Entering into a business partnership in the UK has lots of benefits, but there are times when disagreements occur, leaving one or more of the partners attempting to expel another partner from the business.
The cause of the disagreement can vary from personality clashes, problems with a partner’s behaviour and level of commitment, and issues with inappropriate conduct.
Over time, disagreements can lead to a dysfunctional partnership, and the best course of action is to remove a partner from the partnership.
Partnership Agreement
If there is a Partnership Agreement in place, then this should guide partners on how to deal with any expulsion. In the absence of any formal partnership agreement, the default provisions of the Partnership Act 1890 may apply.
There is no statutory power allowing partners to expel one another, so these provisions should explicitly be included within a partnership agreement (a good reason why you should always have a partnership agreement in place!).
Without an agreement in place, the default legal position may be that the only way a partner can be expelled is via dissolution of the partnership.
This may not be what the partners want. A partnership agreement will provide partners with full control over any exclusion without having to resort to the default position in the Partnership Act.
Expelling a Partner
If you are in a partnership and feel a partner should be expelled, then you will need to refer to the partnership agreement and follow the expulsion clause closely. For example, if it states that you have to meet the partner to discuss before any expulsion then you should do this.
Also, remember that expulsion impacts the partnership, as you will need to deal with the settlement of the expelled partner’s shares, profits, and equity. The terms of the payment need to be agreed and the partnership, if it is to continue, should decide how the payment will be made.
Expulsion Clauses
Usually, partnership agreements will contain clauses relating to disagreements and the handling of disputes. This is the first place to start with any disagreement. In the absence of any dispute resolution, then a well-drafted partnership agreement will set out the ground upon which a partner can be expelled.
These grounds often include:
- Criminal behaviour
- Insolvency/bankruptcy
- Material breach of the terms of the agreement
- Misconduct
- Dishonesty
- Permanent Incapacity
The expulsion clause in the agreement should always state what the method of expulsion should be and how expulsion will be exercised. Usually, partners are required to serve a notice of expulsion, coupled with a period of suspension.
An important point to remember is that when constructing the expulsion clause in the partnership agreement, you should ensure that the grounds for expulsion are not so wide as to lose meaning.
Historically, the courts have always applied a strict interpretation of expulsion clauses. Therefore, you should ensure that the grounds are set out clearly, and the process for expulsion is also clear and followed correctly.
Partnership agreements can also have express powers which allow the partnership to place a partner on garden leave or suspend them whilst the grounds for exclusion are investigated. The agreement could also be drafted to bring forward compulsory retirement of a partner.
In recent years, businesses have followed GP practices by including a ‘green socks clause’ in their partnership agreements. The clause allows partners to expel another partner without specific grounds (e.g. you don’t like the colour of their socks).
The clause has the benefit of encouraging all partners to pull their weight and fulfil their duties to the business.
The green socks clause is not 100% guaranteed, for example, the remaining partners must not be deemed to be acting in a discriminatory way to the partner they are expelling.
Exercise of Expulsion
The right to expel should relate to very specific circumstances and be exercised in good faith. Some agreements also include terms to the effect that a certain percentage of partners have to agree to the expulsion before it is carried out.
If you do not have a partnership agreement in place, or you feel that the one you have requires updating, then take action straight away. Having a well-drafted partnership agreement not only saves time and money, it also ensures that all parties are adequately protected against risks, such as losing assets in the future.
Considerations on Expulsion
There are some important financial and practical considerations when considering expulsion. One of the main decisions the partnership will have to make is what happens to the expelled partners’ share.
- Partnership Agreement: Always refer to the partnership agreement in the first place as some agreements stipulate that the remaining partners should buy out the leaving partner.
- Valuations: Of course, before any payment is made there needs to be a valuation of the partner’s share. Some partnership agreements include a calculation to be used on any valuation, and others are silent on this point.
- Payments: The partnership should also consider if the payment is to be one lump sum or a set of instalments.
- Employment Rights: if the partnership is a limited liability partnership (LLP) then you will have to ensure that the partnership did not unfairly dismiss the partner so be sure to take legal advice.
Another important consideration is restrictive covenants. A restrictive covenant restricts outgoing partners from setting up a competing business or soliciting the business’s clients and staff.
Once a partner has been removed, the partnership should review the partnership agreement to ensure that it reflects the way the partnership operates and contains all relevant provisions and clauses.