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Managing and Responding to Partner Exits – Part One: 10 Steps to Protect your Firm

We have seen an increasing number of professional services firms taking protective measures in respect of their partners as well as employees, to ensure the firm’s survival during and beyond the COVID-19 pandemic. Some firms are introducing reduced working hours and pro-rated profit share for partners, reducing partner monthly drawings and deferring partner distributions and others are making or considering capital calls from partners. Inevitably some firms will also be looking at partner de-equitisation and exits as a way to preserve the business and retain profitability as far as possible.
 
If the crisis is prolonged, firms are likely to plan for and make cuts across all levels. Partners may be quietly persuaded to leave (on an agreed basis) or forced to leave (if the firm has the power to compulsorily retire partners  under its partnership or LLP agreement and mutually acceptable exit terms cannot be agreed). Some partners may have already secured a new role before or even during the crisis as some firms will see the opportunities in the current market to make strategic partner acquisitions.
 
Managing partner exits during the current economic climate will be more challenging than ever. In part one of this two-part series, we set out 10 steps for firms to encourage an amicable and co-operative exit and avoid any potential legal claims and disputes as far as possible. In part two, we will set out 10 steps that partners facing a potential exit can take to protect their position.

The partners or senior management of the firm (depending on the terms of the partnership or LLP agreement) will need to:

1. Identify and understand the rights of the firm and the exiting partner under the partnership or LLP agreement and the general law. These are frequently overlooked or misunderstood.

2. Keep a paper trail to support the decision-making process.

3. Avoid simplistic selection criteria. Reliance on financial performance only may disadvantage certain categories of partners and may amount to unlawful discrimination such as: partners who are on or recently returned from maternity leave and/or working part-time or flexibly; older partners who have recently returned to full time client work after stepping down from management; and partners who have had periods of sickness absence due to ill-health such as cancer or indeed the COVID-19 virus.

4. Ensure all partners in the group to be affected are included in the selection pool and are assessed consistently against each other and be prepared to provide a copy of written assessment sheets to affected partners upon request.

5. Keep the number of people involved in the process to a minimum and impress on them the importance of keeping the proposed exits confidential whilst discussions are ongoing. The partnership or LLP agreement should ideally contain appropriately worded provisions for confidentiality obligations, agreeing internal and external statements, non-disparagement and co-operation for a smooth handover of client matters.

6. Prepare a reasonable retirement package proposal for each affected partner on a confidential, without prejudice basis. Try to offer up-front the two things that most exiting partners need:  as much time in their role before their exit date to enable them to find another job – even more necessary now than ever before; and a sensible financial cushion to protect them if they are not likely to find another job at any time in the near future (which may be the case during the current crisis and economic climate).

7. Think carefully about the damage that may be done to the partner’s career prospects by requiring an extended period of garden leave. If the exiting partner is really such a threat to the firm and its client connections that it wants to lock them out of them market for an extended period, should the firm really be asking them to leave at all?

8. Keep the possibility of seeking a formal resolution under the partnership or LLP agreement in your back pocket if negotiations do not proceed as planned.

9. Ensure that the decision-makers do not commit anything to email or paper about the exiting partners which they do not wish to be seen. Partners can require certain personal data held about them by the firm to be provided to them by making a Data Subject Access Request. Be aware that the partner may also be entitled to access information and documentation under the partnership or LLP agreement.

10. Consider a consultation with the entire partner group about the prospect of potential partner exits and ways of avoiding partner exits. If partners exits are unavoidable, consider mitigating the effects for the affected partners by offering an enhanced exit package.

Senior Associate Wendy Chung, Associate Wonu Sanda and Managing Partner Clare Murray are all experts in partnership law. If you are a firm considering the retirement of partners or you are a partner who is facing a proposed exit, please do get in touch with them, or any member of the Partnership Team, for guidance on your specific rights, responsibilities and potential liabilities.

CM Murray is Ranked Band 1/Tier 1 for Partnership by Chambers and Partners and Legal 500, and is recognised as having ‘one of the legal world’s strongest offerings in this area’. (Legal 500 UK 2019).

Unless specifically stated otherwise, we use the term “partner” in a colloquial sense to mean a partner in a UK partnership as defined in the Partnership Act 1890 or a member of a limited liability partnership incorporated in England and Wales.