Published in Practical Audit and Accounting Journal.
Standfirst: Those wanting to leave for a new firm need to plan their move carefully.
A team move can be the beginning or the end of a firm. For the predator seeking to recruit a team it can really put that firm on the map. For the firm losing a team, it can be a crippling loss of a skill base and profit centre. For all parties concerned, be it the firm losing the team, the team itself or the firm gaining the team, the key objective is usually damage limitation.
Whichever side of the team move you are on, it is advisable to seek independent legal advice at an early stage. In Towry EJ Limited v Bennett and Others  EWHC 224 (QB), Mrs Justice Cox considered whether a team had been solicited by their new employer. The fact that members of the team took independent legal advice as to what they could say to clients was directly relevant. For the moving team there is a sensitive balance to be struck between, on the one hand, complying with their continuing obligations to their current firm and, on the other hand, the steps they can take in preparation for their move.
Experience has taught most lawyers that a client’s objectives cannot be taken for granted. One of the most common is to get the move done quickly. A second objective almost invariably is to maximise following, be it a client following or a team following; this objective usually drives the strategy adopted in a team move scenario. The individuals in the team who are moving are also normally intent on preserving their personal reputation.
The recent string of law firm failures is a lesson to partners considering a move that due diligence should be carried out on the financial status of the firm which they are considering joining. Partners looking to move to a firm should also be encouraged to enquire about the partner and staff turnover rate at the firm and to speak to other partners who have recently left or are leaving to get a better insight into the internal workings of the firm.
When dealing with restrictive covenants applicable to departing partners and employees the starting point is to establish the boundaries by looking at the way in which they are drafted and to consider the activities which they seek to restrict. Generally the safest starting point (and a way of reducing the risk of conflict) is to assume that the restrictive covenants will be enforceable.
Restrictive covenants are enforceable provided that they go no further than is reasonably necessary to protect a legitimate business interest, such as a firm’s client connections and the stability of its workforce. Sometimes a situation involves a team where all the expertise of a firm in a relatively narrow field moves. That raises a question mark about whether there is a legitimate business interest to protect for the firm from which the team is moving because the firm may no longer be able to service the clients in that particular field. In that situation it might be arguable that all or some of the restrictive covenants may not be enforceable.
There are also practical difficulties in a team move because often the restrictive covenants will be expressed in slightly different ways for the senior equity partners, the fixed share partners and the employees and this will influence the way in which the team move is organised and staged. Then there is the question of whether the moving team should tell the firm they are joining about the restrictive covenants and provide them with copies. Sometimes there will be a contractual obligation to the existing firm contained in an employment contract, or an LLP members’ agreement, stating that a senior employee or partner must inform any new firm they are considering joining of the restrictive covenants by which they are bound. An advantage of doing so is that the new firm then shares the problem. A disadvantage is that the new firm might be worried about the risk of an allegation that it has induced a breach of contract and it may become more cautious or wish to delay the move.
Client influence will often be a useful negotiating tool for a departing individual when the firm they are leaving tries to hold them to non-dealing and non-compete restrictive covenants. There are large numbers of clients who are not prepared to be told by firms who they can and cannot instruct. For example, there may be certain clients who only instructed the current firm due to their relationship with the departing individual or their professional reputation and expertise in a particular field. Those clients would probably want to follow the departing individual. It is unlikely that the current firm would wish to involve a client or ex-client of theirs in court proceedings if that client chose to instruct a departing individual at their new firm. It is often also possible to reach agreement in respect of clients for whom both the current firm and the new firm act, especially if it can be agreed that the current firm can continue to service a client in relation to a specific area of work which the new firm cannot cover.
The team members should also be mindful of other obligations that they may owe to the firm from which they are moving, such as the duty of good faith which is usually seen in the LLP and partnership context and the duties of fidelity and loyalty in the employment context. Often these duties are encompassed in an obligation to act in the best interests of the firm and to devote their whole time and attention to the firm. Therefore while members of the team remain at their current firm they will be limited in terms of the preparatory steps they can take in relation to the team move. Careful thought needs to be given to what can and cannot be done.
