Managing partner exit without LLP agreement

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Gannons acted in the interest of a partner in an LLP to manage his exit from the partnership.

Our client, an architect, was being forced out of an LLP architects’ practice by the other two members. The partners had not made an LLP agreement when forming their partnership, which created problems for them, and informed how we approached the case in the best interest of our client.

Our approach to resolve the LLP dispute

The LLP member instructed us, and on the basis of this, we confirmed that even in the absence of an LLP agreement, our client had certain rights that he was entitled to exercise.

We then presented a petition at court for the LLP’s winding up on just and equitable grounds.

This brought his former partners to the negotiating table, where we brokered a settlement for our client. Our client then withdrew his court petition in return for the sale of his share to the remaining LLP members.

No LLP agreement

The three members incorporated and set up an LLP architectural practice in 2011. The three members believed incorporating an LLP would formally structure their relationship. Before 2011, they simply worked and marketed the business under a mutual name. Unfortunately, the three members did not draw up a formal written LLP agreement.

Events leading to LLP exit

In late 2015, the members’ relationship deteriorated. In early January 2016, the other two members endeavoured to remove our client from the LLP. The pair acted to force him out of the business by removing his right of entry and use of the IT system. They locked him out of the office and deleted his profile from their website. They also took over his clients, informing them that he no longer worked for the LLP.

The rights of an LLP member

Following these actions, our client asserted the fact that he remained a member of the LLP. He attempted to resolve the situation to avoid legal costs. He told his partners that he would willingly retire from the LLP if they purchased his shares for fair value. However, the two members rejected our client’s offer.

The onus was not upon our client to make such an offer. Usually, the remaining LLP members avoid litigation costs by offering to purchase the departing member’s shares.

Consequences of no written LLP agreement

We were instructed to resolve the dispute. There was no written LLP agreement. However, there were oral “agreements” concerning some terms. Naturally, the members fundamentally disagreed as to what those terms stated.

With no written or clear oral agreement, the default provisions in the Limited Liability Partnership Regulations 2001 apply.

Default provisions

These provisions are that: firstly all members are entitled an equal share of the LLP’s capital and profits. Secondly, that every member may take part in the LLP’s management. Finally, no majority of the members has the power to remove any member, unless there is an express agreement in place between the members, which confers the power to do so.

Consequences of the default provisions

We examined whether the other members of the LLP had the power to remove our client, and if so, whether his removal from the LLP was valid.

If they did not have such a power, then removing him from the LLP would be conduct which was unfairly prejudicial. This entitled our client to bring a claim before the court.

Arguments to resist our client’s expulsion

We made the case that the removal of our client was invalid based on the following circumstances: because there was no formal LLP agreement, then the default LLP rules applied. The default rules state that no vote by the majority of members can oust any other member. LLP’s in this state require a clear oral agreement as to how to go about removing a member – which had not been reached in this case. As there was no such clear agreement between all members, they did not have the power to remove or expel our client.

Arguments by the other side

The other side tried to argue that an express power to remove a member from the LLP had been agreed and exercised. However, their case constantly shifted and at best was weak.

For instance, one of their arguments was that when all the LLP members joined, they understood they could be removed by a majority vote of members. However, they couldn’t prove or provide evidence to support their argument. In fact, the view held by our client was that the members agreed to build the LLP for a trade sale once they had built sufficient goodwill.

Our petition for unfair prejudice

An unfair prejudice petition allows a partnership member to petition the court for an order that they wind up the LLP and distribute its assets.

Tactics in such a case are key, and we intentionally raised the stakes by presenting an unfair prejudice petition. This also sought relief for the just and equitable winding up of the LLP.

We served this petition on the grounds that, in this case, the LLP’s affairs are being, or have been, conducted in an unfairly prejudicial manner to the general interests of all the members, or some members’ specific interests.

Forcing the other LLP members to negotiate

Our case was strong. Our client’s unlawful removal and exclusion from the business was clearly unfairly prejudicial conduct. Moreover, the relationship between the members had irretrievably broken down.

No doubt our client was entitled to wind up the LLP on a just and equitable basis. This would potentially devastate the remaining two members. This was likely to bring them to the negotiating table.

Settlement

We negotiated and quickly reached a settlement. The remaining members purchased our client’s share at fair value before executing an LLP retirement deed for our client.

Importance of an LLP agreement

This case shows just how important it is for LLPs to have a well-drafted LLP agreement. Without an agreement that includes rights to remove, then it is difficult to remove partners, rendering you powerless to remove under-performing partners.

If the agreement does not address provisions for payment on leaving, then it’s likely the LLP must pay out on an equal share basis. The equal share rule applies irrespective of the exiting partner’s expended effort.

You avoid these problems with a partnership agreement. Note, LLP members can agree to exclude the operation of section 994 of the Companies Act 2006, unfair prejudice petitions. This avoids the uncertainty of litigation.

Protection from litigation

Wise members protect themselves from litigation costs by offering to buy-out the departing members share prior to the commencement of proceedings. We were surprised the remaining members refused our client’s offer to be bought out at fair value. However, our litigation tactics forced the remaining members to re-consider.

LLPs are common for those businesses providing professional services. The value in the LLP is in the clients of the LLP, and the knowledge of each individual member. John Deane leads the LLP team at Gannons. John acts for both exiting members, and those remaining. Sitting on both sides of the table, we know the issues that are often at play.

  • I was enormously impressed by the dedication to their work shown by everyone at Gannons