Canada: LLPs & Partnerships - Exit Issues

Last Updated: March 30 2017
Article by Martin Chitty

In this podcast on LLPs and Partnerships, we look at the risks and options when someone leaves a Partnership or LLP.

Partners and individual LLP members also need to understand the rights and obligations arising from membership and also how and why they might want to exit such a structure.

Transcript

Siobhan Bishop: Welcome to the second podcast in our series on LLPs and Partnerships. In this podcast, Martin Chitty, a partner in our Employment, Labour & Equalities team at Gowling WLG discusses the risks and options when someone leaves the partnership or LLP. These issues will be relevant for all sectors operating business through an LLP structure or partnership, as well as individuals who need to understand their rights and obligations arising from their membership or partnership.

So Martin, firstly, when someone is looking to leave an LLP or Partnership and possibly take their team with them what does the organisation have to think about?

Martin Chitty: I think, from an organisational perspective, it is a matter of identifying, firstly, the fundamental nature of that organisation, then looking who owes what obligations and to who those obligations are owed. And thirdly, deciding how you take those obligations and then use them for the benefit of the wider organisation in managing the exit process or the behaviour of the individuals involved.

Siobhan: OK, so if we look at Partnerships first, what are the main issues there?

Martin: The old form, or historic partnership, which you tend to see in businesses which are "& Co", meaning "and Company", are governed by the provisions of the Partnership Act and that is based on some very historic concepts.  Essentially, partnerships are a series of interpersonal obligations. So each of the members of the partnership owes obligations, not to the entity itself, because the entity is merely a sum of the parts involved, but to each other. And as a result of that, the obligations on partners under Partnership Act situations are much more onerous in many ways. So, by way of example, there is an inherent duty of good faith as between partners in an old form partnership. There is an obligation not to make a profit from anything which the partnership could otherwise have done. And going back to the very basic issue that is just an extension of the fact that these are essentially personal relationships rather than something more corporate in its personality, or more reflective of something which you might see in the more modern situation with an LLP or even in terms of the employer/employee relationship.

Siobhan: So if Partnerships are less common these days, what are the differences with an LLP structure?

Martin: Well the LLP is a creature of statute, rather than a creature of common law, and from a lawyer's perspective that is all very interesting but in practice what it means is this; that rather than contracting as between themselves, so I might contract with you under an old form partnership, with an LLP I have a relationship with the organisation and my obligations are to the organisation. So if you constitute an LLP under the relevant legislation, the underlying position is that you owe limited obligations to the entity and no obligations to other members. So the starting point, if you are looking at one of these situations, or if you are looking at a situation where you're thinking of setting up a new business, is how do you get that degree of control and that range of obligations onto the individual? And the answer, of course, in those situations is that you make sure that the LLP agreement covers all of these things explicitly. So, if you want to impose an obligation of good faith on people and govern their behaviour as members, or as partners, as we tend to be called, then you need to have it set out in the LLP agreement. If you have someone who is thinking of leaving or you suspect is up to something, like taking a team out or filching clients for a future business opportunity, then the issue is well, "let's start with the contract". What is this person committed to do or to refrain from doing and then, from the organisation's perspective, how can we then use those obligations to make sure that they cannot damage us too much?

Siobhan: So, depending on which structure it actually is, can you run through the different options that each may have?

Martin: Yes, with old form partnerships there is an underlying set of rules and obligations. In the majority of cases though there will still be some form of partnership agreement. So, the starting point with an old style partnership is still to say well what does the partnership agreement give us? What has this person done which they should not have done? What rights do we have in terms of suspending them from active participation? What rights do we have to expel them? Have they done something which is so fundamentally against the obligations imposed on them, as a partner, that we can legitimately expel them? Can we, to take an employment concept, can we put them on garden leave? So can we retain them within the partnership, which might actually protect the position of the other partners, but exclude them from the operation of the business? Can we limit their ability to draw income or their right to accrue a profit share throughout the period of that notice period? So there's always a balance there between control on the one hand and restriction of activities, income flow to the individual and also their exclusion from the market more generally. Now, under the Partnership Act there are some restrictions on solicitation, for instance. They are brought in by reason of the legislation, but you might still need to look if somebody is really, really set on going and whether you would be prepared to litigate and how you are going to run that sort of argument and you might end up having to get an injunction.

One point to think about is the position of the organisation to which they are going, or if they are trying to form some form of team lift, what is it that that other organisation has done to induce them, or to persuade them, either to leave or to take people with them? It might be that you have an opportunity, not only to restrict what your soon to be ex-partner is doing, but also to try and recover the costs and damages from the organisation which has induced that breach. So you would have to show that they have offered some benefit for behaving in this way, having an idea of, or knowing, what the underlying partnership agreement says.

The position in LLP isn't actually very different to the position under an old form partnership. So, as a starting point, look at the LLP agreement. What are the obligations that are owed? What evidence do we have that somebody has acted in breach? What are the consequences of that breach and then what are our options? It is much more likely in an LLP agreement that whoever drafted it will have looked at; can we suspend? Can we put on garden leave? What rights do we have? To what extent can we exclude this individual from the activities of the partnership? To what extent can we defer money coming out? So there are very much the same issues that we have with the old form partnership, it is just that we are much more reliant upon the LLP agreement, as a contract, than we were in an old form partnership, simply because we don't have the statutory provisions which are brought into play automatically.

Siobhan: Thank you very much Martin and as we mentioned at the beginning this is the second in our series of three podcasts on LLPs and partnerships. The first podcast, which is already available on our website, is covering the employment status of partners and LLP members and how to manage those risks. The third podcast will cover team moves in more detail and also how do you get compensation for the damage caused.

We hope you found this podcast useful and if you have any queries on the topics we have covered today, or generally, please do give Martin a call. Thank you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
14 Sep 2017, Seminar, Birmingham, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

18 Sep 2017, Seminar, London, UK

Our annual event as part of the London Design Festival is now in its fifth year. We would be delighted if you are able to join us again.

21 Sep 2017, Seminar, London, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.