Coming M&A Boom Presents Risks and Opportunities for Law Firms

A prominent money manager predicts an imminent boom in mergers and acquisitions, because the US economy is still growing sluggishly, so companies can’t grow fast enough organically to satisfy shareholders, and they have $1.45 trillion in cash.

There’s been no boom to date – global M&A activity is at a three-year low – except in technology and telecommunications, but according to consulting firm PwC “the fundamentals for strong M&A activity remain in place.”

This means there should be a lot of work available for M&A lawyers. If your firm has an M&A practice, now is the time to market it aggressively, and perhaps expand it via lateral hires. If it doesn’t, but wants to enter this practice area, it’s time to consider lateral hires or even an ‘M’ or ‘A’ with a law firm that has an M&A practice.

The one thing your firm shouldn’t do is dabble in this area: according to CNA, one of the world’s largest legal malpractice insurers, “nearly 70% of all business transaction claims are instituted against attorneys who reported that business transactions practice generated 5% or less of their annual revenues.” (p. 2) A review of these claims indicates that attorneys inexperienced in this area “underestimate the complexity of these matters…(and lack) the appropriate resources (to manage them), and the ability to properly process, prepare, handle, and review all of the necessary documents in the transaction.” (p.10)

The biggest source of business transaction claims (35%) is improper preparation, filing and/or transmittal of documents, i.e., the omission or erroneous drafting of a contract provision, failure to acquire the appropriate license, signature, or approval before recording a document, failure to file or record a document in time to meet a deadline, etc. The second biggest source of these claims (30%) is negligent advice. The other major source is conflict of interest, which occurred more often in this area of practice than in any other that CNA insures; the most common type of conflict of interest alleged was that the attorney represented multiple parties to the transaction.

To reduce your risk of being sued for malpractice – and incurring the associated stress, costs, and reduced productivity: 

I. Avoid:
A. Representing a client who is more experienced than you in the industry or type of transaction being undertaken.
B. Representing a client who may be engaged in a fraudulent transaction (you may be sued by those victimized by the fraud).
C. Representing a client who asks you to “cut corners” (this may be a sign of fraud).
D. Representing all parties to a transaction.
E. Representing one party, while the other parties are unrepresented.
F. Representing one party in a transaction, and having your fees paid by another party.
G. Scrivener representations, whereby the parties have agreed to a transaction and retain you to draft a contract that reflects their agreement.

II. Follow these procedures for engagements that you do accept:
A. Use a checklist.
B. Document the scope and specifics of the engagement in a letter to the client, and don’t begin work until the client has signed and returned it to you.  Sample Letter #1   Sample Letter #2 (see page 43) 
C. Document all instructions from the client.