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Protecting your firm from partner departures | Feature

While partnerships’ attention has necessarily focused on issues such as minimising costs and optimising virtual working for the last few weeks, retention of talent must not slip down the list of priorities. Tough calls are being made around cuts to partners’ drawings and compulsory retirements, but equally firms need to urgently consider how to retain the key talent they need to survive.

The threats may come from a variety of directions. Working from home and spending more time with loved ones may prompt thoughts of early retirement. Others may be spurred on by a ‘carpe diem’ outlook to strike out on their own. Preparatory communications for a team move may be all-the-more tempting when not attending a physical office. Existing entrepreneurial outfits are already actively trying to poach top talent. Being familiar with the protections you already have and knowing the options available if the threats become reality will stand you in good stead.

Firms can be reassured by the layer of protection that already exists. Fiduciary duties between partners or which LLP members owe to their firm while they remain a partner prohibit diversion of the firm’s business opportunities, misuse of confidential information and soliciting clients and employees for a competitor business which they will be joining or starting. Partners are also obliged to disclose their knowledge of activity which may damage the interests of the firm, including their own misconduct.

These duties may well be bolstered by express contractual terms within partnership and LLP deeds. Lengthy notice periods are not uncommon and 12 months, coupled with lengthy restrictions, may go a long way to providing protection. Utilised properly, garden leave provisions may offer damage limitation, preventing a disillusioned partner from wreaking havoc in the office constrained by the duties outlined above. There are also likely to be extensive confidentiality provisions within partnership documents to supplement the equitable duty of confidence.

Post-termination restrictions are the classic protection to ‘lock’ partners into firms but they must go no further than is necessary to protect a legitimate business interest. Despite there being limited case law on this issue, it is likely that more onerous restrictions will be enforceable against LLP members than employees. We know that is the case for traditional partners. Recent case law (Pricewaterhousecoopers LLP v Carmichael [2019]) has applied old authority upholding a five-year restriction preventing a former partner from acting for any client of the firm (Bridge v Deacons [1984]). Until now, partnership experts had doubted Bridge v Deacons was still good law. Typical restrictions include ‘non-solicitation’ of clients, staff and referrers; ‘non-dealing’ prohibiting a partner from acting for a client or employing/going into business with a partner or employee and a ‘non-compete’ (more common in the accountancy sector than the legal sector). Regarding duration, there is no ‘magic number’ to guarantee enforceability; the question is what is reasonable and necessary to protect interests such as client connections, confidentiality and the stability of the workforce. 12-month restrictions are not uncommon for the legal sector.

How then can firms bolster this tool-box and proactively guard against flight risk?

Larger firms may have the IT capability to detect activity such as large-scale transfers of information to personal email addresses or communications at unconventional hours. As with other forms of personnel-monitoring, GDPR compliance must be borne in mind. Keeping in touch with partners and communicating about decision making is a powerful preventative measure.

It is possible to include anti-team move clauses in partnership documents although enforceability is currently untested in the courts and is likely to require collusion between partners. Waiting room provisions may regulate the number of partners leaving within a set period. Amending constitutional documents to incorporate new or strengthened provisions now is an option, but it may be tricky to garner the requisite buy-in from partners.

What strategies are available to a firm that discovers competitive activity? An essential first step is to understand the full picture and assess the likely risks to the business. Will the profit share available for redistribution help to retain other, more profitable, business streams? Could the departing team even complement the partnership with mutual referrals? Interview the key players separately to find out as much information as possible and if persuading them to stay is an option.

If action needs to be taken, it may be that suspending the partner/s in question or placing them on garden leave buys some time to stabilise the team and consolidate client relationships. Capitalising on the provisions contained in the partnership documents is important as these provide a road map.

The nuclear option is pursuing a claim and seeking injunctive relief; undue delay will be fatal. Threatened actions against the recruiting firm may add to the pressure and focus minds towards a prompt settlement. Caution should be exercised in doing this as liability may be escaped if advice that restrictions are not enforceable has been obtained. Firms will be concerned that litigation and associated publicity reflect badly on the firm’s management and reputation, and may threaten recruitment, client relationships, or merger prospects.

As ever, decisions on which steps to take will fall to a cost-benefit analysis by the partnership. A distracting legal dispute just as we emerge from the crisis is unlikely to be in any parties’ best interests. Turning one’s mind to prevention and preparation could save this strife.

 

 

Eleanor Diamond is an associate at Fox & Partners

 

 


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