Ethics; Considerations in Representation
§ 1.1Who Is Client When Forming New Business Entity?
As with any legal matter, it is important to identify precisely who the client is for purposes of representation. It is also important that all parties understand who the attorney does and does not represent. When forming a new business entity, the attorney can represent an individual owner, all the owners collectively, or the business entity itself. Clarifying issues of representation is even more critical when forming a new entity because of the numerous potential conflicts of interest that may, and often do, arise when dealing with several parties.
The attorney may potentially represent a single owner or several owners during formation of an entity and then transition to representing the entity after formation. This transition should be clearly provided for in the retainer agreement and services contract between the attorney and the individual(s). Further, it may require additional authorizations from other owners or authorized personnel in the business before the transition may take effect. This situation has two potential ethical considerations: (1) representing the individual owner may create potential conflicts of interest that prohibit later representation of the entity, and (2) communicating with other owners may inadvertently create unintended attorney-client relationships, with the attendant duties to avoid conflicts of interest that arise when representing multiple clients.
The Texas Disciplinary Rules of Professional Conduct prohibit an attorney from representing a person “if the representation of that person (1) involves a substantially related matter in which that person’s interests are materially and directly adverse to the interests of another client . . . or (2) reasonably appears to be or become adversely limited by the lawyer’s or law firm’s responsibilities to another client.” Tex. Disciplinary Rules Prof’l Conduct R. 1.06(b), reprinted in Tex. Gov’t Code Ann., tit. 2, subtit. G, app. A (West 2013) (Tex. State Bar R. art. X, § 9). If the conflict is not likely to affect representation, the attorney must obtain written informed consent from the affected clients. See Tex. Disciplinary Rules Prof’l Conduct R. 1.06(c) (An attorney may represent a client in the event of a conflict of interest if “(1) the lawyer reasonably believes the representation of each client will not be materially affected; and (2) each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages involved, if any.”).
The comments to the disciplinary rules state clearly that an attorney “should not give advice to an unrepresented person.” Tex. Disciplinary Rules Prof’l Conduct R. 4.03 cmt. Thus, it is best practice when representing one owner to thoroughly document and preferably have written acknowledgment from each nonclient owner that such a nonclient is not the client and has not been given individual legal advice.
In addition to these concerns, the attorney may discover after representation has already begun that previously unknown adverse interests exist between individual owners, or that new adverse interests have arisen between owners, that prohibit further representation of the initial client.
§ 1.3Representing Business Entities
The Texas Disciplinary Rules of Professional Conduct provide that an attorney employed or retained by an organization represents the entity and that “[i]n dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when it is apparent that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing or when explanation appears reasonably necessary to avoid misunderstanding on their part.” Tex. Disciplinary Rules Prof’l Conduct R. 1.12(e). The constituents of the organizational client, whether incorporated or an unincorporated association, “include its directors, officers, employees, shareholders, members, and others serving in capacities similar to those positions or capacities.” Tex. Disciplinary Rules Prof’l Conduct R. 1.12 cmt. 2.
Comment 1 to rule 1.12 recognizes that “[u]nlike individual clients who can speak and decide finally and authoritatively for themselves, an organization can speak and decide only through its agents or constituents such as its officers or employees,” and that “[i]n effect, the lawyer-client relationship must be maintained through a constituent who acts as an intermediary between the organizational client and the lawyer.” Tex. Disciplinary Rules Prof’l Conduct R. 1.12 cmt. 1. Because client communications will be conducted through constituent intermediaries, the constituents should be informed in writing that (1) the lawyer represents only the entity and not any individual constituent of the entity and (2) any information supplied by any of them must be shared with other decisionmakers for the entity but will remain confidential to the outside world.