Protecting The LLP’S Business

The following protections are established by the LLP Act:

• Any member carrying on a business that is of the same nature as and competes with the LLP’s business without the LLPs consent must account to the LLP for all profits made by the member from that competing business.
• A member must also account to the LLP for any benefit he obtains (without the LLP’s consent) in relation to a transaction involving the LLP or use of LLP’s property, name or business connections.
• A member leaving the LLP will be free to establish a competing business unless he expressly agrees otherwise. He can also provide services to the LLP’s customers.

These limited protections are commonly restated and augmented by the LLP agreement – increased levels of protection are afforded (a) whilst the member remains a member; and (b) for a reasonable period after he leaves.

Members involved in the day-to-day running of an LLP will know its business intimately, including every key customer and supplier. In the event that a member leaves, the business of the LLP should be protected by including enhanced non-compete obligations in the LLP agreement. Members can agree that they are not permitted to set-up a rival business or otherwise compete with the LLP whilst they are members and for a period thereafter. This restriction should apply for a reasonable time period after the member leaves the LLP and to a defined territorial area.

In an attempt to protect the LLP’s business, LLP agreements usually contain terms to prevent members from:

• Poaching employees of the LLP;
• Poaching the LLP’s customers; and
• Interfering with the LLP’s suppliers (e.g. procuring that a supplier no longer supplies goods or services to the LLP).

These terms should apply while a member remains a member and for a reasonable period after they leave.

An LLP agreement often imposes an express duty of confidentiality on the members in relation to LLP information, including information relating to:

• Customers and suppliers of the LLP;
• The business and the LLP itself;
• The other members of the LLP; and
• The terms of the LLP agreement.

This duty of confidentiality should continue after a member exits the LLP.

Unless agreed otherwise, a member has a right to apply to court if his interests are being unfairly prejudiced by the LLP or the other members.

Unlike the shareholders of a company, members in an LLP can agree to exclude this right to claim unfair prejudice indefinitely or for an agreed period. Including relevant provisions in an LLP agreement could avoid potential disputes with disgruntled or expelled members arising in the future.