In many attorney-client relationships, lawyers provide legal advice that is used to help clients achieve and maintain their business goals.

These relationships sometimes evolve over time, and attorneys and clients may become friends or create other social or professional relationships separate and apart from the attorney-client relationship. Attorneys and clients may also look for other ways in which to work together on business projects. It is becoming more and more common for attorneys to consider investment opportunities with clients.

Imagine an existing client looking to get a new business off the ground. Low on cash but high on potential, the client approaches the attorney seeking legal advice but, instead of agreeing to a traditional fee arrangement, the client offers the attorney an ownership interest in the new business venture. Although such arrangements are not inherently unethical, the transaction may come with some limitations.

So what are the rules? This article provides some tips and guidance on the rules for, and restrictions on, attorneys in these scenarios.

The Ethical Guardrails

Notably, the American Bar Association (ABA) has observed that the Model Rules of Professional Conduct do not prohibit a lawyer from acquiring an ownership interest in a client endeavor, whether as a traditional investment opportunity or in lieu of a cash payment for legal services.

Model Rule of Professional Conduct 1.8(a) provides that a lawyer “shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client,” unless the lawyer follows certain rules.

Those parameters include that: (1) the terms are fair and reasonable to the client and provided in writing; (2) the attorney advises the client, and the client has the opportunity, to seek independent legal counsel in connection with the transaction; and (3) the client provides written, informed consent to the essential terms of the transaction and the lawyer’s role in the transaction (including whether the lawyer is representing the client in the transaction).

Considering the requirements of Rule 1.8 at the outset can help ensure that financial arrangements entered into between attorney and client remain ethical.

Fairness and Reasonableness

The first requirement for entering into an ownership or other pecuniary interest adverse to a client under Rule 1.8 is that the terms must be fair and reasonable.

Whether the terms of the arrangement are fair and reasonable will typically be viewed from the perspective of the client and, sometimes, after the fact (as opposed to at the time of the transaction). Courts and bar associations alike may scrutinize such arrangements, searching for any indication that the attorney traded on the client’s confidences and secrets or otherwise took advantage of the client’s confidential information in exchange for financial compensation or gain.

The concern is that such an arrangement could suggest that attorneys are elevating their financial interests above the interests of their clients, thereby potentially creating a conflict.

Attorneys can consider seeking the advice of their colleagues or other impartial attorneys to assess the reasonableness of the terms. Taking such an approach can help avoid the appearance of bias or impropriety in the attorney obtaining financial interest in the client.

Independent Counsel

Consistent with Rule 1.8, advising the client to consult with independent counsel can help the client confirm the path forward as well as evaluate the fairness and reasonableness of the terms of the deal.

Additionally, independent counsel may increase the likelihood that the transaction survives scrutiny by a court or bar association. Ultimately, the decision to engage independent counsel is left up to the client. They may elect to forego consultation with independent counsel after being fully advised, but the attorney’s obligation is only that the client have the opportunity to do so.

Obtain Written Informed Consent

Obtaining written informed consent from a client typically requires that: (1) the client has been afforded the opportunity to consult independent counsel; (2) the client has been informed of the risks, advantages, disadvantages, alternatives and information necessary to assess the transaction; and (3) the client affirmatively and expressly consents to the transaction in writing.

To obtain the client’s informed consent, attorneys may consider documenting the specific information provided to the client regarding the potential risks associated with the proposed investment. It can be helpful to ensure the document includes sufficient detail so that, if a question ever arises, a third party can readily determine that the attorney reasonably informed the client of the scope and risks of the transaction prior to obtaining consent.

Thinking about the future of a potential dispute, having sufficient documentation helps avoid the risk of divergent memories or a “he said/she said” testimonial dispute later. Another important disclosure consideration is the degree to which the relationship between the attorney and the client might be affected by the proposed arrangement.

For example, the attorney’s investment could change the relationship between the parties and impact the attorney-client relationship if the attorney becomes a shareholder, limited partner or partner of the client. Some attorneys, even though it is not required, may take the additional precaution of having another witness sign the written consent.

Following the recommended steps and guidelines may help achieve the ultimate goal to eliminate misunderstanding and prevent disputes regarding the client’s consent to the transaction down the road.