In these difficult economic times firms have taken various steps to reduce costs, either to survive or to maintain levels of profitability.  When looking at employee costs, and short of making redundancies, firms have proposed salary freezes and salary cuts coupled with reduced working hours, while for partners – often a small but expensive category
de-equitisation has been mentioned frequently in the press.

But what does de-equitisation really mean and can it actually be achieved other than as a result of a threat of more drastic action?

In our experience de-equitisation means different things to different people; for some it may mean a reduction in their share of the equity (usually linked to some performance criteria) while for others it means termination of equity partnership and a re-engagement on a fixed share arrangement (more akin to the status of an employee rather than a partner).

In firms with a well drafted agreement, and a remuneration structure aligned to performance, the power to reduce the equity share can usually be found to exist.  However, in many firms, when those responsible for the management contemplate the removal of an individual from the equity group and
re-engagement on fixed share terms, it is often found that the agreement contains no power to enable such action to be taken.

If management has identified that a ‘change of status
de-equitisation’ is necessary, it may be tempting to approach an individual and say – either you agree to this change of status or we will seek approval of a resolution for compulsory retirement (assuming the agreement contains an express power for compulsory retirement – if it doesn’t, there is no power to remove an individual).   It is at this point that management can get themselves into difficulty.

If there is a power to compulsorily retire a partner, it must be exercised in good faith for the benefit of the partnership or the LLP as a whole and the procedures must be followed to the letter.  It follows that before an individual is approached with the “agree to
de-equitisation or face retirement” proposal, management must at least ensure that they have identified a compulsory retirement criteria and satisfied themselves that a resolution seeking such action can stand up to objective analysis.

Informing an individual that management has decided that they are to be removed from equity if they don’t agree to de-equitisation can create problems if the individual doesn’t agree; any subsequent proposal for compulsory retirement is very likely to be met with a forceful response that management had pre-determined that the individual was to be forced to retire without applying an objective criteria.  Management finding themselves in such difficulty invariably find that they are on the back foot and that the bargaining power has shifted to the individual such that the terms of an agreed
de-equitisation become less appealing to the firm.

De-equitisation is a very serious step and – despite the impression that may be created in the press – should not be taken without some very careful thought.

For more information on these issues please contact

Clive Greenwood

or your usual Lewis Silkin contact