Can a Colorado lawyer take an equity or ownership stake in a client company, either in place of cash fees or as an investment?
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This page answers the general question as of 2001. Ezel answers yours: whether it's allowed on your facts, under the current rules of professional conduct in your state, with citations.
Plain-English summary
Opinion 109 (adopted May 19, 2001; annotated June 20, 2009 and August 6, 2015) addressed whether a lawyer may acquire an ownership interest in a client, either by taking equity in lieu of a cash fee or by investing for equity in connection with legal services, a practice that grew as start-up companies sought legal help with little cash. The Committee endorsed ABA Formal Opinion 00-418 as the correct statement of the ethical considerations and concluded the Colorado Rules do not prohibit the practice, provided the lawyer complies with Rule 1.7(b) and (c) (representation that may be materially limited by the lawyer's own interests), Rule 1.8(a) (business transactions with clients), and, where the interest is taken in lieu of cash fees, Rule 1.5(a) (reasonable fee), along with other applicable rules.
On the business-transaction requirements, the opinion explained that to comply with Rule 1.8(a) the transaction and its terms had to be fair and reasonable to the client, fully disclosed and transmitted in writing in a way the client could understand, with the client advised in writing that independent counsel was desirable (Colorado's rule then required advising that such counsel "may be advisable") and given a reasonable opportunity to consult it, and with the client's informed written consent. On reasonableness and valuation, the opinion concluded that equity taken as a fee had to be of reasonable value judged by an objective standard based on circumstances reasonably ascertainable at the time of the transaction; a later change in the value of the equity would not, by itself, require new disclosures if Rule 1.8(a) was satisfied when the agreement was made.
The opinion treated equity received before the legal services were performed as the equivalent of an advance fee. Citing In the Matter of Sather and the Colorado trust-account rules, it concluded that advance fees remain the client's property until earned, so the lawyer had to determine, with the client's consent, how much of the equity was earned at the outset and document it consistent with Sather's requirements for an earned retainer; unearned equity remained the client's property and had to be safeguarded (for example, certificated securities kept separate from the lawyer's property). On ongoing conflicts, the opinion stressed that the potential conflicts between a lawyer who is both counsel and an equity owner are myriad, that the lawyer had to continually reassess whether the lawyer's investment compromised independent professional judgment under Rules 1.7(b) and 2.1, and that the disclosure to the client should flag the potential conflicts, the possibility that they could require withdrawal under Rule 1.16(a), and that the lawyer might vote the equity in the lawyer's own self-interest. It added that the conflict rules apply regardless of a client's sophistication, because it is always the lawyer's duty, not the client's, to recognize and disclose the conflict.
Currency note
This opinion was issued in 2001, before Colorado's 2008 revisions to the Rules of Professional Conduct, though the Committee annotated it in 2009 and 2015 with bracketed updates to the current rule numbering. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.
Common questions
Q: Could a Colorado lawyer take stock in a client instead of charging a cash fee?
A: The opinion concluded yes, the Colorado Rules did not prohibit it, so long as the lawyer complied with Rule 1.8(a), Rule 1.7(b), and Rule 1.5(a)'s reasonable-fee requirement; it endorsed ABA Formal Opinion 00-418.
Q: What did Rule 1.8(a) require before the lawyer took the equity?
A: The opinion required fair and reasonable terms fully disclosed in writing the client could understand, advising the client in writing that independent counsel was desirable and giving a reasonable opportunity to consult it, and obtaining the client's informed written consent.
Q: How was the value of the equity judged for reasonableness?
A: The opinion concluded the equity had to be of reasonable value judged objectively on circumstances reasonably ascertainable at the time of the transaction, and that a later change in the equity's value would not by itself require new disclosures if Rule 1.8(a) was satisfied at the date of the agreement.
Q: What happened if the lawyer took equity before doing the work?
A: The opinion treated that as an advance fee that, under In the Matter of Sather and the trust-account rules, remained the client's property until earned, so the lawyer had to determine and document how much was earned and safeguard any unearned equity.
Background and rules framework
The opinion interpreted Colo. RPC 1.8(a) (business transactions with, and pecuniary interests adverse to, a client), Colo. RPC 1.7(b) and (c) (representation materially limited by the lawyer's own interests), Colo. RPC 1.5(a) (reasonable fee) and the comment recognizing payment in property, Colo. RPC 2.1 (independent professional judgment), Colo. RPC 1.13 (organization as client), Colo. RPC 1.8(b) (not using client information to the client's disadvantage), and the Colorado trust-account rules on advance fees, read against In the Matter of Sather, 3 P.3d 403 (Colo. 2000). It endorsed and attached ABA Formal Opinion 00-418.
Citations and references
Rules of Professional Conduct:
- Colo. RPC 1.8(a) / Model Rule 1.8 (business transactions with a client)
- Colo. RPC 1.7(b), 1.7(c) / Model Rule 1.7 (own-interest conflicts)
- Colo. RPC 1.5(a) / Model Rule 1.5 (reasonable fee; payment in property)
- Colo. RPC 2.1 / Model Rule 2.1 (independent professional judgment)
- Colo. RPC 1.13 / Model Rule 1.13 (organization as client)
- Colo. RPC 1.15A / Model Rule 1.15 (safekeeping client property)
Cases:
- In the Matter of Sather, 3 P.3d 403 (Colo. 2000), advance fees remain the client's property until earned; standard for an earned retainer
- Feiger, Collison & Killmer v. Jones, 926 P.2d 1244 (Colo. 1996), client sophistication is a factor in fee reasonableness
- In re Breen, 830 P.2d 462 (Ariz. 1992), it is the lawyer's duty, not the client's, to recognize and disclose conflicts
Other opinions cited:
- ABA Formal Op. 00-418 (2000): acquiring an ownership interest in a client (endorsed and attached)
See also
- ABA Formal Op. 00-418: Taking Equity in a Client
- ABA Formal Op. 00-416: Buying a Client's Receivables
- CBA Formal Op. 110: Charging Liens and Security
Source
- Landing page: https://www.cobar.org/ethicsopinions
- Original PDF: https://www.cobar.org/Portals/COBAR/Repository/ethicsOpinions/FormalEthicsOpinion_109.pdf
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