SRA lays out what firms can and cannot do to prepare for ABSs

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By Legal Futures

30 November 2010


Limits of contact: firms can talk to external investors but not reach firm agreements at the moment

The Solicitors Regulation Authority (SRA) has outlined the steps that law firms are able to take under the current rules in preparing to become an alternative business structure (ABS).

Updating its July 2009 Preparing for ABSs guidance – which just highlighted what solicitors should not do – the SRA says that it is “keen to enable firms to make appropriate preparations for the setting up of ABS” within the scope of the present law and professional rules, with issues such as maintaining independence to the fore.

It said these can include:

  • Discussions with potential business partners;
  • An agreement to enter into exclusive negotiations with a potential business partner;
  • A non-binding arrangement with a potential business partner for the setting up of an ABS (ie, an arrangement “subject to contract”);
  • Certain conditional contractual arrangements to be activated once the regulatory requirements have been changed on 6 October 2011 and all necessary approvals granted by the SRA, such as an agreement to accept new non-lawyers, or an outside investor, into partnership;
  • Practical preparatory arrangements, such as discussions with banks, the registration of company names, the acquisition of domain names, etc.;
  • Joint planning;
  • Public announcements; or
  • Joint marketing, including meetings with clients.

However, the SRA warned that the detail will be key. “For example, it is possible that certain conditional contractual arrangements could amount to a breach of current rule 14 of the Code of Conduct by creating a third-party interest over the existing ownership rights in the firm.”

The new guidance makes it clear that for the time being non-lawyer individuals or businesses cannot have any ownership interest in a law firm, or exercise any control or management over one (beyond legal disciplinary practices). Examples of arrangements that firms cannot currently enter into include:

  • Selling your ownership interest in the practice or any part of it (or any service company) before you have been authorised as an ABS, eg you should avoid granting any option to purchase your interest in the firm for nominal value, in circumstances which would suggest that the ownership and/or control of the firm has already passed;
  • Putting your future business partner in control of material decisions about your business;
  • Putting your firm in the position of acting as a “front” for another organisation;
  • Putting any outsider in de facto control of any votes in a meeting of the partners, members, shareholders or directors;
  • Creating a situation where a third party becomes a “shadow director” of your firm with effective blocking power on decisions made by your firm; or
  • Allowing your firm to become, in effect, a subsidiary of an outside organisation. “By contrast, there is no objection to a firm adopting a common logo or branding style to link the firm’s image with that of other service providers.”

However, depending on the circumstances, the guidance says it is possible that firms can apply for waivers from these requirements. SRA now has an ABS team in place to deal with queries. The authority expects to publish its regulatory requirements for ABSs in May 2011 ahead of accepting applications from August.

To read the guidance in full, click here. The ABS team can be contacted at ABScontact@sra.org.uk.

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