A Partnership Is For Life?

 

Years ago is right.  Old Charles was still a partner then.  You’ve had three new partners since then, to my knowledge.  So what makes you think it still applies?

 

 

But you didn’t get them to sign a new agreement, or even a memo to the effect that the old one would apply?  And I’ll bet you didn’t do anything amongst yourselves when Charlie retired?

 

 

I would say so.  After all, we were talking about risk management, and what greater risk can you have than that your business might be dissolved immediately.  You see, the basic rule is that a partnership is dissolved, and a new one formed, whenever a partner leaves or joins.  The new one is not, unless you do something positive to the contrary, governed by the instrument or deed that applied to the old one.  So what you end up with is a partnership at will.

 

 

It means your fractious new partner was right.  If you do have a partnership at will, any partner can simply dissolve the partnership by notice to the others, effective at the moment of giving the notice.

 

 

I am.  Where a partnership at will is dissolved, the basic right for all partners is to have the business wound up under the Partnership Act 1890.  What you then get in reality is some frantic negotiation as to the terms which the dissatisfied partner can extract from the others.  He’ll potentially be in the driving seat, as he is the one who can simply say he wants it all wound up unless you meet his terms.

 

 

I agree that it’s potty.  So does the Law Commission.  In the report it’s just published, which has a draft Partnership Bill attached to it (which it intends should replace the 1890 Act) it suggests abolishing the partnership at will as a concept.  It wants to replace it by giving a dissatisfied partner the right to resign on reasonable notice, and to be paid out his share.  But that will inevitably be a few years off yet, and in the meantime it’s up to you to get your documentation in order to stop the problem.

 

 

Well, the Court can step in.  Especially if it can infer that one partner has impliedly consented to the continuation of the business by the others, and that dissolution would harm the business, it can make what’s called a Syers v Syers  order.  It will then order that the share of the one is bought out by the others, on terms it lays down.  But it is a discretionary remedy, and you really don’t want to get involved in litigation anyway, do you?

 

 

It isn’t as easy these days.  The pressures that you are all operating under are so great that some people can’t cope in civilised ways.  What you can do, though, is to recognise the problem as early as possible, and try to manage it.  For instance, how do you choose your partners in the first place?

 

To be honest, we’ve made up the last couple on the basis that they’d leave if we didn’t.  They were pulling in the fees, and we didn’t want to lose them.  Come to think of it, the one who’s causing problems now actually threatened to go if we didn’t take him into partnership.

 

A lot of firms make the same mistake.  They give no thought whatever to the suitability of the individual in question for the role of partnership.  Or, rather, the roles, as a part of the problem is often that people can’t handle the juggling act of trying to support all the roles that a partner is called upon to play – entrepreneur, marketeer, fee earner, people manager, financial manager etc.

 

 

It depends how thorough you are prepared to be.  Some of the larger firms will have complex partner selection processes, and those will be aimed not at the professional competence of the candidates – that will be regarded as a given – but at the ways in which they can contribute their other skills to the partnership, and how they will behave as a partner.  They’ll use such tools as psychometric tests, to find out what attitudes and behavioural characteristics the candidates have.  You may not be in a position to use all these techniques, but don’t reject the idea of using some of the tools.  You might want to outsource parts of the assessment process.  Above all, actually go through the thought process of considering whether you think the candidate will be someone you will want to work with – and someone who will want to work with you!  After all, it may be a distasteful to lose a very good fee earning employee; but it’s lot easier and less disruptive than losing him a few years later, when he is an equity partner.

 

 

You can help the newcomer a lot.  For a start, talk to him about what’s expected of him as a partner.  That can cover a large number of areas.  For one thing, you need to explain what roles he will be expected to undertake.  For another, you should explain to him how the culture of the partnership works.  Remember, it may have become natural to you, but it will all be very strange to him.  Make sure he knows what you and your partners believe is the way in which partners should behave to each other.  You might even want to help by formalising this in terms of a partners’ code of conduct.  Offer him all the support you can to smooth the transition.

 

 

Think about what training he may need to help him do what you expect of him.  For instance, he may, as a partner, be called upon to appear in public, talking to the press or giving seminars.  Offer some training in public relations, or making presentations.  Or he may be confused by the mass of management accounting information which is suddenly thrust upon him on a monthly basis, and be in need of some training in the handling and interpretation of accounts.  One thing which is almost inevitable is that he’ll face some problems making the transition from employee to boss – often in respect of the same people who the day before were his workmates - and he may well need some training in human resources management.  There are lots of the so-called ‘soft’ skills that partners need, and which we often neglect.

 

 

Well, there the same is going to apply whether it’s a new partner or, dare I say it, one as senior as you!  All partners are entitled to expect the others to perform to a certain level, in a number of different ways.  The key thing to start with is that everyone should know what that level of expectation is.  That means that the partners actually have to talk to each other, to agree what they want from the partnership, and what they believe they’ll have to put into it to get that.  It’s not an easy process, and it may involve some soul-searching, but it needs to be done if everyone is going to be pushing in the same direction.

 

 

There are always going to be some differences, but if the gap is a radical one, then the truth may be that it is better for both sides to part company.  Otherwise, the odd man out will just get frustrated, because he’s involved in an enterprise he doesn’t truly believe in; and the others will get resentful because he isn’t supporting their vision.  But if both sides understand why the difference exists, then at least the process of managing the necessary change should be easier and less stressful.

 

 

Then the other partners have to explain to him, in as constructive a way as possible, what their reasonable expectations of him are.  They should offer him a defined path to come up to scratch, as you put it, with agreed measures and times, and whatever support and training they may agree upon as being appropriate to that.

 

 

Then he may have to go.  In my own experience, it’s better to bite the bullet and make the change happen, than just to allow things to fester and live in an atmosphere of unpleasantness.

 

 

Not if you haven’t got a partnership agreement, no you can’t.  If, on the other hand, you have a proper agreement, which allows for expulsion without cause, and offers a fair and transparent process for reaching the determination to expel, and which treats the expelled partner fairly in financial terms, then yes, you can.  In my view, any properly drawn partnership agreement will have just such provisions.

 

 

That’s it precisely.  Get drafting.

 

Simon Young MBA is a solicitor and management consultant.

 

syoung@eurobell.co.uk