You hired a business attorney to represent your startup. Nice work! Legal counsel can ensure your business doesn’t run into any trouble during takeoff. But what kind of advice can your attorney give? Can he/she help you with personal matters too? What obligations does your attorney have to you?
On the other hand, maybe you’ve stumbled upon this article because you’re considering securing an attorney for your business, but you don’t know what to expect. How can you pay this attorney? You understandably would prefer to keep your cash on hand for business expenses, not legal fees. Can you pay your attorney with an ownership interest in the company?
This article will answer questions such as these. I will explore the relevant ethical rules which control the actions of attorneys. In describing the ethical rules which affect business representation, I refer to the American Bar Association Model Rules of Professional Responsibility, a set of rules drafted by the national association of attorneys which have been adopted (perhaps with some modifications) by the various state governments of the United States.
For Whom Does the Attorney You Hired Work?
Perhaps this question seems silly. After all, you hired the lawyer, so they must work for you, right? Actually, this likely isn’t the case. When you hire an attorney to assist your business, they probably represent the company itself, not its owner. While this may seem like a distinction without a difference, it actually matters a great deal. An attorney owes certain duties to its client, known as “fiduciary duties”. These duties require attorneys to loyally serve their client’s best interests.
Under ABA Model Rule 1.13, an attorney who represents a business owes fiduciary duties to the business itself, not its manager-owners. This means that, should a manager engage in activities which would harm the best interests of the company, the attorney is not only permitted, but required to take action to prevent such activity. This typically involves revealing the proposed harmful action to the higher-ups of an organization.
This rule is especially relevant if your startup is a corporation. The attorney of a corporation has an ethical duty to report activities of the managers which could hurt the company to the board of directors. This power even enables the attorney to reveal confidential information to third parties, should it be necessary to protect the company.
Hopefully, this rule is a total non-issue for you and your company. You obviously want your company to succeed, so your interests are aligned with its best interests. However, the fact that your attorney represents the company itself may restrict the kind of assistance they can provide you, as an individual.
Can The Company Attorney Offer You Personal Legal Advice?
You picked an attorney because you feel you can trust them. Reasonably, you may also seek their advice for your personal legal questions. Can they provide this information if they represent the company? To give the annoying lawyer answer; it depends.
Your company’s attorney can also represent you, provided there is no conflict of interests. This rule sounds simple: if you ask questions unrelated to the running of the business, the company lawyer can answer, and thus also represent you, right? Not so fast. Conflict of interests rules are a minefield. You may think that a question is sufficiently unrelated to the business for a lawyer to answer but be disappointed to hear them refuse to answer. The existence of a conflict of interests is a highly fact specific issue – it depends on the situation.
However, just because there is a conflict doesn’t mean you’ll never get an answer out of your attorney. In many cases, an attorney can still represent two clients which have conflicting legal interests, provided the attorney believes he or she can still effectively represent both parties, and receives the informed consent of both clients, confirmed in writing.
Can The Attorney You Hired Serve as a Director on Your Company’s Board?
In short, yes. The company’s attorney is obliged to serve the best interests of the company, and he or she may also serve on the company’s board and offer business advice. However, this can pose some issues. If there is a conflict between the attorney’s ethical duties and their fiduciary duties as a board member (yes, board members have such duties too), this creates a major conflict of interests issue.
Can The Company Attorney be Paid with an Ownership Interest?
Yes. The company attorney can accept an ownership interest in the company, provided the exchange is objectively fair and the client (so the business, as represented by its managers/owners) gave their informed consent, in writing. The attorney must also advise the company to seek separate legal counsel for negotiating this deal and give the company an opportunity to do so.
Other Ethical Issues
It is unreasonable, for the purposes of this blog post, to give an exhaustive list of the ethical rules which arise when an attorney represents a business. I will simply note that, when your lawyer interacts with federal agencies such as the IRS and the SEC on behalf of the company, the lawyer is subject to special ethical rules, imposed by those agencies, which may alter their behavior.
The Takeaway
Hopefully, this article provided you, a small business owner and/or manager, with some idea of what to expect from your company’s legal counsel. However, if you understandably have questions about what your attorney can do for you company, even after reading this introduction to legal ethics in business representation, you should discuss your concerns with your attorney. They will be able to describe the boundaries of your particular relationship and enable you to make the most effective use of your new counselor.
Sources:
https://psu.pb.unizin.org/entlawoperationalissues/chapter/chapter-2-introduction-and-preview/
Image Sources:
ABA Logo – www.americanbar.org
Other Images from Microsoft Word Stock Images
Hi Joe,
Your article was a great and informative introductory read on what to expect when retaining legal counsel for an entrepreneur. The brief discussion of the model rules, and the dos and don’ts that come along with them, helps a budding entrepreneur a great deal in understanding who the attorney they retain is actually representing, and how that might affect them.
Similarly, addressing the various ways an entrepreneur might be thinking of paying their attorney, i.e., through an ownership interest or even asking them to serve on the board of directors, is a very important piece of helping someone who is considering retaining an employer for their business. This information is vital, particular in the early-stages of a business, when capital might not be plentiful.
More broadly, you mention the fiduciary duties an attorney owes their client, and it might also be helpful to include some more specific discussion of these duties.
Overall this was a great read! Keep up the good work.
I think this is a fantastic idea to give the business their perspective of our ethical/professional responsibilities. As lawyers we all must pass the MPRE/follow the rules, but we take it for granted that our clients know these rules. I think your second section is a clean concise way of saying that your business’s attorney is here for your business. You do specifically cite the Model Rules in some parts and not others, I would wonder if you could add those additional rules just for conciseness.
Hi Joe. I really enjoyed reading your blog post. I think it’s extremely important for clients and attorneys to be on the same page with all facets of representation. Your effective breakdown of the ethical constraints surrounding attorneys who represent businesses is a great way to ensure all parties are on the same page, particularly in an incredibly important area such as legal ethics.
If I were a small business owner, I’d be curious to know more exactly how waiving a conflict would work. For example, a small business owner may feel that they have the ability to unilaterally waive a conflict to get an attorney to represent both their business and them personally. While that is likely not the typical case, I’d be curious to know what would generally be required to get my business to waive a conflict.
Your blog post was a good, insightful read full of extremely important information. Making sure the client knows of ethical constraints facing their attorney would only make the attorney’s representation of the client more effective. Thanks for the post!