No big bang yet: silver circle firm reveals high-level discussions over ’anti-embarrassment clause’
A growing number of UK firms are considering adding private equity-style provisions to their partnership agreements to ensure retired partners do not miss out if the firms receive injections of external cash.
Travers Smith senior partner Chris Carroll confirmed last week that his firm was among those that have considered adding a so-called ’anti-embarrassment’ clause to their partnership agreements.
Carroll said he had held discussions with a handful of colleagues about adding the clause. The provision would allow retired partners to receive shares of the profits generated by a value-creating event such as a flotation.
“Because we don’t foresee doing anything in the near future we’ve decided for the moment not to open that particular can of worms,” Carroll revealed.
Carroll added that the discussions had begun when the idea of external investment in a UK law firm first gained real currency.
“After Lehman a lot of the talk about firms floating and the Legal Services Act [LSA] generally went off the agenda,” said Carroll. “Now it’s back and people are starting to think about things like this again.”
Coming nine months before the full implementation of the LSA on 6 October, the trend coincides with an increasing appetite among firms to seek ways of converting partner income into corporate capital to gain a tax arbitrage.
“With the top rate of tax now at 50 per cent, people are looking at ways of trying to convert some of their current income into capital by maybe creating some sort of corporate vehicle within the LLP,” said Carroll. “But it’s important to not come up with anything too overtly racy.”
BDO tax partner Colin Ives confirmed that an increasing number of firms were considering creating corporate members because of the LSA.
“Using a corporate member doesn’t depend on the act, but it’s causing people to review their partnership arrangements,” Ives said. “Currently a corporate member, which is a limited company that technically functions as another partner in the firm, has to be owned and controlled by qualified lawyers. After 6 October they can be owned by anybody.”