Limited partnerships are more widely used by companies as platforms for employees to hold shares in share incentive programs. To make sure employees who are entitled to profits continue working “loyally and diligently” for companies, partnership agreements usually require employees have employment relationship with companies they work with if they want to be eligible as a partner (or for share incentive) and any termination of the employment relationship be result in “automatic withdrawal from the partnership”. There are various events where “employment agreement termination” occurs. Objective facts of employment termination by negotiation or the employee unilaterally are clear, from which it is easy to see they are no longer eligible to be a partner. In case of a unilateral employment agreement termination by the employer, especially when such termination is wrongful, is the employee no longer eligible to be a partner? This matter is always arguable in the legal world and could be dealt with by courts in different ways in the same case.     

Some courts hold that wrongful employment agreement termination by the company will result in automatic withdrawal from the partnership (or ineligibility for share incentive programs).

In the partner withdrawal case (Case No.[2018]Y01CF7204) between Guangzhou Shin & Sheen Share Investment Partnership Limited and Lan Shihua decided by Guangzhou Intermediate People’s Court, the court of the first trial held that the verdict now in effect proved that the termination of the employment relationship between Lan Shihua and Wuzhou Company was wrongful and should not be seen as an event where automatic withdrawal from a partnership applied, while during the second trial Guangzhou Intermediate Court held that Shin & Sheen was a platform for Wuzhou Company to implement the share incentive plan for employees and after the termination of the employment relationship between Lan Shihua and Wuzhou Company, Lan Shihua was not an employee of Wuzhou Company and not eligible for the share incentive plan for employees of Shin & Sheen and should withdraw from the partnership of Shin & Sheen although the partner agreement in dispute didn’t address issues relating to dismissal of a partner. Lan Shihua could recover losses arising from the wrongful employment termination by Wuzhou Company in other legal ways.      

During the second trial of the partnership case (Case No.[2019]Y19CF16635) between Lu Xiaochun and partnerships including Dongwan Boqi Investment Partnership (Limited) and Yu Ming Xin Company before Dongwan Intermediate People’s Court, the appellant Lu Xiaochun claimed that he filed a labor arbitration application for the wrongful employment agreement termination by Yu Ming Xin Company and the court should stop the trial until the labor case was closed. Dongwan Intermediate Court held that in the Employee Held Share Management Rules of Yu Ming Xin Company employees holding shares, not including the company’s actual controller must have employment relationship with the company, but as the employment relationship between Lu Xiaochun and the company was terminated by the company on 30 January 2019 and could not be further performed, Lu Xiaochun was no longer eligible for the company’s share incentive plan and all his claims to the appeal court should be rejected.  

Some courts hold wrongful termination of an employment agreement will not result in automatic withdrawal from a partnership (or ineligibility for share incentive). During the second trial of the partnership case (Case No.[2020]L.01C.F.9505) brought by Feng Bo, etc. against Fuyun Partnership, Jinan Intermediate People’s Court held that Fengbo, a party to the case filed a labor arbitration application for issuance of the notice of a unilateral termination of the employment agreement by East Town Company with eligibility for a partner to be decided so that he could not be found as ineligible to be a partner and the argument of Fuyun Company that Feng Bo was no longer eligible to be a partner should be rejected.

Share incentive programs aim to attract and retain talents by giving rights to extra economic benefits, which usually apply to staff in positions closely related to personal qualities such as senior management and key employees. If the employment agreement of an employee in such a position is terminated unilaterally by the employer, the relationship between the two sides has broken up and personal qualities on which the position is based no longer exist with no possibility of further performing the employment agreement and no need for share incentive in academic terms. Although I agree more with Guangzhou Intermediate Court and Dongwan Intermediate Court, considering similarities to the verdict of Jinan Intermediate Court, to avoid disputes it should be agreed in the course of drafting a share incentive plan or partnership agreement that a termination of the employment agreement will result in automatic withdrawal from the partnership from the date of such termination and a unilateral termination of the employment agreement by the employer will result in automatic withdrawal from the partnership from the date when the employer receives the employment agreement termination notice without respect to any subsequent dispute over the employment relationship between the two sides.