Growth of the Merger
One fallout of the sub-prime recession, aka “the great recession” was this: large and medium law firms drastically reduced hiring directly out of law schools. This led to a wave of law school grads deciding to hang out a shingle and go it alone. Not all of these businesses survived and thrived…but many did! Today, those surviving solos are actively joining up with each other to form new partnerships and LLC’s. Because of this uptick in small and solo firm mergers, I thought it would be a good time to revisit some of the malpractice considerations of a merger.
Protect your Merger from the Unknowable Past
First, you’ll want to protect your new partnership from the ghosts of your respective practices’ past. This can be done easily, if not cheaply. Each merging entity must purchase an Extended Reporting Endorsement (ERP) from his or her previous insurer. (Link to previous blog). When each of the merging entities does this, it eliminates any potentially negative impact on your new relationship in the event of a surprise claim from the past. A warning here: Don’t rely on a verbal confirmation. Require each merging entity to produce the actual ERP endorsement.
What if one Party is Uninsured?
It’s always possible that one or more of the merging entities is without insurance at the time of the merger. If that is the case, an ERP endorsement will not be available to that attorney or firm. Several risk shifting options may be available, but it will take a professional touch to sort that out.
If one of the merging lawyers was previously employed by a firm that will continue to operate after his or her departure, it is quite likely that the firm’s continuing LPL coverage will include coverage for “past employed attorneys” for claims made in the future arising out of work done when the attorney was employed by the previous firm. But you need to make sure you know how this works!
Be sure to get a knowledgeable professional agent involved before you proceed with the merger.
Avoiding Potential Pitfalls
New clients will bring new challenges. Establish a process for vetting each new potential client. Your system should include researching past legal services and cases of the individual merged entities as well as your new firm as a whole.
Make sure the bar history of all the lawyers involved in the merger is obtained and reviewed. Post-merger is not the time for surprises. Trust, but verify.
The professional liability claim history of all lawyers involved in the merger must be considered as well. This will have an impact on your new firm’s lawyer professional liability insurance (LPL) premiums.
Make sure widely disparate AOP’s and their impact on LPL premiums is considered and understood by all parties.
Have a meaningful discussion with your professional insurance agent about policy limits, deductibles and coverage features that will work best for the new firm.
A Successful Approach
We find the firms that merge together smoothly share a unified approach to:
- Client relationships
- Firm operations, data collection
- Case development
- Work-place environment
Those new firms predestined to “unmerge” quickly are those where the merged entities continue to operate as individual entities, albeit corralled together in one office. Their rapid unwinding is often related to the uncomfortable realization that each lawyer has a professional responsibility and liability for the legal work of the others. For “lone-wolf” types, the constraints of a combined operation seem to chafe. Resistance to new firm protocols inevitably leads to collapse.
“How we are going to operate” must be part of the pre-merger discussion. Expectations need to be set early and followed through.
Hope for the Best, Plan for the Worst
Speaking of splits, experience is a great teacher here. One of the most important “agreements” to negotiate (and put into writing) as part of any merger is an agreement on how to unmerge if it becomes necessary. Messy splits are the norm unless the how-to has been pre-agreed. Think of it as a business “prenup”.
There are a lot of benefits to merging, when it’s done thoughtfully and methodically. As with any relationship, open and consistent communication is a key to success.