Partner expulsion case offers lessons to LLP firms and their partners

This article was first published by Accountancy Daily on 27 January 2020.

27 January 2020

Just before Christmas, the High Court ruled on a dispute regarding the expulsion of a partner from one of the Big Four under the firm’s 2017 LLP Agreement (LLPA).
 

The case Joseph v Deloitte NSE LLP concerned a challenge from David Joseph, a Swiss-based partner at Deloitte, to a decision by the firm to dismiss him.

The legal issue in dispute – whether the firm is obliged to convene a special meeting of the full partnership (consisting of some 1,700 equity partners) to consider the Claimant’s expulsion – is narrow, but the case is of broader interest to LLP firms and partners with important lessons for both.

Background

On 23 July 2019 the Board of Deloitte served notice of retirement on the claimant, confirming his exit with effect from 31 January 2020.  In the meantime he was placed on garden leave.

Under the LLPA the termination of a partner’s membership of the firm by the Board involves three stages:

  • Stage 1 - notice of retirement.
  • Stage 2 - where the partner “feels aggrieved”, the partner has the right to present their case at a Board meeting.
  • Stage 3 – then if the partner is “still aggrieved”, the partner within seven days of the Board meeting may notify the Chairman that he or she wishes the Board to convene a special meeting of all the equity partners to review the Board’s decision.

In this case the Claimant was told by the Managing Partner that the next Board meeting was in Oslo “on 2 October… [and] the final Board decision following this meeting will be communicated to you by no later than 9 October”

On 1 October the Claimant sent the Chairman a written summary of his case and indicated that on medical advice he would not attend the Board meeting in person. The Board met as planned next day and decided to uphold their earlier decision to terminate the Claimant’s partnership. However, this was not communicated to the Claimant, and so on 10 October – eight days after the Board meeting – he wrote to the Chairman asking when he would receive their decision and indicating that if the Board had not changed their decision then he would want them to convene a full partners meeting under stage 3 above.

In response the firm sought to explore with the Claimant what he hoped to achieve and any alternative way forward, but when it became clear that he was insisting on his right to call a special meeting of the full partnership to hear his case, Deloitte took the point that the Claimant’s request was out of time because it was made on the 8th day after the Board’s meeting.  

The Claimant’s unsuccessful legal challenge

The Claimant’s case was that his request for a full partners’ meeting to hear his appeal was not out of time on the proper interpretation of the LLPA. He argued that Deloitte’s suggestion that communication of the Board’s review decision was not necessary for time to run was in breach of clauses in the LLPA requiring the Board to communicate their decisions with reasons, and governing the duty of fairness and good faith owed by the partners to each other. He pointed out that without knowing the outcome of Board review, the partner cannot know if he is “still aggrieved” and so this precondition to the exercise of the right of appeal at stage 3 cannot exist. Having promised to communicate their decision to him within seven days, he argued that it was not just and equitable for the Board to be allowed to refuse his request for a full partners’ meeting.

The Court disagreed and held that the LLPA was “clear and unambiguous” in its provision for a seven day appeal deadline from the date of the Board meeting itself, rather than from communication of the decision.  It emphasised that the LLPA is a carefully drafted legal document governing the relationship between “a sophisticated user group” of equity partners who could be expected to have entered into it “with their eyes open” (to its strict time limits).

Implications for LLP firms and partners

This case is part of a broader trend in commercial cases towards strict contractual interpretation and an emphasis on the natural meaning of contracts.  Individual LLP partners should be aware that legally they are in a very different position to employees.  The legal theory is that all partners are of equal bargaining power when they enter into their partnership agreement (even if in reality this is far from true) and so they should be held strictly to the rules of the firm. This applies not only to time limits, but also in other areas (for example, enforcement of non-compete restrictive covenants).