The moving team should be cautious about the information that is shared with a new firm. The practical reality of the situation is that there is usually a strong degree of tension between the team’s duty to comply with the confidentiality obligations owed to the current firm on the one hand, and the information that the new firm will require before committing to taking on a partner and his team on the other hand. Where the name of a client is public knowledge, for example, because there is a public announcement which has appeared in the press which identifies the name of the firm and the particular partner dealing with the matter, that information is public knowledge and will not normally fall within the confidentiality obligations. Similarly, it may be possible for a partner to disclose information to the new firm in an anonymised form which arguably would not amount to a breach of the confidentiality obligations. Departing individuals also have to be very mindful of the risk of criminal prosecution under section 55 of the Data Protection Act 1998 which makes it an offence to unlawfully obtain personal data, either knowingly or recklessly, without the consent of the data controller (in this case, their current firm). This could for example include information contained in a business plan from which individual clients or colleagues can be identified.
Internal communications between members of the team have to be handled particularly carefully and the team members should avoid using an office telephone or an office email account to contact each other because the current firm may be monitoring and recording those communications. The safest approach is to assume that office phones and email accounts are being monitored by the current firm. Even text messages from private phones and emails to and from private email addresses are potentially disclosable in litigation.
So far as external communications are concerned, one of the most powerful things that the leaving team members can offer the current firm is a degree of control about what and when clients are told about the move. It is usually safer for the team to avoid mentioning anything to clients until the firm which they are leaving has been told and been given an opportunity to make an announcement. Asking the new firm to avoid making any triumphalist announcements in the press is also a helpful way of reducing the risk of litigation and should hopefully encourage the parties to reach an amicable agreement.
Recruitment of team
Some of the most commonly asked questions in a team move scenario are about recruitment; how do I bring other members of the team in? How do I get the new firm to target people whom I know are potentially good candidates in the old firm without acting in breach of a non-solicitation of staff clause? One way of proceeding is for the new firm to place an advertisement in the press. If a member of staff in a firm answers an advertisement which turns out to be to join a firm where somebody with whom he worked previously has moved, it is difficult to attack that individual on legal grounds. The use of experienced and competent head-hunters will be helpful in attracting the right types of candidates.
It is likely that the current firm will interrogate the leaving team to establish whether the team members’ stories are consistent and to elicit evidence of collusion between the team members. It is therefore important for the team to ensure that their reasons for leaving do not suggest solicitation by one individual. The team should also carefully plan how and when the announcement of their departure is to be made.
Staggered versus team moves in concert
The way in which a team’s departure is organised can be very important. Staggered departures are usually (but not always) the safer way to proceed because it is harder for the firm which the team is leaving to prove that there has been collusion between the team members. It may also mean that the team members who remain at the firm for the time being can continue to service clients until the team is able to do so at the new firm.
Litigation that arises in the context of a team move scenario can be particularly messy and expensive and it can give rise to negative and embarrassing publicity. In most cases the best strategy will be one which is designed to reach an agreement and to minimise the risk of litigation. Mediation can be an extremely useful way for the parties involved in a team move dispute to reach a fair, sensible and commercial resolution. Unlike litigation, it offers privacy and flexibility which enables the parties to agree to creative solutions, such as fee sharing arrangements between the new and old firm. It is also usually a much cheaper and quicker way for the parties to resolve a dispute. Courts are increasingly encouraging solicitors to advise their clients at an early stage to seriously consider mediation as an alternative to commencing litigation.
Inevitably a team move scenario is a difficult and sensitive issue for all parties involved. Particularly so for the partner or employee leading the team move; there is no doubt that most team leaders feel vulnerable because they are about to go up against the firm where they may have spent a number of years and have gained a number of colleagues and friends. Emotions often run high. Partners in the firm which is losing the team are likely to feel that they have been betrayed. The firm which is gaining the team will be keen to secure a return from what may be a substantial investment. Careful legal analysis and a coherent strategy will often be key to resolving difficult issues.
Neena Patel is a senior associate at City law firm Fox.