Can you rely on your ‘green socks’ clause?

Making the decision to expel a partner is never an easy one and the reasons for doing so will vary widely.

Some situations will be straightforward. A partner may, for example, be found to be in clear breach of the partnership deed if there is an issue of gross misconduct. Unfortunately, less clear-cut circumstances are more common, such as a personality clash that is causing disfunction within the partnership and preventing it from operating effectively.

In these instances, a ‘green socks’ clause could be the answer. But can they be relied upon in practice?

What is a green socks clause?

A green socks clause is a clause that can be included in a partnership agreement, which allows partners to be expelled on ‘no fault’ grounds. Its name refers to the fact that the reason for expulsion could be as innocuous as wearing the wrong colour socks.

An example of when you may wish to use such a clause would be an under-performing partner. An under-performing partner can create unease in a practice, resulting in low morale amongst other partners and employees. Having the ability to expel such a partner, without having to rely on ‘with fault’ grounds, can be an attractive option and is often seen as an ‘easy’ way to resolve the problem.

Are green socks clauses legal?

For a green socks clause to be added to a partnership agreement, all partners must agree – which means there is no reason why it should not be effective in law. However, should an expelled partner decide to challenge their expulsion, the Courts will check that the correct process has been followed and that it has been carried out to the letter. They will also want to ensure that the process isn’t being abused in anyway, for example as a way to discriminate against an individual.

What can you do to reduce the risk?

Exercising a green socks clause is effectively relieving someone of their livelihood and their business, without explanation or rationale. For this reason, the courts will be very strict. Even the smallest deviation from the process is likely to invalidate the expulsion and expose the expelling partners to the risk of a counter claim. The Courts may also want to convince themselves that the underlying reason is not illegal (such as discrimination) so may well want to understand the expelling partners’ reasoning.

Remember that if the matter does become litigious, the process of disclosure will require that all evidence is released. This will include any emails, paper notes and other records however stored, as well as witness statements. If any of these hint at either a deviation from the process or an illegal reason, the Courts would take a very dim view. Given that tensions will be running high and the expelling partners are likely to generate a lot more correspondence than the sole partner being expelled, this can be a risky process.

For these reasons, it’s always wise to seek legal advice well before an expulsion is made. This can help you to ensure that you fully understand the process, and that emotions do not overrun in a way which could cause problems later on. You will also want to ensure that some documents are covered by ‘privilege’ and thus are not disclosable.

Our recommendations

A well drafted green socks clause can be beneficial on two counts. It can encourage all partners to carry out their duties conscientiously, and it can make it easier to take action against anyone who falls below the required standards.

However, they should not be seen as the ‘easy option’. A better starting point where there are problems is usually to consider whether a ‘with grounds’ expulsion clause can be used.

Green socks clauses are best avoided in two-man partnerships because they become too unstable. They should also be avoided in partnerships where two or more partners are closely related. This is because the relatives are unlikely to vote against each other, effectively meaning the green socks clause can only be used against the non-related partners.

It is good practice to ensure that unanimous consent is required to exercise a green socks clause – something which is often difficult to achieve – and to include a mandatory mediation process and cooling off period.

Exercising a green socks clause is a very drastic step to take and the decision should never be made lightly. If you are considering the expulsion of a partner, we strongly recommend that you seek legal advice as early as possible to maximize your chances of success.

For more information, please contact Daphne Robertson on 01483 511555 or email d.robertson@drsolicitors.com