Can a lawyer take stock in a client's company as payment for legal fees?

Plain-English summary

A lawyer was asked to perform legal services for a three-person partnership: negotiating and drafting contracts with third parties, preparing a partnership agreement, eventually incorporating the partnership, and later negotiating and drafting contracts for the new corporation. The committee was asked whether the lawyer could take shares of stock in the to-be-formed corporation as all or part of the compensation.

The controlling rule was DR 5-104(A), which barred a lawyer from entering a business transaction with a client where they have differing interests and the client expects the lawyer to exercise professional judgment for the client's protection, unless the client consents after full and adequate disclosure and the transaction is not unconscionable, unfair, or inequitable when made. The committee also pointed to EC 5-18, which provides that a lawyer for a corporate entity owes allegiance to the entity rather than to any stockholder, director, officer, or other connected person, and should keep the entity's interests paramount.

The committee concluded that it is not per se improper for a lawyer to accept compensation in the form of corporate stock for services rendered to a corporation and its predecessor partnership. Under DR 5-104(A), a lawyer may provide services in consideration of stock so long as the lawyer feels independent professional judgment will not be affected by the stockholder status, the client consents after full disclosure of the potential conflicts, and the transaction is not unconscionable, unfair, or inequitable when made. The committee added that a lawyer may not continue the employment if independent professional judgment would be affected by the business interest, and that a lawyer may accept stock in a newly formed corporation as compensation for legal services previously rendered (citing Michigan State Bar Op. CI-1059).

Currency note

This opinion was issued in 1994, under Virginia's former Code of Professional Responsibility (the disciplinary rules and ethical considerations it cites), before the Virginia State Bar's adoption of the Rules of Professional Conduct effective January 1, 2000. 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 Treat this page as historical context, not current guidance.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: Can a lawyer accept equity in a client's business instead of cash for fees?

A: Under this 1994 opinion, yes, it is not per se improper. The committee held a lawyer may take corporate stock as compensation if independent judgment will not be affected, the client consents after full disclosure of the potential conflicts, and the terms are not unconscionable, unfair, or inequitable when made.

Q: What happens if the lawyer's stock interest starts to affect the representation?

A: The committee said the lawyer may not continue the employment if independent professional judgment will be affected by the business interest in the corporation.

Q: Can a lawyer take stock for work already done?

A: Yes. The committee opined that a lawyer may accept stock in a newly formed corporation as compensation for legal services previously rendered.

Background and rules framework

The opinion interpreted former Virginia DR 5-104(A) (business transactions with a client requiring informed consent and fair terms), with EC 5-18 (a corporate lawyer's allegiance to the entity). That provision is now carried forward in Virginia Rule 1.8(a) and ABA Model Rule 1.8(a), which add a written-consent requirement and an opportunity for the client to seek independent advice.

Citations and references

Rules of Professional Conduct:

• Former Virginia DR 5-104(A); EC 5-18 (Code of Professional Responsibility)
• ABA Model Rule 1.8(a) (business transactions with clients)

Other opinions cited:

• Michigan State Bar Legal Ethics Op. CI-1059: a lawyer may accept stock as compensation for legal services previously rendered.

See also

• VA LEO 1653: Assigning Marital-Home Proceeds to Secure a Divorce Fee
• VA LEO 1606: Fees Compendium (Retainers, Trust)
• VA LEO 1747: Honoring a Lien on Settlement Funds

Source

• Landing page: https://vsb.org/Site/about/rules-regulations/leo-opinions.aspx
• Original PDF: https://www.vsb.org/common/Uploaded%20files/LEOs/1593.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Committee Opinion
April 11, 1994
LEGAL ETHICS OPINION 1593

CONFLICT OF INTEREST - BUSINESS
TRANSACTION WITH CLIENT:
ATTORNEY RECEIVING CORPORATE
STOCK AS PAYMENT OF LEGAL FEES.

You have presented a hypothetical situation in which an attorney is asked to perform
legal services for a three-person partnership relating to (1) negotiation and drafting
contracts between the partnership and third parties; (2) preparing a written partnership
agreement; (3) eventually incorporating the partnership; and (4) negotiation and drafting
contracts between the new corporation and third parties in the future.
You have asked the committee to opine whether, under the facts of the inquiry, it is
permissible for the attorney to receive as all or part of this compensation for his services,
shares of stock in the to-be-formed corporation.
The appropriate and controlling Disciplinary Rule related to your inquiry is DR:5104(A), which states that a lawyer shall not enter into a business transaction with a client
if they have differing interests therein and if the client expects the lawyer to exercise his
professional judgment therein for the protection of the client, unless that client has
consented after full and adequate disclosure under the circumstances and provided that
the transaction was not unconscionable, unfair or inequitable when made. Further
guidance is provided by Ethical Consideration 5-18 which admonishes in pertinent part
that
[a] lawyer employed or retained by a corporation or similar entity owes
his allegiance to the entity and not to a stockholder, director, officer,
employee, representative, or other person connected with the entity. In
advising the entity, a lawyer should keep paramount its interests and his
professional judgment should not be influenced by the personal desires of
any person or organization.
The committee is of the opinion that it is not per se improper for an attorney to accept
compensation in the form of corporate stock for legal services rendered to a corporation
and to its predecessor partnership. The committee believes that an attorney may, under
DR:5-104(A), provide legal services to a corporation in consideration of the stock issued
so long as he feels his independent professional judgment will not be affected by his
status as a stockholder, the client consents after full disclosure by the lawyer of the
potential conflicts of interest, and provided that the transaction is not unconscionable,
unfair or inequitable when made. The committee is of the view, however, that an attorney
may not continue employment if his independent professional judgment will be affected
by his business interest in a corporation. Further, an attorney may accept stock in a newly
formed corporation as compensation for legal services previously rendered. See Michigan
State Bar Legal Ethics Opinion CI-1059 (undated), ABA/BNA Law. Man. on Prof.
Conduct, 801:4890.

Committee Opinion
April 11, 1994
Legal Ethics Committee Notes. – Under Rule 1.8(a), a lawyer may not enter into a
“business transaction” with a client unless the client is given an opportunity to seek
independent advice, and there has been full disclosure and consent in writing.