Thoughts About Restrictive Convenants for CPA Firm Partners
May 2015 -
I spend a good amount of time speaking with managing partners about their goals including lateral partner hiring and also speaking with partners who are contemplating making a change. One of the common elements for both sides is dealing with restrictive covenants. Over the years, I have seen many such agreements and have been involved with and seen the resolution of the agreements when partners depart. I am happy to share that 95% + of the time these issues are resolved amicably, though not without some degree of tension.
This is a very sensitive topic as the decision for a partner to resign is quite difficult as is the decision for a firm to terminate or ask a partner to leave. These are almost always long term relationships within the firms and with their clients. In addition, while the New York metro area encompasses several million people, our CPA community is small and close-knit, so I think its almost imperative to try and separate on as good of terms as possible.
Resolution of the restrictive covenants is probably the most difficult issue in cases like this, as no one wants the cost and distraction of litigation. And, I can say from first hand experience, these issues are almost always settled through negotiation and not litigation.
The best way to minimize such disputes is to have a well-crafted and fair agreement from the start. To that end, I would like to share an excellent article about restrictive covenants from a valued business colleague, Michael Lasky of the law firm of Davis and Gilbert.
Here are my main observations on this article and topic:
- Agreements have to be reasonable in terms of time, geographic scope and liquidating damages.
- Injunctions are very difficult to obtain and enforce.
- Courts will blue-pencil existing agreements if deemed unfair, so firms and partners would face an "unknown" they may want to avoid.
- Partners considering a change should have legal representation, but with an eye for a fair settlement rather than litigation.
- Terms should be clearly defined (i.e., soliciting versus servicing clients) or a court may decide for you.
If you are a partner contemplating a change or a firm seeking to be sure your covenants are fair, I hope this is helpful. I am happy to provide confidential input if you have questions.
If you would like to discuss this or any other issues related to your practice or career, please don't hesitate to contact me. My direct line is (212) 490-9700. Or email me at firstname.lastname@example.org. Absolute confidentiality always assured.