How to Avoid Partnership Disputes
As you may realise from reading our website or blogs, we deal with a lot of partnership disputes. By partnership disputes we mean disputes between professionals in a partnership or quasi-partnership situation. We deal with partnership disputes in traditional partnerships, disputes between members in LLPs and shareholder disputes between shareholders in limited company professional practices.
The structure and constitution of the firm does not matter (apart from if it gets litigious – which we aim to avoid); it is the nature of the relationships between the partners, members or shareholders that makes a difference. In this blog will use the word partner to describe someone who owns an interest in a professional firm.
Because we see a lot of partnership disputes, we often see the root of the dispute that occurred long before we were instructed. We advise clients entering into a new partnership that they must get a Partnership Agreement (or LLP Members’ Agreement or Shareholders’ Agreement) agreed at that stage. The point of the agreement is that it focuses the minds of the partners to set out how they will manage the practice and what will happen in certain situations, at a time when they are getting on. Trying to agree an arrangement once the parties have fallen out is never easy. It is a business pre-nup.
You can look at the partnership etc agreement as an insurance policy. Like all insurance policies, you hope never to call on it, but it is there in case of an unforeseen problem. Our advice to clients is that once the agreement has been signed, it should be locked in a drawer somewhere to gather dust. If the parties are tempted to look at it, that implies there may be an issue. At that stage it is better not to open the drawer and dust down the agreement, but to go to the pub or coffee shop and sit down and try to agree a way forward. Once you start checking what the agreement says you are on the slippery slope towards using it. This may not be a bad thing and it is your insurance policy, but it tends to entrench positions whereas the chat in the pub or coffee shop may reach solutions.
There are three main areas in our experience that cause problems between partners:
1) Profit sharing;
2) Division of work and management tasks; and
3) Appropriate behaviours.
So, before you enter into a partnership, you need to have a frank and open conversations about these three areas.
How will you share profits? What will be your approach if one partner has a particularly good, or a particularly bad, year?
Who will carry out which management tasks and how will they be rewarded? Will there be an adjustment to the fee earning target? How long will they do this for?
And finally, is the issue of appropriate behaviours. What are the values and beliefs of the firm? How are people expected to behave and what will happen if they do not?
Most partnership agreements have a fault-expulsion clause which covers issues such as bankruptcy, ill-health, professional misconduct and breach of the agreement, but more often we deal with scenarios where the majority of partners feel that one partners behaviour or performance goes against the ethos of the firm, but is not caught under one of the fault provisions. For larger firms (say six or more partners) a no-fault expulsion clause is usually put in the agreement to cover the scenario, but this does not work in smaller practices.
In conclusion, the best way to avoid a dispute is to plan ahead so as not to have one. Have a difficult conversations now, whilst you’re getting on. Additionally as soon as there is a problem, you need to discuss it. A problem ignored does not go away. If you don’t have an agreement, get one drafted and, if you have one, review it.
We are always available for a brief no obligation chat about any issues you may have.