THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK

FORMAL OPINION 1999-04

TOPIC: Law Firm Mergers

DIGEST: A law firm merging with another firm need not obtain the express consent of its clients to their matters being handled by the new form of organization, but should give its clients notice of the merger if the merger would result in the clients’ matters being handled by a firm materially different from the one prior to the merger.

CODE: DR 2-111; 5-105(D); EC 2-8; 7-8; 9-2.

QUESTION

When one law firm merges into another, does it need to obtain consent from its clients to their matters being handled in the new organization?

OPINION

The inquirer is a member of a firm (Firm A) that is merging into another firm (Firm B); Firm A would no longer exist and the partners of Firm A would become partners in Firm B. The inquirer wants to know whether the partners in firm A have to get express consent from their clients to the change of law firms, by, for example, asking the clients to sign and return a form.

We note at the outset that there may be issues of contract and partnership law involved in this question that the opinion does not address. In particular, the opinion does not consider the extent to which retainer agreements entered into with the old firm can be modified without the express consent of the client so that the new firm succeeds to the rights and obligations of the agreement.

The question is whether, independent of these contractual questions, there is any ethical obligation to obtain the consent of clients to their matters being handled in a new merged firm. That is, regardless of whether the client can look only to the former partners of Firm A to enforce the retainer agreement, or also to the partners of the now-larger Firm B, is there an ethical requirement of obtaining consent from all clients to their matters being handled by the new law firm?

There is nothing in the Code that directly addresses this question. The Code does prescribe that upon a sale of a law practice the client must be notified and given an opportunity to object, but that consent to the transfer of the matter to the buyer will be inferred from a failure to object. DR 2-111. No express consent is required. A sale of a law practice is a far more complete disruption of the attorney-client relationship than a merger, where the lawyers handling the matter typically continue to handle it, so we conclude that no requirement of express consent is necessary in the merger context either.

Even though there is no requirement of express consent, that does not mean that clients need not be informed of the merger. A lawyer has a continuing duty to advise clients of information and developments material to the clients’ decisions in connection with the matter entrusted to the lawyer. EC 7-8 states, "A lawyer should exert best efforts to insure that decisions of the client are made only after the client has been informed of relevant considerations." EC 9-2 states, "[i]n order to avoid misunderstandings and hence to maintain confidence, a lawyer should fully and promptly inform the client of material developments in the matters being handled for the client." These provisions, which have been elevated to the status of rules in the Model Rules, Rule 1.4,

(a) A lawyer shall keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information.

(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. are applications of the common law duty of all agents to keep their principal informed of material facts. Restatement (Second) of Agency 381 (1957); N.Y. State 555 (1984). "Material facts are those which, if known to the client, might well have caused him, acting as a reasonable man, to alter his proposed course of conduct." Spector v. Mermelstein, 361 F. Supp. 30, 40, (S.D.N.Y. 1972), aff’d in part, 485 F. 2d 474 (2d Cir. 1973).

These general duties have usually been applied to information directly related to the matter entrusted to the lawyer, e.g., Spector, or to conflicts of interest that could compromise the lawyer’s ability to exercise independent professional judgment on behalf of the client, e.g., N.Y. City 1996-3 (lawyer should consider informing client when lawyer represents adversary counsel even when no consent is required). But there is no reason why the duty of an agent to inform the principal of material developments would be so limited, since factors relating to the lawyer’s own practice short of circumstances giving rise to conflicts of interest could certainly affect the client’s decision to employ the lawyer. See generally EC 2-8 ("Selection of a lawyer should be made on an informed basis."). In the case of a sale of a practice to a new lawyer or firm, for example, the Code can be said to make the judgment that such a sale is always material, necessitating client notification and opportunity to object. DR 2-111.

Not all mergers will be material to all of the clients of the merging firms, but some may be. When a three-lawyer firm merges with a 300-lawyer firm, the clients of the larger firm will have little concern that three new lawyers have been added to the firm by way of a law firm "merger" — with transfer of client matters and, perhaps, technical reformation of the partnership — rather than a simple hire. In that example, however, the clients of the three-lawyer firm may well be represented by a materially different firm than the one that represented them before the merger. A client that enjoyed the status of being firm A’s largest client or appreciated working with a small firm may now be relegated to one among firm B’s many clients working with one or two of firm B’s many lawyers. Similarly, if a personal injury firm were to merge with a corporate law firm or a "union-side" labor law firm were to merge with a "management-side" firm, the clients of both firms might well feel the development to be material to their decision to continue to retain the merged firm. Thus, where a merger would result in the clients of one of the merging firms being represented by a materially different firm than the one that had previously represented the client (or in other cases where the lawyer knows that a particular client would view the change as material), the client should be advised of the merger and of the information that makes the merger of significance.

We do not believe it is necessary or appropriate to provide the full panoply of notice that is required by DR 2-111 upon a sale of a law practice.

C. Written notice of the sale shall be given jointly by the seller and the buyer to each of the seller’s clients and shall include information regarding:

1. The client’s right to retain other counsel or to take possession of the file;

2. That fact that the client’s consent to the transfer of the client’s file or matter to the buyer will be presumed if the client does not take any action or otherwise object within 90 days of the sending of the notice, subject to any court rule or statute requiring express approval by the client or a court;

3. The fact that agreements between the seller and the seller’s clients as to fees will be honored by the buyer;

4. Proposed fee increases, if any, permitted under DR 2-111(E); and

5. The identity and background of the buyer or buyers, including principal office address, bar admissions, number of years in practice in the state, whether the buyer has never been disciplined for professional misconduct or convicted of a crime, and whether the buyer currently intends to re-sell the practice.

DR 2-111(E) (referred to in DR 2-111(C)(4)) provides:

The fee charged a client by the buyer shall not be increased by reason of the sale, unless permitted by a retainer agreement with the client or otherwise specifically agreed to by the client. In a merger, unlike in a sale of a practice, the formerly responsible lawyers will usually continue to look after the matter, and retain an interest in keeping the client satisfied, which provides a level of structural protection for the client that is absent in a sale of a practice. Rather, the precise content of the notice given will vary with the circumstances and should be guided by the purposes of the notice: to provide the client with the information necessary to understand and, if desired, respond to a material development in the representation.

CONCLUSION

The Committee concludes that, while express consent is not required, when a merger would leave a client represented by a firm materially different from the one that had previously represented the client, the client should be notified of that fact as a matter of the lawyer’s general duty to advise the client of all material developments in the matters entrusted to the lawyer’s case.

Issued: September, 1999.