Corporate Structure - Who is Your Client?
You will often be asked to act on a joint retainer for more than one party. This is your opportunity to consider two important issues, namely:
- the extent of the risk that you will be assuming if you act for more than one party (remembering that a company is its own legal entity and is separate from its shareholders); and
- getting paid for the work that you will be doing (there isn’t much point in representing an empty shell company if you are going to end up being its first unpaid creditor).
Joint representation can be a liability trap. Imagine the potential conflicts arising with issues such as:
- unequal contributions to capital (e.g., Paul has the idea but Peter is the only one with the financial means to bring the idea to the market);
- personal guarantees for credit lines or equipment (the lender isn’t likely to chase Paul when it is Peter who has the deep pockets);
- casting votes for the chair of the board or other officer (what to do if there is a tie?); or
- decisions to designate the beneficiaries of insurance policies (e.g., Peter wants to designate his wife who will then step into his shoes if he dies, but Paul doesn’t ever want to be in business with her and wants to designate the company as the beneficiary so that it can buy back Peter’s shares).
Some corporate lawyers inform the shareholders that they will agree to act for the company only (of course, they will require instructions from the individuals creating the company, but once given, their primary responsibility is to the company). Keep in mind, of course, that your client the company may be dependent upon the financial support of its shareholders and it may be appropriate to obtain guarantees for your fees and disbursements from the shareholders even though you are not acting for them personally.
If you decide to expand the scope of your representation to include more than one party, you must have informed client consent. Chapter 3, rules 3.4.5 to 3.4-7 of the Code of Professional Conduct for British Columbia (the “BC Code”) requires the clients to acknowledge, preferably in writing, the following:
- You must withdraw from acting when a conflict of interest arises;
- You cannot treat information obtained from one client as confidential from the other, and any information that may be relevant to their joint enterprise or to the other, will be disclosed unless contrary instructions are received, in which case you must withdraw from the joint representation; and
- You require permission, in advance, to act as a “peace-maker” on internal disputes, and, if you are unable to make peace, you are not allowed to represent either party unless you have permission, in advance, to continue to represent the “continuing” client. Without such instructions, you must cease acting for both clients once the dispute arises.
Remember that in a typical two-shareholder company, there are three relationships which can give rise to potential conflicts for you as counsel – the relationship between the two shareholders, and the two distinct relationships between the shareholders and the company.
The Law Society of British Columbia website sets out two precedent letters that you may use as the basis for compliance with Chapter 3, rules 3.4-5 to 3.4-9 of the BC Code, and is a recommended precedent to confirm the client understands the implications of joint representation. Take joint representation seriously. Your failure to make complete disclosure can vitiate client consent and can cause you to breach your duty to the clients.
Be careful about allowing unrepresented parties to sit in your office while your client gives you instructions. Doing so creates the risk of the unrepresented party thinking of you as their lawyer also. Don’t wait for the parties to identify their role in the transaction, as they will frequently assume that you already know as much as they do about the matter at hand (even if none of them has ever told you anything about it). In order to avoid the possibility of confusion about your role, consider refusing to act as host for negotiation meetings, ensuring your role as lawyer is clear.
If you are involved in the preliminary negotiations, do not meet with the vendor and the purchaser to draft an offer, letter of intent or agreement to buy a business without having first made clear to the parties:
- whom you represent and whom you do not represent;
- that any material issues discussed will be reduced to writing (in which writing you will reiterate whom it is that you are representing); and
- that the non-client should obtain independent legal advice before finalizing any documentation.
It is always good practice for the non-client to acknowledge in writing that you are not acting for them. A second alternative is for you to provide them with a letter that stipulates that you are not representing them. If you must witness the non-client’s signature to any document you should mark the document “witnessed as to execution only, no legal advice sought nor given” – but even that step should only be taken after careful consideration of the risks and benefits of doing so. If something goes wrong, “I was just trying to be helpful” is not likely to be an effective defense to a claim being made against you.
You also have to be on the lookout for evolving conflicts. For example, if shareholders of an existing enterprise (or proposed shareholders for a new enterprise) who, at one time, have been in agreement begin to disagree over the merits of a proposed course of action, you may find yourself prevented from acting for any of them, particularly if you have not set up the initial retainer appropriately in accordance with Chapter 3, rule 3.4 of the BC Code.
Think twice before deciding to represent more than one party. Sometimes, it’s just simpler for everyone if you make it clear that you will only represent the company. This also allows you to avoid the “[insert your name] always did like you best!” argument between shareholders.