This case is also a reminder to firms that it makes sense to keep their LLP agreements and governance arrangements under review, particularly as they expand. The right to appeal against expulsion at a special meeting of the full partnership might make sense for smaller firms, but will rarely be appropriate at larger ones. At too many firms, partner exit and expulsion mechanisms are impractical.

Lastly this case is a reminder of the legal costs when cases go to court. In a costs judgement the Court considered the parties’ legal costs (£300,000 for Deloitte and £138,000 for the partner) and ordered the partner to make an interim payment of £125,000 towards Deloitte’s costs, with the proportionality of the rest of Deloitte’s costs and the partner’s liability for them to be determined separately. This highlights the need for real care on partnership exits, to avoid costly litigation.

This article was first published in Accountancy Daily on 27 January 2020.

Further information

If you have any questions or concerns regarding the topics covered in this blog, please contact Andreas White or any member of the Employment Law team.

Latest blogs & news

Back to work – where exactly does this leave employers in the aftermath of “Freedom Day” ?

“Freedom Day”, and what it actually means in practice, is not proving to be as straightforward as some had hoped (and arguably as the Government had initially led the business community to believe).  Employers can be forgiven for feeling confused as to what is expected of them and what they should be doing in terms of bringing their employees back into the workplace. We are by no means at the end of the debate, but we summarise below, the latest developments

Disciplining an employee for posting racist comments online

We have seen examples of people being ‘outed’ for posting racist comments online by individual bystanders who have been able to find their LinkedIn profiles and then contact relevant employers calling for the employee in question to lose their job.  Unfortunately, this is nothing new. But what can an organisation do in these circumstances, if it wants to demonstrate that it stands against racism and discrimination?

Back to the workplace – the new guidance and key considerations for employers

With lockdown restrictions moving to “Stage 4” of the Government’s roadmap to recovery, one of the key questions will be what this means with regard to returning to the workplace and, in a recent article, we considered the rights of employees on this issue.

Law firm partner’s profit share allocation was a reasonable exercise of discretion

Most disputes between partners of professional services firms are settled either through confidential negotiations or arbitration.  A public resolution of the matter through a full hearing and reported judgment is a rare occurrence. A recent example of such a case involving an ex-partner of a law firm is a useful reminder that it is difficult to challenge profit share or bonus decisions as an irrational exercise of discretion.

Regulatory compliance, trust and confidence in the financial services sector

In a case that attracted national media coverage and emphasises the crucial importance of regulatory compliance and the highest standards of professional conduct in the financial services sector, the High Court dismissed a breach of contract claim brought by an investment manager.

Your legal rights on returning to the office in the UK during COVID

So the Prime Minister has announced that most restrictions in place due to the coronavirus pandemic will be lifted on 19 July, despite acknowledging that the pandemic itself is far from over and that case numbers are expected to continue rising.   

 

Leading the way: it’s time for action on pregnancy loss

In recent weeks, it has introduced a formal workplace policy providing paid time off for all staff who are directly or indirectly affected by pregnancy loss. This is not only a significant enhancement to the provisions required by law but is also, I understand, the first of its kind being put in place by a UK law firm. We hope other firms in our sector and beyond will follow suit and normalise protection in this space, thereby supporting the wellbeing of those affected and protecting talent.

Keeping the crypto market on its toes? The FCA publishes latest cryptoasset consumer research and takes regulatory action against Binance Markets Limited

For the fourth year the FCA has published research on the changing relationship between consumers and cryptoassets. In spite of the pandemic, the strong upward trend in public engagement and media coverage has continued, with the FCA estimating 2.3 million adults now hold cryptoassets.

How wide should an investigation into bullying claims be?

When deciding whether to focus on the discrete allegations or look beyond them, employers need to balance confidentiality with duty of care to employees, says Mark McWilliams.

Disciplining staff for misconduct outside the workplace

Employers need to show the individual’s behaviour clearly affected the organisation’s reputation or their colleagues, says Catherine Bourne.

What are my rights on returning to work after a spinal cord injury?

