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Compulsory retirement of partners in the Covid era

Compulsory retirement may soon be rearing its head as the pandemic shakes up senior management and exposes weaknesses in the boardroom. Ivor Adair looks at the risks involved for firms with a partnership structure.

Many expect a surge in compulsory retirements as partnerships review which partners and teams have performed over the lockdown. Management will have decide how they will optimise the business in a post Covid-19 downturn. This means taking steps to retain strong performers and potentially in turn, significant clients or customers. It also means poorly performing partners will be targeted for retirement. The reputational and financial downsides of a legal battle in relation to a mismanaged compulsory retirement process cannot be underestimated.

Employees in partner clothing

Management ought to be sure that the individual they are dealing with is not in truth an employee with enhanced employment rights. This means carefully examining the facts informing the partner’s status. In particular, fixed share partners paid a guaranteed fixed sum equivalent to a salary and who don’t participate in management, should be red flagged as potentially employees and more closely examined. You cannot be both a partner and an employee of the same firm nor a member and an employee of the same limited liability partnership (LLP).

Review the partnership agreement

Once the firm is content they are dealing with a true partner, a careful look at the firm’s partnership agreement is essential. The partnership agreement is likely to provide for a “fault”-based expulsion power (for example, for serious breach of the agreement or misbehaviour akin to gross misconduct) and a “no-fault” compulsory retirement power.

If there is no power to terminate the partner, the firm cannot do it – in which case it may need to consider an amendment to the agreement. That should only be done if it is in the best interests of the firm and not simply to expel an underperforming partner. The support of the partnership is likely to be required. Other powers such as restricting access to premises or IT systems where notice has been given may be sensible if the agreement needs to be reupholstered. Management should ensure the agreement, any amendments or deeds of adherence are properly executed.

Be practical, commercial, creative and respectful

If there are genuine concerns about the partner’s contribution or behaviours, management should first discuss this with the partner and give them a chance to improve. Strong leadership and getting the message across clearly is vital. A half-hearted attempt to raise performance concerns will only result in a more emotional response to compulsory retirement. It may also lead to suspicions that there is an ulterior motive.

If there are no improvements, then a discreet discussion with the partner, before deciding to serve notice can go a long way to avoid bruised egos and a distracting and costly dispute. It is important to choose a senior figure to speak to the partner. This approach can pave the way to a mutually acceptable outcome, with both sides giving on matters which cost them nothing but are valuable to the other party. Agreeing internal and external messaging is likely to be important to both.

In exchange for entering into a retirement deed waiving all claims, concessions can be considered. Relaxing or removing covenants, varying the retirement date, expediting repayment of capital or undistributed profits, agreeing a reference, retaining a mobile phone number and outplacement support can help reach an amicable outcome. The firm might even want to think about a consultancy arrangement to retain valuable experience or client connections on a more commercially attractive basis. If a deal is not feasible, management will need to consider its termination powers.

Remember, with great power comes great responsibility

If retirement of the target partner is being considered, a limited group of partners should take independent legal advice to prevent the partner from having the right to see that advice. In the LLP context, the contract is king and in the case of expulsion powers, the clauses will be construed against the firm.

Accordingly, management needs to follow the procedure set out carefully, ensure the meeting is quorate and validly held (particularly if management meetings are being held by video conference), observe the correct period and give notice in accordance with the notices provision in the agreement.

Attempting to terminate a badly performing partner by expulsion is usually a bad idea and likely to result in a challenge. Management will need to be mindful that even where they go down the compulsory retirement route and pay profit share for a notice period, a partner can still challenge the decision. The partner may allege that the decision was made in bad faith or for an ulterior motive, that the decision is an act of discrimination or, in the case of an LLP member, retribution for whistleblowing.

Increasingly in practice, a firm will offer the partner an opportunity to respond to a proposal to retire. This may not be strictly necessary, but failing to do so is unlikely to sit well with the values of a modern professional firm. It also sends a damaging message to new and junior partners. Moreover, it might be argued by the partner to indicate bad faith and is inconsistent with natural justice. Management could even go as far as providing the partner with a copy of the information on which the decision will be made and invite their responses.

Fairness of decision making

If the partner can establish compulsory retirement was wrongful they will be entitled to the drawings they did not receive after the purported compulsory retirement. A claim for damages at large in some cases could not be ruled out.

A particularly thorny issue is the extent to which a decision to compulsory retire a partner might be subject to an implied Braganza duty (Braganza v BP Shipping Ltd [2015] 1 WLR 1661). If applicable, this duty focuses on the fairness of the decision-making process and the rationality of its outcome. A court or arbitrator will set the decision aside where the decision-maker has: a) taken into account irrelevant factors, or disregarded relevant factors, and b) made a decision so unreasonable that no reasonable decision-maker could ever have come to it. Whether this duty would be applied will largely depend on the circumstances and whether the compulsory retirement power in question amounts to a pure contractual power or is one which allows one party to form an opinion.

Presenting a defensible rationale for the decision to compulsory retire, keeping properly prepared documents and ensuring the partner’s responses to the concerns raised is before the decision makers ought to help reduce the risk of successful challenges. The content of this article is not legal advice and is not intended to provide more than general commentary on the subject matter. Specialist partnership law advice should always be sought about your specific circumstances.

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