BUSINESS LAW AND PRACTICE WORKSHOP NOTES AND TASKS
Professional Conduct
Acting for partners when drawing up partnership agreement
One solicitor needs to draft partnership agreement for all the parties, but they all need to
get SEPARATE LEGAL ADVICE (to avoid potential conflict of interest scenario).
In event of dispute, will need to be represented separately.
Conduct issues with tax
Indraj and his colleagues would like you to act for all of them on the sale of the shares to
keep the costs of the transaction down
You can’t act where there is a conflict, or a significant risk of conflict between two or more
current clients unless the matter falls within the scope of an exception (para 6.2 COCforS).
Here there is a significant risk of such a conflict - therefore to act you would need to satisfy
one of the exceptions set out at paragraph 6.2(a) or (b) of the Code.
First, you must satisfy yourself that, if you acted for all, you are acting in the best interests of
each client (SRA Principle 7).
Secondly, if you rely on paragraph 6.2(a) of the Code, you can only act if:
- all the clients have given informed consent, given or evidenced in writing, to
you acting;
- where appropriate, you put in place effective safeguards to protect clients’
confidential information; and
- you are satisfied it is reasonable for you to act for all the clients.
Paragraph 6.2(b) of the Code is not applicable.
FSMA conduct issues
Indraj wants your advice on whether £1.85 million represents a good deal in the current
climate for sales of IT businesses.
This is likely to involve you crossing the line between legal and financial advice. If your
advice amounts to a regulated activity under the Financial Services and Markets Act 2000
(“FSMA”) and you advise without being authorised by the Financial Conduct Authority or you
are exempt, you will be committing a criminal offence.
You need to consider the following:
• Are you in business?
1
, • Are you carrying on a specified activity as defined in the Financial Services and
Markets Act 2000 (Regulated Activities) Order 2001 (“the RAO”)?
• Does the specified activity relate to a specified investment in the RAO?
• Does an exclusion apply?
Here, you are in business (because you work for a law firm) and you are being asked to
advise on the merits of the deal (a specified activity). Shares are a specified investment.
However, the activities you are carrying out are in connection with the sale of a body
corporate and you can rely on the takeover exclusion because:
(a) The activity relates to the sale of the entire share capital in CompU Ltd; and
(b) The parties to the transactions are connected individuals selling to a body corporate.
Even if you are complying with FSMA you must also consider whether you are competent to
give such advice. If you are not, you will be in breach of paragraph 3.2 of the Code.
Your firm is not authorised by the Financial Conduct Authority and has a policy of not relying on
the ‘professional/necessary’ exclusion if the risks associated with a transaction exceed the firm’s
standard insurance cover of £5m.
Explain why your firm can advise Talkers on the merits of investing in FSC without committing an
offence under the Financial Services and Markets Act 2000.
EXAM: always go through every step for all marks.
1. Competent to act? Principle 7 and paragraph 3 (acting in best interests of client – won’t be
acting in best interests of client if not competent to carry out work for client.)
2. s 19 of the FSMA 2000 provides that: ‘No person may carry on a regulated activity in the UK
unless authorised or exempt to do so’ (the ‘General Prohibition’).
3. Breach = criminal offence
4. Identifying what you are being asked to do e.g. merits of buying shares
5. Is it a regulated activity?
S22 FSMA 2000 the 4-step test for a regulated activity:
(a) Are you in business?: yes a law firm is.
(b) Is there a specified activity?: e.g. advising.
(c) Is there a specified investment or does the specified activity relate to information about a
person’s financial standing or the setting of a specified benchmark?: yes we are advising on
the acquisition of shares of FSC.
(d) Is there an exclusion?:
The ‘takeover’ exclusion: It will apply to a transaction to acquire or dispose of shares in a body
corporate or for a transaction entered into for the purposes of such an acquisition or disposal if:
2
, (a) the shares consist of or include 50% or more of the voting shares in the body corporate;
and
(b) the acquisition or disposal is between parties each of whom is a body corporate, a
partnership, a single individual or a group of connected individuals. (Art 70 shows connected
people)
Either you are acquiring 50% or day-to-day control.
For lawyers we are not specifically giving investment advice but when you do due diligence there is
some serious overlap which is why this exclusion exists.
