McGladrey & Pullen Partners Vote to Reconcile with Block

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McGladrey & Pullen’s partners have voted to accept a revised services agreement that would reunite them with H&R Block subsidiary RSM McGladrey.

RSM and McGladrey & Pullen have been locked in a legal battle ever since M&P terminated the 10-year-old services agreement in July. The two firms have operated in an alternative practice structure since 1999, with M&P focused on audit and attest services, and RSM providing other types of accounting and tax services.

Under their services agreement, RSM had provided accounting, payroll, marketing and other administrative services to M&P in return for a management fee. After M&P elected to terminate the agreement in July, RSM filed suit and then Block moved to terminate the agreement in September. The two firms went through mediation and then arbitration proceedings.

An arbitration ruling, which was handed down Nov. 24, favors H&R Block and RSM, enforcing the restrictive labor covenants involving employees of the two firms.
About 650 McGladrey partners began meeting in Orlando, Fla., on Wednesday and voted Thursday 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 accounting profession, which has 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.

H&R Block president and CEO Russ Smyth talked in an earnings call Tuesday 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.

The enforcement of some of the terms of the original agreement by the arbitrator seems to have forced M&P’s hand. “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.”

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 they saw the writing on the wall, it became obvious that the two sides were going to come together,” said Koltin.

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