Expulsion of a Partner – key considerations and strategies

The expulsion of a Partner can be a challenging process to navigate to ensure that any disruption to the business is minimised.

Steps to take when a partnership dispute arises

The first step when disputes arise is to review and ascertain the legal and contractual position. It is important to identify the clauses in the LLP Agreement which set out the procedure and position on expulsion. There are a number of grounds which are commonly used to expel a Partner, including but not limited to:

• Any conduct which is going to harm the business including bad behaviour
• A breach of contract
• Insolvency or bankruptcy
• Failure to meet performance standards
• Mismanagement of any partnership monies
• Being convicted of a criminal offence.

The LLP Agreement should also set out the steps and processes, including Partner meetings and resolutions, that are required to expel a Partner which should be followed carefully. There are several elements to consider at this stage and the engagement of legal and financial advisors is recommended to ensure compliance with not only relevant laws but also the firm’s own expulsion procedures.

The LLP Agreement will usually set out the notification process whereby the Partner will be informed of the decision and the grounds for expulsion. It will be important to set out the responsibilities of the expelled Partner for the transitional period to allow business to continue as usual. It may be helpful at this stage to consider the value of the Partner’s shares, how any financial settlements will be paid, and how the remaining Partners’ equity will need to be adjusted.

As appropriate, it is then important to keep clients informed of the changes in the partnership. This should ensure that clients are reassured – clear communication of the changes and the clients’ new internal contacts will be key to maintaining their trust. The aim during the whole expulsion process is that clients receive an uninterrupted service and the support they would normally expect.

The negotiation levers are a vital component of the expulsion process and can include:

• An examination of any intellectual property rights held by the Partner
• A review of the non-compete clauses within the partnership
• Consideration as to the financial terms on exit which may need to be adjusted and negotiated, particularly in the case of a senior or founder member where synthetic goodwill payments and anti-embarrassment provisions may ease the path for a swift exit.

The company’s reputation should also be managed, to ensure that the business can continue to operate smoothly following the expulsion. However, the internal dynamic and communication is essential to maintaining stability within the business.

As explained above, the legal, financial and tax implications of any expulsions should not be underestimated – and the impact should be evaluated carefully. Complying with all relevant legal principles is critical in avoiding any disputes, with financial compliance assisting with protecting the future of the business.

Prior consideration is key

By carefully considering all the legal, financial and ethical aspects of an expulsion, a business can focus on maintaining a healthy partnership environment both internally and externally while managing the expulsion process smoothly.