McGladrey & Pullen and H&R Block subsidiary RSM McGladrey sent a memo Friday to their employees announcing the deal on their administrative services agreement that their partners voted to approve Thursday (see McGladrey & Pullen Partners Vote to Reconcile with Block):

As most of you may already be aware, the M&P partners met this week in Orlando to discuss a renewed business agreement with RSM McGladrey and H&R Block (HRB). On the M&P Board’s recommendation, the partners agreed to complete a new administrative services agreement which keeps M&P and HRB/RSM working together. 

The Board’s recommendation was based on many months of work by leaders of M&P, RSM McGladrey and HRB. Along the way, we considered a number of different contract provisions, sought arbitration rulings on the interpretation of our existing contracts, and looked for a solution that best meets the objectives of all of our stakeholders:  clients, employees, partners, and shareholders. The new agreement will meet those objectives. 

The task at hand now is to move forward. The current state of the economy presents us with both challenges and opportunities. We already have launched our FY11 planning process and review of our strategic plan under the assumption that we would reach a resolution that would keep the firms working together. This effort will be important as we continue to focus on further building our national organization – building our brand, capturing more market share, earning client loyalty and providing career opportunities for our people.

Thank you for staying the course with us and for your unwavering focus on client service. We believe that we are well positioned for continued success and look forward to a bright future together.

Our best regards,                     

C.E. Andrews                                                                                                   
President, RSM McGladrey Inc.   

Dave Scudder
Managing Partner, McGladrey & Pullen LLP

H&R Block also issued a press release with more details on the agreement:

H&R Block Announces Agreement Between RSM McGladrey, Inc. and McGladrey & Pullen, LLP

·   Agreement resolves issue with McGladrey & Pullen, LLP

·   Renewable five-year extension of existing arrangements

·   No material financial impact

For Immediate Release:  December 11, 2009

KANSAS CITY, Mo. -  H&R Block, Inc. (NYSE:HRB) today announced that its wholly-owned subsidiary RSM McGladrey, Inc. (“RSM”) has reached an agreement on terms (the “Renewal Agreement”) with McGladrey & Pullen, LLP (“M&P”), an independent partner-owned public accounting firm delivering audit and attest services. The Renewal Agreement, which was approved by a vote of the M&P partners subject to definitive documentation, will extend the current collaboration of the two firms through an alternative practice structure until May 1, 2015.  Thereafter, the collaboration will renew automatically for additional five-year terms absent withdrawal by either of the parties under clearly defined circumstances.  The Renewal Agreement largely retains the existing restrictive covenants, as interpreted in a recently concluded arbitration proceeding.

“This agreement provides a stable foundation for future growth of RSM McGladrey,” said Russ Smyth, president and chief executive officer of H&R Block.  “The discussions were ultimately healthy to review the needs of both firms and to identify how we can best manage our respective operations to improve client service, accelerate growth initiatives, improve partner wealth creation and increase shareholder returns while preserving and protecting the independence of M&P.  We believe the real winners from this agreement will be our clients and future clients, as the new arrangement will facilitate taking this collaboration to an entirely new level,” added Smyth.  “We look forward to building our joint business and despite the current economic pressures, we see enormous opportunities for the future.”

Under the Renewal Agreement, the core alternative practice structure remains intact.  In this structure M&P is solely responsible for the attest practice and related professional responsibilities.  The parties have agreed to enhance cooperation in various areas with the goal of more completely aligning both firms’ short and long-term strategies to facilitate enhanced client service, and to improve operating efficiency and profitability. 

While this agreement contains important changes in both the operational and financial relationship between RSM and M&P, and is subject to definitive documentation, the net financial impact of these changes has no material effect on H&R Block’s earnings guidance  for fiscal 2010.  Specifically, there is no impairment charge resulting from these changes.