**If Talkers acquired only 10% of the shares, the exclusion wouldn’t apply so the work would be a
regulated activity. Therefore, would need to look at second flow chart.
Does the professional exemption apply?
S327 exemption (assume it doesn’t form major part of firm’s work but need to check)
Specific incidental test? Yes, advising on merits of investing in FSC is incidental to carrying out the
legal work in connection with the acquisition)
*Need to show work is inextricably linked for professional/necessary exclusion to apply
3
, WS 1 - PARTNERSHIPS
Recognise and advise on existence of partnership – Is there a partnership?
CHECKLIST TO APPLY:
Point Detail Questions to ask – then use evidence to apply
1. Partnership ‘A relationship which exists when • What is their business doing/area of work?
exists two or more persons carry on • Are they making managerial decisions?
when s1 PA business together with a view of ® Are they having regular meetings to
1890 is profit’ discuss progress/make decisions?
satisfied • What is their common objective?
CANNOT vary this definition – can • What are the details on their details of how
be oral/in writing/implied by they will share profits?
conduct • Are they making a profit now?
® Irrelevant – “view of making profit” so
just need to look to make profit in
future
• Are they ‘carrying on a business in
common’?
• How many people are working together?
• What is their aim?
2. s2 PA helps S2(2) – Sharing of gross returns
to does not create partnership in
determine itself.
whether
partnership S2(3) – receipt by a person of a
exist share of profits of business is prima
facie evidence that he is a partner
in the business
3. Sharing of Also consider other fundamental NB: Joint ventures can be a company or
expenses, characteristics when drawing partnership
net profits conclusion e.g. sharing of decision-
and losses making
indicate
partnership
Should draft partnership agreement right from the start!
******CHECKLIST FOR PARTNERSHIP PROBLEMS:
1. Is there a partnership? (only necessary if it’s not clear there is a partnership)
2. Does PA 1890 say anything about the problem?
3. If so, can it be varied by contrary agreement?
4. If so, is it varied/added to, ie…
5. What are the terms/duties of this partnership?
6. Interpret and apply relevant provisions of partnership Act and/or agreement
7. Advise appropriately
4
Professional Conduct
Acting for partners when drawing up partnership agreement
One solicitor needs to draft partnership agreement for all the parties, but they all need to
get SEPARATE LEGAL ADVICE (to avoid potential conflict of interest scenario).
In event of dispute, will need to be represented separately.
Conduct issues with tax
Indraj and his colleagues would like you to act for all of them on the sale of the shares to
keep the costs of the transaction down
You can’t act where there is a conflict, or a significant risk of conflict between two or more
current clients unless the matter falls within the scope of an exception (para 6.2 COCforS).
Here there is a significant risk of such a conflict - therefore to act you would need to satisfy
one of the exceptions set out at paragraph 6.2(a) or (b) of the Code.
First, you must satisfy yourself that, if you acted for all, you are acting in the best interests of
each client (SRA Principle 7).
Secondly, if you rely on paragraph 6.2(a) of the Code, you can only act if:
- all the clients have given informed consent, given or evidenced in writing, to
you acting;
- where appropriate, you put in place effective safeguards to protect clients’
confidential information; and
- you are satisfied it is reasonable for you to act for all the clients.
Paragraph 6.2(b) of the Code is not applicable.
FSMA conduct issues
Indraj wants your advice on whether £1.85 million represents a good deal in the current
climate for sales of IT businesses.
This is likely to involve you crossing the line between legal and financial advice. If your
advice amounts to a regulated activity under the Financial Services and Markets Act 2000
(“FSMA”) and you advise without being authorised by the Financial Conduct Authority or you
are exempt, you will be committing a criminal offence.
You need to consider the following:
• Are you in business?
1
, • Are you carrying on a specified activity as defined in the Financial Services and
Markets Act 2000 (Regulated Activities) Order 2001 (“the RAO”)?
• Does the specified activity relate to a specified investment in the RAO?
• Does an exclusion apply?
Here, you are in business (because you work for a law firm) and you are being asked to
advise on the merits of the deal (a specified activity). Shares are a specified investment.
