|Reprint permission from Crain's Chicago Business - May 1, 2000.
The tech-heavy Nasdaq isn't as white-hot as it was a month ago, but too many firms are still scrambling to justify taking some or all of their fees in stock or options from their cash-strapped, high-tech clients. At least one market-savvy law firm has institutionalized the practice by creating an "incubator" and offering a cut-rate package of specialized services particularly designed for start-ups with limited resources, but in need of sophisticated counsel and support.
Investing in clients demonstrates confidence, lawyers who play the game contend. They claim to be responding sensitively to a tech-driven culture that treats stock as coin of the realm. But they also are meeting competition; about a third of the lawyers representing the more than 500 companies that went public last year owned client stock at the time of the offering.
And they are stanching the outflow of legal talent; in increasing numbers, top lawyers are being lured away by other law firms that invest in soon-to-be-public clients, or dot.coms themselves.
At the root of the decision is greed. Partnering up with clients is simply irresistible to lawyers who see the prospects of multi-million dollar paydays. The companies they represent may think they're playing with funny money anyway, and aren't averse to husbanding their precious cash and sharing future profits, instead.
They should be.
It's true that there are no ethical rules that directly prohibit a lawyer from becoming a shareholder in his client's business. They merely require the lawyer to reasonably believe that his representation of the client won't be "adversely affected" by his own interests, and to secure the client's consent after any actual or potential conflicts of interest are disclosed.
The logic behind these ethical precepts recognizes that every client thinks of his lawyer as a fiduciary, one who owes him an unconditional duty of loyalty and candor. Yet how loyal and candid can a lawyer be if he's working both sides of the street?
The client has a right to make an informed judgment before plunging into any business deal, especially one involving his lawyer. So, the lawyer should encourage him to obtain independent legal advice before entering into the arrangement.
Yet, too few do. If they did, they would betray the sad reality that the client can no longer count on his lawyer as a reliable source of the unvarnished truth.
The inevitable consequences of stock for services should be obvious to the entrepreneur who really understands why he hired a lawyer in the first place. Even if the client doesn't mind paying his lawyer what turns out to be an unreasonably large fee-itself an ethical violation for good reason-the stage will have been set for the lawyer to protect his own interests over the client's.
For example, the lawyer's own stake in the venture may color the advice he gives about how minority stockholders are to be handled, how much compensation should be paid to promoters, and when dividends are to be declared.
Lawyers aren't oblivious to the problems and, although they're not easily deterred, many do take steps to avoid the most obvious of conflicts.
If the lawyer were honest with himself, he would admit the difference is one of form and not substance. The client is buying the lawyer's undivided loyalty and dispassionate judgment, and not the machinations of a conflict-ridden, financially interested insider.
No matter how law firm policies are conveniently reconfigured for the new economy, the corporate client remains entitled to the benefit of that age-old bargain.
Copyright © 2000 by Crain Communications Inc.