When placing a partner on garden leave, plan first and act second

Most well-drawn partnership and LLP agreements will now contain a ‘garden leave’ clause which, conventionally, permits the firm to suspend a partner who has given (or been given) notice to retire from exercising some or all of his rights.

The most common form of the clause (which I pioneered many years ago) gives the firm a wide discretion as to the directions which can be given to the suspended partner and permits those directions to be adjusted as required during any period of garden leave. Only rarely will the suspended partner’s profit share be adversely affected.

Variations on such a power permit a partner to be suspended while his expulsion from the firm is under consideration and, in extreme cases, may take a ‘Martini’ form (any time, any place, anywhere) and allow the suspension of a partner who has no intention of leaving the firm.

The most common errors when exercising such a power are a failure to adequately consider its terms and an assumption that, just because a partner has given notice, the power must necessarily be invoked straight away.

Admittedly, some powers are framed as an all-or-nothing option which must be exercised forthwith if at all, so that a ‘wait and see’ option is not available, but this is rare. A properly drawn clause will allow time for reflection and a more tailored approach.

Too many firms panic as a result of a key partner giving notice, put him straight on garden leave and only then approach ‘his’ clients, trying to shore up the firm’s relationships. By such an unstructured approach, the firm plays right into the outgoing partner’s hands by alienating those clients.

What is required is a cool and careful assessment of the impact which the outgoing partner’s departure will have and how that departure can best be managed. Plan first and act second.

 

Elephant traps

There are a number of elephant traps into which firms consistently fall when approaching garden leave powers because far too much is assumed and too little attention is paid to the actual terms of the power.

• A suspended partner is not automatically disenfranchised or prohibited from attending partners’ meetings. Even if he is disenfranchised, he may still be entitled to receive notice of meetings and any supporting papers.
• A partner will normally have a right to information regarding the firm’s affairs under an express provision in the agreement or under section 24(8) of the Partnership Act 1890 or regulation 7(8) of the Limited Liability Partnerships Regulations 2001. That right will not automatically disappear upon his suspension.
• A suspended partner will not automatically be required to return his mobile/ blackberry and laptop nor be denied continuing access to the firm’s computer and email systems.
• A suspended partner will not necessary cease to be entitled to continuing access to training facilities in order to satisfy his CPD requirements.
• A suspended partner may be prohibited from contacting clients, but what if they contact him? Does the prohibition apply to purely social contact? This is unlikely.
• Though he may be suspended, the partner retains his status as such. It follows that the firm cannot properly remove his name from the firm’s website or put a bounce-back message on his email account indicating that he is no longer a partner or that he has left the firm.

Carelessness and lack of foresight in this regard can present an open goal to a partner in an LLP who is looking for a repudiatory breach of the LLP agreement or to a partner in a traditional partnership who is looking for dissolution grounds (albeit that the latter has a more formidable hill to climb).

If there is discretion under the power, think up every conceivable scenario and cover it specifically, assuming that the power allows this.

When you are facing a team move, do not automatically assume that all members of the team must be treated the same way. On mature reflection, it may be preferable for a key partner to be put on full garden leave and for the others to be placed on a less restrictive regime, provided that they behave themselves.

It’s your firm. Look after it.

rciab@partnershipcounsel.co.uk