Joint clients forming a company who then disagree on a shareholders' agreement term (Code 6.2)
Priya Raman and Tomasz Nowak ask Fenwick Hale LLP to incorporate a private company limited by shares for their new catering business. They have agreed to be equal shareholders and the only directors. The firm agreed to act for both on the basis that they had a substantially common interest, and both gave informed consent in writing. Two weeks later, while the firm is drafting a shareholders' agreement, Priya says she wants a clause allowing her to buy Tomasz's shares at nominal value if he leaves the business within three years. Tomasz strongly opposes the clause. Each now asks the firm to negotiate the best terms for them on this point.
Which of the following best describes the firm's position under the SRA Code of Conduct for Solicitors, RELs, RFLs and RSLs?
Choose one answer to see the reasoning.
Worked answer
Correct answer D: There is a conflict on the share-transfer clause, so the firm must not negotiate it for both; it may still act for both on aspects where a substantially common interest remains.
THE RULE TO REMEMBER
A solicitor acting for joint clients under the substantially common interest exception must not act on any aspect where their interests now conflict, such as a term they are negotiating.
Joint clients forming a company who then disagree on a shareholders' agreement term (Code 6.2)
Paragraph 6.2 of the Code bars a solicitor from acting 'in relation to a matter or particular aspect of it' where there is a conflict of interest or a significant risk of one, unless an exception applies and its conditions are met. Setting up a business together is the SRA's own example of a substantially common interest, which is why the firm could properly accept instructions from both. That common interest has now broken down on one aspect: Priya and Tomasz want opposite outcomes on the share-transfer clause and each wants the firm to negotiate for them. The SRA's conflicts guidance says that where substantive negotiations between the clients are foreseen, the solicitor should not act unless an exception applies, and neither exception fits two clients negotiating against each other. The firm cannot advise both on that clause. At least one of them, in practice both, should be separately advised on it. The firm may continue with aspects where they remain in agreement, such as the incorporation filings, if it is still reasonable to act and the consent and safeguard conditions are still met.
Why A is wrong: Consent given when the clients' interests were aligned does not cover a new conflict on an aspect where they now want opposing outcomes; the exception must apply to that aspect.
Why B is wrong: Paragraph 6.2 applies to 'a matter or particular aspect of it', so the conflict on one term does not automatically bar the firm from aspects where the clients' interests remain common.
Why C is wrong: Separate meetings do not remove the conflict: the firm would still owe each client a duty to push for opposing outcomes on the same clause.
Why E is wrong: Whether the firm charges is irrelevant to whether a conflict of interest exists under paragraph 6.2.
A little more practice done.
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