People are one of the most valuable assets of a professional services firm – their reputations, the quality of the service they provide and the client relationships they build are what ultimately create profits. Firms know this, and they invest heavily in attracting and retaining talented teams of people. But do they devote the same amount of time and effort in ensuring that the teams they so carefully assemble can’t just up-sticks and go and play for the opposition?
From agreement to dispute
Most well drafted limited liability partnership (LLP) agreements will include some form of post-departure restrictive covenants (although the desire to enforce them lacks consistency) but there are additional contractual options that LLPs might consider in order to discourage members from engaging in strategies to leave a firm and take a team of other members and employees with them.
Any member of an LLP is entitled to leave the partnership in accordance with an agreement with the other members or, in the absence of such agreement, by giving reasonable notice. But team moves do not concern one individual exercising a right to leave the firm – they concern a pre-planned strategy to move a group of individuals.
The LLP members involved in such a move are usually aware that they owe duties to the LLP and commonly make careful plans to minimise the risk of the firm easily gathering evidence that the team move involved breaches of those duties. The result can be a dispute between the firm and the members of the team which centres on establishing what duties existed, the existence of evidence that those duties were breached, and the consequence of those breaches.
Disputes are uncertain, time consuming and potentially expensive to resolve. So, to try and discourage team moves being attempted and thereby avoid disputes it is worth firms considering the deterrent effect that can be achieved by provisions in an LLP agreement.
Obviously, it is all about what LLP members will accept, but there are four key terms that are potentially worth including in an LLP agreement.
The majority of team move strategies require the team to move either at the same time or within a reasonably proximate timeframe. As an impediment to such a strategy, the LLP agreement may include a provision which limits the number of members who may voluntarily leave the firm within a specified period where those members are in the same team or the same business sector. Even if members are ordinarily entitled to retire on, say, six months’ notice, a waiting room clause may prohibit two or more members of the same team from retiring within the same financial year or within the same 12-month period. Such a provision may disrupt a team move strategy where the senior members of the team need to establish themselves quickly at their new home in order to attract business.
A garden leave clause may entitle the firm to require a member that has served notice of voluntary retirement to immediately cease all normal business activity. Carefully drafted, this may entitle the firm to prevent the member from attending the office, undertaking client work, having contact with clients, other members, staff etc. and engaging in any activity which maintains their profile in the market. If a member knows that they can effectively be removed from the market for the duration of their notice period, the strategy of the team move may not be viable.
A well drafted LLP agreement will include a provision which specifies the period in which a member’s capital will be repaid in the event of their voluntary retirement. Most LLP members borrow their capital and the lenders require the borrowing to be repaid when the members leave the firm. The member will desire that the capital is repaid by the firm as quickly as possible to enable them to repay the lender. To discourage members from seeking to engineer a team move, a provision may be included in the LLP agreement which extends the period during which the firm is obliged to repay capital if the retirement of the member is discovered to be as part of a team move. The member may be concerned as to the personal implications of retiring as part of a team move if the repayment of their capital is significantly delayed.
Disclosure and reporting obligations
There is a deterrent effect of specific provisions in an LLP agreement which require a member to disclose information regarding approaches they have received to leave the firm, their knowledge of approaches made to other members or employees to leave the firm, details of head-hunters, recruitment consultants, competitor firms etc. who have contacted members or employees. Such a provision might also include a requirement that the member serving notice of retirement will, if requested, provide a statement detailing the data, information and documentation of the firm, clients and staff held by the member other than on the firm’s systems and the names of all parties to whom any such data has been disclosed.
The firm must of course consider the effect such provisions might have on current and potential members; for example, an LLP agreement which is too onerous may run the risk of making the firm unattractive. But there is a balance to be struck. A firm which invests time and money in building successful teams must protect that investment and the profits made by those teams – failing to do so may result in the firm losing its competitive edge, and losing out on the most talented individuals.
Clive Greenwood is a partner at Lewis Silkin