Risk Update

When Client Payment Terms Cause Conflicts Concerns (During Covid Times or Not)

Many ages ago, during the heady days of the dotcom boom when I worked at a firm — and certainly today — it was not unheard for law firms to take client stock in lieu of cash payment. (At that time, even commercial landlords insisting on the same.) There was even a fresh-at-the-time Silicon Valley firm built on that premise. (Spoiler alert: dotcom crash.)

So Karen Rubin’s latest did indeed bring back some memories: “Take stock instead of legal fees? Take a hard look and mind the ethics rules” —

  • “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.”
  • “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.”
  • “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.)”