If the merger does go ahead it is likely spark a radical shake-up of both groups which could involve a multi-billion pound disposal programme.
SmithKline and AHP's lawyers are working on a plan to ring-fence potential legal liabilities arising from problems with some of the US group's products.
One option is to follow the example of T&N, once the largest asbestos manufacturer in the UK, which capped liabilities by taking out an insurance policy. Another plan under consideration is setting up a separate company which would be liable to pay any claims. The newly merged group would then be freed of any future liabilities.
Despite the legal complexities, the two sides are confident that they can reach a solution. "They would not have gone ahead with the merger talks and gone public if they thought that the potential problems were insurmountable," said one source.
AHP has recently been forced to withdraw from sale two leading dieting drugs, Redux and Pondimim, which were commonly used in the now discredited diet cocktail known as Fen-Phen. Research demonstrated that they could cause potentially fatal complications. It also faces legal action over Norplant, a contraceptive device that is alleged to have negative side- effects, including personality changes. Analysts estimate that legal claims could rise to several billions of dollars.
If a merger does go through AHP's agrochemical arm, which includes herbicides, pesticides and fertiliser businesses, is likely to be sold off soon after the deal is completed, according to sources close to the talks. The business does not sit easily with the huge prescription drugs and healthcare business that SmithKline and AHP seek to create.