Mcle Article: What Transactional Lawyers Should Know About Conflicts of Interest

• Jurisdiction: California,United States
• Author: Neil J Wertlieb and Nancy T. Avedissian
• Citation: Vol. 2016 No. 1
• Publication year: 2016

MCLE Article: What Transactional Lawyers Should Know About Conflicts of Interest

Neil J Wertlieb and Nancy T. Avedissian^*

Check the end of this article for information on how to access 1.0 self-study credit.

This article is part of a series by the authors that focuses on ethical issues of particular interest to transactional attorneys in California.

Neil J Wertlieb is a corporate partner at Milbank, Tweed, Hadley & McCloy LLP in Los Angeles. He is a former Chair of the California State Bar's Committee on Professional Responsibility and Conduct, a former Chair of the Business Law Section of the California State Bar, and a former Co-Chair of the Corporations Committee of the Business Law Section. He is also the General Editor of Ballantine & Sterling: California Corporation Laws, an Adjunct Professor at UCLA Law School, and a frequent speaker and expert witness on corporate transactions, corporate governance, and attorney ethics.

Nancy T. Avedissian is the General Counsel and Vice President, Legal Affairs, at Worldwide Clinical Trials, a global provider of clinical research services to the pharmaceutical industry. Ms. Avedissian is a former corporate associate and colleague of Mr. Wertlieb's at Milbank.

Unlike litigators, those of us who are transactional lawyers work on friendly deals where the parties have common goals and interests. In litigation (as well as certain other practice areas, such as criminal law and family law), battle lines are obvious and there's usually a clear winner and clear loser in the fight. No such battle lines exist in business transactions, and, after a successful closing, everyone's a winner. In fact, we sometimes celebrate a successful engagement with closing dinners attended by people from both sides of the transaction. The notion of the parties celebrating together after a verdict, conviction or divorce is absurd.

So, because our clients and their business counterparts have common goals, there can be no ethical conflicts of interest that apply to transactional lawyers, right? The answer, of course, is a clear and resounding "NO!" One need not look any further than a simple M&A transaction-where a buyer is looking to buy a business and a seller is looking to sell that business-to see that conflicts of interest abound in a transactional practice as well. Even though buyers and sellers share the same fundamental goal-the transition of the business from seller to buyer-the interests of the buyer (e.g., paying the lowest possible price, with strong representations and indemnification coverage) are often diametrically opposed to those of the seller (e.g., selling at a premium, with minimal representations and indemnity exposure).

For perhaps too many transactional attorneys, focusing on the details of what may constitute a conflict of interest in a particular situation (and what to do about it) becomes overshadowed, or even completely eclipsed, by the initial self-congratulation and excitement of obtaining a new client representation. Further, in those first days of a new representation, an attorney may be pressured to move forward with the transaction, engaging in discussions with the client and its counterparties, participating in negotiations and drafting documents, perhaps after only having applied the proverbial "smell test" to evaluate whether any conflict of interest exists. However, taking an "I'll know it when I see it approach" to analyzing conflicts of interest, even in the transactional arena, is inadequate. Under many circumstances, recognizing possible conflicts may not be as intuitive as some attorneys may expect.

It is not uncommon for transactional attorneys to represent clients with conflicting interests. Under the ethical rules applicable to all attorneys in California, such representations may also create a conflict of interest for the attorney representing such clients. To meet an attorney's ethical obligations under California law, a careful review of the facts, an application of California-specific rules, and the possible request of an appropriate waiver from one or more clients, are all necessary steps in properly addressing conflicts of interest. Most conflicts can be waived by the clients potentially affected, but only with their informed written consent. This article discusses how to identify, analyze, and address such conflicts of interest, paying particular attention to issues commonly faced by transactional attorneys.

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What constitutes a conflict of interest and what do I do about it?

A conflict of interest exists where the interests of an attorney's clients actually or potentially conflict with each other, and the attorney's duty on behalf of one client requires the attorney to take (or omit to take) action which is or may be harmful to the interests of one or more other clients of the attorney.¹ An unaddressed conflict may result in situations where an attorney's zealousness may be diminished, or his or her judgment may be impaired or duty of loyalty divided. Generally, failure to resolve or otherwise address a conflict of interest in accordance with the rules regulating attorney conduct could result in disqualification of the attorney in one or both conflicted matters, and may also result in liability for malpractice or breach of fiduciary duties, fee disallowance or disgorgement, sanctions, or (for willful breaches) discipline by the State Bar of California.²

The rules regulating attorney conduct in the State of California are set forth in the California Rules of Professional Conduct (the "Rules"), which were promulgated by the State Bar of California and approved by the California Supreme Court and are binding on all members of the State Bar of California.³ The Rules are disciplinary rules, not statutory laws, but courts often use the Rules to determine whether attorneys or law firms should be disqualified from a particular representation.

An attorney's responsibilities with respect to conflicts of interest are governed by Rule 3-310, relevant sections of which are set forth below:

(B) A member [of the State Bar of California] shall not accept or continue representation of a client without providing written disclosure to the client where:

(1) The member has a legal, business [or] professional ... relationship with a party ... in the same matter; or
(2) The member knows or reasonably should know that: (a) the member previously had a legal, business [or] professional ... relationship with a party . in the same matter; and (b) the previous relationship would substantially affect the member's representation; or
(3) The member has or had a legal, business [or] professional ... relationship with another person or entity the member knows or reasonably should know would be affected substantially by resolution of the matter ....⁴

....
(C) A member shall not, without the informed written consent of each client:

(1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or
(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or
(3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.5

....
(E) A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment.⁶

An obvious conflict of interest would exist in the simple M&A transaction mentioned above if an attorney (or that attorney's law firm) were engaged to represent both the buyer and the seller in the transaction. A conflict of interest would also exist if the attorney were to represent just one of the parties in the acquisition but the counterparty is also a client of the attorney (or that attorney's law firm) in unrelated matters. Other potential or actual conflicts of interest arise for the transactional attorney when, for example, the attorney is engaged to form a business entity on behalf of multiple parties or to negotiate and document employment terms on behalf of both an executive and her corporate employer.⁷

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It is important to note that the Rules do not refer to or require actual harm to a client for a conflict of interest to exist. A conflict of interest may exist even when there is just a risk that the attorney's duties may be compromised.⁸

Who exactly is my client?

Because attorneys owe fiduciary duties to their clients, it is essential to know who the client is-and is not-in any given matter. Occasionally for the transactional attorney, identifying the client may prove difficult or sensitive. Generally, when representing an organization or corporate entity, it is the organization that is the client-and not the officers, directors, shareholders, or other constituents associated with the organization. As a practice matter, engagement letters should always specifically and correctly identify the client, even if the letters are addressed to the attention of the officer with whom the attorney has a relationship or from whom the attorney takes direction.

Rule 3-600(A) provides that, in representing an organization, an...