At a recent meeting of my monthly roundtable of 20 of the 30 largest local CPA firms in Chicago, we invited attorney Russell Shapiro, partner with the law firm of Levenfeld Pearlstein, to speak to us about key issues which are rarely addressed in CPA firm agreements. The first four items are listed below; the last four will appear in a future blog post.
Two important caveats: (1) Several of these issues are governed by state laws, which vary considerably from state to state and (2) the term “partnership agreement” is applicable to all legal entities.
1. If a firm’s partnership agreement is silent on paying deferred compensation to retired or otherwise terminated partners, do these partners have a legal claim to receive deferred compensation payments nonetheless?The answer is mostly yes, which will surprise a lot of people. To the extent that the partnership agreement does not address the subject of buyout payment to departing partners, the applicable state partnership law will govern. Most state partnership laws provide that a departing partner is entitled to be paid his/her pro-rata share of the greater of the liquidation value of the firm’s assets or the firm’s going concern value, which includes a factor for goodwill, unless the firm’s partnership agreement provides otherwise. So, this means that firms whose partner agreements are silent on goodwill are still at risk if one of their partners departs and sues for payment for his value in the firm. Firms who don’t wish to pay goodwill to departed partners should include in their partnership agreements specific language stating exactly what they will pay to departing partners.
2. Can firms impose damages in excess of one times fees for violation of non-solicitation agreements? Mostly, yes. As long as the industry standard for valuing deferred comp is in the one times fee range, firms are safe with a 100% valuation, even if their valuation for retirement purposes is well under one times fees. In fact, they can safely exceed one times fees if they are more profitable than an average firm – 150% of fees is probably as high as a firm should go.
3. Are non-solicitation agreements for staff enforceable? This is an area heavily impacted by state law. Some states will enforce a properly written non-solicitation agreement while others will not. Illinois, for example, is a state in which the legality of these agreements is usually upheld.
4. If the partners vote to reduce partner retirement benefits, is this enforceable in a court of law? Quite possibly, no. The court will protect against amendments (a) that single out one partner or (b) reduce retirement benefits for all partners unless a majority of those near retirement age agree.