How Fixed is Fixed?

By Roderick I'Anson Banks and Simon Jelf

www.partnershipcounsel.co.uk

Use of a two-tier structure in partnerships and LLPs is commonplace. Fixed share partners get a fixed amount, equity partners take the rest. Received wisdom is that equity partners deserve the upside in good times, because they take the hit in bad times. The profits of fixed share partners are, well, fixed. True, if there are no profits, they will suffer too, if it is a share of profits they receive and not a guaranteed “salary”, but in a bad – as opposed to disastrous – year, they may earn more than the equity partners.

But these are exceptional times. With employees being furloughed and equity partners facing drastic reductions through no fault of their own, can fixed share partners expect to remain immune from cuts?

Inevitably, the terms of the agreement will be key. If it contains a power to review the fixed shares, downwards as well as upwards, at any time or if the annual review date is imminent, all well and good. Bear in mind that fixed share partners may have been lured into the partnership from the (relative) safety of employment and may well not have agreed to put their income at the discretion of others.

If there is no such power, can the relevant part of the agreement be varied? Even then, could the equity partners carry such a vote? How will the fixed share partners react?

Can one or more fixed share partners be culled to reduce costs? Again this depends on the agreement but it is hardly a quick fix.

Whatever the solution, the biggest hurdle to overcome may be a conceptual one: does fixed really mean fixed?