Ethics and the Business Lawyer

• Publication year: 2003
• Pages: 43
• Citation: Vol. 32 No. 10 Pg. 43

32 Colo.Law. 43 Colorado Lawyer 2003.

2003, October, Pg. 43. Ethics and the Business Lawyer

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43

Vol. 32, No. 10, Pg. 43

The Colorado Lawyer
October 2003
Vol. 32, No. 10 [Page 43]

Ethics for Colorado Lawyers Special Issue

Ethics and the Business Lawyer
by Cecil E. Morris, Richard F. Hennessey

Cecil E. Morris, Jr., Denver, is Special Counsel with Pendleton, Friedberg, Wilson & Hennessey, P.C. and current Vice-Chair of the Colorado Bar Association Ethics Committee. His practice focuses on civil trials and arbitration. Richard F. Hennessey, Denver, is a Director and President of Pendleton, Friedberg, Wilson & Hennessey P.C., and is a former Chair of the Colorado Bar Association Ethics Committee. His practice focuses on healthcare lawyering, and business. The authors can be reached at (303) 839-1204

Cecil E. Morris, Jr. Richard F. Hennessey

Ernie Entrepreneur was ecstatic. His patent application had just been approved on a new high-efficiency photovoltaic cell, and he was confident it would be a commercial success. He had put off setting up a company through which to commercialize the new technology, but he knew he couldn't wait any longer. Money was tight, but he had a plan. A buddy of his in college, Denny Deals, was a fifth-year associate at Acme, Best & Crown ("ABC"), a large 17th Street law firm in Denver. Ernie was on his way to meet with Denny, and he was rehearsing his sales pitch.

Identifying the Client

After briefly catching up with their lives, Ernie told Denny about the approval of his patent application and his plans to start a new company to market the technology. "Could you represent me, Denny?" asked Ernie.

In response, Denny sought to clarify who the potential client was. "Actually, Ernie, would you want me to represent the new company or you individually?"

Ernie was a little puzzled and frustrated. "What difference does that make?" Ernie asked. "It'll be my company."

"For the moment that's true, but down the road it could make a big difference," Denny said. "The law treats you and the company as separate, each having distinct legal interests. Initially, I could represent you as the founder and sole shareholder and the company as long as you both have common interests and objectives. A lawyer has duties of loyalty and confidentiality to each client and may represent two clients in the same matter, as long as each client's interests are not at odds with the other's."1

"But Denny, I will be seeking additional investors, so there will be other shareholders and other officers and directors. Again, this is going to be big," Ernie replied.

"That's when any problems are likely to occur," Denny said. "At that point, the different shareholders, officers, or directors of the company could have important differences about ownership or management. For example, they may have different positions about voting requirements and the buy/sell agreement. In such a situation, the rules prohibiting conflicts of interest will prevent me from representing both the company and the individual shareholders, if the shareholders have important differences among themselves to resolve."2

"Well," Ernie said. "I need a good lawyer to represent my new company, so let's go forward on the assumption that when the time comes, first and foremost, you represent the company, not the shareholders. I realize, if and when appropriate, the other shareholders and I may have to get our own lawyers."

Acquiring an Ownership Interest

Coming to what he knew would be the hard part of this conversation, Ernie explained that he could not afford to pay cash for legal services. Instead, he wanted Denny and ABC to represent his new company in exchange for stock. Since this would not be an ordinary fee arrangement, Denny realized he needed to obtain approval from the firm's managing partner, Greta Greyhair, both to accept the representation and to take stock as payment for the firm's legal services.

After meeting with Ernie, Denny scheduled a meeting with Greta for later that day. Denny was excited. For her part, however, Greta focused on fundamentals. "Is it ethical to take stock in a client as payment for legal services?" Greta asked.

Answering her own question, Greta said, "Taking stock in a corporate client in lieu of a cash fee is not prohibited, but the lawyer doing so must comply with the ethics rules." Referring to the recent American and Colorado Bar Associations' ("ABA" and "CBA") formal ethics opinions on this issue,3 Greta noted: "First, the lawyer must comply with the special rules contained in the Colorado Rules of Professional Conduct ("Colorado Rules" or "Colo.RPC"), which govern business transactions between the lawyer and client.4 These rules are intended to ensure that the terms of the transaction are fair and reasonable and that the client fully understands.

"Furthermore, the lawyer must comply with Colo.RPC 1.7 governing situations in which the lawyer's representation of a client may be materially limited by the lawyer's own personal or financial interests;5 Colo.RPC 2.1, requiring that a lawyer exercise independent professional judgment and render candid advice in representing a client;6 Colo.RPC 1.13, regarding the representation of an organization of a client;7 and Colo.RPC 1.8, prohibiting the lawyer from using information relating to the representation of a client to the disadvantage of the client."8 Greta also explained that, under Colo.RPC 1.7(c), any request by a lawyer to the client to waive any conflict of interest must be objectively reasonable.

"Also, the myriad potential conflicts of interest may arise once the lawyer has accepted the representation," Greta continued.9 "In each instance, the issue is whether the lawyer's ownership interest is so in conflict with the interests of the client as to make it unreasonable to believe that the representation will not be adversely affected10 or that the lawyer can exercise independent professional judgment and render candid advice.11 For example, in the face of a takeover attempt, there may be a direct conflict between the lawyer's desire to maximize the present value of the client company's stock and the company's desire to maximize the longer term value of the company by remaining independent."12

At this point, Denny's head was spinning...