Allen Sparkman 2016-02-26 12:04:33
Who’s the Boss? Conflicts of interest may arise if you’re asked to form an entity. Lawyers sometimes face difficulty identifying the client when approached to form an entity to conduct business. This may be particularly true for solos, who may not have ethics advisers to turn to for guidance. The decision as to whom the solo may represent is important both for the lawyer and the potential client or clients. The possibilities often include: • Represent the entity only. • Represent only one of the owners and no one else. • Represent all of the owners as a group. • Represent the entity, plus all of the owners as a group. • Represent the entity, plus one or more but not all of the owners. Several ethical rules are implicated— most importantly the fundamental conflicts of interest instruction in Rule 1.06 of the Texas Disciplinary Rules of Professional Conduct. A lawyer may not represent a person if the representation of that person’s interests (1) is materially and directly adverse to the interests of another client of the lawyer or (2) reasonably appears adversely limited by the lawyer’s responsibilities to another client or to a third person or by the lawyer’s own interests. This type of conflict may be waived if the lawyer reasonably believes that the lawyer’s representation of any affected client will not be materially affected and each affected client consents after full disclosure of all consequences that may potentially result from the representation. How might a lawyer’s own interests affect the representation of a client? What if several people ask the lawyer to help them form a new business, and one of them is a longtime friend of the lawyer? The lawyer should disclose this to all people in the group and should not enter into the joint representation unless everyone in the group consents. Conversely, the lawyer might decide that it is appropriate to represent only the friend. As another example, perhaps the lawyer has represented a number of oil and gas clients, but because of an economic downturn, his workload has slowed considerably. What if the lawyer is then approached by a new client who has developed a battery that potentially will revolutionize the alternative energy business? If the lawyer worries that the lawyer’s representation of this client will affect his ability to obtain work from oil and gas clients in the future, the lawyer must consider how that may affect his representation of this client. Rule 1.12(a) and its comments tell us that a lawyer retained to represent an organization represents the organization as distinct from its directors, officers, employees, members, shareholders, or other constituents. However, an organization can speak and make decisions only through its agents or constituents. Accordingly, the lawyer must maintain the lawyer-client relationship through a constituent who acts as an intermediary between the organization and the lawyer. The lawyer must be confident that the intermediary legitimately represents the organization and must also be careful that the intermediary does not come to think of the lawyer as representing the intermediary. Too many lawyers think that Rule 1.12 somehow protects them from being viewed as the lawyer for an intermediary or another constituent of the entity; it does not. May a lawyer represent an entity that has not been formed? A potential conflict arises because the entity does not exist at the outset of the representation. The lawyer must communicate with some or all of the owners or other constituents, but, because the entity does not yet exist, the entity itself cannot consent to the conflict. A lawyer who wants to represent an entity to be formed should also consider that, since a lawyer is an agent of the lawyer’s clients, the lawyer for a nonexistent entity has a nonexistent principal. Under agency law, once the entity is formed, it will be unable to ratify the lawyer’s prior actions and representation. The lawyer who acted on behalf of the nonexistent entity may have continuing liability to third parties who dealt with the lawyer as the lawyer for the pre-formation entity even though the lawyer made it clear to the third party that the entity had not yet been formed unless the lawyer obtained the third party’s agreement to release the lawyer from liability once the entity is formed and the entity adopts the lawyer’s agreement with the third party. Understanding the rules and their ethical implications are imperative to a lawyer who is contemplating representing a business with multiple owners or an unformed entity. Of course, this type of representation can be very rewarding, financially and otherwise. ALLEN SPARKMAN practices business law in Houston and Denver. He can be reached at email@example.com.
Published by State Bar of Texas. View All Articles.
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