The partners at McGladrey & Pullen ended a five-month legal imbroglio and voted to accept a revised services agreement that would re-unite them with H&R Block subsidiary RSM McGladrey, ending a litigious struggle that began in July when M&P voted to terminate a 10-year services agreement between the two firms.
McGladrey & Pullen's audit practice is an independent, partner-owned firm, but under a 1999 pact with Block, related professional services have been offered through RSM, which operates in an alternative practice structure with McGladrey. M&P focused on audit and attest services, while RSM provided various types of accounting and tax services. Under that pact, RSM had provided accounting, payroll, marketing and other administrative services to M&P in return for a management fee.
However, after M&P elected to terminate the agreement in July, RSM filed suit and Block subsequently moved to terminate the agreement in September. The two firms went through mediation and subsequent arbitration proceedings.
An arbitration ruling, which was handed down in late November, favored H&R Block and RSM, enforcing the restrictive labor covenants involving employees of the two firms.
In a December earnings call with analysts, H&R Block president and chief executive officer Russ Smyth spoke about the pending resolution of the dispute after the company announced that the arbitration ruling had been handed down and that the two firms were continuing negotiations on changes to the current arrangements that would allow the collaboration to continue.
Last month, roughly 650 McGladrey partners met in Orlando, Fla., and subsequently voted to approve the agreement after the M&P board, including managing partner Dave Scudder, had earlier approved the deal.
The revised agreement will change the economics of the revenue split slightly, favoring RSM partners, according to Allan Koltin, CEO of PDI Global, a Chicago-based consultancy to the profession, which had worked closely with both firms. Instead of keeping 65 percent of the profits, the RSM partners will now keep 67 percent of the profits, with the other 33 percent going to H&R Block. There may also be some additional capital requirements for the partners of M&P.
The enforcement of some of the terms of the original agreement by the arbitrator seems to have forced M&P's hand, Koltin opined.
The original non-solicitation agreement said that M&P could not provide services such as tax preparation for between 18 and 24 months if it terminated the agreement, effectively limiting the firm to audit services.
"Once the arbitration ruling came out and McGladrey & Pullen found they were prohibited from providing tax services for a couple of years, that was the end right there," said Koltin. "There was no way they could be independent as an audit-only firm and compete effectively without also providing tax services."
