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Partner Lateral Hires – Part 2 of 3: The Partner’s Perspective

According to the Global Legal Post, the London lateral hiring market remained buoyant last year despite the disruption caused by the coronavirus pandemic. In the present climate, partners may be reflecting on their position in their current firm, particularly if their firm has struggled to weather the storm during the pandemic, or where the firm has not treated its partners as well as might have been hoped during this difficult time.

In this news alert, the second in our series on partner lateral hires, we focus on the key issues, legal risks and practical considerations from the partner’s perspective when contemplating a lateral move.

Read Part 1 of the series, which explores some of the key issues that hiring firms should consider, here.

Express and implied duties to the outgoing firm

Partners who are looking to move firms should ensure they carefully review the terms of their partnership or LLP agreement (“LLPA”) with their current firm, and remind themselves of their duties, obligations and potential liabilities arising under the LLPA, whether express or implied.

Partners are likely to owe fiduciary obligations to their current firm, the extent of which will partly depend on the obligations that the partner is bound by under the LLPA. These fiduciary obligations may include:

  1. A duty to act in the best interests of the firm and for a proper purpose. This will include doing their best to promote the business of the firm while they are a partner, although it does not prevent them from leaving to join a competitor.
  2. A duty not to put themselves in a position where their own interests conflict, or may conflict, with the interests of the firm.
  3. A general duty to disclose to the firm all information obtained by the partner which is material to the business of the firm. This may include information about any actual or threatened activity which could damage the interests of the firm, including any material misconduct or breach of fiduciary duty by the partner.

Other express and implied duties to the outgoing firm that are relevant on exit include:

  1. Wide-ranging confidentiality obligations, preventing the partner from discussing their move with colleagues and clients, and restricting their ability to collect and share information prior to their departure, even in circumstances where the partner might believe that they are entitled to take that information. Disclosure of client information that is typically requested in lateral partner questionnaires may result in a breach of the partner’s confidentiality obligations under the LLPA and/or their regulatory obligations. Partners, and hiring firms, should avoid creating a damaging paper trail during the recruitment process, which could ultimately be disclosable in any subsequent litigation.
  2. Restrictive covenants, the duration and extent of which will need to be carefully considered, noting that the outgoing firm will be holding the partner’s capital, undistributed profits and tax reserves, and these sums therefore might be at risk in the event of a breach of any post-termination restrictions. Relations might become particularly hostile if the partner proposes to take other partners or employees with them to the new firm, thereby potentially triggering an unlawful team move, in breach of their duties to the outgoing firm.

In addition to potentially putting at risk any money owed to the partner, remedies for breach of contractual duties under the LLPA include injunctive relief; an account of profits earned; forfeiture of remuneration and/or damages for losses suffered by the outgoing firm.

Duties towards the hiring firm

Partners will also likely have a duty to make full disclosure to their prospective firm of matters which are material to their proposed status as a partner in the firm, and of which the hiring firm might not be aware. This could include, for example, any previous misconduct by the partner.

Partners should be prepared to respond to questions relating to previous disciplinary proceedings and/or other investigations relating to their conduct within lateral partner questionnaires, and consider the legal and regulatory implications of failing to disclose such information to the hiring firm.

Practical issues and considerations after accepting the new role

Partners are often bound by long notice periods, which can be combined with similarly long post termination restrictions and “waiting lounge” provisions. In addition, the partner could be required to spend all or part of their notice period on garden leave, if provided for under the LLPA.

Lengthy restrictions on exit are likely to be problematic for both the partner and the hiring firm. These restrictions are therefore commonly the subject of protracted negotiations, and partners will often try to agree an early release from their notice period and/or a full, or partial, waiver of restrictive covenants; for example, involving an agreed list of specific clients and/or specific services to be carved out of the partner’s covenants. The outgoing firm may take a robust stance, particularly if it is concerned how the negotiations will be viewed by the wider partnership. However, depending on the circumstances, the firm will inevitably need to take certain commercial issues into account when considering the approach to take in negotiations – for example, if clients want to follow the departing partner, the firm is unlikely to want to hold them hostage.

Given the risks associated with moving to a competitor, partners are advised to seek legal and regulatory advice at an early stage. They should look to initiate an open and transparent dialogue with the outgoing firm as soon as possible to explore ways of circumventing any problematic restrictions, with a view to avoiding future litigation. They should also consider requesting an indemnity from the hiring firm to cover their legal costs; any losses suffered due to damages or adverse costs awards; any losses arising from a reduction in their profit share; any retention or forfeiture of their capital or tax reserve balances; and any liabilities incurred under settlement terms agreed with the outgoing firm. However, the hiring firm may well push back on the terms of any proposed indemnity, or indeed refuse to provide an indemnity at all, factoring in the risk of being seen to have induced or assisted the partner’s breaches.

From a practical viewpoint, partners should ensure they have thoroughly researched the culture and ethos of the new firm and that they are satisfied it is the right place for them – otherwise, they may quickly run into roadblocks, whether due to an inherent cultural mismatch or a lack of integration. In the current remote working environment, integration may be even more challenging, so partners need to be comfortable that, if they are going to take the risks outlined above to move to a competitor firm, it is worthwhile and will lead to a successful and sustainable relationship that can endure the difficulties posed by the Covid-19 pandemic, now and moving forward.

If you are a partner considering a lateral move and/or require advice on the key issues and risks in relation to a proposed team move, or on any other issue covered in this alert, please get in touch with Partner David Fisher, who specialises in partnership issues for partnerships, LLPs, partners and LLP members.