Any business adopting a Limited Liability Partnership (LLP) structure needs to be careful to comply with the agreements they enter into and to manage them according to the law and their agreements. A dispute over a member’s continued membership of an Investment Fund LLP has highlighted the difficulties in managing individuals and the business where LLP agreements are involved in Flanagan v Liontrust.
Mr Flanagan accepted a position at one of the Liontrust group’s LLPs and according to the business structure he became a member of the LLP. Although he was paid a base amount plus a ‘bonus-like’ payment according to performance, the LLP structure meant that he was not an employee. Instead he signed a LLP agreement with the other members and, at law at least, obtained certain rights to participation in the organisation.
When Mr Flanagan’s part of the business (Emerging Markets fund) ceased to be viable, managers in the wider Liontrust group, who effectively controlled the LLP, sought to give him notice to leave the LLP. Unfortunately for them they took insufficient regard to the terms of the LLP agreement and sought to exercise a right to terminate as if he had been an employee. Essentially their attempts to remove Mr Flanagan therefore failed at law and for an extended period he remained, legally a member of the LLP. This meant that all their practical attempts to exclude him from the business, place him on garden leave and then expel him were technically invalid.
Amongst other mistakes, they failed to abide by the membership agreement by:
- failing to exercise the notice provision according to its precise wording;
- failing to convene meetings of the correct LLP committees;
- failing to give notice to Mr Flanagan of such meetings; and
- claiming to exercise powers which were not in their power (because they required the LLP members to act unanimously).
This highlights how LLP management must have regard to the exact terms of the LLP agreement and underlying LLP law. It is not analogous to company law or the law of ‘normal’ partnerships. The tax, structuring and payments sharing advantages of LLPs are only available because these rules are imposed on members.
Mr Flanagan responded to these various failures and his exclusion from the business by claiming that the LLP agreement which bound him terminated. In his analysis this would mean that he would obtain an equal share of a multi-million pound business rather than the ‘pseudo-employment’ rights he had under the LLP agreement itself.
In turn this failed. Like ‘normal’ partnerships, the court decided that multi-party LLP agreements cannot be terminated in this way. Even if the breach is extreme (as it was here) an individual member cannot bring the entire LLP agreement to an end. As a result, LLP members should be aware that they will remain bound for as long as their membership of the LLP itself is not terminated. It may not be as easy to get out as many would anticipate.
The overall result was that no party correctly interpreted the LLP agreement they had signed or acted effectively in accordance with it. The law is more rigid and more complex than any of them expected. This should be a warning to LLPs and LLP members to have a careful regard to the obligations they are signing up to.