When a partner proposes to move from one firm to another, the process is rarely as simple as firms and partners might first assume. Depending on whether it is the new hiring firm, the current firm or the lateral partner themselves, there will often be a myriad of competing legal, practical and tactical factors and potential pitfalls to contend with, and it is imperative that all parties involved understand what these may be and how to navigate them.
In this three-part series we will be taking a closer look at the key issues which frequently arise during a partner lateral hiring process, from the perspective of the new hiring firm, the current firm and the partner. We kick off part one of the series by exploring some of the key issues that hiring firms should consider.
Securing a successful lateral partner hire can be an important part of a hiring firm’s business strategy. It may be that the lateral hire is wanted to develop a practice growth plan, launch a practice or sector diversification strategy, increase bench strength, inject new energy and innovation into the business and increasingly to improve diversity and inclusion. Whilst no doubt an exciting time, hiring firms should ensure they approach the process aware of the risks and the legal and practical challenges they may face, including the potential new partner’s duties to their current firm and restrictions which may last beyond their joining date.
Do your due diligence
Once a hiring firm has set its sights on a potential partner hire, one of the most important steps to undertake will be its due diligence on the partner. Doing the heavy lifting up front through careful and considerate research can save a firm in time, money, management administration and even exposure to legal risks down the line. Depending on their proposed role and status of the partner in question, information gathering about their education and career background, their potential profitability and prior track record and any disciplinary issues is often a top priority. The hiring firm will want a potential hire to demonstrate that they will bring added value (often profit). They may therefore request business plans, client and customer lists and information. Law firms, for example, typically require the potential partner to complete a lateral partner questionnaire (LPQ) – like an application form but much more comprehensive, covering matters from billing history to current and potential staffing needs.
However, hiring firms should be aware that partners and LLP members may often be subject to confidentiality, fiduciary and professional regulatory obligations, which may be breached by their disclosure of privileged and/or confidential client or firm information. A breach of a lateral hire’s fiduciary duties could result in forfeiture and clawback of any profits earned during the period of any breach, and hiring firms should be mindful that they may be putting the lateral hire at risk. Whilst strict compliance of the potential hire’s obligations can therefore make any lateral moves difficult in practice, hiring firms should consider whether there are any lawful means of obtaining the relevant information, for example only requiring the potential partner to provide publicly held information or, where that is not possible, anonymised data. Nevertheless, it is vital that both the hiring firm and the candidate are aware of the risks and are careful in the knowledge that a document like a business plan may be disclosable in future litigation bought by the partner’s current firm, should they suspect or find out that there has been a breach of the departing partner’s express or implied duties.
In any event, it is prudent that hiring firms do not solely focus on potential financial performance to the detriment of other factors. Uncovering a ‘bad apple’ or ‘rogue’ partner at the recruitment stage can avoid being burdened dealing with poor behavioural issues, serious misconduct or other impropriety thereafter. Where possible, the hiring firm should ask the partner for specific declaratory confirmation and disclosure of any investigations into their conduct, including regulatory processes, and seek out references in relation to their reputation with colleagues and in the market, as well as their conduct and disciplinary record (including whether they have been subject to bullying, discrimination or harassment complaints). This will be especially important where the individual is regulated or is joining a regulated firm like a law firm or financial services firm. The latter may require mandatory regulatory references if the partner is to hold a senior management function.
Notice periods, garden leave and other restrictions for hiring firms to consider
The length of a lateral candidate’s notice period may affect the timetable for their anticipated onboarding. Partner notice periods will vary depending on the firm and industry, but typically range between three and twelve months. Some partners may also be subject to “waiting lounge” provisions which restrict the number of partners in the firm (either as a whole or in a particular practice group) who can leave within a defined period. Such restrictions are designed to deter team moves or at least decelerate the exodus of partners. Such provisions could frustrate a hiring firm’s dreams of poaching an entire team to start a new practice area, for example.
Hiring firms should also be mindful of potential garden leave clauses, which may be used by the existing firm in conjunction with long notice periods to restrict the exiting partners’ contact with the firm’s clients, business plans and access to other lawyers who may be lured away with them. In practice, notice and garden leave may be subject to negotiation.
Further, a lateral partner may have extensive express and implied duties and obligations to their existing firm (including those found in their partnership or members’ agreement). These will typically include a wide-ranging duty of good faith and confidentiality, disclosure and reporting obligations. They are likely to prevent a partner from discussing any move with colleagues and clients, and require them to inform their partners promptly of any circumstance likely to affect the firm business, including the possibility of lawyers or clients leaving the firm. So, a hiring firm should be aware that even early discussions may come to the attention of the current firm, if not by the potential hire then possibly through their fellow partners who may be in the know.
