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Moving times

14 April 14

As law firm mergers and reorganisations become increasingly common, what are the rights and obligations of partners contemplating, or being faced with, leaving their practice?

by Sarah Chilton

Whether you are a partner in a law firm, or aiming for promotion, the recent flurry of mergers and team moves may leave some solicitors wondering whether partnership is the way forward.

If you are a solicitor in private practice in Scotland, you will likely have witnessed some movement over the last few years, whether lateral hires, mergers, team moves, promotions or de-equitisation. When certain sectors have struggled, some firms have had to take action by demoting partners, restricting profit shares, forcing retirement or stalling promotions. This article offers partners and prospective partners some guidance.

Many law firms now operate as LLPs, although some retain their status as traditional partnerships. A few others operate as private limited companies. We will focus on the law relating to LLPs, although many of the practical issues are similar across the various structures.

Ground rules

The law relating to LLPs is mainly found in the Limited Liability Partnership Act 2000 and the Limited Liability Partnerships (Scotland) Regulations 2001. Some concepts are derived from the Companies Act 2006.

Besides the law specifically relating to partnerships and LLPs, and the terms of a partnership deed or LLP members’ agreement, partners are also protected from suffering unlawful discrimination.
Partners in traditional partnerships are protected by s 44 of the Equality Act, and LLP members by s 45 of that Act. The law prohibits discrimination, victimisation and harassment by firms against partners and LLP members, and against prospective partners and members.

For example, it is unlawful to discriminate when deciding who should be offered a position as a partner, the terms on which any such offer is made, or whether a partner should be expelled. It is also unlawful to subject a partner to a detriment on the grounds of a protected characteristic: a person’s age, sex, disability; marriage or civil partnership; religion or belief; pregnancy or maternity; sexual orientation; gender reassignment or race. Any provisions in a members’ agreement which seek to prevent a partner from pursuing these rights will be void.

In contrast, partners and LLP members have no protection from detriment or expulsion in the event that they “blow the whistle”. Members of an LLP are not regarded as employees or workers, the only categories of people protected from detriment or dismissal if they make a protected disclosure within the Employment Rights Act 1996. However, that may not be the final word on the matter: on 24 March 2014, the Supreme Court heard an appeal from the decision in Clyde & Co LLP v Bates van Winkelhof [2012] EWCA Civ 1207. In that case, an equity partner claimed she had suffered a detriment (her expulsion from the LLP) on the grounds that she had made a protected disclosure. The Court of Appeal held that Ms Van Winkelhof was not a worker and, therefore, not able to proceed with her whistleblowing claim.

In reaching its decision, the court applied s 4(4) of the Limited Liability Partnership Act 2000, which states that members of an LLP are not regarded as being employed by the LLP for any purpose unless, if they were partners in a partnership, the member would be regarded for that purpose as employed by the partnership. At the time of writing, we await the Supreme Court’s judgment.

What’s in the LLP agreement?

The first place we look when advising partners who are planning, or being required, to move, is the LLP agreement. That is the document which is likely to govern your promotion, demotion, exit, and post-termination obligations and entitlements.

Considerations if leaving an LLP

First, check the notice requirements, any entitlement of the LLP to place you on garden leave, the post-termination restrictive covenants to which you will be subject, and the arrangements for repayment of capital, loans and profit share. If you are planning to leave, before you serve notice you should know the firm’s options, especially if one may be to place you on garden leave.

Restrictive covenants and garden leave

Many of us are familiar with these concepts so far as they apply to employees post-termination, but the enforceability of provisions relating to restraint of trade is different for partners.

The general principle is that restrictive covenants are void on the grounds of public policy unless they are:

  • necessary to protect a legitimate business interest (such as trade secrets or business connections);
  • go no further than is reasonably necessary to protect that interest.

As a result of the greater equality of bargaining power between partners (in theory), and the fact that partners in a firm usually give covenants to each other on a mutual basis, the approach of the courts is to enforce more onerous restrictions between partners, than between employees and employers. However, the courts may take a different view depending on individual facts, and in particular may treat salaried partners as employees, making it harder for the firm to enforce the restrictive covenants against those partners.

Typical restrictions in an LLP agreement include:

  • non-solicitation of clients;
  • non-solicitation of staff or other partners;
  • restrictions inhibiting team moves;
  • a prohibition on providing services to a firm’s existing clients; and, less commonly,
  • a non-compete clause, preventing the partners working for a competitor.

Despite the greater equality of bargaining power, certain restrictions will still be held to be too wide, rendering them unenforceable. For example, in Dallas Macmillan & Sinclair v Simpson 1989 SLT 454, a five-year restriction preventing an outgoing partner from practising law within 20 miles of Glasgow city centre (which at the time would have covered about half of Scotland’s law firms) was held unenforceable.

The LLP agreement may also give the firm the express power to place an outgoing partner on garden leave. Without such a clause, courts are reluctant to hold that the firm has any form of implied power to place a partner on garden leave.

Being served notice of retirement

The LLP agreement usually sets out the process, and what reasons may be required (if any), to entitle the LLP to serve notice of retirement on a partner. Irrespective of the reason given to you, think about whether that is the real reason for the notice. An LLP may not be bound by employment law, but, as discussed above, they cannot discriminate because of a protected characteristic under the Equality Act 2010. Serving notice of retirement because of a protected characteristic is unlawful, and the remedy is compensation.

Feel you are being forced out?

Often partners feel pushed out before they are served with notice or expelled. They may find it impossible to stay because of bullying, personality clashes, or politics. Sometimes partners are confronted with performance issues, and offered a choice between leaving quietly or having their proposed expulsion put to a full partnership vote.

If going is the only option, think about your objective. Often that is to achieve a smooth exit, with a financial cushion for the future and the best prospect of finding a new role. That process will usually be negotiated between parties and involve assessing whether there are any legal claims, such as a breach of the LLP agreement, or discrimination, and then comparing a partner’s legal entitlements to whatever may be being offered by the firm. At the beginning of any negotiation, it is also helpful to compile a wish list of the things you would like in any termination package. Examples include:

  • Good leaver status. This will often have implications for your rights during notice, including garden leave, your entitlement to information and potentially also the speed of the return of capital.
  • Reference. It is wise to agree the form of a reference to a prospective new LLP or employer, particularly if the circumstances surrounding departure have been contentious.
  • Announcement. The way in which your departure from one firm, or demotion or change of role, is announced is vitally important to your professional reputation, both inside and outside the firm. It is best to agree the terms of that announcement, and also to agree that verbal queries about the reason for departure will be consistent with the written announcements.
  • Post-termination restrictions. It is often possible to negotiate a waiver, or partial waiver, of these restrictions or to agree a list of clients to be excluded.
  • Legal fees. If you negotiate the terms of your exit, it is very common to negotiate a contribution towards, or full payment of, the cost of legal advice.
  • Indemnities. You want to be able to walk away with a clean break, with your capital contribution in your pocket, and no hidden surprises lurking in the basement, for which you may be liable.
  • Outplacement and other support. Think about what else you need. If you are leaving to take up another position elsewhere, there may be little else. If not, you may need outplacement support from advisers who can help you find and secure another role.

Finally, if you negotiate terms for your departure, you should ensure that those terms are properly documented before you leave, so you can move forward with certainty to your next challenge.

Sarah Chilton is a senior associate at Fox, a specialist employment and partnership firm in London, and is dual qualified in England & Wales and in Scotland

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