LLP partner exits: what you need to know

Limited Liability Partnership (LLP) partner exits should always be handled with care: not only to minimise the risk of legal disputes and liability, but also to avoid damaging relationships with clients and the remaining partners and employees of the firm. Professional and financial services firms should endeavour to convey a unified front, particularly now that positive culture, reputation and morale are more valuable than ever.  Whilst partner departures may be sensitive and strained behind the scenes, avoiding a public dispute is usually a strategic priority. 

In this briefing, we outline some common issues regarding partner departures and make practical suggestions to overcome potential pitfalls.

Back to basics – legal status and rights of LLP members

Partners and LLP members are not employees in law, even though in practice the position of many partners at larger professional services firms can in many ways be akin to employment.  They are therefore not protected under unfair dismissal legislation.  They cannot bring claims for unfair or constructive dismissal if they feel they are being pushed out or have been treated unfairly. However, they do benefit from important protections under discrimination and whistleblowing legislation.

Partners whose profit share is cut and/or who are compulsorily retired or expelled by their firms may, therefore, bring employment tribunal discrimination claims (on the grounds of disability, age or gender, for example). They can also bring whistleblowing claims if they are subjected to any detriment on the grounds that they raised concerns in the public interest regarding any legal or regulatory failures or wrongdoing. 

Mandatory retirement ages remain common for LLP members and strict tribunal time limits must be observed in employment tribunal claims, as shown in this recent case.

The right of LLP partners to pursue claims in the employment tribunal can be a powerful weapon and can only be waived or settled in a statutory settlement agreement or ACAS COT3 agreement. The inclusion of an arbitration clause in the LLP Agreement cannot prevent partners from bringing statutory claims in the employment tribunal.  Settlement agreements on exit are therefore often a good idea, not only to ensure an effective waiver of any potential claims, but also to ensure the exit terms are clear.

General principles regarding partner departures

The default legal position is that a partner can only be expelled from an LLP if the power to expel is granted by an express provision in the LLP agreement. The starting point when considering a partner’s departure is therefore the LLP agreement.

A well-drafted LLP agreement will contain detailed provisions setting out how – and in what circumstances – an individual’s LLP membership may be terminated.  It is common to encounter separate provisions dealing with expulsion for cause on the one hand and termination without cause (confusingly often called “retirement”) on the other.  In without cause cases, the notice period will often be six or 12 months, which raises questions about the partner’s duties and profit share in the meantime and potential garden leave.

Many firms prefer to rely on termination without cause provisions as far as possible, as in theory this should be less controversial. In reality, disputes and issues can still arise, for example in cases where firms are alleged to have acted in breach of natural justice, arbitrarily, capriciously and/or in bad faith.  That said, the scope for disputes on the relevant process and threshold (such as bringing the firm into disrepute, material or fundamental breach) is at its highest in cases of serious alleged wrongdoing, which often also engage regulatory reporting rules.

In any event, the LLP Agreement (ideally reinforced by settlement agreement) should deal with key issues such as the leaving partner’s financial entitlements, confidentiality obligations and non-compete restrictive covenants.  It is very important that the wording of the LLP agreement is carefully considered and followed to the letter, as the court will generally interpret its terms strictly, even if that results in a seemingly harsh or unfair outcome for the departing partner (as occurred in this case).

The sting in the tail - restrictive covenants, team moves and forfeiture

The starting point when considering restrictive covenants in an employment context is that they are unenforceable unless it can be shown that they go no further than reasonably necessary in order to protect the employer’s legitimate business interests.  Broadly speaking in employee/employer cases, the courts apply a high threshold for enforcement, certainly against “rank and file” employees rather than directors and those in equivalent senior management roles, due to the imbalance of power in the employment relationship.

By contrast, the general rule in partnership cases (before the introduction of the LLP as a form of legal entity in the UK in 2001) was always that partners are treated as sophisticated, co-owners of the business, of equal bargaining power, who can reasonably be expected to have mutually agreed enforceable terms.  Hence in the leading 1984 Privy Council case of Bridge v Deacons, the court was prepared to enforce a five-year restriction against a Hong Kong law firm partner on departure, which restricted him from providing any legal services to any of the firm’s clients (despite the fact that he had personally had no dealings with over 90% of them).  It is inconceivable that such a clause would be enforceable in an ordinary employment case.

Whilst many partnership lawyers would agree that the facts in that case were extreme, and unlikely to be repeated in the modern context of professional services LLP firms today, partners should be aware that they are at particularly high risk of being strictly held to their non-compete restrictive covenants in legal proceedings.  With so many LLP partner disputes resolved by confidential arbitration, there remains a lack of definitive legal authority on this, but in this interim injunction decision in 2019, the High Court noted that Bridge v Deacons remains the leading authority on the point that “there is a different approach… in relation to covenants contained in partnership deeds” (as opposed to those in employment contracts).  Accordingly at the interim injunction stage the partner was held to their six month non-compete, which prohibited them from joining a competitor firm, despite already having spent 10 months on garden leave.

Finally, as shown in this case, the stakes in team move cases are even higher as LLP partners who coordinate and lead team moves in breach of their fiduciary duties can be liable to forfeiture of their partnership profit share.  This principle will apply to the period of the applicable breach, provided that the profit share can properly be characterised as remuneration for the provision of the partner’s services to the firm, as will usually be the case in modern professional services firms.

In conclusion, LLP partner exits present various challenges and there are numerous traps for the unwary, so specialist advice at an early stage is always a good idea.

This piece was first published by Accountancy Daily on 4 November 2022.

FURTHER INFORMATION

If you would like any further information or advice about the issues explored in this blog, please contact Andreas White or a member of our Employment team.

ABOUT THE AUTHORS

Andreas White is a partner in our employment team. He has substantial litigation experience, with a particular focus on complex and high-value employment and partnership disputes. Andreas has a particular interest in international and cross border employment law. He is a former president of the labour law commission of AIJA.