What to Know Before Investing in a Client

Attorneys that have been representing corporate entities for long periods of time can sometimes become like family. Attorneys typically offer their expertise in the form of legal advice and guidance to their corporate clients, and this may help the clients meet their business and economic goals. As time passes, attorneys may start celebrating the nonlegal success of their clients.

It’s becoming more common for attorneys to financially invest in their clients, whether that means investing in their overall success or in specific projects. Some clients see this as a favorable opportunity to both pay their attorneys but also as potential rewards for attorneys who help with their success.

Model Rule of Professional Conduct 1.8(a) allows attorneys to invest in their clients or conduct this type of business transactions if three requirements are met:

  • The terms are reasonable and fair to the clients and they are disclosed in writing.
  • Clients are informed and given the chance to consult with independent counsel about the transaction.
  • Clients provide a written consent to the terms of the transaction and their attorney’s role in it, including whether the attorney is representing them in the transaction.

The ABA states that the Model Rules of Professional Conduct do not forbid attorneys from acquiring an ownership interest in a claim, whether that is as a traditional investment opportunity or in lieu of cash payments for the legal services provided. The ABA has even mentioned that this type of arrangement might even be preferable for attorneys who represent startup businesses.

By looking at the requirements of Rule 1.8, attorneys can ensure that their financial arrangements or their investments in their client are above board.

Reasonable and Fair Transaction Terms

The matter of reasonable and fair transaction terms will usually be viewed from the clients’ perspective. Courts and bars that review this type of arrangements are usually focused on whether there is any sign that the lawyer is financially trading off of the client’s confidences or secrets, or taking advantage of their position as lawyer and the knowledge of confidential information that comes with it. This is because it can sometimes appear that the lawyer is placing their financial interests above their clients’ interests, potentially creating a conflict.

Some lawyers resort to consulting with an outside lawyer who can objectively assess the terms and help avoid the appearance of bias.

Written Disclosure and Independent Counsel

In addition to complying with the rules, a written confirmation of the terms of the investment can protect both the lawyer as well as their client, as it helps with reducing the risk of any misunderstandings between.

The lawyer should also inform their client that they can an should consult with independent counsel to make sure that the proposed terms are fair. This allows the client to benefit from professional judgement that is free from conflict.

Informed Consent

As always when dealing with conflict of interests, a lawyer getting a client’s informed consent to an investment will generally involve more than just reporting that there is a possibility of a conflict. Most lawyers will take extra steps to make sure that any consent their client gives is effective by providing enough information for the client to understand the possible risks associated with the consent.

This may involve informing clients of any alternatives to the proposed transaction, as well as disclosing the objective advantages and disadvantages of the transaction.

An important thing to disclose might be the ways in which the arrangement may affect the relationship between the client and the lawyer. For example, a lawyer investing in their client could impact the attorney-client relationship, such as if the lawyer became a shareholder or a partner of the client.

In order to get the client’s informed consent to the potential risks, many lawyers prepare a writing that documents all the specific information provided to the client. This writing is detailed enough to ensure that if there are ever any questions, a third party can see that the client was indeed reasonably informed prior to giving their consent.

Many lawyers also ensure that the client’s actual consent is done in writing. This means that when the client signs the disclosure, they also add a statement that says they:

  • Have had the opportunity to consult independent counsel,
  • Have been informed of the risks, alternatives, advantages, disadvantages, and any information necessary to objectively asses the transaction, and
  • Consent to the transaction.

An additional precaution that some lawyers choose to take is to have a witness to the client’s signature.

Reflect the Transaction’s Impact in Internal Documents

In some cases, an investment can change the nature of the relationship of the lawyer and the client to law practice. For example, a lawyer may become a client of the firm, in addition to their other roles with the practice.

Thus, in order to discover and resolve any potential issues, lawyers should consider whether these financial relationships need to be documented within their law firms’ official systems.