Legal · Startup Law

Is any conflict of interest between a shareholder who also serve as company's legal adviser?

Reuven Granot Corporate Strategic and Scientific Officer at Perlis Ltd

December 9th, 2016

One of our partner shareholders is a law office, whom we gave shares from our 100% stock instead of paying consultancy fees. Now, when we start seeing interest from investors we realize that his legal advises are oriented to his personal interest and in quite clear contradiction with our company's best interest. He is not a Board of Directors member, but tries to change the decisions by interfering and advising for his personal best interest. What would you do?

Gordon Troy Trademark Attorney - United States and International, Copyrights, Unfair Competition, Internet and Computer law.

December 9th, 2016

Why would you invite a shareholder into the boardroom to give you legal advice? I don't see it as any more complicated than that. Of course it's a conflict of interest! It should never be done, and sadly I see it often. On many occasions we have to undo such a misguided situations. You should capture all of the communications that demonstrate the attorney was acting in his/her own interest (self interest) and not that of the company. Hire an attorney to represent the company and work on a "game plan" to remove the 1st attorney.


Brian Davis Partner at Crinion Davis & Richardson LLP

December 9th, 2016

This is not necessarily a conflict of interest.  The American Bar Association and most state rules governing attorney ethics impose restrictions on a lawyer's ability to engage in a business transaction with a client.  In my state, among other protections, the client's written consent is required.  You should consult with independent counsel who can advise you on the rules applicable in your jurisdiction.

In my practice, I always decline the type of representation you describe, even with clients I have represented for decades.  Why?  For precisely the reasons you reference -- the risk that the client will perceive a conflict, and thereby lose confidence that I'm representing the client with only the client's interests in mind.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

December 9th, 2016

Mr. Davis is too kind. You got what you paid for; bad advice for bad paper. You should have sold your shares to investors and paid a good lawyer for competent representation. I was offered shares dozens of times over the years and in 100% of those cases the business failed. If you are offering shares to your attorney or others who you should be paying, it is because investors don't think as highly of your business as you do. 

Brian Davis Partner at Crinion Davis & Richardson LLP

December 9th, 2016

In response to Mr. Stein, I have no opinion, and am not expressing any opinion, on the lawyer's competence or the quality of his advice.  My comments were directed only to the conflict of interest question.

Gordon Troy Trademark Attorney - United States and International, Copyrights, Unfair Competition, Internet and Computer law.

December 9th, 2016

Mr. Davis is correct that the ABA (as well as most states) have guidelines, rules, etc. about such conduct. My point is that despite doing everything possible, I don't see a way that it can be done without a conflict of interest. This is why i would never agree to take shares instead of payment, and why i have seen every situation where it was done to be a problem. 

Reuven Granot Corporate Strategic and Scientific Officer at Perlis Ltd

December 9th, 2016

Thanks a lot to your comments. Actually I did not offered shares to this lawyer. He get them from another shareholder. I should have vote against this transfer. At least now, I understand that I have to do my best to avoid advises from this shareholder and follow the votes of shareholders meetings.