Reinhard v Ondra LLP & Ors (Rev 1)

An LLP member’s “share” is not an abstract ownership interest. It is the totality of the contractual and statutory rights and obligations attached to membership. The court must identify those rights by construing the relevant LLP agreement and any applicable default provisions.

An incoming member ordinarily joins on the terms governing the existing members, subject to express agreement to the contrary. A contractual discretion to review a member’s share or bonus must be exercised rationally and in good faith. Failure to conduct a required review, or taking materially irrelevant matters into account, may sound in damages.

The claimant joined the defendant LLP under an employment contract which stated that he would initially be granted a 1% share of the partnership, subject to annual review. He claimed that this gave him immediate membership, rights to income and capital, and later entitlement to 2% and 3% shares.

The defendants contended that the contractual share was only notional, that membership would arise only after execution of further LLP documentation, and that the claimant’s employment and membership could not coexist. The claimant also claimed bonuses, payment in lieu of notice, expenses and misrepresentation. The judgment determined liability issues, leaving further submissions on the effect of section 4(4) of the Limited Liability Partnership Act 2000, misrepresentation and quantum.

1. Construction and membership. The reference to a “share of the partnership” in the contract referred to membership of the LLP and the rights attached to that membership. The claimant was to become a member on commencing employment. His membership was to be governed by the April 2009 draft LLP agreement, so far as applicable, and subsequently by materially similar terms in the March 2010 LLP agreement. He was not required first to execute deeds of adherence or allocation.
2. A member’s share in an LLP is the totality of the contractual or statutory rights and obligations attaching to membership. It may include rights to income profits, capital profits, distributions and surplus assets, but those rights depend on the governing agreement. The statutory default provisions apply only where the parties have not agreed the relevant matter.
3. The court held that section 4(4) of the Limited Liability Partnership Act 2000 prevents a person from being both a member and an employee where, under the statutory hypothesis, he would have been a partner in a traditional partnership. The precise effect of that conclusion on the claimant’s contractual rights required further submissions.
4. The defendants were contractually required to review the claimant’s share annually in the light of his performance. The review due in 2011 was not conducted within a reasonable period. The claimant was therefore entitled to damages, although he was not entitled to establish that a rational review would necessarily have increased his share from 2% to 3%.
5. A discretionary bonus had to be assessed rationally and in good faith. The 2011 bonus decision was irrational or perverse because the defendants gave improper weight to the claimant’s failure to generate new business, although that was not an immediate requirement of his role, and failed properly to consider his actual performance. Quantum was reserved.
6. The claimant was entitled to payment in lieu of notice, including the amount which would have been received as a dividend on a 2% share during the notice period. His expenses claim succeeded. The defendants’ counterclaim for repayment of the £50,000 bonus was dismissed. The misrepresentation claims required further submissions.