One of 2017’s biggest legal trends is the upswing in law firm merger activity. Altman Weil’s MergerLine site reports 76 deals announced through 2017 Q3, the most ever recorded through three quarters, with a prediction that there might be 100 mergers by year-end, surpassing the 2015 high of 91.

Firm mergers raise lots of conflicts issues, and some mergers are scuttled when they can’t be resolved. Another issue that can be troublesome in the courtship stage involves the considerable amount of financial information disclosed, namely: How can firms that are exploring a merger guard against the possibility that revealing financial information to each other might lead to poaching each other’s top rainmakers in the event that the merger doesn’t go forward? Can firms enter into non-solicitation agreements, to alleviate this reasonable concern?

Issue of lawyer mobility

A new ethics opinion from the North Carolina state bar addresses agreements, made as part of merger negotiations, not to solicit or hire lawyers from each other for a specified period of time in the event that the firms decide not to merge.

The ethics issue arises under Model Rule 5.6(a), which prohibits a lawyer from offering or making an agreement that restricts the right of a lawyer to practice after terminating an employment relationship (except for retirement benefits agreements).

The rationale is that agreements that impose practice restrictions after a lawyer leaves a firm limit a lawyer’s professional autonomy; and more important, they limit the freedom of clients to choose a lawyer.

De minimis restriction

The North Carolina opinion reviewed an agreement between two firms exploring a merger. In addition to customary terms barring disclosure of confidential client and proprietary firm information, if the firms decided not to merge, each firm agreed not to:

  • induce or solicit each other’s lawyers or other employees to join either firm;
  • hire or engage each other’s personnel as partners or counsel;
  • for the term of the merger exploration agreement (one year) and for two years after termination of the agreement.

The Committee noted the reality of the merger marketplace, surmising that “the non-solicitation provision was included in the agreement to foster the trust necessary for both firms to disclose financial information about [lawyer] productivity” without fear that if negotiations fell apart, one or both firms would try “to lure highly productive lawyers or ‘rainmaker’ lawyers away” from each other.

The proposed agreement was permitted under the Tar Heel State’s adoption of Rule 5.6, the Committee said, viewing it as a matter of first impression. First, the agreement imposed only a de minimis restriction on the mobility of the two firms’ lawyers. “If there is a reasonable business purpose,” the Committee said, a “restriction that impacts lawyer mobility may be permissible.” This one was for a relatively short, defined period of time, and only affected employment with one other law firm.

In addition, the Committee said, the restriction on lawyer mobility did not impair client choice: it would not prevent or inhibit a client from following a lawyer who left one of the firms in order to take a position with a firm that wasn’t subject to the agreement.

The Committee cited the ethics rules as “rules of reason” (as noted in their scope section). Under that rubric, and with its limited impact, the “no poach” provision passed muster.

Any more out there?

I’m not aware of other ethics opinions that deal with this aspect of Rule 5.6(a), or a no-poach clause. If your firm is part of the hot merger marketplace, it would be wise to tread carefully and seek advice before including such a clause in your agreement with a potential merger partner. And of course, as always, check your jurisdiction’s version of the rules.