Expulsion provisions: How law firms are destroying partner loyalty

UK partnerships will celebrate their one and a quarter centenary this year, but recent analysis shows law firms are moving even further towards corporate models. In this article, we analyse the results of our recent survey of expulsion provisions in partnership deeds and look at the changing nature of the partnership relationship.

The legal sector has for some time been shifting away from the traditional (and some would say old-fashioned) model of partnership towards more corporate models. It is not just about the choice of business vehicle; professional firms comprising a collective of owner-managers with aligned interests and equal decision-making powers (i.e. the type of business envisaged when the Partnership Act first came into being) are becoming an increasing rarity.

One area which typifies this shift towards a more corporate culture is that of partner removals and retirement. Under both the Partnership Act and the LLP Act, there exists no default right of removal. The assumption of both of those Acts is that, unless explicitly agreed between the partners, no majority has the power to expel an individual member; the partnership relationship is intended to be one
of long-term mutuality and reciprocity.
The reality is very different in many large
law firms today.

Removing partners

For many years, most professional firms have reserved the right to remove a partner who has significantly defaulted on his or her obligations to the firm. That is common sense and undoubtedly in the interests of the business - the alternative, without such a power, is to dissolve the firm or to resort to court proceedings.

However, in recent years there has been an increased prevalence of 'no fault' expulsions and 'mandatory retirement' clauses. The intention of these provisions is to permit a partner to be removed by the firm (either by a specified majority
of the other partners or by one or
more empowered individuals) and,
critically, without having to establish
any specified cause.

Many firms continue to reserve the
right to remove partners at a specified
age, notwithstanding the age discrimination legislation that has since come into force and the case law that has sprung up
around it, much of it involving law firms
(with Seldon v Clarkson Wright and Jakes the most significant and well-known authority thus far).

Mandatory age-based retirement now constitutes direct age discrimination unless it can be objectively justified in the circumstances of each particular case -
in other words, unless the organisation
can demonstrate that mandatory retirement was a proportionate means of achieving
a legitimate aim.

In the wake of this legal shift and the accompanying societal changes, it is estimated that only 20 per cent of UK employers still retain a mandatory retirement age. It may come as a surprise to see
just how out-of-step the legal sector is
with this trend.

We recently examined both of these issues in more detail in a market survey. The results were, in places, startling.

The Swansong survey

We invited all of the UK's top 200 law firms (by turnover) to participate in this survey. We received a response rate in excess of 20 per cent from a broad cross-section of the market, including magic circle, silver circle and mid-market firms.

The majority of firms responding to the survey had more than 51 partners, with no respondent stating that they had fewer than 31 partners (although some declined to provide an answer). We did not seek to distinguish traditional partnerships from LLPs, but we excluded firms structured as limited companies or foreign entities for the purpose of our analysis.

Whilst we were confident that the use of both no-fault expulsion and mandatory age-based retirement provisions was commonplace in large professional firms, the key findings left no doubt and confirmed our hypotheses convincingly:

• 90 per cent of respondents stated that they include a no-fault expulsion clause in their partnership deed;

• 70 per cent of firms confirmed they still include a mandatory age-based retirement provision;

• there was no obvious correlation between the size of a firm and its likelihood of having a no-fault expulsion clause; and

• one third of firms had exercised their no-fault expulsion clauses in the previous 18 months.

Furthermore, nine out of ten firms had updated their deeds in the past five years, clearly indicating that these inclusions were deliberate and reflective of current thinking.

So, it seems that no-fault expulsion is now commonplace in law firms and, notwithstanding the recent age-discrimination legislation, mandatory age-based retirement remains the norm.

Collective benefits

Why are partners in professional firms so willing to accept that they can be removed at any time or that they must stop working at a particular age? If these provisions are not simply hangovers from the past (and the indication is that they are not), what are the collective benefits that outweigh the individual risks?

From the firm's perspective, removal of a partner is very often a painful and time-consuming process. It can be costly in both a financial and an emotional sense. The very significant impact of an expulsion on the individual concerned means that the courts will construe expulsion clauses very narrowly and insist that the provisions of the deed are strictly adhered to.

In the case of a 'for cause' expulsion, the firm will first need to properly establish the cause and then rigidly apply the terms of the deed (in terms of voting process, notice periods, service and so on). If any element is missing or was cut short, then the expulsion will be invalid and the clock will be reset as far as removal of that individual is concerned. The advantage of a no-fault expulsion is that one limb of the process - that of establishing cause - falls away and the process is made rather easier, quicker and cheaper.

