GPSolo March 2007
BUSINESS AND COMMERCIAL LAW
Turning Away Clients: A Look at Problematic Representations
In today’s legal profession, where practice development—bringing in business—is so highly prized and endlessly discussed, it may seem heretical to be discussing when transactional lawyers need to turn away clients or matters. However, survival in the field requires exactly such guidance. The corporate scandals that have affected so many companies, investors, customers, suppliers, and employees have introduced another type of pressure on the business bar, namely pressure to prevent such problems.
Be wary of cases in which the client is counting on getting something that seems too good to be true.
One of the best ways to do so is to avoid dealing with clients who are likely to place counsel in compromising positions. It is prudent for firms to create a panel of senior lawyers, well versed in ethics and professional responsibility as well as commercial norms, to consider whether the circumstances exist in particular cases to warrant withdrawal from or declining representation.
Don’t know enough. This should be obvious, but we see too many cases where it is not. If the requisite expertise and experience are not possessed by or readily available to the lawyers doing the work, the matter must be declined or referred elsewhere.
The pain of rejection… of advice. If the client will not listen to the guidance of experienced lawyers concerning the risk of a given structure or transaction, including the legal risk arising from business terms or structures, problems are likely to result. To be clear: We are not talking about a client insisting on pursuing a deal where it may lose money; it is not our place to dissuade clients from doing that so long as we apprise them of the material risks. We are talking about situations where by its nature a deal appears to be deceptive, overreaching, incomplete, or otherwise likely to prompt after-the-fact recriminations. It will not insulate lawyers to state that they were simply implementing a client’s “business decision” or “accounting-policy decision” in cases where senior-level counsel has discussed serious reservations with the client and explained why the risk is beyond material, only to have the client flatly reject the advice.
See through… or else! For public clients (and private clients who are pursuing private placements of securities or who have their financial statements audited at the insistence of lenders or private equity investors), an unwillingness to fully disclose material transactions is a bad sign. If a client or potential client is reluctant or unwilling to do so after appropriate advice as to what is required, counsel has reason for concern about the clients being embroiled in scandal or violating the law. Materiality of proposed disclosures is always a legitimate issue, and competent counsel will often disagree about materiality of any particular matter. However, a continuing reliance on immateriality as a justification for nondisclosure is ground for serious concern.
Doing it in the worst way. When a client rushes into a major deal with strategic implications for its business without wanting to understand its implications, or simply says that “we have no choice,” be concerned. It is rare that there truly is no other choice, and a client who is desperate to do something today may very well be desperate to undo it tomorrow.
Not enough space… lacking independence. Even clients who want to do the right thing may need objective counsel to help identify it. If you or your firm is too close to the client or transaction because of the volume of business you do with that client, personal relationships with the key actors, a personal stake in the transaction at issue, or otherwise, you may not be able to provide the requisite independent advice in particular cases. Similarly, if counsel has a personal financial stake in a deal’s getting done, he or she probably cannot take a hard look at whether the deal makes sense, is properly documented for the client, or might have an incentive to overreach the other party.
Knock! Knock! Nobody answers. If counsel cannot obtain from the client coherent (or any) answers to queries about the structure of or rationale for key points in a deal or the deal itself, that is a red flag. If a deal is being arbitrarily imposed on someone, or if the client does not believe that there is a rational basis for some or all of the deal’s key terms, it suggests something is wrong. That is especially true in the case of public clients, where public disclosure of material transactions is required. If no one can identify plausible, genuine commercial rationales for all parties, the deal invites claims for misleading public disclosures, no matter what is eventually included in the 10-Ks, 10-Qs, etc.
Haunted by the past. If a client has a history of problematic behavior—for example, failed deals spawning disputes, litigation, regulatory challenges, bankruptcies, and the like—there need to be serious discussions about whether and why things are likely to be different going forward.
In our opinion…. There is debate in the literature about whether corporate counsel is customarily required to act as a “gatekeeper” with respect to the securities and the mergers and acquisitions markets by affirmatively screening out undesirable participants. However, there is no debate that, as a result of the misuse of tax and securities opinions in many recent scandals, rendering formal opinions to be relied on by third parties substantially increases counsel’s responsibility. Use of express language in engagement letters to disavow any commitment to provide an opinion is recommended where counsel is not agreeable to committing to provide it.
Something for nothing. Be wary of cases in which the client is counting on getting something that seems too good to be true, such as tax benefits without economic risk or substance, and simply wants you to quickly “review the documents.” Also be wary of cases in which the client believes that other parties in the transaction will do something irrational simply because they “like” the client or “they value the personal relationship so much.” Unrealistic expectations have a way of causing unrealistic, but all-too-real, hostility toward all concerned when they are not attained.
Taking it too personally. The multitude of scandals involving improper disclosure of executive compensation (such as backdated stock options) illustrates another sign of trouble for counsel for a corporation: management that exhibits a high degree of emphasis on its own remuneration at the expense of looking out for the company. When discussion of a proposed transaction frequently shifts to addressing its direct benefits to management, the interest of the company may be jeopardized.
So, what can we do? If a problematic situation does arise, the manner in which counsel should extricate itself depends on the stage at which the problem comes to light. If the problem involves a proposed new client where no work has been done, all that is required is a declination and nonrepresentation letter. When dealing with a new matter for an existing client where no work has been done, a similar letter with respect to the particular matter should suffice.
If work has already been done, client consent to the withdrawal is needed under Rule 1.16 of the Model Rules unless it is clear that the lawyer is being used to perpetrate a crime or fraud—a higher standard than simply being uncomfortable with the situation.
FOR MORE INFORMATION ABOUT THE SECTION OF Business Law
This article is an abridged and edited version of one that originally appeared on page 59 of Business Law Today, July/August 2006 (15:6). For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.
Periodicals: Business Law Today, bimonthly magazine; The Business Lawyer, quarterly law journal; eSource, monthly e-newsletter.
Books and Other Recent Publications: Bankruptcy Deadline Checklist, 3rd ed.; Financial Statement Analysis and Business Valuation for the Practical Lawyer, 2nd ed.; Reorganizaing Failing Businesses, rev. ed.; Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley; Model Asset Purchase Agreement with Commentary; The Practitioner's Guide to the Sarbanes-Oxley Act; The Portable Bankruptcy Code & Rules, 2006 ed.; Model Joint Venture Agreement with Commentary; The M&A Process: A Practical Guide for the BUsiness Lawyer.
Marty Robins is a sole practitioner in Buffalo Grove, Illinois, specializing in business transactional matters. He can be reached at email@example.com.