In this regular feature, lawyers at Reynolds Porter Chamberlain deal with questions sent in by readers. These need not be limited to insurance related matters, and can focus on any area of your activity. In this issue we look at the desirability of having a shareholders' agreement, the professional liability of solicitors handling litigation, and developments relevant to brokers in the European marketplace

Q. Should your business have a shareholders' agreement?
Alan Toulson recommends careful consideration.

At one extreme, there are single shareholder companies. At the other extreme, there are plcs with a complete separation between the shareholders and the directors and where the company is governed in accordance with the rules laid down in the Companies Acts and City Codes. In between these extremes, there are many companies where it is appropriate for the rights and restrictions of shareholders and directors to be set out in a shareholders' agreement.

Consider a private company with five shareholders, four are full-time working directors, each holding 15% of the shares, and the fifth is an outside investor, holding 40% of the shares.

In the absence of a shareholders' agreement, any shareholders who together hold a majority of the shares will be able to appoint the board of directors. The board in turn will be able to make decisions by simple majority of directors attending a board meeting. There is little protection for minority interests.

Unlike partners, directors and shareholders do not owe a duty of good faith to each other.

A shareholders' agreement will be able to address key issues:

  • Does each shareholder have the right to a seat on the board?

  • What restriction is there on meetings taking place in the absence of one or more directors or shareholders?

  • Do the directors, by simple majority, have the right:

    - to change the nature of the business;

    - to alter their own employment contracts;

    - to enter into long-term obligations;

    - to issue additional shares to existing or new shareholders?

  • Should dividends be declared or should profits be re-invested?

  • Does a shareholder have the right to sell his shares?

  • Do the other shareholders have the right to buy them? If so, at what price?

  • Can dissenting shareholders be forced to sell their shares if the majority wants to sell the company?

  • What arrangements exist for resolving any deadlock?

    The skill in negotiating a shareholders agreement is to produce a document which assists to promote the best interests of the parties, not to impose a series of obstacles to management.

    Alan Toulson is the senior partner of Reynolds Porter Chamberlain, and a member of the corporate department. Contact him on
    akt@rpc.co.uk

    Q. We are insurance brokers acting for numerous insured solicitors. They are facing an increasing number of claims from clients who have lost at trial. How likely are these claims to succeed given that there are always winners and losers in litigation?


    Philip Saint advises on this developing area.

    Increasingly, clients are looking to their legal advisers (and their insurers) to compensate them in the event that they lose at trial.

    What are the principles that govern whether solicitors are likely to face liability in such a scenario?

  • The solicitor is under a duty to act with reasonable skill and care. This does not mean that the solicitor always has to be right, but it does mean that he or she has to achieve a minimum competence in giving advice

  • The standard against which the solicitor is to be judged is that of the reasonably competent solicitor specialising in that particular area of law

  • In advising on matters where there are different views in the profession, each of which is followed by a substantial number of solicitors, a solicitor complying with any one accepted practice will usually escape a finding of negligence

  • A solicitor is entitled to rely on counsel's advice, but he is still obliged to exercise his own independent judgment, and if he reasonably thinks counsel's advice is obviously or glaringly wrong, it is his duty to reject it

  • An important recent case has confirmed that solicitors also remain under a duty to warn that the risks of their view of the merit of a case may not be accepted by the court. In circumstances where advice is being given to the client regarding the different outcomes that might occur at trial, it will usually be at least implicit that a risk is involved. For best practice, the solicitor should advise on the extent of risk.

  • Often, advice is given in the context of considerable time pressure. Even if this time pressure is imposed by the client (for example in making an emergency application to the court) the court is unlikely to lower the standard of care expected from the solicitor.

    Clearly, solicitors need to pay particular attention to the standard of advice given when advising on the chances of success of a claim and the full extent of the risk involved. If they cannot show that such advice has been given then they open themselves up to potential liability. Insurers may wish to scrutinise the procedures in place within a firm to ensure that these standards of professional competence are being met.

    Philip Saint is a solicitor in RPC's professional liability department. Contact him on
    pjs@rpc.co.uk

    Q. I am aware that Lloyd's is opening up its network allowing European brokers to bring new business into the market. How will standards be maintained and professionalism safeguarded?


    Jonathan Moss looks at developments in the European marketplace.

    At the beginning of this year, Lloyd's simplified its accreditation guidelines and financial criteria permitting Continental brokers to operate. Traditionally, brokers based in Europe have not had direct access to the Lloyd's Market. This has been a bone of contention for many international brokers and representative bodies, such as the European Federation of Insurance Intermediaries. The cross-border nature of the insurance market indicates that it is a strong candidate for harmonisation and yet the idea of the European single insurance market is still not a reality.

    The expansion will inevitably bring new business that would have gone to local markets and the specialist European brokers will also benefit. This will lead to a greater understanding of individual member states' work practices and their insurance requirements. Legislation is in place to ensure that such diversity will not threaten standards nor devalue current checks and balances.

    The EU's proposed Directive (COM 2000501/Final) to create a single market for insurance brokers allowing them to operate in any EU member state is a major step towards an integrated European market. This should be adopted by the European Commission in September this year and should be brought into force in England in 2004.

    Previous legislative attempts have failed to introduce a single European body of law with respect to brokers, but the tide is turning. The last significant example was the proposed 1979 Directive on insurance contracts aimed at removing the conflicting interpretations of misrepresentation and non-disclosure throughout member states. The states, however were not prepared to accept the radically different proposals and no formal legislation was adopted.

    The Directive on brokers is different as it encapsulates the growing need to acknowledge the importance of the broker fraternity in Europe and elsewhere. Building on Directive 77/92/EEC, it simply reflects brokers' requests to facilitate the free movement of agents. Insurance intermediaries must have general commercial and professional knowledge and ability, professional indemnity cover, no previous bankruptcy, financial capacity and be of good repute.

    The Directive is aimed at protecting customers acquiring insurance and services. There is a requirement for full and frank information to be provided by the broker including any contractual obligation to do business with one or more insurance undertaking. There is also a useful clause about the setting-up of appropriate and effective complaints and redress procedures for the out of court settlement of disputes between insurance intermediaries and customers.

    The Directive, once implemented, will provide a framework and a yardstick for measuring the propriety of brokers and a means of evaluating their work practices. It reflects the wishes of the insurance world at large and, as such, should be an important breakthrough in the safeguarding of brokers' standards and professionalism.

    Jonathan Moss is a solicitor in RPC's insurance and reinsurance department. Contact him on
    jcm@rpc.co.uk

    Send us your queries
    Keep sending us your queries. The legal surgery is co-ordinated by Stuart White, whose email address is
    sgw@rpc.co.uk

    If you need further information about the above topics, please email the lawyer concerned. If you have a legal query about another topic, email Stuart White, and the appropriate person at RPC will contact you to discuss it.

    The initial discussion is free of charge. Depending on the query, either the discussion should be enough to sort it out, or there may be a need for further work, in which case you would be free either to make arrangements with RPC or to instruct any other firm.