UK: Time to change, partner.

UK: Time to change, partner. - Partnership law is undergoing a restructuring.

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Last Updated: 31 Aug 2010

Partnership law is undergoing a restructuring.

The very public inability of Arthur Andersen's partners to decide on a new global leader for their firm revived an old chestnut, namely the question of whether the partnership mechanism can cope with enterprises of this size. Last year Andersen's rivals KPMG transferred the majority of their audit operations into KPMG Audit plc. The logic was primarily to protect partners' assets from legal actions. But somewhere on the agenda too, it was suggested, was the idea of streamlining the management structure.

Simultaneously, the law on partnership is up for a serious overhaul.

KPMG's move was driven by the escalation of scary legal actions aimed at the joint and several liability which puts all partners in the frame for the failure of any one of them. A recent £110 million judgment against accountants Binder Hamlyn, for example, threatened partners' personal assets. Recognising partnerships' fears, the Channel Island of Jersey passed a law offering professional partnerships limited liability, as is available to US firms. Worried that the UK's professional elite would remove their registrations to Jersey, the Conservative government set its own limited liability partnership (LLP) bandwagon rolling last year.

Now, the professions are waiting to see how the bandwagon will proceed under Labour.

Are the big partnerships going to continue as such? If so, here or in Jersey? The first question is easy to answer. Andersen's particular problem is the outstanding success of its consulting arm. Andersen Consulting may ultimately split off from the Arthur Andersen accounting side, but neither looks likely to ditch the partnership structure. A partner of Andersen recently appointed from the outside explains why. 'I experienced four owners in 10 years in a plc. Looking over the corporate shoulder hampered effectiveness. Here, we own the business. Takeover is simply not an issue.'

Bill Knight, senior partner of City law firm, Simmons & Simmons, has another angle. 'The partnership structure motivates people in many ways,' he says. 'Owning the business gives a greater degree of buy-in and is a factor in keeping people. Making a partnership work, including settling on the right degree of involvement, is demanding but the stability you get in return is extremely valuable.' Keith Clark, his opposite number at the UK's biggest law firm, Clifford Chance, acknowledges that, 'The flat structure of a partnership gives you some interesting politics. Replacing it with more complicated hierarchies would give us different, but not obviously better, politics.'

On the LLP issue, the spectrum of opinion is much wider. 'We would look at LLPs,' says Knight. Others are taking the issue on the front foot.

At accountants Clark Whitehill, partner David Furst specialises in advising professional firms. He is full of trenchant criticism of the consultation document issued by the Department of Trade and Industry (DTI) in February.

The DTI proposes that the liquidator of a failed LLP could claw back significant tranches of partners' pay and also call upon individual guarantees. Also, LLPs would have to disclose detailed financial information, something old-style partnerships have traditionally been loath to do. Furst says, 'The paper was unhelpful. If those are the lines that UK LLP legislation takes, it will have few attractions.'

The Jersey law, in whose authorship Ernst & Young (E&Y) and Price Waterhouse (PW) played major roles, is milder on disclosure and less onerous in the event of liquidation. However, the DTI has made it plain that firms operating in the UK will have to meet UK disclosure standards whether registered in Jersey or not. Meanwhile the Inland Revenue has made an unsympathetic ruling on Jersey LLPs. Both E&Y and PW are said to be considering setting up an experimental Jersey LLP to get the Inland Revenue's ruling settled in court.

Yet not all LLP fans are set on a Jersey solution. John Rink, managing partner of lawyers Allen & Overy, is by no means alone in arguing that, 'The DTI paper was very positive. Going to Jersey would be a nonsense.'.

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