Post-termination restrictions
If a potential lateral partner is subject to post-termination restrictive covenants, they may be impeded from moving seamlessly between firms and perhaps delivering on their promises to bring a loyal client following when they join.
Typical restrictive covenants in partnership and members’ agreements include non-compete restrictions, prohibitions on soliciting and dealing with certain clients, on soliciting or hiring former colleagues and, sometimes, specific prohibitions on team moves. Such restrictions can last up to 24 months or more.
The basic starting position is that restrictive covenants are void on grounds of public policy because they are considered a restraint of trade. However, the English courts will enforce them provided they are necessary to protect one or more of the existing firm’s ‘legitimate business interests’ and they go no further than reasonably necessary to protect those interests. Typical business interests include the existing firm’s confidential information, its client or supplier connections, investor client connections or the stability of its workforce.
It is important though to bear in mind that a separate body of partnership law has developed in relation to partner restrictive covenants, as a result of which the Courts are more likely to enforce restrictive covenants against partners (and by extension) LLP members, which might not otherwise have been enforceable against employees. This is because exiting partners are regarded as more akin to a vendor of an interest in a business; there is a mutuality of obligation in that as well as being bound by the restrictive covenants, they also receive the benefit of them if other partners leave; and there is not expected to be the same power imbalance as exists with the employer/employee relationship. Carefully drafted restrictions, tailored to the specific circumstances, which are reasonable in scope and length are, therefore, likely to be enforceable against partners. There may be individual circumstances however where partner restrictions are still overly wide to be enforceable or where, for example, an LLP member appears in substance more akin to an employee and where the enforceability of their restrictive covenants may be legitimately open to challenge.
Breach of restrictive covenants could put the lateral partner’s capital, undistributed profits, bonus arrangements and other financial entitlements held by their current firm at risk, as well as expose them to potential injunctive action and liability for damages for losses suffered. As such, exiting partners will take their obligations seriously. In some cases, the lateral partner may be contractually obligated to disclose the restrictions to prospective hiring firms to put them on notice. In any event, a hiring firm would likely wish to enquire about the extent of any restrictive covenants, as in certain circumstances they, too, can be exposed to claims for conspiracy or procuring or inducing breaches by the partner. Even in the absence of express restrictions, if a lateral partner is, for example, involved in orchestrating a team move to the hiring firm in breach of their fiduciary obligations, that could provide the basis for the old firm to seek a springboard injunction to stop the partners joining the new firm for a period of time long enough to “neutralise” the threat the unlawful team move may pose. Further, in practice, a firm bruised by the departure of their star partner, or profitable team, may look to the hiring firm as having deeper pockets than the individual partners, and make the firm the target of litigation.
It will usually be prudent for the hiring firm to ensure that they are aware of, and do not turn a blind eye to, the lateral partner’s obligations and any enforceable restrictions, and take legal advice if necessary. The hiring firm may wish to seek warranties in their onboarding agreements with the lateral partner that such partner is not subject to any restrictions which prevent them from moving and fulfilling their new role.
It may be possible for a departing partner to negotiate a release from, or partial waiver of, their restrictive covenants, for example, a reduced time period or carve out for specific clients and/or in relation to specific services only. This will, of course, depend on individual circumstances, including the partner’s relative bargaining power and whether the current firm has any incentive or motivation to agree such a waiver.
Indemnities
Due to the various risks involved in a partner move, it is not unusual for a prospective lateral hire to ask the hiring firm to provide a written indemnity to make the partner whole on their potential financial losses.
Hiring firms may understandably be reluctant to commit to indemnifying a partner for potentially significant and unlimited liabilities. Indeed, such an agreement would be disclosable in any potential litigation and the firm could possibly be at risk of being viewed as having induced or assisted the partner’s breaches. However, there may be no other way to give an anxious lateral partner comfort, and if an indemnity is necessary, hiring firms should consider carefully what they are prepared to cover, how much, and whether they can lawfully provide this assistance, mindful of the risk of exposure to a claim for inducement and/or conspiracy.
Conclusion
Hiring a lateral partner will come with lots of considerations, and hiring firms should carefully manage the process by obtaining relevant information and being mindful of the legal risks. Taking prompt legal advice in relation to what questions to ask, both in relation to past conduct and future obligations, whether to give an indemnity, and what warranties to require, will all help to manage and mitigate the risks which a hiring firm may find themselves exposed to during a lateral hire process. While there are clear commercial reasons for expansion and growth which may, for some, outweigh the risks, it will not always be worth the potential fall out which can result from neglecting proper due diligence and planning.
If you are an LLP or partnership considering hiring a lateral partner or require advice on the key issues and risks in relation to a proposed team move, or on any other issue covered in this alert, please get in touch with Sarah Chilton or Wonu Sanda, both of whom specialise in partnership issues for partnerships, LLPs, partners and LLP members.
