Together forever?

Over the next year legal Partnerships will be the target for major reform.

Jeremy Fleming examines how law firms are protecting their workforces from the rising tide of defections

In a year's time, partnership could look very different.

First, reform of the Partnership Act may be under way.

The legislation - which has remained largely unchanged since it was created in 1890 - is currently the subject of a report by the Law Commission (see [2000] Gazette, 14 September, 1).

However, the Act is of greatest relevance to small partnerships which never constitute themselves formally by agreement, and therefore rely on its default provisions.

At the other end of the scale, sophisticated firms juggling their partnerships to accommodate global corporate ambitions are also facing a revolution.

Limited liability is likely to become a reality next year when the Limited Liability Partnership Act 2000 comes into force, while the Law Society is making moves towards allowing forms of multi-disciplinary partnerships (see boxes).

It is making life for partnership law practitioners - only recently recognised as a practice area - extremely interesting.

Richard Linsell, a partnership specialist at City law firm Rowe & Maw, says the new culture of more mobile executives is bringing other challenges.

In the law, it is reflected in the concern partnerships are increasingly showing to protect themselves from defections.The old tricks are becoming more sophisticated, so that straightforward restrictive covenants protecting goodwill have now developed in some cases into sophisticated 'good leaver/bad leaver provisions', he says.

Broadly, these clauses enable firms to retain the outgoing partners' capital for a period.

If the partner goes into a different and non-threatening sphere of work, then the firm will release his capital quickly (good leaver), but if he moves to a competitor, the firm will retain the capital as a carrot to prevent the partner involved from pilfering clients (bad leaver).

'There's nothing like hanging on to someone's money to stop them nicking clients,' says Mr Linsell.

These techniques also apply to indemnity clauses for outgoing partners, which are increasingly used to limit damage that may be caused by partner defections.

By refusing to give a 'bad leaver' from the firm a full indemnity, he is still concerned that the firm's interests are protected.

Richard Turnor, vice-chairman of the Association of Partnership Practitioners (APP) and head of the partnerships team at City firm Allen & Overy, says that, in the age of global branding and information technology, 'firms are also ensuring that partners who leave do not take any of the electronic documentation that partnerships now see as vital to the service that attracts clients to them'.

Renowned partnership specialist Ronnie Fox of City firm Fox Williams, founder and chairman of the APP, says: 'Firms realise that the current merger waves, with their accompanying losses of partners and sometimes teams, can be very damaging.

So longer notice periods, tighter restrictive covenants, and gardening leave clauses are de rigeur.'

Mr Fox does not doubt the main factors encouraging law firms to make greater use of such clauses: 'The accountancy firms' legal arms (such as KPMG's KLegal, Andersen Legal's Garretts and PricewaterhouseCoopers' Landwell) are expanding aggressively, and they have been very successful in other jurisdictions, so there is no reason why they shouldn't be here as well.

The 60 or so US firms in London are also now establishing themselves as significant service providing partnerships, and they too are expanding.'

Gardening leave clauses mean that a partner who hands in his notice indicating that he intends to move to a competitor is compelled to take a certain amount of time out of the market, in order to enable the firm that has suffered the defection to consolidate its client base around a new adviser.

Although there are rumblings that these clauses can be unfair on the partners involved - leaving them to miss work for as long as a year, until the clause lapses - Mr Linsell says that they also have their advantages.

One of his friends in a City accountancy partnership was recently put out to garden for a year.

The partner was worried he would lose some his high-profile banking clients.

Mr Linsell says: 'In the event his golf handicap went down, he had the opportunity to spend time with his wife and children, and it did not do him any harm.

If serious bankers find out that a professional is on gardening leave, his kudos goes up because they know that he must have been worth that clause.'

In fact, the gardening clause can backfire on the firm that forces a partner to find other things to do through inactivity.

Mr Linsell adds that another partner on gardening leave went trekking in Bhutan, and sent postcards to his old colleagues, letting them know how much he was enjoying the freedom they were paying for.

He says: 'If I got a postcard from Bhutan, and I was a trekking enthusiast, I would be very pissed off.'

Another, more complicated, problem thrown up by the current mood for mergers is the so-called 'waiting room' clause which states that only two to five partners can hand their notice in at the same time.

These clauses are also on the increase, with whole departments and smaller branch offices increasingly falling prey to global predators.

Another area in which partnership specialists have found their advice in high demand is partnership de-merger.

This is especially prevalent as a result of recent rulings made by the US Securities and Exchange Commission (SEC).

The SEC is unhappy about the combination of audit and other consultancy advice, especially legal, in one firm of professional advisers.

This is causing the bigger accountancy firms to break up their enormous practices.

So far, Cap Gemini has bought Andersen Young, a consulting branch of big five accountants Arthur Andersen, and PricewaterhouseCoopers is rumoured to be in talks with Hewlett Packard for the sale of its consultancy arm.

Transactions like these are keeping partnership lawyers busy.

There has been a domino effect, according to Mr Turnor, as other partnerships get 'caught up in the pressure of a global trend'.

However, Ronnie Fox thinks the SEC has a 'bee in their bonnet', and maintains that one of the accountancy firms may soon challenge the commission.

Partnership lawyers are currently caught in the middle of the global upheavals affecting the companies they advise, but from next year, with the introduction of the LLPs Act, they will become advisers to a new business vehicle.

Mr Linsell thinks the LLP will be 'very popular within five years'.

He explains: 'With its horizontal management structure, flexible management, lower national security contributions and easier compliance, it will become the business vehicle of choice for new media and technology companies.'

He foresees that partnership lawyers might soon be colonising corporate ground from company lawyers, if the popularity of LLPs lives up to his expectations.

However, he does say that LLPs may struggle to attract employees who are looking for the stock options that only companies can provide.

Mr Turnor is also confident that the start-up companies will use the new LLP structure, and he also predicts that partnership law will begin to impact on company department work as a result.

Mr Fox is more sceptical.

He says that the onus on companies to disclose their accounts makes LLPs less attractive than US LLPs and therefore many companies may choose to become LLPs in the US - as City giant Clifford Chance did at the start of this year.