One market effect of the ongoing COVID-19 pandemic is that transactional clients might be eager to offer you stock or some other form of participation in a deal in lieu of your legal fees.  An uptick in proposals like this could come as clients try to limit cash outlays until the business climate and their operations become less unpredictable.  In an arrangement like this, the client preserves cash and if the deal works out your investment in a client might increase in value, even above the cash fee you might have earned.  It would seem like a win-win situation, right?

Not so fast.  Deals like this can raise risk for firms, and the ethics rule governing transactions between lawyers and clients has several requirements.

Accepting stock in lieu of fees

Taking stock or having a personal financial stake in a client’s transaction can potentially create a conflict of interest between your personal interest in the investment and the client’s interests, particularly if you will also be acting as a legal adviser in the deal.  The optics by themselves can raise risk — namely the appearance that you might structure the transaction or advise in a way favoring your own interests over the client’s.

If the deal goes south, the parties might look for deficiencies in the lawyering; a conflict can give rise to a claim, or at the very least complicate your defense.

For these reasons, many larger firms limit or even prohibit investing in clients.  In all events, business transactions with a client — whatever form they take — are subject to your jurisdiction’s version of Model Rule 1.8(a), which governs whenever the lawyer knowingly acquires an ownership or other pecuniary interest adverse to a client.  See ABA Formal Opinion 00-418 (July 7, 2000) (advising that lawyers can invest in clients, including stock in lieu of fees, but must comply with Rule 1.8(a)).

Rule 1.8(a) prohibits business transactions with a client unless:

  • the deal is fair and reasonable to the client;
  • its terms are fully disclosed to the client in writing;
  • the client is advised in writing to consult independent legal counsel and given a reasonable opportunity to do so; and
  •   the client gives informed consent, in writing, to the transaction and the lawyer’s role in it, including whether the lawyer is representing the client in the transaction.

And when you also represent the client in the transaction, you must additionally comply with your jurisdiction’s version of Model Rule 1.7, which governs “material limitation” conflicts, in which your financial interest in the transaction raises “a significant risk” that your representation of the client will be materially limited by your own interests.

Real life risks

The real life risks are illustrated by a complaint filed last week here in Cuyahoga County (Cleveland), Ohio.  The complaint’s allegations set out a complex transaction, but include the claim that the lawyer in the deal accepted a two percent ownership interest in the plaintiff at the same time he was representing the plaintiff, but without meeting the requirements of Ohio’s Rule 1.8(a).  The relief sought includes a declaration that the defendant’s ownership interest was not lawfully obtained and is void.  (No responsive pleading has been filed as of yet.)

Many decisions illustrate the possible pitfalls.  See, e.g., BGJ Assoc., LLC v. Wilson, 113 Cal. App. 4th 1217 (2003) (oral contract between client and lawyer/joint venturer void; client’s consultation with other counsel not sufficient unless client signed a written waiver).  Professional discipline can also be a consequence.  See, e.g., In re Snyder, 35 S.W.3d 380 (Mo. 2000) (lawyer who made fee agreements that included acquiring interest in clients’ residential property suspended for failing to comply with Rule 1.8(a)).

Takeaway on taking stock

The current climate is one of uncertainty for clients and lawyers.  If you are offered the opportunity to participate by way of an investment in a deal in which you are representing a client, whether or not the investment will be in lieu of your fees, consider the risks, and make certain that you comply with your jurisdiction’s ethics rules, including on conflicts and business transactions with clients.