I am often asked whether it is appropriate to have one lawyer document a joint venture (or multiple owner company) on behalf of the proposed business owners (2 or more people). A variety of considerations come into play.
As a legal matter, attorney ethics rules, at least in Texas, permit an attorney to take on such a role. However the parties must knowingly consent to the situation.
There is certainly an efficiency to having all parties sit down with the lawyer, put their agreement together and move to completion without involving multiple lawyers and the ensuing conference calls, discussions and scheduling issues. Not to mention the potential cost.
When an attorney decides to form/document a business entity for two or more people, some aspects of a traditional attorney-client relationship change. For instance, the attorney’s role is no longer to advocate or negotiate on behalf of one party. Rather the attorney’s role changes to documenting the agreement between the multiple parties.
If either party wants independent advice or help in determining what to negotiate they would have to hire their own lawyer.
No party to such a representation can expect the lawyer to keep confidential anything that party tells the lawyer in connection with the formation or expect that such information would be held secret or would not become known to the other(s) party(ies) to the representation. In other words, separate counsel would be required to discuss matters in complete privacy. This acts to lessen rights to attorney-client privilege in many circumstances.
Discussion With All Parties
In forming the Company, the lawyer will be required to consult with all parties concerning the decisions to be made and the considerations relevant in making them, so that each one can make adequately informed decisions. This means the lawyer will function as a conduit and will be communicating with all parties on the same subject matter from time-to-time.
Withdrawal From Representation
The lawyer will be forced to withdrawal from the transaction if any party to the multi-party representation so requests or if it becomes apparent that:
- the matter cannot be resolved without the necessity of contested litigation on terms compatible with each party’s best interests;
- that any party will not be able to make adequately informed decisions in the matter;
- that there is more than a little risk of material prejudice to the interests of other parties if the contemplated resolution is unsuccessful; or
- the lawyer reasonably believes that the common representation can no longer be undertaken impartially and without improper effect on other responsibilities the lawyer has to any of the clients.
Should I Go This Route?
There are certainly efficiency and timing benefits to having one lawyer preparing the governing documents of the new entity and looking out for all owners. However, there are significant risks if the parties begin to disagree – in fact a lawyer could possibly be forced to withdrawal causing the parties to need to restart the formation process with new counsel.
This is something to be weighed and considered by the parties.
About the Author
R. Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258 or www.mcbrideattorneys.com.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.