Deals: Debate over notification timing
Law firms should not have to tell the Solicitors Regulation Authority (SRA) about upcoming merger and acquisition (M&A) activity as early as the heads of terms stage, leading advisers have argued.
London law firm CM Murray – which acts for other law firms – also warned that the regulator would have to keep any information released at an early stage “strictly confidential”, otherwise clients, staff and partners could “get spooked and undermine a potential transaction”.
The SRA has proposed that law firms notify it in advance about particular ‘prescribed events’ – the first two being M&As and a law firm beginning to hold or receive client money.
CM Murray’s response said a new prescribed events rule created “a workable framework for monitoring evolving risks”, provided that there was sufficient information for law firms “to understand clearly when the obligation to notify has been triggered, and sufficient time for them to do so”.
However, the consultation “implies that agreement of heads of terms tend to follow due diligence whereas in our experience, due diligence usually does not start (and certainly not in earnest) until after heads of terms have been agreed”.
Key commercial terms were not always addressed in heads of terms and were only finalised “on the brink of exchange” or after due diligence, with some agreed principles only settled in the final documentation.
“As such, we feel that requiring notification at heads of terms stage is not workable in practice.
“The first point at which the parties can say with a degree certainty that merger/acquisition is likely to complete is the point at which the merger/acquisition agreement is signed.”
The firm suggested that law firms should be required to notify the SRA about M&As at the earliest of the following moments: promptly after signature of the agreement, if a period of 30 calendar days or more is expected to satisfy conditions and/or undertake pre-completion steps; 30 calendar days prior to the expected completion date; or as soon as possible, if completion is expected or likely in less than 30 calendar days.
The response pointed out that potential deals tended to be 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.”
CM Murray was concerned too about the “huge volume” of information the SRA would seek about deals, 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.
“There should be a clear reason for each request because we would expect firms to devote a substantial amount of time and recourse to ensuring notifications to the SRA are comprehensive, up to date and not misleading.”
The firm suggested that event notifications included a ‘white space’ section for firms to add explanatory information to support their notifications and pre-empt concerns.
As we reported yesterday, the Law Society’s response also did not agree that the heads of terms stage was “the most appropriate or proportionate trigger”.
Instead, there should be a “more flexible, risk-based approach” to defining when notification should happen.
CM Murray managing partner Clare Murray will be speaking at our Regulation & Compliance Conference on 3 December in London.
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