London. (Photo: Shutterstock)

Professional practices, like many businesses, have reacted to the downturn caused by the coronavirus and national lockdown by seeking financial assistance, deferring tax and implementing cost-saving measures, such as furloughing employees. Many partners have accepted both a reduction in monthly drawings and suspended partner profit distributions.

Unless the economic impact of the pandemic crisis abates, further measures such as the claw-back of awarded but unpaid discretionary bonuses and de-equitization of equity partners will be imposed.

Poorly performing partners or those no longer perceived as a good fit are at greater risk because of the business impact of the crisis. The next logical and proactive step will be to remove partners who are "not paying their way."

There must be a contractual power to do so and any agreed-upon process should be strictly followed. Having partners exit "in the right way" will minimize the risk of expensive litigation, preserve confidence in the firm's leadership, reinforce the firm's brand, and retain clients.  Removal of expensive partners where profits are stretched may enable retention of talent or recruitment of candidates offering a viable future contribution.

Firms should be wary of the following key considerations/challenges.

What Does the Partnership Agreement Say?

The right to exercise any compulsory retirement or expulsion power, and the mechanics for doing so, should be carefully considered at the outset.

A review of the agreement and related documentation will usually identify how much notice the firm must give, whether the partner can be put on garden leave or suspended, the existence of a "waiting room" provision (which prevents a certain number of partners from leaving the firm within a specified period), financial entitlements linked to exercise of the options for exit, the scope for delaying or withholding profit share, and restrictions that apply to the partner on retirement.

Failure to Follow a Proper Process

The law is likely to impose constraints on discretionary compulsory retirement powers, including a duty to act in good faith in the best interests of the firm and process and outcome limitations—i.e. ensuring the firm has not acted arbitrarily, capriciously or irrationally. Firms should assume that decision-making will be scrutinized.

Employment Tribunal Rights

Is the target partner a true partner or an "employee" in partner clothing? An employee will benefit from enhanced employment rights and owe less stringent duties of good faith to the partnership. Onerous restrictive covenants are also more difficult to enforce against employees.

Discrimination or whistleblowing claims (traditional partners are not protected by the whistleblowing legislation) are available to partners and LLP members. Selection of partners for retirement should not be influenced by protected characteristics (sex, sexual orientation, age, race, religion or belief, gender reassignment, marriage or civil partnership or maternity or pregnancy) or protected disclosures regarding alleged wrongdoing.

Time limits for bringing such claims are short and are likely to put pressure on reaching a settlement before litigation is commenced. Compensation for discrimination or whistleblowing claims is uncapped and these claims are heard in a public forum. The risk to the reputation of a professional practice and partners (who can be held personally liable as agents of the firm) involved is potentially significant and could lead to regulatory problems for both if malpractice is exposed.

Rights to Documentation

Partners may have express rights to documentation, rights to documentation under the default regimes that apply in the absence of an agreement, and can make use of data subject to access request rights.

Decision-makers should take care to ensure a paper trail is kept to support their position and not commit anything to writing that may undermine a fair process. Independent partnership advice may need to be taken directly by a limited number of partners/members to avoid giving all partners—including the partner being asked to leave—a right to see the advice.

Reaching Agreement

In the current climate, the firm's leadership should be focused on client relationships and retaining talent. Referral of a forced retirement to a vote or litigation arising from mismanagement is an unnecessary distraction, may reflect management shortcomings, be unsettling to other partners or damaging in the wider context of what is going on, e.g. a merger.

A partner will typically want to leave on favorable terms in a manner that enables him or her to work unimpeded elsewhere. If cash flow permits, allowing retention of i) any drawings received; and ii) (an early) distribution of projected profit, return of capital and releasing tax reserves are likely to pave the way to a constructive discussion about a settlement.

A firm is wise to give on things that cost it nothing but are likely to be important to the partner, for example, relaxation of restrictions where there is no competitive threat to the business.

Treating the departing partner with respect and decency is likely to go a long way to avoiding an expensive legal battle. The involuntary mechanisms loom in the background if agreement cannot be reached.

Ivor Adair is a partner at Fox & Partners.

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