Breaking Up Is Hard to Do

When a business partnership is new and everybody is toasting the new team, nobody thinks much about the legal agreements the partners just signed. In the subsequent months, even years, these documents tend to gather dust in a drawer. However, once things begin to unravel, out come the agreements, with each partner spinning the contractual rights in his own favor. By then, it's too late to think about

When a business partnership is new and everybody is toasting the new team, nobody thinks much about the legal agreements the partners just signed. In the subsequent months, even years, these documents tend to gather dust in a drawer. However, once things begin to unravel, out come the agreements, with each partner spinning the contractual rights in his own favor. By then, it's too late to think about what was important from the beginning — the language that spells out what happens when the partnership ends.

Brokers partner up for a variety of reasons — to increase production and cut costs, to provide better service to clients or, sometimes, for a senior broker to establish an exit strategy from his practice. However, whether it's called a partnership agreement, a joint partnership agreement or a joint production agreement, some kind of contract is needed when a partnership between members of a team of brokers is formed, whether it be between a senior broker and junior colleagues or just between two seasoned brokers.

While the agreements that define these partnerships are intended to be legally enforceable contracts, few brokers consult with counsel before drafting and signing them. Though brokers may instinctively consult with a lawyer before executing an employment contract, separation agreement or “forgivable loan” agreement, they generally do not feel the same need to do so when entering into a joint agreement. That's rather shortsighted, since these documents are every bit as complex as employment agreements. Further, at least one party to such an agreement probably is a sophisticated and driven rep who is not likely to shy away from enforcing his will should the partnership break up. Truly, joint agreements — as well as many other employment contracts — are most important for defining what happens when the relationship sours or otherwise dissolves.

A properly crafted partnership agreement will define: who the parties are; the rights and obligations of each party during the term of the partnership; the circumstances under which one or all of the parties can demand the dissolution of the partnership; and consequences of the breakup.

Several provisions of the joint agreements are critical. The first — and most commonly ignored — is identification of the parties involved. The agreement is, of course, between the two or more broker partners. But many of these partnerships may be governed on some level by the rules of the employing broker/dealer firm. Some firms require specific financial and administrative terms to be attached to the partnership and incorporated into an agreement. Other firms have guidelines that denote favored protocol that may not necessarily be required as contract language.

There is a direct relationship between the degree of control that a firm exerts over the partnership and whether that firm is also a party to a partnership agreement. A firm may have a prototype agreement for brokers wishing to enter into a partnership arrangement. And it is not uncommon for an employing firm to be a signatory to an agreement negotiated between the brokers.

It is critically important to evaluate the merits of having the employing firm as a signatory to the partnership agreement and the consequences of it. As a signatory, the employing firm may not only be liable for proper payment of fees and commissions to the broker partners pursuant to the terms of the agreement, it may also be entitled to enforce restrictive covenants such as agreements not to solicit. These clauses, which may be buried in such agreements, are intended to bind the partners. But they can also provide the employing firm with a contractual weapon to prevent the loss of accounts when a partnership ends.

From the broker's perspective, the day-to-day structural framework of the partnership is paramount. The most important issues involve specifying which broker is bringing which assets to the partnership and deciding how these assets are valued. The partnership agreement should specify in whose name and broker number each customer's business will be listed and handled.

The agreement also should specify whether there will be a partnership account number into which all partnership accounts and assets will be transferred or whether the partners will continue to maintain their separate broker numbers. Attribution and distribution of fees and commissions to each of the partners is obviously important and generally require some negotiation and detailed contract language. While the parties may understand their shorthand formulae, it is important to remember that a third party, such as an arbitrator trying to interpret the agreement after the fact if a dispute should arise, will not be as attuned to any such unusual parlance.

So the agreement must define who owns the assets and customers, specifying whether each broker will retain ownership rights over the customers brought to the partnership by the respective broker and clarifying the ownership status of partnership assets such as customers brought to the partnership after its formation. Note that the firm, especially if a signatory to the agreement, will have to stake out its own interests in the ownership of these accounts.

The natural corollary of these issues is the disposition of partnership assets upon dissolution of the partnership. Common grounds for dissolution are an inability of the partners to continue working together; movement by one or more partners to another firm; death; retirement; and disability of a partner.

The agreement should address the rights and obligations of each partner to the other partner(s) and to the partnership in each such instance. Fundamentally, these issues involve definition of ownership of the accounts, disposition of outstanding commissions and receivables, and post-dissolution conduct by the partners. As previously discussed, where the employing firm is a party to the agreement, it may have a significant say in each of these matters and may seek to rely upon such contract provisions to prevent account transfers or partnership moves to a competitor.

If the creation of the relationship is important to the prospective partners, it probably does not make sense to use a form partnership agreement prepared by the employing firm. Doing so may be expedient, but it may also be fraught with danger. Such form agreements likely are weighted in favor of the firm. There are important legal and business interests that the partnership agreement should protect, and a form agreement may just not be adequate. The main reason a partnership agreement is created is to protect the parties involved in an acrimonious dissolution.

Writer's BIO:
Jonathan P. Arfa
is a New York employment lawyer representing brokers. arfalaw4executives.com

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