course be obtained from the former partners/sole practitioner of the acquired firm again this is not without risk.   

Mr Andrews, the sole practitioner, had a £2,500 excess and no claims against him for thirty years.  Bell & Co obtain an unlimited indemnity from Mr Andrews in respect of  any excess they are required to pay arising from claims from his former practice. A claim comes in relating to Mr Andrews.

Bell & Co’s excess has unfortunately rocketed to £50,000, after the acquisition of Dodgy & Co’s business. The payment of this wipes out Mr Andrew’s savings and he now faces bankruptcy and the indemnity is worthless in respect of any future claims.

Light at the end of the tunnel

The change brought in by the Solicitors Regulation Authority to the Solicitors Indemnity Rules for 2010 may however assist some firms at least in achieving certainty when they merge/acquire another firm. 

The change, which can be found in Rule 5.3 (a) of the Minimum Terms and Conditions, allows a firm to elect to acquire run-off cover for any liabilities of the firm provided cover complies with the Minimum Terms, and provided the premium is paid under the terms of the policy (the cost is typically between two and three times the annual premium). The firm making the election must also report the succession cover election to the SRA within 7 days.

If, however, the firm fails to make an election or pay the premium due then the position will revert to the Successor Practice Rules.

The changes should at least offer a sense of certainty for all parties concerned but it remains to be seen whether it will be taken up on a large scale.

If any firm is contemplating a merger, acquisition or succession, it is crucial to ensure that all angles are covered. Please contact our Compli team if you require further assistance.

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