According to the most recent NHS statistics 2,500 people are injured or diagnosed with a spinal cord injury every year. Indeed it is estimated  that there are a total of 50,000 people living in the UK with a spinal cord injury of some sort. Unfortunately sustaining a spinal cord injury impacts on every aspect of a person’s life. Often, where everyday tasks are a challenge, returning to work may seem unrealistic. The fact is that employment rates among people with spinal cord injuries remain much lower than the general population.

Should staff be compelled to have the COVID-19 vaccine?

There is currently no legal requirement to be vaccinated and the government has so far shied away from compelling people to be. Michael Gove’s review of the potential use of vaccine passports, expected in June, could alter the position. Employers can encourage staff to get vaccinated (as they may do with a winter flu jab, for example), provide access to medical information, allow paid time off to get the vaccine and provide sick pay for those suffering with side effects. However, insisting that employees are vaccinated could risk exposure to discrimination claims from those whose choice not to be vaccinated.

Preventing solicitor burn-out: more than ‘just an HR issue’

Failing to promote a good workplace culture based upon a firm’s core values is a potential regulatory issue.

Whistleblowing in the financial services sector – back in focus

The Financial Conduct Authority (FCA) recently launched a whistleblowing campaign, “In confidence, with confidence”, encouraging individuals working within the financial services sector to come forward and raise any concerns they have regarding potential wrongdoing, emphasising its commitment to protecting their identity and an increase in both resources and training at the FCA.  The FCA also commits to create a report about all concerns which have been expressed and to provide updates to a whistleblower every 3 months if so requested. 

Are bonus payments at an employer’s discretion?

In light of a recent EAT ruling, Nadjia Zychowicz and Eugenie Freeman discuss whether a high-performing employee should be awarded a bonus if the business is at risk of insolvency.

What are the alternatives to compulsory redundancy?

With many employers under significant pressure to cut costs, Moira Campbell outlines some possible options to consider other than reducing staff headcount.

The discontinuation of LIBOR and phasing in of SONIA in the Sterling Markets, what do we know so far?

Global financial markets are preparing to transition away from the use of the London Interbank Offered Rate (“LIBOR”) and adopt an appropriate alternative risk free rate (“RFR”) by the end of 2021. What are the reasons for the move away from LIBOR, the progress to date in terms of identifying the Sterling Overnight Index Average (“SONIA”) as the most appropriate alternative rate in the Sterling markets, and the steps still required to be taken to ensure such markets are ready for the phasing out of LIBOR by the end of the year

The importance of seeking support from your employer when going through a divorce

The breakdown of a relationship is a challenging and stressful time, even when you and your partner are on relatively good terms.

There are a number of support services we recommend to help manage the strain which comes with relationship breakdown and the significant changes to your and your children’s circumstances. People often go first to friends and family and then perhaps to a lawyer, counsellor or financial advisor. Many people do not feel comfortable talking to their employer about their circumstances and in this blog, we explore how it can be important from both a personal as well as family law and employment law perspectives.

Breach of 2002 banking undertakings - the CMA writes to Danske Bank

At the end of last month, the Competition and Markets Authority (CMA) published a letter written to Danske Bank concerning its breach of the Small and Medium-sized Enterprise (SME) Banking Behavioural Undertakings 2002, following loans it had offered under the ‘Bounce Back Loan Scheme’.

Should businesses scrap unconscious bias training?

Equality and diversity training initiatives have received a considerable amount of negative attention recently. In December 2020, the government announced its intention to scrap unconscious bias training for civil servants. Since then, there have been press reports of senior managers allegedly claiming that unconscious bias does not exist and the training is just ‘virtue signalling’ and a waste of money. 

So does this mean employers should now bin their diversity training? I don't believe so.  

Share insightLinkedIn Twitter Facebook Email to a friend Print

Email this page to a friend

We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

Leave a comment

You may also be interested in:

Skip to content Home About Us Insights Services Contact Accessibility