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Weekend vote, no notice: HWLE invalidly dismissed partner, court finds

HWL Ebsworth’s late managing partner Juan Martinez awarded himself additional partnership shares worth more than $6.5 million before invalidly expelling a partner for “agitation” over a decision to exclude him from its proposed public listing, a court has found.

On Monday, the NSW Supreme Court held that HWLE partners, led by Mr Martinez, undermined their own partnership deed by failing to notify partner Greg Lewis of a hastily convened weekend motion to expel him.

The judgment illustrates the extraordinary degree of control exercised by Mr Martinez over the firm he built, and the reshaping that the firm will be forced to undergo following the loss of its powerful managing partner.

Any partner expulsion is a rarity in large legal firms, but the case marks the second time in recent years HWLE has been found to have improperly dismissed a partner.

The ruling adds to the challenges for the firm, as it faces the prospect of paying damages, deals with the fallout from its cyberattack and confronts a future without Mr Martinez, who died suddenly from a heart attack last month.

Chief strategy officer Russell Mailer, who is tipped to become HWLE’s new managing partner, said the firm would await advice before considering its position.

Additional $6.5 million

The case also provides an insight into the machinations of HWLE under Mr Martinez, who pursued and then abandoned a billion-dollar listing of the firm he built into the country’s largest.

In the lead-up to the IPO, Mr Martinez successfully moved to increase his own “calibration points” – a measure that determines profit share entitlement – by 34.1 points.

The extra points stood to be worth more than $6.5 million at the firm’s billion-dollar valuation.

That same motion, which was passed by 95 per cent of partners, also reduced Mr Lewis’ points to zero.

Unlike other large firms, HWLE operates without a governing board, and significant power is granted to the managing partner in its partnership deed.

Calibration point allocations were voted on by partners following a recommendation by Mr Martinez, according largely to performance. According to the partnership deed, the managing partner also enjoys discretion to determine the profit allocation of fixed-draw partners.

In the case of an expelled partner, the managing partner likewise is able to solely determine whether outstanding profit entitlements should be granted or withheld.

Expelled via email vote

Mr Lewis, who had expected to earn up to $3.1 million in the aborted listing, had come into conflict with Mr Martinez over a decision to exclude him from participating in the IPO as an equity partner.

After requesting an increase in his calibration points in July 2020, Mr Lewis was informed by Mr Martinez that it was “not proposed” he participate in the listing. Weeks later, Mr Martinez succeeded in demoting Mr Lewis to a salaried partner position after accusing him of “agitation” over the decision.

In November, after further discussions failed to lead to a resolution, Mr Martinez emailed a 24-hour voting link to partners at 4.38pm on a Saturday, proposing to expel Mr Lewis and waive a seven-day notice requirement. In a second email sent during the vote, he told partners expulsion was “the only option so we can move forward”.

In filings, Mr Lewis said he was not made aware of the motion until after it passed.

According to the firm’s partnership deed, an 80 per cent majority of equity partners is required to approve any expulsion. Eighty-six of the firm’s 181 equity partners approved the motion, with only one dissenting. Ninety-four failed to vote by the time the portal closed on the Sunday afternoon.

Acting justice Michael Elkaim found Mr Martinez improperly construed the meaning of the 80 per cent requirement, and, by bundling the proposal to dispense with notice with the expulsion motion, “entirely undermine[d] the seriousness and consequences of the expulsion motion”.

In 2019, Justice Stephen Robb of the NSW Supreme Court called the dismissal of a former HWLE partner, Tim Griffiths, “flawed”, “irrational”, “wrong” and “unsupportable”.

In a separate unfair dismissal case won by HWLE in 2019, the Federal Court’s Justice Nye Perram described Mr Martinez as a man who cared “about the earning of fees and the elimination of subordination”.

A hearing to determine relief will be held at a later date.