There are other incidental benefits to the firm. Partners will feel greater pressure to perform if they are conscious that job security is not what it once was. Whether or not such pressure also has an impact on the culture, ethos and long-term prospects of the business is rather harder to determine. It should not be forgotten that partners do not have the benefit of unfair dismissal or redundancy rights and so, absent any other claim they may have against the partnership (such as discrimination), the partnership deed is
the final word on how they will be treated when removed.

From the individual's perspective, it may at first be difficult to see why there is any such advantage beyond the collective good. But, the lack of emotive 'expulsion' language and scrutiny of an individual's performance in an open forum can be of benefit. If a partner's time has come, he
or she can leave the firm simply having been asked to go and with their reputation a little more intact.

Our survey also demonstrated that these provisions are generally proving
to be effective. Very few respondents reported any particular difficulty in applying the terms of their no-fault provisions and many reported that their very existence
was enough to encourage partners to move on without making a fuss. More than one third of firms have operated the provision in the past 18 months, but many more have pointed to them in conversations with partners, who then made the sensible decision to depart on their own terms.

Dispute risks

The use of no-fault expulsions is not without risk. As the co-editor of our survey Jeremy Callman (of 10 Old Square) points out, case law in this area is lacking because the vast majority of disputes end in a negotiated settlement. But, there are obvious areas of potential dispute.
The partners (or specified individuals) within the firm who wield the axe are exercising a power and cannot dishonestly abuse that power. Decisions must not be made on a discriminatory basis.

Other key questions remain unanswered - should a partner have a right to respond to any information that is circulated before an expulsion vote is taken? Does natural justice require a right to be heard? As we have seen in recent years, although partners are usually reluctant to enter into the fray, they will do so if and when they feel sufficiently aggrieved, and these questions will be tested by the courts before too long.

Notwithstanding these potentially tricky questions, a significant majority of large UK law firms now include no-fault expulsion provisions in their partnership deeds and they are accepted by partners as a means of efficiently running the firm. Management teams feel the need to have the tool at their disposal and most partners are able to see the benefit to the firm, even knowing that they personally may one day be in the firing line.

When it comes to mandatory age-based retirement, the benefits are perhaps less clear cut - both for the firm and the individual. The Seldon case went in favour of the firm, but only after a lengthy legal battle and, like every case, it very much turned on its particular facts.

Seldon was decided against the backdrop of both a state pension age and default employee retirement age of 65.
The default employee retirement age has since been scrapped (without the world ending), whilst the state pension age creeps slowly upwards.

Furthermore, Mr Seldon was found to have had significant bargaining power when, alongside his fellow partners, he signed up to a retirement age of 65. How many new partners genuinely have that level of influence - particularly in larger firms? In other words, retaining an age-based retirement provision is by no means risk free.

Furthermore, whereas such clauses may have been relied upon infrequently in the past (with most City partners long gone, with full pockets, before that date arrived) the trend towards later retirement may well make the issue less hypothetical, with partners being retired earlier than
they might wish.

Nevertheless, Seldon is clearly a helpful authority for firms wishing to maintain a clause of this sort and will make many would-be litigants think twice. An age-based retirement provision does at least provide a benchmark against which exit discussions can take place and expectations managed.

Moreover, the potentially legitimate aims relied upon in that case will have an enduring appeal for all firms. In the face of continued market pressures, who doesn't want greater control over workforce planning and to recruit and retain the brightest and best of the next generation?

Is the end nigh?

Partnership is no longer the cosy world it once was. Most law firm partners can now be fired without cause and even those who make it through a glittering career still face the axe once there are too many candles on their birthday cake. The legal sector is significantly behind the curve in this respect but, despite all the societal and legislative pressures, there is no obvious indication that it intends to catch up any time soon.

For good or bad, new generations of partners face careers with ever-decreasing barriers to their removal from their firms. The implication is that partners no longer see themselves as entering into a long-term relationship with their firm or fellow partners, or, perhaps more accurately, they are not willing to commit so fully to that relationship in the way they once were. They do not expect jobs for life, nor do
they expect to give unquestioning support to their fellow partners.

Do these findings represent multiple nails in the coffin of the traditional partnership model? Well, that might depend on exactly what you consider the 'traditional model' to be. We must remember that, ever since their inception, partnerships have been evolving to meet the needs of the businesses they serve.

Consider the advent of limited partnerships, the removal of the 20-partner limit, salaried partners and, most recently, LLPs. In Darwinian terms, partnerships have always been extremely adept at perceiving their environment and successfully adapting to it. This latest trend is exactly that - another evolutionary step for an extremely successful species.

Exactly what 'partnership' means in today's legal world is certainly changing, but there's no need to put on the black armbands just yet.

Jon Haley and Anna Gregory are partners in Farrer & Co's professional practices group (www.farrer.co.uk)