In whose interest must a member act?

November 23, 2011

KEY POINTS

  • It cannot be assumed that a member of an LLP is obliged to act in the best interests, or for the benefit, of his fellow partners, or that he owes his firm fiduciary duties
  • Representatives of corporate members may find themselves unable to act in the interests of their appointing member, if those interests conflict with the LLP’s
  • If a corporate member of an LLP is a mere ‘cipher’ for another entity, then a court may impose liability on the entity which truly influences that corporate member

Partners generally have a great deal of autonomy in how they work, meaning that a firm’s management must trust partners to behave consistently with a firm’s values.  In our experience members of LLPs expect and want the same degree of collegiality as in traditional partnerships.  Most Partners expect their fellow partners to further shared goals. 

But where there is a suspicion that a member of an LLP is acting contrary to the interests of his fellow members, the question arises: what duties do members of an LLP owe to the LLP and each other?  Where express duties are not set out in the Members’ Agreement, duties demanded by operation of law become critical.  Until recently it has been assumed that the obligations of a member towards his firm are similar to those owed by a director to a company.  But the recent case of F&C Alternative Investment (Holdings) Limited v Barthelemy & Anor  has questioned the extent of members obligations to the LLP, raising fears that partners may be able to act against the interests of their firm with impunity.

Fiduciary Duties?

The legal basis for the loyalty a member of an LLP must show his firm is not set out in statute. Absent judicial guidance, lawyers have drawn comparisons with the duties owed by partners in traditional partnerships and by directors of companies.  In each of those two cases, the individual partner or director is in a ‘fiduciary’ relationship with his organisation.  Broadly speaking, this means that the individual must not put his personal interests before those of his organisation.  The implications of a fiduciary relationship are wide-ranging.  For example, a fiduciary has strict legal limitations to avoid placing himself in a position of a conflict of interest.

In the F&C Alternative Investment case it was confirmed that members of an LLP do not owe fiduciary duties to each other.  This is unsurprising, as an LLP is a hybrid between a partnership and a company and, in the company context, directors owe their duties to the company, not to the other directors.  This is a key difference between traditional partnerships (where individual partners owe fiduciary duties to each other) and LLPs (where they do not). 

Of greater interest was that the case held that it cannot be assumed that a member of an LLP will owe fiduciary duties to the LLP.  Members will owe the LLP fiduciary duties if they have a sufficient degree of control over the LLP’s affairs, but a rank and file member, who has little or no input into the operation of the LLP, is not put into the position of a fiduciary. For many large firms, this could be the great majority of partners.

This begs the question: is there no fiduciary relationship, what limitations are there on a member acting against the interests of his firm?  For now, the best way to achieve certainty on this point is to make explicit in the members’ agreement those limitations which have up to now been presumed.  In professional services firms, the sorts of issues which should be particularly looked at and documented within the members’ agreement usually involve remuneration, the ownership of clients and the responsibility for the sharing of liabilities.    

Corporate Members

A second issue raised by the F&C Alternative Investment case is the extent to which representatives of corporate members of an LLP are free to act in the interests of their appointing member, that is, the very purpose of their appointment.  In the F&C Alternative Investment case, representatives of a corporate member sat on the LLP’s board and, because of the degree of control they were able to exercise regarding the conduct of the LLP’s business, were held to owe fiduciary duties to the LLP which overrode the duties owed by those representatives to their appointing corporate member. 

In practical terms, if a representative of a corporate member on the board of an LLP were to form the view that a particular action should be taken in the best interests of the LLP, he could not, in light of the fiduciary duty he owes to the LLP, obey an instruction to him from his appointing member to vote against it.

This finding could cause problems for groups with subsidiary LLPs.  Although the issue of competing duties is similar to that faced by directors appointed to the board of subsidiary companies, in the LLP context there is no equivalent to the rights shareholders have to step in to guard their interests.  As is often the case, a well drafted members’ agreement seems to be the only solution to this problem.

Liability of Non-Members

The third key finding in F&C Alternative Investment case was that the parent company of the corporate member was held to be liable to buy out the other members of the LLP, even though the parent company was not a party to the Members’ Agreement and played no direct part in the management of the LLP.  The judge justified this finding because he considered the corporate member to be a “cipher” for its parent.  This is a reminder of the fact that in many cases the Court has extremely wide-ranging remedial powers, which can cut across any hoped-for protections that intermediate subsidiaries may bring.


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Daniel Sutherland
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dsutherland@foxwilliams.com

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