However, the activities you are carrying out are in connection with the sale of a body
corporate and you can rely on the takeover exclusion because:
(a) The activity relates to the sale of the entire share capital in CompU Ltd; and
(b) The parties to the transactions are connected individuals selling to a body corporate.
Even if you are complying with FSMA you must also consider whether you are competent to
give such advice. If you are not, you will be in breach of paragraph 3.2 of the Code.
Your firm is not authorised by the Financial Conduct Authority and has a policy of not relying on
the ‘professional/necessary’ exclusion if the risks associated with a transaction exceed the firm’s
standard insurance cover of £5m.
Explain why your firm can advise Talkers on the merits of investing in FSC without committing an
offence under the Financial Services and Markets Act 2000.
EXAM: always go through every step for all marks.
1. Competent to act? Principle 7 and paragraph 3 (acting in best interests of client – won’t be
acting in best interests of client if not competent to carry out work for client.)
2. s 19 of the FSMA 2000 provides that: ‘No person may carry on a regulated activity in the UK
unless authorised or exempt to do so’ (the ‘General Prohibition’).
3. Breach = criminal offence
4. Identifying what you are being asked to do e.g. merits of buying shares
5. Is it a regulated activity?
S22 FSMA 2000 the 4-step test for a regulated activity:
(a) Are you in business?: yes a law firm is.
(b) Is there a specified activity?: e.g. advising.
(c) Is there a specified investment or does the specified activity relate to information about a
person’s financial standing or the setting of a specified benchmark?: yes we are advising on
the acquisition of shares of FSC.
(d) Is there an exclusion?:
The ‘takeover’ exclusion: It will apply to a transaction to acquire or dispose of shares in a body
corporate or for a transaction entered into for the purposes of such an acquisition or disposal if:
2
, (a) the shares consist of or include 50% or more of the voting shares in the body corporate;
and
(b) the acquisition or disposal is between parties each of whom is a body corporate, a
partnership, a single individual or a group of connected individuals. (Art 70 shows connected
people)
Either you are acquiring 50% or day-to-day control.
For lawyers we are not specifically giving investment advice but when you do due diligence there is
some serious overlap which is why this exclusion exists.
**If Talkers acquired only 10% of the shares, the exclusion wouldn’t apply so the work would be a
regulated activity. Therefore, would need to look at second flow chart.
Does the professional exemption apply?
S327 exemption (assume it doesn’t form major part of firm’s work but need to check)
Specific incidental test? Yes, advising on merits of investing in FSC is incidental to carrying out the
legal work in connection with the acquisition)
*Need to show work is inextricably linked for professional/necessary exclusion to apply
3
, WS 1 - PARTNERSHIPS
Recognise and advise on existence of partnership – Is there a partnership?
CHECKLIST TO APPLY:
Point Detail Questions to ask – then use evidence to apply
1. Partnership ‘A relationship which exists when • What is their business doing/area of work?
exists two or more persons carry on • Are they making managerial decisions?
when s1 PA business together with a view of ® Are they having regular meetings to
1890 is profit’ discuss progress/make decisions?
satisfied • What is their common objective?
CANNOT vary this definition – can • What are the details on their details of how
be oral/in writing/implied by they will share profits?
conduct • Are they making a profit now?
® Irrelevant – “view of making profit” so
just need to look to make profit in
future
• Are they ‘carrying on a business in
common’?
• How many people are working together?
• What is their aim?
2. s2 PA helps S2(2) – Sharing of gross returns
to does not create partnership in
determine itself.
whether
partnership S2(3) – receipt by a person of a
exist share of profits of business is prima
facie evidence that he is a partner
in the business
3. Sharing of Also consider other fundamental NB: Joint ventures can be a company or
expenses, characteristics when drawing partnership
net profits conclusion e.g. sharing of decision-
and losses making
indicate
partnership
Should draft partnership agreement right from the start!
******CHECKLIST FOR PARTNERSHIP PROBLEMS:
1. Is there a partnership? (only necessary if it’s not clear there is a partnership)
2. Does PA 1890 say anything about the problem?
3. If so, can it be varied by contrary agreement?
4. If so, is it varied/added to, ie…
5. What are the terms/duties of this partnership?
6. Interpret and apply relevant provisions of partnership Act and/or agreement
7. Advise appropriately
4
