As solicitors we are involved in many law firm sales and purchases each year and the structure of both the buyer and seller (we often say that there is no such thing as a merger) creates some different scenarios. In this blog I want to look at them and the issues that need to be addressed.
We have bought Partnerships and LLPs on behalf of other Partnerships and LLPs and bought Partnerships and LLPs on behalf of Limited Company law firms. We have also bought Limited Company law firms on behalf of both LLPs and Limited Companies. Similarly we have acted for sellers of law firms in a range of similar structural options.
At the risk of teaching lawyers how to suck eggs, or even to mix a metaphor, a partnership does not exist as a separate legal entity and so the partners must sell the partnership assets to the buyer, unless the buyer decides to become a partner in the partnership. If the buyer is an existing law firm, that will be unlikely, but is not unknown.
Similarly, most LLP sales are set up so the buyer acquires the assets of the LLP. Because the LLP is tax transparent there should be little tax difference to the selling members of the LLP, but please take independent tax advice. The buyer could become a member of the LLP and operate that way; this model may work for a non-law firm buying into a law firm, but such an entity would probably prefer a company structure.
With a partnership or LLP as the seller, and the buyer acquiring the assets, it makes little difference whether the buyer is an LLP or a limited company as the entity will acquire the assets of the selling firm from its partners or members.
Where an LLP is buying from an LLP or a limited company, the acquiring LLP could in theory become a member of an LLP or a shareholder in a limited company that it acquires. The trading law firm could pass its profits up to its shareholder owner or its owning member in the LLP, remembering that than LLP must have at least two members. This can add a layer of complexity and the trading law firm would need to be licensed as an ABS (Alternative Business Structure) if it were not already an ABS as it is has a deemed non-lawyer owner of a law firm.
One issue that we see is that sellers who are shareholders in a limited company law firm often want to sell their shares (rather than getting the company to sell its assets) for better Capital Gains Tax treatment. If the buyer agrees to this share purchase, it often decides that it will hive the assets up into its existing structure after completion. It wants to save having two sets of PII Insurance, two COLPs, two COFAs and double everything else.
In this scenario we effectively have to run a share purchase and an asset purchase simultaneously as, for example, the staff transfer regulations (TUPE) will need to be carried out immediately post completion but need to be started weeks before completion. Similarly any regulatory approvals will need to be requested before approval for both the share sale and the asset transfer to the buyer.
The key issues centre around the difference between an asset sale and a share sale. In a limited company the company owns the assets and employs the staff. An LLP also owns its assets and employs its staff. Both have contracts with their clients and suppliers. That stays the same – the ownership of the shares in the company changes or a new member acquires the membership interests of the outgoing members of the LLP. This is often a simpler process, although the due diligence is similar.
In an asset sale, each asset needs to transfer across separately. This makes property transfer more complicated and staff need to TUPE across and be consulted. Each contract will need to be assigned or novated, and particular care must be taken with change of control clauses that can end contracts if the owner of the entity changes. With a traditional partnership, the partners are jointly and severally personally liable and care must be taken to end their liability.
In any structure care must be taken if the partners/members/owners have given personal guarantees to have them removed.
The Solicitors Regulation Authority regulates solicitors firms and licenses ABSs. For regulated and licensed law firms, a share sale or an LLP being acquired by a new member will not cause regulatory issues if the new owner is a regulated or licensed entity.
Where there is an asset sale, the client retainers, conditional fee agreements and client account balances will need to transfer to the new owner’s regulated entity. Retainers and client account monies cannot be transferred without client consent and this must be fairly obtained before the transfers occur. Conditional fee agreements need to be assigned carefully to ensure they remain valid.
This article was written by Mark Briegal of Bennett Briegal. Mark can be contacted at email@example.com or on 07973 283 678.
Please note the contents of this blog are for information only and must not be relied upon as legal advice as each scenario is different.