High Court rules member’s profit share can be subject to forfeiture (Hosking v Marathon Asset Management LLP [2016] EWHR 2418 (Ch))

The High Court has ruled that a profit share payable to a member of an LLP was capable of being subject to forfeiture where the member was found to have breached his fiduciary duties to the LLP.

Facts

The Claimant, Jeremy Hosking, was a founding member of the Respondent, Marathon Asset Management (the “LLP”), and entered into an LLP deed with the other founding members. The LLP deed provided that profits payable to Founding Members are shared equally, save that if any of the Founding Members became a Non-Executive Member (i.e. they no longer worked in the business) their entitlement was reduced by 50%.

Mr Hosking retired in December 2012, becoming a Non-Executive Member. In the same month the LLP commenced arbitration proceedings against him, for breach of his contractual and fiduciary duties to the LLP, having held discussions with four of the LLP’s employees in July 2012 about the possibility of starting a competing business.

The Arbitrator upheld the LLP’s claim and awarded forfeiture of 50% of the profit share payments received by the LLP between July 2012 and December 2012, in addition to equitable compensation. The rationale for the application of forfeiture to only 50% of the profit share payments was that this sum represented remuneration, since it was only received by Executive Members involved in the day to day running of the business. The remaining 50%, received by both Executive and Non-Executive Members, reflected the members’ ownership interest in the LLP, and was thus not subject to forfeiture.

Mr Hosking appealed to the High Court on the basis that none of his share of profits in the LLP should be subject to forfeiture.

Judgment

The High Court dismissed the appeal. It held that while the forfeiture rule had traditionally been invoked in relation to agents and the fees payable in respect of the provision of their services, the rationale for it (being the need to deter fiduciaries from betraying the trust placed in them) extends more widely, and requiring payment of damages may not represent adequate compensation. The court went on to say that in unusual cases where a profit share can be identified as a reward for undertaking specific services, there is no good reason to treat it differently from any other form of remuneration (i.e. the law should be concerned with substance over form). Finally, the court held that while the forfeiture principle can be specifically excluded by parties, it may be implied where the contract is silent.

Implications of the Judgment

It is important to bear in mind that this decision only applies to a situation where partnership profits are analogous to remuneration.

This case highlights the need for LLP agreements to be drafted clearly and comprehensively. Parties should explicitly spell out in the agreement whether any profit share payable to the members is intended to be remuneration for performance of their fiduciary duties or other specific duties and if so, whether that profit share should be subject to forfeiture if the members breach those duties.

This article was written by Paul Herbert, Partner, Corporate, with assistance from Emily Kearsey, Trainee Solicitor.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.