Top tips for updating your LLP Agreement

Top tips for updating your LLP Agreement

Fergus Payne, partner and head of the partnerships and LLPs practice group at law firm Lewis Silkin LLP, explains how to update your LLP Agreement

Top tips for updating your LLP Agreement

Let’s face it, most accounting firms operate as LLPs and have done so for a long time. But what if your firm has a signed LLP agreement and it has not been substantively reviewed or updated for several years or maybe since the firm converted? The agreement may have had a sticking plaster or two along the way, such as changes recording the introduction of partner capital to address the salaried member tax rules, but certainly no major overhaul.

Since the introduction of LLPs now some 18 years ago, we have seen a good number of developments in the contents of a LLP members’ agreement, sometimes to reflect the shift to a more corporate management style or to address legal developments over that period. If your agreement has not been reviewed in the last few years, then it may require updating, particularly if you want to avoid difficulties enforcing certain provisions in the agreement, to ensure that the firm’s goodwill is adequately protected or to bring it into line with the firm’s actual practices and customs.

It is easy to overlook the fact that LLP legislation is so light that there is little to fall back on in the absence of a comprehensive members’ agreement. The so-called default rules are likely to result in unwanted terms.

Problem partners

One of the areas that we often see being revisited are the provisions that relate to dealing with under-performing or problem partners. It is now commonplace for LLP agreements to give the firm the right to remove a partner without cause. This right is a valuable one for the firm, particularly when dealing with performance issues, but also when having to operate in difficult economic conditions. The principal issue here is who can exercise the right. Should it be the partners and, if so, by what majority? Or should it be the management board with, say, a right of appeal to the partner group by the partner who faces removal?

As complaints of inappropriate behaviour have become more commonplace, it is advisable that the LLP agreement gives the firm the power to suspend partners in certain circumstances together with the right to investigate potential misconduct. It is also important to have the ability to put partners on gardening leave during any notice period. A firm will not have any of these rights unless they have been specifically written into its members’ agreement.

Keeping it confidential

One tip is that the LLP, through its management board or managing partner, should be able to take legal advice in respect of an individual partner and keep it confidential from the individual concerned. This will require an express term in your agreement as partners may otherwise have the right to see this advice.

A number of partners resigning in close proximity and joining competitor firms could clearly have a detrimental effect on the firm’s future trading and cashflow if capital must be repaid. To protect against this, you could include a “departure lounge” clause in your agreement to limit the number of partners – say one or two – who can give notice to leave during a specified period.

LLP agreements typically contain post-retirement restrictive covenants. But it is possible that restrictions in an agreement drafted several years ago may no longer be enforceable or adequate to protect a firm’s business. Restrictive covenants are considered to be a restraint on trade but can be enforced if they are reasonable measures necessary to protect a firm’s goodwill. The time periods should not be excessively long and the other constituent parts of a restrictive covenant should also be considered, such as the geographical extent and the scope of any client solicitation provisions. It may be unreasonable, for example, to restrict a former partner from acting for all clients of a firm if that partner only carried out work for specific clients.

Parental leave and flexible working

Agreements now typically have comprehensive provisions in respect to maternity leave but often not for paternity, adoption and shared parental leave or even flexible working. This is an area of developing law and practice generally that needs to be kept under constant review. For this reason it may be better from an administrative perspective to deal with these issues outside the LLP agreement as partner policies that can be amended more easily.

In my experience, firms now more readily consider the consequences of a sale of the business and whether recently retired partners should share in the proceeds. The rationale behind a so-called “anti-embarrassment” clause is to ensure that partners who have contributed to the creation of value in the firm should benefit rather than miss out entirely through the timing of their retirement. The benefit would typically last for a limited number of years following retirement with the individual partner’s entitlement decreasing over that period.

It is also worth reviewing the voting requirements in the agreement to check that they remain appropriate or should be changed so that decision making is not at risk of deadlock. An obvious mistake would be to provide that a unanimous vote is required to expel a partner with the result that a partner guilty of misconduct cannot be removed.

One final and practical point to bear in mind is the current voting threshold to make changes to the LLP agreement, which is why the firm should build the necessary partner consensus before any formal vote takes place.

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